Thursday, August 14, 2014

Income Inequality

Perhaps I should be focusing on executive compensation, a more limited version of the topic.  But I don’t know enough about either to know how much overlap there is between the two concepts. Part of that fault is likely my own, as I have not inquired closely.  Yet I wonder if the lack of clarity lies at least partly with the explainers rather than the listeners. 

I also cannot tell if people are worried about inequality primarily because it is an inefficiency – an overall drain on the economy, because increased concentration of wealth dangerously enhances the power of the few over the many, or because it just seems morally wrong – undemocratic, unchristian, something. All three seem plausible. Picketty’s book assumes it is bad, so I am told.  The whole concept of hearkening to GINI scores suggests that we’re supposed to just know that it’s unhealthy.

You know my suspicions already.  Whenever there is lack of clarity in the discussion, I ask whether there is lack of clarity in the thinking, and suspect that there is some large unacknowledged emotional reason that is a real driver of the discussion.  Do we actually know that inequality harms the economy?  How much?  In what way? Who measures this?  Is the idea that it decreases competition and innovation at all but the highest level, that it is a 1% frictional drag on all levels that is a large problem in aggregate?  Tell me how.  Is the moral shortcoming something that can be expressed as a generalised Christian or democratic truth that applies to many situations, or is this one of those things that just feels unchristian or unfair after a certain point?  What is that point?

I can find possible explanations off the top of my head that might apply.  Corrupt 3rd-world economies often have extreme concentrations of wealth in the hands of a few.  Maybe there’s cause and effect.  A lot of people secretly believe that there’s a (mostly) fixed amount of money in a place and if Jack gains a dollar, Jake loses one.  It’s not true, but I can understand the feeling. Other folks believe that because the Bible warns against greed and Jesus had some specific criticisms of the rich that we should pass laws to keep wealth in check.  Because some people clearly get rich by illegal or immoral methods, there is a spillover that suggests that all of the rich are under suspicion.  Or, executives who are hugely compensated might be encouraged to extract the most they can, or care little about the long term and reinvestment. Too great a separation may reduce esprit de corps enough that production ebbs. These reasons and more, I think I understand.

It’s just that I don’t recall the evidences for any of these being laid out very systematically that these bad things always happen, or even mostly happen because of inequality.  I imagine there is at least some evidence for some of them.  Readers who wish to direct me to links, or even longer treatments, are welcomed.


jaed said...

I think part of it's embedded in our biology. I of course cannot find the link now, but I've read an article or two suggesting that we are well adapted for hunter-gatherer bands of a few dozen to a few hundred people, and that our instincts about money are also geared for this situation. If one of the members of such a band has a hundred times as much stuff as the poorest member, something's wrong: someone's been cheating. So we also have that sense of something wrong when we see that level of disparity in a society of billions (where it doesn't indicate cheating or bad dealing at all, because the expected disparity level goes up as the scale goes up).

Now add mass media that gives us immediate access to all sorts of people. Set a guy who owns an island and a fleet of jets next to a family in a one-bedroom apartment, and that instinct kicks in: "Unfair! The rich guy must have been stealing!" I think that's where the "It's just morally outrageous" feeling comes from.

Another aspect is the fact that a small amount of a rich person's wealth could do good to a poor person out of all proportion to the harm done to the rich person by taking it. (Example: You could take a few thousand dollars from Bill Gates to buy some poor family a decent used car: he wouldn't even notice the loss and it might make all the difference in the world for the family, their ability to earn more money, etc.)

Of course, this breaks down fast when you start doing the math about how many people could really use a few thousand bucks (or more) versus the economic effect of removing all that money from Bill Gates. But in the single example, as long as you don't extend it to more people, it looks like it makes sense. And people with no sense of number will want to generalize it because they see the benefits when you do it once, and don't see the drawbacks that will happen once you extend it to everyone.

Tribal instincts, plus lack of a sense of proportion.

Assistant Village Idiot said...

I'm liking your first paragraph, because I'm thinking that the small-tribe attitude to wealth distribution being carried over comes from this blog. It's a favorite of mine.

I think you accurately capture the narrative-versus-arithmetic problem of wealth distribution as well. If we took all their money, we still wouldn't be much richer. And then we would have punished/hampered the geese that lay the golden eggs.

Earl Wajenberg said...

For me, the big objection to such gross income inequalities is the concentration of power in such a small number of people. It doesn't strike me as inherently immoral, but as politically dangerous. I don't have particular evidence to point to, other than the lessons of history regarding centralized power.

james said...

Speaking of tribes, do you read Belmont Club?

Assistant Village Idiot said...

I have. I don't. Should I bump it up my list?

Assistant Village Idiot said...

BTW @ Earl. I think wealth is only limited power in America. Bill Gates has power over some people, but not many. My local police and zoning board have more power over me.

That's not necessarily a bad thing. When it becomes state and federal it becomes more ambiguous.

james said...

WRT BC: Only if it strikes your fancy. I thought his gloomy view of the more obvious American tribes was worth a look, but his focus is more international.
Nobody has time to read everything interesting :-(