Is Increasing Inequality Acceptable If Everyone Benefits?

[russ_watters]

One thing I've always wondered about the income inequality debate is why all the focus on income in the first place? Basic economics says that well being is best measured by consumption, no? Most data I've seen show consumption inequality is relatively flat...

It's probably just because incomes are easier to measure -- I'd be interested in seeing the data you are referring to though.

 

[_N3WTON_]

It's probably just because incomes are easier to measure -- I'd be interested in seeing the data you are referring to though.

Give me a bit to find it and then I'll post it

 

[billy_joule]

My problem is with the extent of the problem and the power extreme wealth brings.

EDIT; svg file won't embed, see it here: http://static.guim.co.uk/ni/1414602038364/Oxfam_Health_3010_WEB.svg

The Oxfam report found that over the past few decades, the rich have successfully wielded political influence to skew policies in their favour on issues ranging from financial deregulation, tax havens, anti-competitive business practices to lower tax rates on high incomes and cuts in public services for the majority. Since the late 1970s, tax rates for the richest have fallen in 29 out of 30 countries for which data are available, said the report.

This "capture of opportunities" by the rich at the expense of the poor and middle classes has led to a situation where 70% of the world's population live in countries where inequality has increased since the 1980s and 1% of families own 46% of global wealth - almost £70tn.

http://www.theguardian.com/business...lth-inequality-needs-urgent-plan-action-oxfam

http://www.theguardian.com/business/2014/jan/20/oxfam-85-richest-people-half-of-the-world

Though, Oxfam (and I) are bleeding heart lefties so feel free to write it off :D

 

[_N3WTON_]

My problem is with the extent of the problem and the power extreme wealth brings.

EDIT; svg file won't embed, see it here: http://static.guim.co.uk/ni/1414602038364/Oxfam_Health_3010_WEB.svg

http://www.theguardian.com/business...lth-inequality-needs-urgent-plan-action-oxfam

http://www.theguardian.com/business/2014/jan/20/oxfam-85-richest-people-half-of-the-world

Though, Oxfam (and I) are bleeding heart lefties so feel free to write it off :D

Despite tax rates falling for the rich, I think most people would agree that tax policy in most of the developed world is quite progressive...

 

[_N3WTON_]

To Russ Watters, I'm too dumb to figure out how the embed the images, so I'll give you links instead:
http://www.bls.gov/opub/mlr/2005/04/art2full.pdf
http://www.hoover.org/research/mismeasure-inequality

 

[jz92wjaz]

If I were evaluating the health of the economy, I'd want to know consumption, productivity, income, and debt.

Despite tax rates falling for the rich, I think most people would agree that tax policy in most of the developed world is quite progressive...

http://taxfoundation.org/article/summary-latest-federal-income-tax-data

In the US, it's fairly progressive. Here's the breakdown for 2011 (federal income taxes as a percentage of income):
Top .1%: 22.82%
Top 1%: 23.5%
1-5%: 17.7%
5-10%: 12.8%
10-25%: 9.7%
25-50%: 7.0%
Bottom 50%: 3.13%

I believe this only includes income tax, and doesn't include social security, medicare, or tax credits. Above .1% it's been regressive in the past due to capital gains, with the effective rate of the most wealthy being about 16%.

Edit: Here's another link of an analysis someone put together this year.
http://pgpf.org/budget-explainer/taxes

 

[Vanadium 50]

and cuts in public services for the majority. Since the late 1970s, tax rates for the richest have fallen in 29 out of 30 countries for which data are available, said the report.

I'd be interested in what cuts in public services since the 1970's that this report is talking about. Comparing the per-capita inflation-adjusted budget for HEW in 1970 and HHS+Education in 2014, it looks like spending is up by a factor of 3.

 

[wigglywoogly]

I have doubts about the abilities of a metric like GDP, wealth or income to portray how well people are living (keeping in mind we are trying to evaluate what's 'good' and 'bad' here.)

Amartya Sen has something of an objective-list theory approach to measuring this, incorporating literacy rates, life expectancy, infant mortality rate, and so on. But also recognising that in a practical sense, things that determine a person's happiness (like 'dignity' and 'social standing') are a) highly abstract and b) relative to when and where they are.

So we have an over-mathematised theory of utility and preferences, markets and currencies, and we try to 'engineer' the economy, by altering variables with monetary policies and so on, to some point where consumption is maximised, or the optimal consumption path or whatever. Is that the 'best' thing to do? Well of course if you describe the world in terms of that model then it's the best thing to do.

But engineering it 'aint. Very fluffy stuff indeed.

 

[russ_watters]

I have doubts about the abilities of a metric like GDP, wealth or income to portray how well people are living (keeping in mind we are trying to evaluate what's 'good' and 'bad' here.)

Amartya Sen has something of an objective-list theory approach to measuring this, incorporating literacy rates, life expectancy, infant mortality rate, and so on. But also recognising that in a practical sense, things that determine a person's happiness (like 'dignity' and 'social standing') are a) highly abstract and b) relative to when and where they are.

So we have an over-mathematised theory of utility and preferences, markets and currencies, and we try to 'engineer' the economy, by altering variables with monetary policies and so on, to some point where consumption is maximised, or the optimal consumption path or whatever. Is that the 'best' thing to do? Well of course if you describe the world in terms of that model then it's the best thing to do.

But engineering it 'aint. Very fluffy stuff indeed.

Seems to me like you are contradicting yourself. You seem to be saying you don't like using complicated statistics to measure standard of living, then propose even more complicated ways of measuring standard of living (without giving us the data!). But if you have some statistics, I'll be more than happy to have a look at them.

 

[wigglywoogly]

Seems to me like you are contradicting yourself. You seem to be saying you don't like using complicated statistics to measure standard of living, then propose even more complicated ways of measuring standard of living (without giving us the data!). But if you have some statistics, I'll be more than happy to have a look at them.

No. Here's why:

I don't think there's anything 'complicated' about GDP. I just think it's a dull measure of well-being. That said, I don't think there's anything very complicated about the Human Development Index, but it's probably a better measure of well-being than GDP.

On the other hand when economists posit some kind relationship between, say, GDP and consumption, that's what I'm saying is overly complicated and damn near impossible to verify.

 

[my2cts]

MIT's Technology Review ran an article on inequality, where they argue that a) it is bad, and b) it is technologically driven, in that it raises some people's income and wealth more than others.

I see a tension in these. Suppose I could wave a magic wand, and double the income of everyone in the bottom half, and triple it for everyone in the top half. This would benefit everybody, at the cost of increasing inequality. Would this not be a good thing?

Unless real wealth is created in the process, the "top half" incurs a disadvantage after correction for inflation.

 

[Czcibor]

Good that you (Russ) posted data, so let's look at them a bit deeper:

Gains for the selected percentiles: 0,19; 0,13; 0,21; 0,38; 0,70; 0,88.
In the analysed period people in the bottom 20% got +19%, while those among top 5% +88%. During boom no one would mind (tide raising all boats worked), however, you know when those data show stagnation from around year 2000, then it starts being an issue. (not necessary a problem, but at least a perceived injustice)

Is it a problem?

It might become a problem if it leads to high level of dissatisfaction at the bottom. Not necessary a communist revolution, surge in nationalist (anti immigrant) groups can happen if people at the bottom are unhappy.
Another problem is growth opportunities. Can person at the bottom get education / start a business? (in practice) If not then their talents are going to be lost.

Also I would say, that some of inequalities are not "a problem", but "a symptom of underlying problem". For example salaries and stock options of top management. Poor corporate governance which leads to... shareholders being ripped off. Luckily shareholders do not in such bad situation because international companies are masters in international tax planning, so pay little tax, and tackling that problem would require a huge international cooperation. My point: tackling such pathologies would a bit reduce inequalities and reduce the perceived unfairness of the system which would be useful for social stability.

 

[ChiralWaltz]

I have never found giving money away to be the solution to a problem. It may make us feel good in the short run but does not work in the long run. In the US, programs are available for low income households. One has to make a certain amount to be eligible for them. The problem is that once they make more money, the programs that are available to them diminish. If I were in their shoes and I saw I was working more and getting less, I would stop working as much. It would seem by giving away benefits, in some cases, it does more harm than good and generates an appeal to be part of a lower economic group.

The issue is not even income inequality but rather some people are just really poor. Finding a way let those people bring themselves out of poverty and become self sufficient should be the focus. What happens if the wealthy class stops being able to support lower economic class after it has been ingrained in society for generations?

Education seems to be one of the key contributors in the determination of poverty. If we choose to redistribute wealth, it should be done so in the form of getting people in poverty educated. Requiring that people have a minimum level of education before being eligible for benefits could help. I do not think there should be a free benefits program without proof that the recipients are bettering themselves and striving to not be dependent.

 

[jz92wjaz]

It's unfortunate. I'm aware of a few programs that cause a person to lose thousands of dollars in assistance if they make a dollar over the limit. If people at least keep more when they make more money, you can help people get back on their feet, even if the gain is small. When their yearly income has to go up $5,000 to $10,000 just to break even in disposable income, your program has a problem. Unfortunately, with virtually every government assistance program in the US, this sort of problem exists somewhere.

This seems like it would be a bi-partisan issue to fix, and yet the problem remains and is still present in new programs.

 

[billy_joule]

USA is painted in poor light compared to other OECD nations here:

http://www.nytimes.com/2014/11/17/o...evably-gets-worse.html?ref=international&_r=0

 

[russ_watters]

USA is painted in poor light compared to other OECD nations here:

http://www.nytimes.com/2014/11/17/o...evably-gets-worse.html?ref=international&_r=0

Indeed, that article is premsied in the idea that inequality is in and of itself a bad thing. Debunking that is the entire point of this thread.

Worse, the article deceptively uses one graph that addresses the question raised in this thread (the usually false claim "the rich get richer while the poor get poorer"), but the timeframe is cherry-picked. There is one year in the past few when it happened in any significant amount and that's the year they picked as a starting point of a data snippet. Pick a year later or a year (or 2 or 3, etc.) earlier and the effect goes away mostly or completely. For example, if we start with the start of the recession in 2007, all brackets in 2013 were still below their 2007 incomes, including the richest.

 

[Czcibor]

USA is painted in poor light compared to other OECD nations here:

http://www.nytimes.com/2014/11/17/o...evably-gets-worse.html?ref=international&_r=0

If you want true, but very properly cherry picked study to show how the US has very anti-business, pro-equality policies I have one:
http://taxfoundation.org/blog/us-has-highest-corporate-income-tax-rate-oecd

;)

 

[jz92wjaz]

Food for thought. Do the poor get richer as a result of the rich getting a lot richer, or do the rich get a lot richer because they are seeing disproportionate benefits of the increased productivity of society as a whole?

The answer to this obviously has to be answered on a case by case basis, and depends on how equal you are to begin with. So, in our current economy, which is it? Is rising inequality a cause of growth or a side effect of it? Would our economy be better, the same, or worse if the lower classes received a higher rate of income growth than the wealthy did as our productivity increased?

 

[TheBiologist]

Inequality is no longer a problem, so we needn't worry about it too much. What we SHOULD be focusing on is medical science and resolving/ending wars, poverty and hunger.

 

[billy_joule]

Inequality is no longer a problem, so we needn't worry about it too much. What we SHOULD be focusing on is medical science and resolving/ending wars, poverty and hunger.

Poverty and inequality most often go hand in hand.

Inequality has been rising in many countries. The poor achieve lower education, have poorer health, higher crime & incarceration rates, lower productivity etc etc. All of which have massive long term costs on society as a whole.
http://en.wikipedia.org/wiki/Economic_inequality#Effects

 

[Vanadium 50]

Billy Joule, suppose we had a society where one day the rich doubled their wealth, and the poor did not - it stayed constant. Inequality has clearly gone up. Do you believe the problems like "poorer health, higher crime & incarceration rates, lower productivity etc etc" will suddenly become much worse?

 

[jz92wjaz]

If you double the spending money of any significantly large group of people overnight it seems to me that you risk destabilizing the economy with their new investments/purchases. Instability tends to disproportionately hurt the poor.

 

[billy_joule]

Billy Joule, suppose we had a society where one day the rich doubled their wealth, and the poor did not - it stayed constant. Inequality has clearly gone up. Do you believe the problems like "poorer health, higher crime & incarceration rates, lower productivity etc etc" will suddenly become much worse?

No.
But I'm sceptical that that situation could exist, and for reasons like the following it's becoming less likely to be possible:

The view that income inequality harms growth—or that improved equality can help sustain growth—has become more widely held in recent years (see “Equality and Efficiency” in this issue of F&D). Historically, the reverse position—that inequality is good for growth—held sway among economists.

The main reason for this shift is the increasing importance of human capital in development. When physical capital mattered most, savings and investments were key. Then it was important to have a large contingent of rich people who could save a greater proportion of their income than the poor and invest it in physical capital. But now that human capital is scarcer than machines, widespread education has become the secret to growth

http://www.imf.org/external/pubs/ft/fandd/2011/09/milanovic.htm

Put simply, I don't think the rich could double their wealth without those that provide the human capital losing out in some way. The rich do not exist in a vacuum, they cannot create wealth independently* of the wealth of the poor as the poor either produce the goods & services or consume them. Either the poor are producing more goods and their wealth is not increasing proportionally or the poor are paying more for goods with the same wealth, both result in a decline in wealth of the poor.

As an anecdote; On a professional engineers wage I won't be able to provide my future children with the same quality of life my grandfather provided his seven children and wife. He was a day labourer. Most young people of my generation will be poorer than their parents. This isn't solely due to inequality but it is partly.

 

[Pythagorean]

Billy Joule, suppose we had a society where one day the rich doubled their wealth, and the poor did not - it stayed constant. Inequality has clearly gone up. Do you believe the problems like "poorer health, higher crime & incarceration rates, lower productivity etc etc" will suddenly become much worse?

My understanding is that it's not a "sudden" thing, but that it will result in physical segregation due to home price differences, which will result in neighborhoods with a homogenous population of peoples with low socioeconomic status. And that these neighborhoods, fueled by the crime-education-poverty triangle, will make the neighborhood a smaller priority for budgeting and administrative attention. We will call them ghettos.

 

[russ_watters]

Poverty and inequality most often go hand in hand.

No they don't. Inequality and prosperity most often go hand in hand. That's what this thread is about!

Put simply, I don't think the rich could double their wealth without those that provide the human capital losing out in some way.

But that's the way it has worked for many decades.

As an anecdote; On a professional engineers wage I won't be able to provide my future children with the same quality of life my grandfather provided his seven children and wife. He was a day labourer.

That's shocking. The median PE salary in the US is $100,000. He must have been quite a day laborer!

Most young people of my generation will be poorer than their parents.

That's false. Incomes are rising over time. Most young people are/will be richer than their parents. I provided the data that proves this.

 

[jz92wjaz]

I've seen multiple reports that suggest that Millenials are less financially secure than their parents. The reports show that they have higher student debt, lower employment, and lower inflation adjusted wages. It may be partially because we spend more time in college, but a college degree has become more necessary, so jumping into the workforce out of high school is much less of an option than it was for the previous generation. People are reluctant to hire new graduates due to limited resources and their inexperience. It's not impossible, but I do believe this job market is tougher for us than it was for our parents, and we have to work harder and smarter because of the world we live in.

http://www.washingtonpost.com/busin...659b1e-aa17-11e3-9e82-8064fcd31b5b_story.html

 

[billy_joule]

No they don't. Inequality and prosperity most often go hand in hand. That's what this thread is about!

Which of these lists has more prosperous nations?

The ten most unequal nations:
Namibia
Zimbabwe
Denmark
Switzerland
United States
Gabon
Brazil
Central African Republic
Swaziland
Guatemala

The ten most equal nations:
Japan
China
Spain
South Korea
Macau
Ireland
Italy
Yemen
Finland
Australia

http://www.nber.org/papers/w15508

All tabulated here: http://en.wikipedia.org/wiki/List_of_countries_by_distribution_of_wealth

I've never heard the word 'prosperous' used to describe many of the nations in the first list. I wouldn't conclude inequality and prosperity go hand in hand.

That's shocking. The median PE salary in the US is $100,000. He must have been quite a day laborer!

He had a 6 bedroom house in a nice neighbourhood. A comparable house would cost me over 1mil, let alone supporting 7 kids on one income! The cost of living and housing prices has outstripped incomes year on year where I live.

That's false. Incomes are rising over time. Most young people are/will be richer than their parents. I provided the data that proves this.

Yes, incomes are rising but by poorer I mean less wealth.
http://money.cnn.com/2014/09/22/news/economy/gen-x-poorer-than-parents-pew-study/

 

[Vanadium 50]

I've never heard the word 'prosperous' used to describe many of the nations in the first list. I wouldn't conclude inequality and prosperity go hand in hand.

Switzerland? Denmark?

Let's look at historical data. In 1982, China had a Gini coefficient of 0.29 and India one of 0.32. Today Japan has the lowest in the world at 0.574. By your argument, in 1982 these should have been the most prosperous countries in the world. Instead, they had poverty rates of 96% and 86% respectively. Today their poverty rates are lower - much lower in the case of China - and their inequality rates are much higher: their Gini coefficients are twice what they used to be. If you look at the global trends over the last 30 years or so, there has been a trend towards decreasing poverty and increasing inequality.

The argument that reducing inequality will reduce poverty is simply not supported by the data. The argument could be made (and has been made) that reducing inequality is a good in and of itself, but again, the evidence is that this will increase poverty. How much worse are we willing to make the lives of the poor, in order to punish the rich?

A very interesting word was used earlier - "disruption". Henry Ford disrupted the world, and by the way, made a fortune doing it. This was not good for buggy-whip makers.

 

[russ_watters]

I've seen multiple reports that suggest that Millenials are less financially secure than their parents. The reports show that they have higher student debt, lower employment, and lower inflation adjusted wages. It may be partially because we spend more time in college, but a college degree has become more necessary, so jumping into the workforce out of high school is much less of an option than it was for the previous generation. People are reluctant to hire new graduates due to limited resources and their inexperience. It's not impossible, but I do believe this job market is tougher for us than it was for our parents, and we have to work harder and smarter because of the world we live in.

http://www.washingtonpost.com/busin...659b1e-aa17-11e3-9e82-8064fcd31b5b_story.html

Second sentence in the article:

They may be the first cohort to end up worse off than their parents.

"May". It hasn't happened yet. Most of the issue for millenials is that many came of age at the start of the Great Recession. So they are off to a bad start. Only time will tell if their situation is to remain bad, but lately the economy has been growing quickly and job numbers improving.

And, as the quote says: if it does happen, it would be the first time ever. So my point is not impacted but you would have to make an argument for what/why the change. Student debt is a potentially viable answer and I do think it is a problem that needs to be fixed, but a large part of that problem is due to the slow start millenials got due to the recession.

 

[russ_watters]

Which of these lists has more prosperous nations?

I've never heard the word 'prosperous' used to describe many of the nations in the first list. I wouldn't conclude inequality and prosperity go hand in hand.

That's an invalid way to do the analysis. Different nations with vastly different structures may have vastly different inequalities regardless of if they are rich or poor. What we're talking about is an all else being equal situation: tracking one country (usually, the US) through time. So again, the way it has worked is that when the economy rises, inequality rises and when the economy falls inequality falls.

"Inequality" has been an issue over the last year or two in the US because it is rising in the US. That's why we're having this discussion. It is rising because the economy is growing. Prior to that, during the Great Recession, few people talked about inequality because it dropped when the economy dropped.

He had a 6 bedroom house in a nice neighbourhood. A comparable house would cost me over 1mil, let alone supporting 7 kids on one income!

Well again, good for him -- but that situation was not typical.

The cost of living and housing prices has outstripped incomes year on year where I live.

That situation is not typical for the US. The statistics I provided are adjusted for inflation -- cost of living. Housing prices had a wild bubble 10 years ago, but that bubble burst and housing prices are no longer out of whack with their historical trend.
http://www.jparsons.net/housingbubble/

Also, 7 kids? That's not typical either. Family sizes have decreased over time. So given that you should be making a ton more money and have a smaller family than your father, I see no reason why you shouldn't have a substantially better standard of living. Again, individuals can vary, but that is the norm in the US.

Yes, incomes are rising but by poorer I mean less wealth.
http://money.cnn.com/2014/09/22/news/economy/gen-x-poorer-than-parents-pew-study/

No you don't. We've been talking about incomes throughout this entire conversation. You were correct to be talking about gini coefficient (though you didn't do it right) -- which is a measure of income equality. Standard of living is not well tied to wealth because wealth isn't what you use to make your house and car payments and buy groceries -- income is.