Aug 3 2009, 1:22PM
A Defense of Inequality That Proves Too Much?
[Update: Will responded and I responded to him here.]
I emailed Will Wilkinson with a question about his new inequality paper a couple of weeks ago, but since he says he's open to taking questions on his blog, and since I see some of my concerns echoed in Jon Chait's latest New Republic column, I figured I would re-post my question here.
One of the points Will makes in the paper -- a good point, and one that doesn't come up enough -- is that income is neither the exclusive nor the best way of measuring inequality. Consumption might be a better measure. As Will puts it: "If we're interested in the overall material well-being of a life,what we really want to know is the quantity of goods and services a person has consumed over the course of his lifetime, and the value to that person of all those goods and services."
And Will makes the point -- accurately, I think -- that consumption inequality doesn't look as bad as income inequality. He argues that inexpensive goods are improving in quality faster than expensive goods, and that the bundle of goods consumed by poor families rises in price more slowly than the bundle of goods consumed by rich families. Will writes:
You can see leveling in quality across the price scale in almost every kind of consumer good. At the turn of the 20th century, only the mega-rich had refrigerators or cars. But refrigerators are now all but universal in the United States, even while refrigerator inequality continues to grow. The Sub-Zero PRO 48, which the manufacturer calls "a monument to food preservation," costs about $11,000, compared with a paltry $350 for the IKEA Energisk B18 W. The lived difference, however, is rather smaller than that between having fresh meat and milk and having none. The IKEA model will keep your beer just as cold as the Sub-Zero model.
But my question is this: Doesn't this prove way too much? If rich families are spending an additional $10,650 for fridges that will offer little in the way of "lived difference," this does not suggest to me that all is peachy in the U.S. of A. It suggests that those rich families have $10,650 lying around that could be redistributed at little "lived" cost!
So, if Will's argument is that income differences in the United States increasingly fail to translate into commensurate differences in consumption, why isn't this just a brilliant argument in favor of redistributing more income than we already do? Perhaps Will Wilkinson of the Cato Institute should be a hero to liberals everywhere!
(Photo: a web producer in the Atlantic mothership seems to have added this flickr photo to the blog post.)
That consumption inequality is less than income inequality and therefore we shouldn't care about inequality has always puzzled me for another reason: we don't really attach any deep moral meaning to a particular 90-10 ratio or Gini coefficient, rather, the meaning is attached to the *trends* we observe (e.g. inequality is rising). To point out that consumption inequality is less than income inequality isn't really interesting (in fact, in the presence of any forward-looking behavior this will be true)--you need to prove that consumption inequality has a different trend than income inequality. And people who point to consumption inequality never do this.
Btw, there is something to your point that WW's argument is essentially that of rapidly declining marginal utility with respect to consumption, which from a utilitarian perspective would support redistribution.
the argument being co-opted it being used for substantially different agendas:
WW is arguing that while leaving markets free will produced measured income inequality, the inequality in standard of living is decidedly narrower.
Yours is a rationlization for government to take more of their money away from them because they wont miss it.
One is a defense of economic freedom, one is rationalizing taking some away.
well, I agree that the question of redistribution is largely separate from the question of inequality, but not totally separate. I think my argument would be that WW's paper shows inequality to be a problem, or at least provides prima facie evidence it's not optimal, if (1) you are a utilitarian; or (2) you adopt some rawlsian difference principle in which the just society maximizes the wellbeing of the least well-off.
Conor
"$10,650 lying around that could be redistributed..."
I love it. Why don't you come right out and say to Americans -- "we own you, and can do what we want with your money!"
One of the points made in the original article was that it was a bad idea for government to rely for funding on such a small portion of the population. First, the income of the rich varies a lot from year to year. Since governments seem incapable of building up reserves (they spend any money that comes in), this makes funding unstable.
Second, there's always the possibility that high earners will find something else to do with their time after they make their first million. They don't have to keep slaving away for the tax man. They don't have to live in high-tax states either.
Third, it encourages all sorts of fun and games with the tax code, since if your taxes are high, there's a lot to be saved by avoiding them.
Income inequality may be a problem. My own feeling is that the more opportunity there is, the more inequality there will be. People who don't bet, don't win.
But you haven't explained where the inequality is coming from, what you'd do about it, and whether you have any limit on how much those dastardly rich people should pay.
If 10,000 super-rich people could support the entire Federal government, it sounds like you would say "screw you guys, you work for us!"
>Income inequality may be a problem. My own feeling is that the
>more opportunity there is, the more inequality there will be.
>People who don't bet, don't win.
The problem, of course, is that this is a feeling, not a fact. The countries with the highest rates of inequality in the world are poor nations where most of the population faces very limited prospects for social mobility. And, among developed nations, it turns out that social mobility is no greater in the US than in most of its counterparts that have much lower levels of inequality.
As for sources of rising inequality and policy options that can/do affect it, the eminent economists David Card and Richard Freeman have a nice littel edited volume on the subject, focusing on comparisons between the US and Canada (Small Differences that Matter: Labor Markets and Income Maintenance in Canada and the United States).
Are the prices for goods like refrigerators really an instructive case study in terms of income/consumption inequality as it plays out in our country?
What about the cost of a college education, or a graduate degree--the things that traditionally separate the winners from the losers in this economy? What have the dramatic tuition increases at even subsidized State schools done to the debt-load of either middle class parents or their children, who often enter the job market with decades of indentured servitude ahead of them (which shifts all manner of life decisions backwards--marriage, kids, home ownership, saving for their own children's education, retirement)?
When you see relatively low-ranked private schools charging $50,000/year and some State schools charging $20,000/year, it tells you not just that tuition increases have become totally unhinged from potential earning power, but that there are a sufficient number of families who can afford to send their kids to college at almost any price.
I believe that the cost of higher education has risen in tandem with income disparity, and it is there that the slope of the playing field for the next generation can be most accurately measured.
You are assuming that a more expensive education gets you a more lucrative career. I don't think that's the case.
There's also an argument that making more money available for college is just driving up the price, since the supply is limited. More kids are going to college and getting nothing out of it, and paying huge amounts for an education they never actually use.
Its not really assuming that much. Nearly all top-tier colleges and graduate programs are between 20k-50k/year. And you'd be hard-pressed to show me a lucrative career where the school you went to doesn't matter.
Making more money available? You mean gross inefficiencies in the way Wall St. financiers and CEOs are paid in relation to the largely illusory value they add to the real economy?
As for more kids going to college and getting nothing out of it, what choice do they have? You're screwed either way. What careers are there for people who don't go to college? Do we have blue collar manufacturing jobs anymore?
70% of adults in the U.S. have no college degree, so there must be some work for them. 50% have no college classes at all.
See http://en.wikipedia.org/wiki/Educational_attainment_in_the_United_States
You can start a small business and do very well for yourself without a degree.
Yes, please redistibute more so I can stop being productive but still enjoy the lifestyle I want. I like having nice things, but I hate working.
What could possibly be wrong with this idea?
I think you have to consider why the people with the extra 10 grand have it in the first place. Are they gaming the rules of corporate governance to have excessive pay packages at the cost of corporate financial health or are they coming up with good ideas and working hard to make them succeed?
Brian
I'm sure all of those Sub-Zero workers in Wisconsin are glad that someone goes out of their way to buy American fridges instead of Chinese models.
I'd also suspect that anyone buying a Sub-Zero fridge is buying a permanently installed unit, something that is adding value to their house when they sell it. So, for $10,000, you're adding $10,000+ to the resale value of your home. An IKEA fridge is likely to be cheap enough to be moved to the garage for dad's beer and cases of soda for parties once a family can afford a better fridge.
Does the demand for expensive, niche products create a disproportionate amount of new employment to meet the demand? If the rich were taxed into a lower price point, would they end up buying the same efficiently-mass-produced devices the rest of us do? Is the greater price of that fancy fridge due to more people being employed to create it?
Are we going to tax people out of work just so we can afford to then pay them benefits?
I think it is much better support for a consumption tax than it is for increased redistribution. If you create value in society, then doesn't it make sense that you should be permitted to deploy that excess value you created as you see fit? If you take two people, one with an idea that produces 100% growth and one with no idea at all, you would take 50% of what the idea person makes each year and give it to the no idea person. Obviously this kills compounding and makes everyone worse off over the longer term. If someone wants to spend it on fancy refrigerators, sure, tax them, they're acutally removing value from society. But why tax people who plow it back into running businesses and employing others, especially if the only reason you're taxing them is so that you can hand it over to someone who wants to spend it on consumption.
The much-discussed Value Added Tax could be adapted to this redistribution without being confiscatory. A federal tax applied to the top 10% of items on the price curve in a variety of markets (cars over $40K, refrigerators over $10K, universities over $25K/yr) and spent in the UnEmployment, Retraining, FoodStamp line would be a worthwhile change in the tax code.
I fail to understand why the existence of inequality - whether income or consumption, confers upon a central authority the right to seize and redistribute "excess emoluments" through some sort of compulsory charity. Is there a presumption that the gain is ill-gotten? There seems to be a presumption that the poor are in their situations due to action or inaction on the parts of the rich and the bourgeoisie. Individual or institutional instances of exploitation should be remedied, but a high earner should not be punished simply for that fact. It is well to remember that what you subsidize, you get more of - this extends to indolence, dependency and ignorance. You know - give a man a fish ....teach a man to fish......