David R. Henderson  

Henderson on Piketty, Part 5

How Europe did a "1937"... An odd incident in modern libe...
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?

This is from "The Unintended Case for More Capitalism," my review of Capital in the Twenty-First Century by Thomas Piketty.

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COMMENTS (9 to date)
John Voorheis writes:

Of course one need not rely on purely normative reasons to care about inequality. Piketty, as you note, doesn't make these arguments, but if

a) the Great Gatsby curve is causal or

b) the observed correlation between inequality nad political polarization is causal

then there's a case to be made that we should care about inequality, regardless of what our preferred SWF is.

Pajser writes:
David R. Henderson writes:

Oops. You’re right. Thanks.
I’ll leave it on, though, because of the first comment.

AS writes:

Why do other people like Piketty obsess over nominal income ratios when its really utility that matters? Utility has clearly been converging over time, as evidenced by the poor's access to roughly the same goods.

ThomasH writes:

While I think it is great that the poorest Americans in 2014 have a standard of living better than the richest American in 1814, that hardly touches the issue of inequality.

It seems that two things have changed to make income inequality more salient now than a generation ago.

1) "Then" there was a perception that a "rising tide lifts all boats." One could propose measures to increase wealth such as freer trade, deregulation, immigration reform, or lowering marginal tax rates with the supposition that almost everyone would benefit and losers would be compensated. Many have lost that perception.

2 The role of money in political campaigns has grown.

Jay writes:

@ ThomasH

Re: #2 in your list, the amount of money has grown but not the effectiveness as shown in the recent elections. The D's outspent by a large margin and got stomped. The fact that a billionaire can spend millions on a candidate and they still lose by 20 points does not make the poor worse off.

Effem writes:

I personally believe inequality matters for psychological reasons.

Would you take a job at another university making 10% more but where all of your peers make double for the exact same work? A super-rationalist may be able to make that trade but i'd argue that 90% of humans end up bitter and less happy overall despite the higher earnings.

To me the issue today is that the wealth gap is increasingly viewed as the result of a lot more than just hard work (luck, inheritance, tax policy, money in politics, too-big-to-fail, etc etc). This is not good for utility (when measured to include non-consumption utility).

Ali Bertarian writes:

Effem wrote: "Would you take a job at another university making 10% more but where all of your peers make double for the exact same work?"

That is a non sequitur. We don't all do the same work.

Somehow I don't think that it even matters to you that we don't all do the same work. You are right, it is a psychological problem. You are covetous and envious.

The fact that you and others view the cause of any inequality as due to "a lot more than just hard work" says more about you than you realize. Look at inheritance, for example. Only about 20% of millionaires come from families whose ancestors were millionaires. But that doesn't matter, because those who covet and envy others will always think of an excuse to try to take other's stuff.

"Utility" is just a sound, a group of letters, that people use to excuse their covetousness and envy. Do you really believe that there is a mathematical equation that tells you how much stuff every single person on this planet should have? Who is going to force the rest of us to live by your mathematical formula?

Effem writes:


My question may have been hypothetical, but I take it your answer would have been no, based on your visceral reaction. Psychological problems matter...after all, isn't greater happiness really the goal of the entire game of economics? What good would more money but less happiness be?

As for me, I'm rich. I work in finance where any warm-body who went to the right school could get rich. I'd like to think i'm better than a warm body...but to be honest, i'm not sure. And if you are worse than a warm body and make some awful investment decisions? Well then the government and/or Fed will probably bail you out. Then you hire a sophisticated accountant to drive your tax bill down to low-double-digits using techniques that only someone rich could access.

Obviously there are also plenty of supremely talented people who make their wealth by truly providing some superior service. My point was that the perception (and possibly the reality) is that this is becoming a lower percentage as time go by.

The system needs to be fair...and just as importantly feel fair. The bottom half in a system that feels fair will be quite a bit happier than the bottom half in a system that doesn't. The US has gone from something that felt like a meritocracy to something that feels like crony capitalism run amok.

I could be totally wrong but that's the way it seems to me. Those with wealth would be wise to keep an ear to the ground. We live in a democracy - you make 51% of people unhappy and they can redistribute everything if they feel like it...

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