4.02.2007
Who cares about economic inequality?
(rambling)
I used to get very exercised by the thought of th widening gap between the richest 1% of this country and the poorest 30% (or any variation on those arbitrary percentages). To some degree, I still do: after all, in certain microeconomic situations, wealth is a zero sum game (though not in the aggregate economy, to be certain), and one robber baron's takings is a direct loss to workers' wages and benefits.
But it occurs to me, among many others, that economic inequality itself is nothing to worry about in the abstract. In particular societies, it can be an ill, of course. But the main thing I worry about is how the poor and the working class are doing. If the poor and working class in a country are able to reliably afford adequate shelter, food, clean water, educations for their children, health care, and find jobs if they want them, then that country is doing well, no matter what the inequality gap is. At least that is my judgment. Inequality can be rampant and amazing, but if the basic needs (of health and vocation) are met for pretty much everyone, who cares?
If, on the other hand, the worst-off and the second worst-off (the working class) cannot reliably obtain these things, then it makes a big difference that there are CEOs raking in $100 million or more in a single year for doing the same job that never used to pay that much, with no evidence of a productivity expansion in executive performance to show for it. That is to say, massive executive pay is wildly out of touch with what rational markets should be producing when it has no bearing to actual performance and only exists as a weird insider deal between Boards of Directors and "superstar" CEOs that has developed relatively recently. It has no bearing on actual performance because firms were doing just fine 20 years ago without paying their CEOs ridiculous sums of money relative to what they are now. So far, what it accomplishes is a wealth transfer from productive enterprise (the firm's capital, workers' benefits/pay, shareholder wealth) to CEOs who, while not needing the carrot, will be happy to buy another super-yacht with the money.
The upshot of this rambling is this: In the modern United States, I don't worry so much about executive pay and the widening gap between rich and poor as much as I worry about the health care crisis, horrible inner city and rural poverty, and the viability of having a high mobility middle class. I think the last part is the saddest of all because it is the promise of America: get an education and a job and work 80 hours a week and invest your money and you too could buy a house and go on European vacations. To the extent that high marginal taxes (ironically called "progressive" despite their dampening effects) have created work disincentives and made it difficult to break into this vision of the upper-middle class, our income tax system is a failure. But that is a topic for another day.
As long as there are ways to capture some of these mega-earnings and use it to fund direct transfer tax credits and grants along Milton Friedman lines (the "negative" income tax, et al.) then there is no reason society should not be attempting such transfers. Maybe the best way to do this is with a consumption tax, because I'm skeptical of progressive income taxes and believe them to be both destructive of income mobility and unfair in principle.
. . .
random biblical quotation to end on: "Deliver me not over unto the will of mine enemies: for false witnesses are risen up against me, and such as breathe out cruelty. " - Psalms 27:12
I used to get very exercised by the thought of th widening gap between the richest 1% of this country and the poorest 30% (or any variation on those arbitrary percentages). To some degree, I still do: after all, in certain microeconomic situations, wealth is a zero sum game (though not in the aggregate economy, to be certain), and one robber baron's takings is a direct loss to workers' wages and benefits.
But it occurs to me, among many others, that economic inequality itself is nothing to worry about in the abstract. In particular societies, it can be an ill, of course. But the main thing I worry about is how the poor and the working class are doing. If the poor and working class in a country are able to reliably afford adequate shelter, food, clean water, educations for their children, health care, and find jobs if they want them, then that country is doing well, no matter what the inequality gap is. At least that is my judgment. Inequality can be rampant and amazing, but if the basic needs (of health and vocation) are met for pretty much everyone, who cares?
If, on the other hand, the worst-off and the second worst-off (the working class) cannot reliably obtain these things, then it makes a big difference that there are CEOs raking in $100 million or more in a single year for doing the same job that never used to pay that much, with no evidence of a productivity expansion in executive performance to show for it. That is to say, massive executive pay is wildly out of touch with what rational markets should be producing when it has no bearing to actual performance and only exists as a weird insider deal between Boards of Directors and "superstar" CEOs that has developed relatively recently. It has no bearing on actual performance because firms were doing just fine 20 years ago without paying their CEOs ridiculous sums of money relative to what they are now. So far, what it accomplishes is a wealth transfer from productive enterprise (the firm's capital, workers' benefits/pay, shareholder wealth) to CEOs who, while not needing the carrot, will be happy to buy another super-yacht with the money.
The upshot of this rambling is this: In the modern United States, I don't worry so much about executive pay and the widening gap between rich and poor as much as I worry about the health care crisis, horrible inner city and rural poverty, and the viability of having a high mobility middle class. I think the last part is the saddest of all because it is the promise of America: get an education and a job and work 80 hours a week and invest your money and you too could buy a house and go on European vacations. To the extent that high marginal taxes (ironically called "progressive" despite their dampening effects) have created work disincentives and made it difficult to break into this vision of the upper-middle class, our income tax system is a failure. But that is a topic for another day.
As long as there are ways to capture some of these mega-earnings and use it to fund direct transfer tax credits and grants along Milton Friedman lines (the "negative" income tax, et al.) then there is no reason society should not be attempting such transfers. Maybe the best way to do this is with a consumption tax, because I'm skeptical of progressive income taxes and believe them to be both destructive of income mobility and unfair in principle.
. . .
random biblical quotation to end on: "Deliver me not over unto the will of mine enemies: for false witnesses are risen up against me, and such as breathe out cruelty. " - Psalms 27:12
Labels: economics rant
# posted by Vanity @ 22:52 
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You make a great point that few have raised. I think in the case of the United States, we have not met the needs of the poor or working class. The most important factor in my opinion being an equalizing (class and generational wise) education has been kept from the majority of the poor and working class.
I just think it's too easy, economically, to provide everyone with health care, basic shelter, and food. At least in this country. I don't see why shifting to a strong consumption tax and moving some defense spending over to welfare spending couldn't accomplish this over time. There are problems, of course, but none that are insurmountable.
Well-spoken Vanity. There has to be at least $50 to maybe $100 billion in completely wasted defense spending yearly that could be used in such a way, as well as with regards to fighting the posible oncoming environmental disaster.
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