Posts Tagged Inequality
New post on Pieria, discussing why inequality could be ethically ‘wrong’:
What is inequality?
Inequality is a situation where certain people have access to things – places, goods, services – which others do not. Historically, inequalities have often been enforced by fiat, such as aristocracies and guilds, or perhaps based on group characteristics, such as apartheid or slavery. In capitalist societies, we typically use property rights to restrict peoples’ access to resources. A poor man who walks into a store and tries to take something without paying will be prevented from doing so by security or the police, while a rich man who pays will not. The same applies to private schools, expensive social clubs or fine works of art. Unless you have a sufficient number of vouchers (money), you are legally and socially restricted from access to the overwhelming majority of resources in society.
Justifying inequality therefore entails arguing why some deserve more of these vouchers, and hence greater access to places, to goods and services, to social opportunities, than others. Defenders of inequality typically rely on one of 3 ethical arguments: just deserts, voluntarism, and grow the pie. I will consider each of these arguments in turn.
As I said on twitter, the article was definitely influenced by Matt Bruenig, but for balance here’s me saying similar things quite a while ago. The point is that contemporary debate often has it backwards: it is asked why exactly we should reduce inequality, as if that is some sort of natural baseline. But if you accept that people are born equal (which most do, even if they don’t like to say it out loud), then the question is why some are more restricted from pieces of the world than others. Defenders of inequality sometimes proceed as if the 3 ethical arguments above override any other concerns.
In my previous post on cutting taxes on the rich and inflation, I explored Jame’s Kroeger’s thesis that, past a certain point, tax cuts for the rich just inflate the price of positional luxury goods and hence do not benefit the rich people. I found some supporting evidence, such as the CLEWI rise and the evidence that marginal tax cuts aren’t good for growth (i.e. don’t increase production).
Apparently we aren’t the only ones to note this type of argument, as I stumbled across something similar in Moshe Adler’s Economics for the Rest of Us. Adler argues that inequality may create price inflation, by giving firms with market power an incentive to provide fewer goods at higher prices. The logic is simple: if the distribution of income is more unequal, the rich will be willing to pay significantly more than the poor and so, in absence of ability to discriminate, the profit maximising price for a firm will be higher.
Adler has a variety of supportive evidence. Firstly, he cites the 14% decline in musicians performing at concerts, instead choosing to perform at private parties for larger sums, and netting a 20% increase in revenue to boot. Secondly, he notes that in New York, high square footage apartments bought by the rich have been on the up, in conjunction with a more than doubling of price per square foot. Thirdly, he mentions that doctors have begun to charge large sums for face time, and as a result are seeing fewer patients. To top it off, he presents survey evidence that rich people often only do these things because other rich people do them, rather than because they need the extra space/goods/time. This is in line with Kroeger’s ideas about positional luxury goods.
But the problem here isn’t just about price rises. As Adler notes, inequality actually reduces the size of the economic pie as well as altering the distribution of it, because fewer goods are provided at a higher price.
The net result of these effects is that fewer goods are produced, and the rich do not get anything that they wanted before other rich people had it, whilst the middle and poor get less. This is pretty substantital evidence against low marginal tax rates.
This is a long overdue post to counter the claim from those who oppose domestic redistribution that it is somehow nationalistic – that if we truly care about the poor, we should redistribute to poor countries, not our comparatively rich countrymen.
From a purely aesthetic perspective, the reason people vote for domestic redistribution is because that is the poverty they are most aware of, and where they can easily see the effects of redistribution. This is due to both availability bias and a general lack of capacity to process the amount of poverty in the world. Launching tirades against voters because of this is, therefore, akin to mocking people for behaving like real people rather than rational economic people.
However, this isn’t the main problem. Redistributing large amounts to developing countries is undesirable for two other reasons.
The first is a laffer-curve style argument: if we were to collect as much as possible in the short term and redistribute it, our economy would be heavily taxed and we wouldn’t even be spending it on public services. In other words, we’d bankrupt the public sector and the economy would grind to a halt, eliminating our capacity for long term redistribution. The long term aid maximising amount of redistribution is probably fairly low as % of GDP, given that taxes cannot be so excessively high as to slow down growth, and enough of the tax revenue needs to be spent in the domestic economy to keep it going. Add political limitations to this and you’re looking at a level of redistribution not dissimilar to what we have now.
Secondly, and most importantly, is the false equivalence between domestic and international redistribution. This is best phrased as follows:
Economic growth is the cure for absolute poverty.
Redistribution is the cure for relative poverty.
The second statement is almost true by definition, whilst the first is clearly borne out by the facts (and I suspect, would not be opposed by those I am disagreeing with here). After all, is there a single example of a poor country developing due to aid? Sure, individual acts of redistribution may extend some lives in the short term, but in many cases it simply destroys industries and reduces the country’s capacity for development in the long term.
Similarly, there is not an example of a country that has grown its way out of relative poverty – the U.S. is the largest economy in the world, yet inequality is rife. Meanwhile, many Northern/Central European countries – though they do very well on growth too, incidentally – are effectively absent of relative poverty.
Now, we can discuss whether domestic redistribution is desirable or not, and whether relative poverty is ‘actually’ a problem or was just made up by Stalin, but for now, defending inequality on the grounds that people in developing countries are even poorer will not suffice.