Hopefully a short post. This idea doesn’t seem radical to me but given the conversation I suppose its different than what most people have in mind.
Its not immediately clear to me that we should care at all about inequality per se. Some folks have argued that income inequality leads to political inequality. Of course, that is not something I am likely to care about either.
What I am concerned with is the conditions that poor people face.
An argument that does have currency with me is that if we can successfully take access to resources from richer people and given them to poorer people then this is a good idea. Not because it reduces inequality, but because it simply increases the opportunity sets of poorer folks which I think is generally better than increasing the opportunity sets of richer folks.
However, ideally I would want this to have as little destruction of total opportunity sets as possible which might mean tolerating very high or increasing levels of inequality in general.
More concretely it could mean creating an economy where the rich got even richer but we could redistribute some of that wealth to poorer folks.
Some might argue that if the rich become super rich they will resist this. Maybe, but its not clear to me that this happens in practice.
Even if you think of the Reagan Revolution as have reduced the amount of redistribution that actually gets to the poor that happened at a time of lower inequality.
It is true that Welfare Reform happened during relatively prosperous times but I think that is a more complex issue. In the 90s, however, the earned income tax credit seemed to be very popular and of course as societies has become richer they tend to increase Social Security for the disabled and elderly.
I don’t mean this to attach to any particularly policy proposal (besides radically lowering immigration restrictions) but just as a general way of thinking about the issue. The question is what can we do to improve the lives of the least advantaged.
Whatever inequality winds up being under this strategy is fine by me.
13 comments
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Wednesday ~ April 18th, 2012 at 9:40 am
Terry
Reblogged this on Secret Blog #2 and commented:
This is from Modeled Behavior, a blog where I try to learn something about economics from someone who doesn’t seem to care about politics.
Wednesday ~ April 18th, 2012 at 9:56 am
Terry
Reblogged. Very Spock, this post. “It is logically the best situation that more people should be participating in the economy. The income gap is immaterial. Oh, you think they’re connected in some way? Fascinating.”
Wednesday ~ April 18th, 2012 at 10:17 am
Effem
Have you considered the research which links health outcomes and overall measures of well-being to the level of inequality? It seems biologically unhealthy to me for large portions of the population to feel like “have nots.” And whether it is rational or not, feeling like a “have” or a “have not” seems to be driven by relative, not absolute, positioning. Some go so far as to suggest that the obesity & depression epidemic in the US is driven by the perceived “have not” status.
I’d be curious to see you do a review of the “softer” side of inequality. Strictly rationally speaking, I agree with you – all that matters is that the poor are “OK.” However, real life may not be so convenient.
Wednesday ~ April 18th, 2012 at 10:47 am
john75
I wanted to echo Effem’s comment. You write this: “What I am concerned with is the conditions that poor people face.”
What if utility is based on relative standing? Your concern would then be income/consumption inequality.
Wednesday ~ April 18th, 2012 at 10:56 am
Becky Hargrove
Two things: Lower income people have to actually be involved in productive economic activity which challenges them and creates actual wealth. They have to be involved in said activity in ways that do not present a direct comparison or choice factor to those who have more freedom to work with money.
Wednesday ~ April 18th, 2012 at 11:20 am
engineer27 (@engineer27)
Anyone who is a fan of capitalism ought to be concerned about concentration of resources. Capitalism works by having as many people as possible trying to solve problems in as many different ways as possible. Most will fail, but the ones that succeed improve life for everyone.
If resources get too concentrated, then capitalism itself breaks down since not enough people get to try out their ideas.
Note that the people who best solved yesterday’s problems (and as a result now command a greater share of resources) are not necessarily the ones best suited for solving today’s or tomorrow’s problems.
Wednesday ~ April 18th, 2012 at 11:35 am
BSEconomist
I think this post is bordering on incoherence. Karl, I love ya man, but I think you’re a little off today… at any rate, my arguement:
First, to say that people should not care about inequality is a ridiculous statement. I could say, “people should not care about the Twilight Saga it’s aweful”, but the fact is that people do in fact care about it. Preferences are preferences. And no it is not “irrational” to do so, not in the sense of economic rationality at any rate. People’s revealed preference is for lower inequality. Period. (For example, I personally do not want my children to live in a world where there is hunger and deprivation and there is nothing wrong with doing what I can to prevent it.)
Second, your argument from opportunity sets makes as little sense. There is no principle of “conservation of opportunities” in an economy. An aggregate opportunity set makes as little sense. On the other hand, in terms of traditional wellfare analysis someone who has many choices already would recieve less utility from an endowment of many more opportunities than someone who starts with few (new chioces are unlikely to improve utility much if many good options are already available). So unless your wellfare function strongly favors the already rich anyway, the wellfare improving thing to do is to “redistribute” choices from the ones with many to the ones with few.
Finally, I just want to (almost) agree with you on one thing. I don’t think it matters how we get there either. Having said that, it is not enough to sit back and say that the problem will take care of itself. I think there is a strong (but anecdotal) case to make that inequality fell off the political radar in the 70′s largely because efforts at amelioration were successful. It has reentered politics precisely because policy since has done so much to reverse those gains. Unless we want to continue to bounce back and forth between these extremes, we as a society should put some real thought into more robust methods to keep inequality under control.
Wednesday ~ April 18th, 2012 at 5:23 pm
Matt (@MeCampbell30)
It seems to me that both of you are arguing that extreme inequality can act to hinder future growth (regardless of the verbiage you use to say it).
Nevertheless, I think this is one of those things where it’s great to theory craft but I suspect the actual explanation of such a cause is more complex than it seems on it’s face.
Wednesday ~ April 18th, 2012 at 12:02 pm
Is it important to have a policy addressing inequality? « BS Economist
[...] left this comment following a confusing post from Karl Smith: First, to say that people should not care about inequality is a ridiculous [...]
Wednesday ~ April 18th, 2012 at 1:36 pm
curtd59
GREAT POST.
Once you’re rich, what you want is status. It’s all you can want. Make it very visible who is contributing to the economy, and the very rich will be very happy. They will be buying something that the government currently prohibits them from purchasing: status.
People who pay taxes don’t care about redistribution. They care about ‘cheating’. They care about misuse in the state.
Thats why they give to the disabled and to the elderly. It’s obvious that they aren’t ‘cheating’. WIth the poor, it’s not so clear who’s deprived, who’s disabled and whose cheating.
Friday ~ April 20th, 2012 at 7:12 am
J.V. Dubois
It is fascinating how this question permeates the economic blogosphere. For me, question like “should we care about economic inequality” is akin to the question “should we care about biodiversity”. Since inequality is framed in this discussion as something inherent to free market capitalism, I will use this framing in the following. Because it was since Adam Smith, where economists argued that free markets and capitalism will generally produce “wealth of nations”. However what is not that clear is – why should markets deliver some national wealth?
Adam Smith argued, that markets drive prices of everywhere to their “natural rate” – with the exception of labor. He envisioned that most humans in the future will make their living from selling their labor. This prediction seems to be correct. What does not make sense from his point of view is why should laborers get richer – why they should enjoy income above the one needed for basic subsistence.
I think that this stands in the core of the inequality question in the future. Economists always think that it is human labor that drives the economic growth. We witnessed shifts from agriculture, to indistry and services – human labor always survived and transformed, and owners of human labor (humans) always managed to extract the rent stemming from the fact that production of human labor is “monopolised” by the state. Slavery is forbidden and last I checked noone “produces” their children so that labor supply is expanded.
However what if “labor” stops being important in the future in the way Adam Smith envisioned? His vision was that the production process will be reduced to the set of the most simple task where humans will serve as robots offering labor. What if in the new era the capital will not need this kind of human labor, or not in such ammount. It is not hard to imagine. Think about people having basic needs for physical products with most of their wants shifted to a virtual experience that is offered by creative an imaginative subset of human population. But since it is supply that drives demand, suddenly the economy turns to be an exchange between this subset of an economy. Human laborers who offer just their basic labor and who carve the experience provided by that “gifted” part of the population simply lack anything they can offer in exchange. They still may lead “good” lives compared to their children, they may not lack of any goods that require simple human labor to produce. But they will be forever shut out of the new economy growing before their eyes.
Friday ~ April 20th, 2012 at 3:53 pm
Mitsu Hadeishi (@syntheticzero)
If one cares about overall economic effectiveness or efficiency it seems to me that inequality is something one ought to care about — not for purely “moral” reasons but simply because having a large percentage of the population living in such a way that they have little access to opportunity (particularly for their children) means we are underutilizing the potential creative and productive output of these people. On the other hand, if the poorest in our society actually did have relatively adequate access to opportunity, education, housing, food, health care — the fact that there are people doing far better than them doesn’t strike me as necessarily terrible — except, again, when thinking about concentration of control, eventually this favors stagnation, as we end up with an entrenched class of people who may or may not actually be continuing to contribute to economic activity but maintain their oversized influence on the economy because they contributed long in the past (or perhaps their ancestors did). The market works fine for allocating resources in the short term, but over the longer term excessive capital accumulation, I would argue, leads to inefficiencies (in banana republics this gets turned into crony capitalism, corruption, etc., and the danger of this occurs in our country as well).
So the issue of inequality is not merely abstract “fairness”; it has an obvious economic impact as well. Waste is waste: having an underclass leads to waste, having an entrenched oligarchy leads to waste. I care about reducing waste, so I care about inequality.
Saturday ~ May 26th, 2012 at 12:19 pm
Are the Poor Getting Poorer? Upward Mobility is the Key! – John Malcolm
[...] Should We Care About Inequality (modeledbehavior.com) [...]