David R. Henderson  

Henderson on Piketty, Part 4

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Here's the next installment from "An Unintended Case for More Capitalism," my long review in Regulation of Thomas Piketty's Capital in the Twenty-First Century:

How does Piketty handle this serious problem? [The problem that his proposed tax on capital would hurt labor?] He doesn't. The only behavioral response to a tax on capital that he discusses at length is that owners of capital would move to lower-tax countries. And to avoid that happening, he puts a lot of thought into how to form, essentially, a tax "cartel" in Europe. He would have countries in the European Union agree to tax capital, making it harder for people to move to lower-tax countries.

Even an economist who likes Piketty's book and favors his tax on capital has pointed out its bad effects on economic well-being. In his New Republic review, MIT economist Robert Solow, who won the Nobel Prize in economics for his pioneering work on economic growth, wrote:

The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option. If a small class of owners of wealth--and it is small--comes to collect a growing share of the national income, it is likely to dominate the society in other ways as well.

Translation: if capital is taxed heavily, workers' well-being will not improve, but because a tax on capital will likely stem the increase in the share of income going to owners of capital, wealthy people will dominate the society less than otherwise.

For Piketty and, presumably, Solow to calmly countenance the possibility of stagnating real wages just to keep capital's share from increasing, they would have to see some large problems with increasing inequality. Solow does not point out any such problems, which makes sense because his review is short. But Piketty, in over 600 pages, does not make a clear statement about why increasing inequality is a problem in a society where almost everyone's lot in life is getting better and better.

So let's fill in the gaps. How big a problem is wealth inequality? In my opinion, if people came by their money without cheating others and without getting special government favors, then there is no problem with those people becoming very wealthy. What really matters is inequality in consumption and, here, the differences between poorer Americans and wealthier Americans are probably as low as they have ever been. Most lower-income people have color televisions, cell phones, refrigerators, comfortable clothing, and three square meals a day. That was not true 60 years ago. Or take a longer view: In the mid-19th century, the poorest people in American were probably slaves. That was, of course, awful. The largely rich people who "owned" them could treat them very badly if they wanted to. And even if they did not want to, let me repeat that these poor people were slaves.

Or consider finer differences between the middle class and the wealthiest. You would have to look carefully--at least, I would--to see the difference in the quality of clothing that billionaires and those with a net worth of "only" $100,000 wear. Both can travel by jet, but the wealthier person can get there more quickly and easily on his private jet. The rest of us have to share space. The private jet is certainly nicer, but is that really a major social problem?


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COMMENTS (17 to date)
Pajser writes:

Equality of wealth matters. Let us imagine an extreme example, two inhabitants of the small island, one of these is the owner of the island, other one is employer. Even if their consumption is exactly the same, owner of the island has power to determine how this consumption will look like, its quality and quantity. Furthermore, and maybe more importantly, owner of the island controls the large and important part of the worker's life: what he does, when, where, under which conditions. The worker is left without his most specific human function: his ability for creation. If the wealth is equalized it would be better. (I'd prefer socialized instead of equalized wealth.)

Pajser writes:

Edit: it should be "other one is employee."

Andrew_FL writes:

I'm not clear why consumption inequality matters one bit. So what if someone rich buys more stuff and lives a more lavish lifestyle than someone who isn't? Surely the only thing that matters is whether those at the bottom are able to improve their well being, and how fast they are able to do so, not whether people better off improve their well being faster?

If everyone lived as well as billionaires do today, but some lived a million times better than that, would that be a "problem?" It seems to me the obvious answer is no.

Greg Heslop writes:

One argument against inequality which has been repeated to me on a couple of occasions is that health outcomes are worse for persons in the bottom percentiles the more unequal is the society. That is, controlling for their absolute material conditions, the relatively poor might do worse on health the richer are the relatively rich.

I have not been able to find a good source on this, however, and am sceptical of the results. My search skills on Google Scholar are quite poor, so someone else might want to try to find the elusive article if curious. Even if the results are true, one might still find inequality quite desirable on utilitarian grounds as it incentivizes people to seek better-paid occupations, or on the grounds which Professor Henderson discusses in the post.

Apart from the health study, I am aware of no evidence that inequality should be of any great concern to anyone. Poverty or political corruption might be, but these are separate issues. It seems to me that there is a near-total absence of substance in most criticisms of inequality.

mucgoo writes:

How about the genuine inequality seen between the West and the developing world?
At least half the globe doesn't have "color televisions, cell phones, refrigerators, comfortable clothing, and three square meals a day."

Pajser writes:

Consumption inequality matters (1) because utility of the same amount of wealth on the bottom of society is greater than utility on top. $100 on the bottom saves lives. $100 on top is not even noticed by consumer. Inequality means inefficient use of resources. It is the problem. Even in society as Andrew_FL described it, it would be the problem. The solution is redistribution. Maybe every possible redistribution causes worse problems than it solves. But it is matter for discussion.

(2) People need to be perceived as worthy members of the society and they suffer if that need is not satisfied. Lets say your son is very short and very weak. Even if the society is advanced enough that height and physical strength do not make any functional difference, he will suffer seriously. It is not envy; he will suffer even if he is not envious. It holds for income inequality as well.

(3) It seems to me, and many people, that inequality, except of direct and indirect effect above, causes more indirect effects: envy, frustration, variety of health and social problems. Some researches (see The Spirit level, or Rowlingson's article) show correlation of health and social problems with inequality and almost no correlation with income in relatively rich societies (from Portugal to USA.)

Greg Heslop writes:

Pajser,

Thanks for linking to the article and the book! They were the ones I had heard comments about but not been able to find. I still find "status anxiety" hard to believe in, but shall give your links a closer look.

Mucgoo,

Your concerns are not really with inequality as much as with poverty. To address the former, it helps just as much to burn the resources of the top few percentiles as it does to somehow get more resources to those in the bottom ones.

BC writes:

The New York Times recently profiled a former Rwandan homeless orphan, who is now a freshman at Harvard [http://www.nytimes.com/2014/10/23/us/from-a-rwandan-dump-to-the-halls-of-harvard.html]. One of his observations about the US was that it is "so wealthy that 'you can’t tell who is rich and who isn’t.'” That certainly puts developed world "inequality" into perspective.

Chris Stucchio writes:

BC, interestingly Rwanda has a Gini of 50, nearly the same as the US with 48. Barely an improvement.

Hopefully one day that kid can escape the horrible, inequality plagued US and make it to a wonderful, inequality-free place like India (Gini of only 33).

Don Boudreaux writes:

On inequality and status, here's the text of a letter of mine that appeared back in the spring of 2006 in the New Yorker:

John Cassidy bolsters the hypothesis that people’s health is harmed by relative (rather than absolute) deprivation by citing evidence from the animal kingdom (“Relatively Deprived,” April 3). For example, “dominant rhesus monkeys have lower rates of atherosclerosis (hardening of the arteries) than monkeys further down the social hierarchy.”

Contrary to Cassidy’s suggestion, however, such findings do not support policies to redistribute income. After all, animals with social hierarchies have no monetary income. Because status among humans is determined not only by income but also by traits such as political power, athletic prowess, military heroics, intellectual success, and good looks, equalizing incomes will intensify the importance of these non-pecuniary traits as sources of status. And there’s no reason why persons with low status in these non-pecuniary categories will not suffer all the stress and envy now allegedly suffered by people with low incomes.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Fairfax, VA

mucgoo writes:

@Greg Heslop

People seriously advocate burning the top just so the GINI coefficient and number of executive cars decreases?

It is a serious question as to why people will argue for redistribution to the "impoverished" of America or other Western countries when they are well above the global mean.

Nathan W writes:

I do not understand why there needs to be a choice like "either enjoy constant shares and stagnant wages OR rising real wages."

Why can't we have both? If real wages rise, can the programmers and engineers not afford to pass on some of the gains to their hairdressers and food service people, perhaps via the minimum wage or allowing labour in addition to capital holders to organize in negotiating for their wage?

Andrew_FL writes:

Pajser, thank you for reminding me why it's not worth engaging people who believe in comparing utilities across persons.

Greg Heslop writes:

Mucgoo,

"People seriously advocate burning the top just so the GINI coefficient and number of executive cars decreases?"

Not to the best of my knowledge, although I suppose Piketty's proposed tax cartel would come close since it reduces overall affluence over time in exchange for less wealth dispersion.

The point is simply that inequality may be addressed in many bizarre ways, none of which is likely to do much about the separate issue of poverty.

BC writes:

Mucgoo: "People seriously advocate burning the top just so the GINI coefficient and number of executive cars decreases?"

Actually, I believe it is indeed fashionable nowadays among the Left true believers to argue that "burning the top" to reduce inequality is valuable in and of itself. Here is a piece from Crooked Timber, entitled "Squeezing the rich is good: even when it raises no money" [http://crookedtimber.org/2014/02/02/squeezing-the-rich-is-good-even-when-it-raises-no-money/]. The author gives three reasons. (1) He believes property rights are fictitious so that individuals' wealth is not "theirs to start with". (2) Rich people often gain "prominence", which "gets them listened to and taken seriously". (3) Rich people can "outbid" others for goods. (By "outbid", I can only assume that the author means "produce other goods and services to obtain wealth to begin with, which can then be traded for goods".)

As far as I can tell, the essay is not intended to be satire.

Gene Marsh writes:

The ability to afford services is what separates the rich and poor today. Childcare, healthcare, banking, dental, car repair, legal representation, college...etc.

"Since the 1980s...the real price of a midrange color television has plummeted about tenfold … . Similarly, the effective price of clothing, bicycles, small appliances, processed foods — virtually anything produced in a factory — has followed a downward trajectory....The same global economic trends that have helped drive down the price of most goods also have limited the well-paying industrial jobs once available to a huge swath of working Americans."

http://www.nytimes.com/2014/05/01/business/economy/changed-life-of-the-poor-squeak-by-and-buy-a-lot.html?_r=0

What could poor people afford sixty years ago that they're priced out of today. How about tickets for a baseball game.
Id rather see the yankees than own a five dollar calculator. But maybe i'm spoiled by my electric toaster?

Gene Marsh writes:

The ability to afford services is what separates the rich and poor today. Childcare, healthcare, banking, dental, car repair, legal representation, college...etc.

"Since the 1980s...the real price of a midrange color television has plummeted about tenfold … . Similarly, the effective price of clothing, bicycles, small appliances, processed foods — virtually anything produced in a factory — has followed a downward trajectory....The same global economic trends that have helped drive down the price of most goods also have limited the well-paying industrial jobs once available to a huge swath of working Americans."

What could poor people afford sixty years ago that they're priced out of today? How about tickets for a baseball game.
Id rather see the yankees than own a five dollar calculator. But maybe i'm spoiled by my electric toaster?

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