Saturday, January 02, 2016

Income inequality is both a problem and a symptom

Paul Graham today published two essays in which he challenges the idea that economic inequality is a problem.
Since the 1970s, economic inequality in the US has increased dramatically. And in particular, the rich have gotten a lot richer. Some worry this is a sign the country is broken. 
I'm interested in the topic because I am a manufacturer of economic inequality. I was one of the founders of a company called Y Combinator that helps people start startups. Almost by definition, if a startup succeeds its founders become rich. And while getting rich is not the only goal of most startup founders, few would do it if one couldn't. 
I've become an expert on how to increase economic inequality, and I've spent the past decade working hard to do it. Not just by helping the 2400 founders YC has funded. I've also written essays encouraging people to increase economic inequality and giving them
detailed instructions showing how. 
So when I hear people saying that economic inequality is bad and should be eliminated, I feel rather like a wild animal overhearing a conversation between hunters. But the thing that strikes me most about the conversations I overhear is how confused they are. They don't even seem clear whether they want to kill me or not.
As someone who believes that extreme income and wealth disparities are indeed bad let me be clear: no, Paul, I do not want to kill you, nor do I want to kill Y Combinator, though upon reflection I can see how someone could get that idea.

My first reaction on reading these essays was: he's attacking a straw man.  Surely everyone realizes that wealth inequality is merely a symptom, not the actual disease.  But then I went and took another look at some of the political rhetoric being bandied about and I realized that this is far from clear.  For example, here is what Bernie Sanders has to say about it:
The issue of wealth and income inequality is the great moral issue of our time, it is the great economic issue of our time, and it is the great political issue of our time.
The reality is that since the mid-1980s there has been an enormous transfer of wealth from the middle class and the poor to the wealthiest people in this country. That is the Robin Hood principle in reverse. That is unacceptable and that has got to change.
Despite huge advancements in technology and productivity, millions of Americans are working longer hours for lower wages. The real median income of male workers is $783 less than it was 42 years ago; while the real median income of female workers is over $1,300 less than it was in 2007. That is unacceptable and that has got to change.
There is something profoundly wrong when one family owns more wealth than the bottom 130 million Americans.
If you stopped reading there you might be forgiven for assuming that Sanders thinks the solution to this problem is to simply re-distribute wealth from the rich to the poor.  And indeed, some of his policy proposals seem to reinforce this idea.  He wants to raise taxes on corporations and the ultra-wealthy ("Demand... that the wealthy and large corporations pay their fair share in taxes..."), raise the minimum wage, and have the government pay for college tuition.

If you look more closely, though, the Right Answer is actually in there, but it's buried pretty deep inside the leftist rhetoric:
The reality is that for the past 40 years, Wall Street and the billionaire class has rigged the rules to redistribute wealth and income to the wealthiest and most powerful people of this country.
This is the problem.   It is not income or wealth disparity per se.  If the differences in income and wealth were entirely reflective of people's productivity and contributions to society there would be no problem.  But they aren't.  Instead what is happening is that the ultra-wealthy are using their disposable income to buy political influence, then using that influence to get laws passed that allow them to collect rents.  They then apply the proceeds of those rents to buy more political influence.  The result is a positive-feedback loop that concentrates power in the hands of a small minority and thus undermines both democracy and capitalism.

Graham doesn't buy this:
Not everyone who gets rich now does it by creating wealth, certainly. But a significant number do, and the Baumol Effect means all their peers get dragged along too.
The Baumol Effect, in case you didn't know, is the tendency of wage increases that come from increases in productivity to "spill over" into jobs where there have been no productivity increases.  In other words, it's trickle-down economics under a fancier name.  The problem with trickle-down economics is that wealth only trickles to a few places.  I can only wear so many clothes, drive so many cars, live in so many houses, hire so many house keepers.  Once I have everything I want, I'll stop spending money on stuff and start spending it on... well, if society is lucky I'll start investing it in startups.  If society is not so lucky, I'll start buying politicians.

Here's Graham's bottom line:
You can mitigate this with subsidies at the bottom and taxes at the top, but unless taxes are high enough to discourage people from creating wealth, you're always going to be fighting a losing battle against increasing variation in productivity.
Graham is saying that you can't solve the "problem" of wealth inequality without suppressing or destroying the wealth-creating processes that led to the inequality in the first place.  And who would want to kill that golden goose?

But this is a false dichotomy.  It completely ignores the other cause of inequality, the fact that "Not everyone who gets rich now does it by creating wealth."

It is possible to address this problem without killing the golden goose.  How?  By rolling back some of the legislation that was put in place by undue political influence.  At the very least, we should strive for a non-regressive tax system, which is what we have now.  If we are to be the kind of nation that we like to think we aspire to be, we should also have enough social safety nets in place that people do not end up destitute through no fault of their own.  We can do all these things without destroying the incentive to innovate.

So why doesn't Graham recognize and advocate this?  Perhaps it's because two of his biggest golden geese — Uber [See correction below] and AirBnB — are actually relying on exactly the kind of political influence I'm calling out here in order to survive and prosper.  Both of these companies have business models that rely to a certain extent on doing end-runs around regulations that apply to their competitors.  It is no accident that both of these companies have quietly hired a small army of lobbyists.

So once again, let me be clear: I do not want to kill Y Combinator, nor do I want to kill Uber or AirBnB.  I am in fact a very happy Uber user.  They provide a terrific service.  They've raised the bar on taxi companies, which very much needed to be done.

On the other hand, I also want an effective, democratic government to provide infrastructure, protect people from extreme economic contingencies (like war and hurricanes), prevent people from profiting from economic externalities (like pollution) and provide oversight for well-regulated, free and transparent markets.  And that's not the direction we're heading.  We're heading towards political power being concentrated irreversibly in the hands of a small minority.  We're heading towards oligarchy.

And that is a problem.

[UPDATE:] Turns out Uber is not a YC company.  I could have sworn they were, but I was wrong.  I apologize for the error.  (But AirBnB is a YC company, so my main point still stands.)

61 comments:

arcady said...

There's actually quite a huge number of people who acquired wealth without actually creating much of anything. Hundreds of thousands in the Bay Area alone who have gotten hundreds of thousands of dollars of unearned wealth simply because they were lucky enough to buy houses in a place where people like Paul Graham wanted to move to in order to create wealth, and which had legislation that effectively limited the supply of houses and made them a rare collectible. The "rent" that is creating a significant amount of this inequality is the literal old-fashioned kind: on land and housing. Get rid of that, and income inequality suddenly becomes a less pressing problem, as the cost of living in productive areas would drop significantly.

Unknown said...

It's good you see income inequality as a symptom and not a cause. but why did it start in the 70's?

No one presents a good reason for this. However, there was one political change in the 70's that precipitated all of the subsequent political effects, including tax changes, that have produced the inequality. And that is political financing. Watergate pushed the country away from the easy money of politics into a tightly regulated system. no more bags of money on desks for votes.

Of course, money didn't get out of politics. It never can. The money-political regulation did create the whole economy of lobbyists and political action committees that we see today, whose purpose is to influence legislation. but the regulation of giving money to politicians also had an enormous negative side-effect. Far from stopping corruption, it has made our system more fragile and more corrupt.

Money serves a single primary purpose, to facilitate trades. What makes the political process work is trading. Compromise is most often, trading. In the old days ((70's and before) People traded money for votes. Legislators traded money to other legislators for votes too. Now all of that trading is illegal. This is a horrible mistake for a democracy.

It has meant unions can't give money to legislators. It has meant drug-outfits can't give money to legislators (as bootleggers used to do, which helped to end prohibition) It has meant our political process has become more and more divisive because you can't trade your ideology!

So who wins in a system where free trade is not allowed? the most connected with the most wealth, because they can hire the best lawyers, they can hire the legislators after they leave office, they can hire the best lobbyists. Instead of trading for votes, you get buying the whole politician, which is exactly what we have now.

Now, perhaps I'm wrong, but I do not know of any other change to our political process that occurred in the American political system besides the elimination of free (money) trading of votes. It seems counter-intuitive, but the purpose of money is to facilitate trade, and when we eliminate it from our legislative process, we corrupt the system.

Peter Donis said...

It looks to me like you and Paul Graham are in violent agreement. :-) You want to keep people from getting rich through buying political influence instead of creating wealth. Graham wants to make sure people can get rich through creating wealth even if we stop them from getting rich through buying political influence. I don't see any conflict between the two of you.

Ron said...

@Unknown: That's an interesting theory. Plausible too, but I'd say there's an important caveat: legalized bribery might be compatible with democracy when everyone is on a more or less equal economic footing (then you might get some real free-market effects) but not when the vast majority of the wealth is concentrated in a tiny segment of the population.

@Peter: I don't know if PG and I agree on the fundamentals or not, you'd have to ask him. But it doesn't matter. HIs thesis is that income inequality is not a bad thing, that in fact it's a good thing, that it's a sign of things working as they should. And it's true that *some* income inequality is (probably) a sign that things are working as they should. Complete equality of outcome is probably not healthy (that's what communism tried to achieve). But the vast inequality we have today, with the top controlling many, many orders of magnitude more than the bottom, is not healthy either.

Bradley Peck said...

The missing point about Uber and AirBnb in your explanation is that their industry completion is *highly* regulated (imo over-regulated) and their "end around" is a disruptive, needed change. If they simply adhered to the same exact market (and attendant regulations by way of the same business models) they'd be another in the machine of cronyism you're describing, not innovators.

Bradley Peck said...

The missing point about Uber and AirBnb in your explanation is that their industry completion is *highly* regulated (imo over-regulated) and their "end around" is a disruptive, needed change. If they simply adhered to the same exact market (and attendant regulations by way of the same business models) they'd be another in the machine of cronyism you're describing, not innovators.

R0B R0D said...

Well I write this as a person in poverty. We make less than 20K a yr with 2 kids. Im not here because I am not smart, innovative or hard working. I am simply not the same as the rich folks and dont have a fancy name. Its all about who you know. Most people that want to invest in others ideas have to like the other person first before they dish out any investment. The idea may be pitched by a different person who is more like the investor and bang, another rich person. I think that I am poor now cuz I was rich in my previous life. Although that may go beyond your subject at hand. The system is working as they want it to. No one in the tech world has anything close to the wealth of the owners of IMF, WorldBank and the US Fed Reserve. Google, AirBnB, Uber, eBay, etc.. are allowed to play with the real big boys. Its designed to be as it is. None of us have a say in it not even the great Jobs, Gates or FB. The game is for the rich by the rich. We can type and moan and yell all we want on the net, on the street, it doesnt matter, as long as we were born into our situation either poor or rich or in the middle the only path is already set out for us. Besides when you die rich do can you take any with you? I may have amazing ideas for a startup but I will never know anyone interested in dealing with me once they set eyes on me. I tell everyone everywhere that I would be a boss if my brain was inside the skin of someone else with a different name. And no one cares about the poor or the middle, everyone in America and those who are in bed with her only care for their own wealth. Its a game I wasnt invited to.

Peter Donis said...

@Ron: PG's thesis is not that "income inequality is a good thing". His thesis is that income inequality that is due to differences in productivity is a good thing (more precisely, that it's unavoidable if you want to create wealth, and creating wealth is a good thing). PG is perfectly clear in his essay that income inequality due to other causes, like playing zero sum games or buying political influence, is a bad thing and should be stopped.

Why is the distinction important? Because it affects how you measure how "fair" or "good" your society is. If you believe that income inequality is a bad thing (regardless of the reason for it), then you measure how fair or good your society is by something like the Gini coefficient. But if you believe that income inequality is only a bad thing if it's due to some cause other than differences in productivity (i.e., other than wealth creation), then you measure how good your society is by how well it prevents people from getting rich by any means other than wealth creation.

You seem to assume without question that the second kind of society--where people can't get rich by any means other than creating wealth (no buying political influence or zero sum games), but can get rich by creating wealth--will have less income inequality than our current society does. But I disagree (and I think PG would disagree too if you put the question to him that baldly). I think such a society would have more income inequality than our current one does. Why? Because there would be more opportunities than there are now for differences in people's productivity to become differences in income and wealth.

Consider: people like Bill Gates and Mark Zuckerberg are extreme outliers in our current society. But that's not because they got very, very rich by creating wealth; it's because the only way to get as rich as they are by creating wealth is to be very productive and win the lottery (be exactly in the right place at the right time--in Bill Gates' case, twice, first with DOS and then with Windows). Imagine what things would be like if the lottery-winning part wasn't necessary? In other words, imagine if you didn't have to have rich parents and go to Harvard to get as rich as Gates or Zuckerberg by creating wealth? Would the Gini coefficient in such a society really be lower than ours?

Don Geddis said...

I second the comment by Peter Donis. Ron, you talk a lot about how inequality is a symptom of real problem, but not a problem in itself. But I basically don't believe you're being completely honest (with yourself). The first problem is that the mainstream and political rhetoric clearly attacks inequality as a problem itself. You apparently are surprised by this (originally thinking Graham was attacking "a straw man", until -- to your credit -- you did the research). There is lots and lots of persuasive rhetoric out there about Gini and various policies (like tax or redistribution) that would lower income inequality. There is almost no discussion about the different causes of inequality, and making sure that any intervention not negatively impact wealth creation. You are to be admired for your careful distinction here, but I think you are overgenerous to those others "on your side", to believe that they share your careful distinctions.

Secondly, I'm not even sure that you really do, deep down, believe the problem/symptom distinction you claim in your post. In a previous comment, you wrote: "the vast inequality we have today, with the top controlling many, many orders of magnitude more than the bottom, is not healthy either." Perhaps that is true, but you haven't supported it with a single bit of evidence in your entire post. This comment shows the cheap, easy, wrong conclusion that inequality itself is a "problem" to be solved; the very "straw man" your post claims is not what anyone thinks.

But even you, in an unguarded moment, actually seem to believe that "straw man" yourself...

P.S.: "The result is a positive-feedback loop that concentrates power in the hands of a small minority and thus undermines both democracy and capitalism." This part is starting to get at a reason why inequality might be bad in and of itself, even if it came about via "legitimate" wealth creation. And what you say is a common mainstream narrative, and it seems to be common sense. The one problem is that it probably isn't true. The research I've seen suggests that buying political influence with money (in the US) is extraordinarily ineffective. It is simply not the case that an oligarchy of rich people run politics in the US. And it is not the common situation that US elections can be bought. If this is the linchpin of your complaint, you owe it to the discussion to actually do your research here. I submit that your story doesn't match reality.

Sonya Mann said...

I have beef with this line: "It is not income or wealth disparity per se. If the differences in income and wealth were entirely reflective of people's productivity and contributions to society there would be no problem." People can't control their capabilities; for example an intellectually disabled person can't contribute to society at the same level that a neurotypical person can (economically speaking). But we shouldn't let those people fall by the wayside. In other words, if the differences in income and wealth were entirely reflective of people's productivity and contributions to society, there would still be a hell of a problem.

Ron said...

@Peter

> You seem to assume without question that the second kind of society--where people can't get rich by any means other than creating wealth (no buying political influence or zero sum games), but can get rich by creating wealth--will have less income inequality than our current society does.

No, I don't assume it. If you remove one of the causes of an effect then -- by definition -- there will be less of the effect. If that is not the case, then the thing you removed was not a cause. That's what "cause" *means*.

@Don

> I'm not even sure that you really do, deep down, believe the problem/symptom distinction you claim in your post.

I don't know what I can say to convince you. Maybe this will help: just because income inequality is a symptom of a deeper problem (the political-corruption feedback loop) as well as a consequence of things that aren't problems (like wealth creation) does not mean that it cannot also be a problem in and of itself. A fever is usually a symptom of a deeper underlying problem (like an infection), and normally a fever is a good thing: it's a side-effect of your immune system doing its thing, and it can actually help kill the critters you're infected with. You can "fight" a fever by, say, immersing yourself in ice water, but that's generally a bad idea. Still, if a fever gets bad enough it can be a problem in and of itself. A high enough fever can kill you, and in such cases immersion in cold water can be a life saver.

I believe that the wealth disparities we have in the U.S. today are reaching the level where they are a problem in and of themselves. The demise of the middle class is particularly worrisome.

> The research I've seen suggests that buying political influence with money (in the US) is extraordinarily ineffective.

What research is that?

> And it is not the common situation that US elections can be bought.

That's true. That's not the problem. The problem is, as Laurence Lessig has pointed out and documented in detail, that a small cadre of rich donors effectively have veto power over any candidate who is not independently wealthy.

@Sonya:

Yes, I agree. I should have said it would be *less* of a problem.

Peter Donis said...

@Ron: "If you remove one of the causes of an effect then -- by definition -- there will be less of the effect."

Other things being equal, yes. But other things are not equal. If you eliminate buying political influence, zero-sum games, etc.--all of the bad causes of income inequality--you will also have much more equality of opportunity, which will greatly increase the impact of variations in productivity--i.e., you will increase the good cause of income inequality. So you aren't just changing one thing.

Ron said...

@Peter: I probably need to write a whole 'nuther post about what I think the correct policy response to this problem ought to be. You're right, it's complicated. Part of the problem is that the idea that compensation follows productivity is actually a myth, even in the absence of political corruption. There are just too many other ways to game the system. Nonetheless, having too much inequality because the playing field is too level would be, IMHO, a much nicer problem to have than the one we're facing now.

Peter Donis said...

@Sonya: "an intellectually disabled person can't contribute to society at the same level that a neurotypical person can (economically speaking). But we shouldn't let those people fall by the wayside."

I agree with this, but I don't think the issue here is income inequality; it's the fact that the resources people need to meet basic requirements (food, clothing, shelter, etc.) are scarce. That means a person who, through no fault of their own, isn't productive enough to generate the income needed to acquire basic resources, will, as you say, fall by the wayside if something isn't done.

But there are two things that can be done. One is for other people to supplement the disabled person's income so their needs are met. The other is to make the resources needed for basic requirements less scarce, so they are cheaper, so a smaller income is sufficient to acquire them. In other words, to create more wealth.

The "end states" of these two methods are very different. The first method results in a world with less income inequality (because income is simply being transferred from the more productive to the less productive), and also less wealth. The second method results in a world with more wealth (possibly much more), but also more income inequality.

Given a choice, I would prefer to live in the second of these two worlds. What about you?

Peter Donis said...

@Ron: "Part of the problem is that the idea that compensation follows productivity is actually a myth, even in the absence of political corruption. There are just too many other ways to game the system."

Now you're assuming that there has to be a "system" that can be gamed. What about the alternative of not having a "system" at all?

Your answer might well be that the "no system at all" alternative (i.e., anarcho-capitalism, or something like it) would be worse; but if you haven't looked at the case in detail (for example, by reading David Friedman's The Machinery of Freedom, if you haven't already), you might not be giving it a fair shake.

You might also object that the "no system at all" alternative, even if it would be better in the long run, is not even remotely possible, politically, now or in the foreseeable future. That might be true. But if so, IMO it says more about the limitations of human nature than the limitations of anarcho-capitalism.

Don Geddis said...

Ron: "I believe that the wealth disparities we have in the U.S. today are reaching the level where they are a problem in and of themselves."

Ah, so your post title is not really true. And your complaint that Graham was fighting a straw man is not quite true either. You do believe that inequality is a problem, in and of itself, regardless of whether it came from wealth creation or not. That's fine, but then your post didn't really provide much evidence to defend the claim that inequality is a problem, and not just a symptom.

"The demise of the middle class is particularly worrisome."

An alternative perspective: the middle class is "shrinking", not because they are poor or stagnant, but instead because they are becoming wealthy. You can get into a lot of trouble by focusing on terms like "middle class". You react emotionally as though that is a fixed group of individual people, say like "bakers" or "tailors" or "farmers" in medieval times. But individual people have lifetime income streams that don't stay in a fixed "class", and what happens to the group that you put a label on, does not mean that happens to any particular individual human. It's like complaining about "poverty", except also defining poverty as "the lowest 10% in income". No matter what happens to your society, mathematically there will always be some lowest 10%, so all your efforts to improve society have zero impact on the "problem" of "poverty". But the problem is really your definition of terms. It is not true that it is impossible to improve the lot of all humans, even the poorest of the humans. Just, using a definition like "lowest 10%" makes it impossible to notice improvements. You're doing much the same thing with "middle class".

"The research I've seen suggests that buying political influence with money (in the US) is extraordinarily ineffective." "What research is that?"

For example, Who Wants to Buy a Politician?.

Here's a post that references an encyclopedia entry on campaign finance with the claim: "Every two years, public-interest groups and media pundits lament the fact that winning candidates typically far outspend their rivals. They infer from this that campaign spending drives electoral results. Most systematic studies, however, find no effect of marginal campaign spending on the electoral success of candidates."

Or Tyler Cowen's comment that "Campaign finance, of course, is one of the areas where “the Left” is most likely to take an anti-science stance."

You say: "The problem is, as Laurence Lessig has pointed out and documented in detail, that a small cadre of rich donors effectively have veto power over any candidate who is not independently wealthy."

I'm open to being convinced, but at the moment I haven't seen this evidence, and currently I don't believe that claim.

Ron said...

@Peter:

> Now you're assuming that there has to be a "system" that can be gamed.

Of course there's a system: humanity is a system. Even anarcho-capitalism is a system. And it can be gamed like any other. In fact, one might argue that gaming the system is *all* you can do under anarcho-capitalism, that that's the whole *point*.

> Ah, so your post title is not really true.

Titles are not a good place to deeply explore all the nuances of a complex issue. A more accurate title might have been, "Income inequality is not the totality of the problem, it is (among other things) a symptom of a deeper problem." But that lacks a certain panache.

> the middle class is "shrinking", not because they are poor or stagnant, but instead because they are becoming wealthy.

Some of them. Others are slipping into poverty. But what worries me is not so much the absolute numbers as the fact that American society is bifurcating into rich and poor with little in between. That reduces social mobility, which is to me the defining characteristic of the American dream.

I just spent several weeks traveling in places where there are rich people and poor people with little in between. The rich people all live in constant fear of violence. They have guards. Their houses are surrounded by 20 foot fences with razor wire on top. That's not the kind of place I want to live.

> Most systematic studies, however, find no effect of marginal campaign spending on the electoral success of candidates."

That in no way contradicts what I said.

> I'm open to being convinced, but at the moment I haven't seen this evidence, and currently I don't believe that claim.

http://lesterland.lessig.org

rrockethr said...

I think you must not have read Graham's article carefully, else you would not have claimed that "So why doesn't Graham recognize and advocate this?" (followed by a subtle accusation of intellectual dishonesty by popularizing a self-interested opinion (not cool) as if it was relevant for the validity of the opinion, but let's not get carried away).
Quoting from the article:

"There are lots of things wrong with the US that have economic inequality as a symptom. We should fix those things. In the process we may decrease economic inequality. But we can't start from the symptom and hope to fix the underlying causes.

Economic inequality is sufficiently far from identical with the various problems that have it as a symptom that we'll probably only hit whichever of the two we aim at. If we aim at economic inequality, we won't fix these problems. So I say let's aim at the problems.

And if there are people getting rich by tricking consumers or lobbying the government for anti-competitive regulations or tax loopholes, then let's stop them. Not because it's causing economic inequality, but because it's stealing.
"

Ron said...

@rrockethr:

Well, hurm. Yes, Graham does say this. But then he immediately follows up with this footnote:

> [7] As well as problems that have economic inequality as a symptom, there those that have it as a cause. But in most if not all, economic inequality is not the primary cause.

The problem that I'm citing here is a self-reinforcing positive feedback loop between economic inequality and political corruption. It's impossible to identify a "primary cause" for a such a self-reinforcing positive feedback loop. Economic inequality makes it possible for a small group of people to exert undue influence on the political process (case in point that just came across the wires: http://bulletin.represent.us/boehner-tobacco-lobby-checks) which in turn results in increased economic inequality. Chicken. Egg.

(But I will concede that I did not recall that passage -- they were long essays -- so I could have been clearer about this.)

Graham suggests:

> "But the solution is not to make people richer. It's to make the police treat people more equitably. Otherwise they'll continue to maltreat people who are weak in other ways."

It's a lovely theory. But how exactly are you going to do that if poor people are effectively disenfranchised?

rrockethr said...

@Ron: The problem I have with your description of the issue is that high economic inequality is just a measurement of a single metric (something Graham also pointed out), not a mechanism or policy, so it doesn't make sense to say it causes something - the measured state is a precondition to a process of some mechanism (corruption of political process in this case), which is the thing causing the undesired effects.
Hopefully this is this is just badly chosen words, reinforcing the current bad narrative, as you have said from the outset that economic inequality is just a symptom, am I right?

I would say that Graham did certainly downplay the importance of this particular mechanism, however he did mention it. He didn't describe the self-reinforcing feedback loop, but I don't think that fundamentally changes anything, except highlighting the severity of the issue with this mechanism. Correct me if I'm wrong.

How to address the issue is a difficult question, but we should perhaps first talk about what should be the goal we strive to achieve, which in my case is a society as meritocratic as possible, which in fact is a highly unequal society.

Peter Donis said...

@Ron: "one might argue that gaming the system is *all* you can do under anarcho-capitalism"

I think this is a severe misuse of language. Under anarcho-capitalism, there is no "system" to game; your only options for getting things you want are to make them yourself, trade for them, or take them, by either force or deception. Saying that all you can do under anarcho-capitalism is game the system basically ignores the first two options and focuses exclusively on the third (and also misstates the third--see below). But the only reason we have any wealth in the first place is the first two options, and the only reason we have wealth much beyond bare subsistence is the second--i.e., specialization and trade. If you seriously think of specialization and trade as "gaming the system", then I think we have a fundamental disagreement that is too deep to resolve by discussion. (Note carefully that I include deception in the third option.)

The problem with the third option is that, unlike the first two, it creates no wealth; at best, it is a zero-sum transfer, but almost always it is a net loss of wealth. So people who want to have a wealthy society have a good reason to try to eliminate the third option if possible. That is the point of having a "system"--i.e., any sort of government. But a key claim of anarcho-capitalism is that this "cure" is worse than the disease, because now, instead of just a third option--take things by force or deception--you have a whole gamut of options that fall under the general heading of "gaming the system", but are much more diverse and harder to control.

Ron said...

> not a mechanism or policy, so it doesn't make sense to say it causes something

But it *is* a mechanism. If I have more money than you do, then I can buy more things than you can. If I have a lot more money than you do, then I can buy a lot more things than you can. And if the amount of money you have is barely enough to cover the basic necessities of life, then when it comes to political influence I can probably outspend you by many orders of magnitude. And then I can do things like, for example, get laws passed that make it impossible to discharge student debt in bankruptcy. And then I can provide you with a loan to cover your college tuition. And now I have a very reliable income stream from you. And that's just one example.

> Under anarcho-capitalism, there is no "system" to game;

Of course there is because, as I pointed out before, humans are a system.

> your only options for getting things you want are to make them yourself, trade for them, or take them, by either force or deception

How is that any different from what we have today?

The reason I say that "gaming the system" is the only option under anarcho-capitalism is because "gaming the system" is usually considered the antithesis of "playing by the rules." But according to the "anarcho" part of anarcho-capitalism there are no rules to play by.

Frankly, anarcho-capitalism is a childish fantasy and is not really worthy of serious discussion. See http://blog.rongarret.info/2013/03/murray-rothbard-was-idiot.html

Peter Donis said...

@Ron: I'll postpone further comment on anarcho-capitalism until I've read the previous post you linked to. The only question I would bring up now is whether Rothbard's presentation is the only one you've read. I mentioned Friedman's The Machinery of Freedom in a previous post; IMO he does a much better job than Rothbard of actually thinking through the implications of not having a government and addressing obvious questions like how police protection would work.

A couple of quick comments on other statements:

"humans are a system"

We're likely to go down a definitional rabbit hole here so I won't pursue this specific statement further except to say that I think you and I are using words very differently. (Similar comments apply to your use of the word "gaming" vs. mine.)

The point I was trying to make is that having a government opens up options for getting stuff from other people without exchanging value for value (see further comments below), that are not present without one, and the bigger and more centralized the government is, the more of those other options there are, the worse their consequences are, and the harder they are to control.

"How is that any different from what we have today?"

All of the options I described as being there without a government require direct interaction with the other party. If I want something you have, I have to deal with you directly--either I trade with you, or I take it from you. If I want stuff from multiple people, I have to deal with them one at a time.

Once a government is in the picture, I can take your stuff without having to ever interact with you--in fact I don't even have to know that you exist. If I can buy political influence and corruption, I can take stuff from millions of people at a much lower transaction cost than if I had to go to each person individually and con them out of their stuff.

Ron said...

> Friedman's The Machinery of Freedom

I did not read it all the way through. Life is too short. But MoF is also easy to dispense with. In a nutshell, Friedman, like all anarcho-capitalists do (as they must because they have no other choice) sweep the issue of economic externalities completely under the rug. Friedman himself nearly concedes this point. In the section entitled "Polllution" he writes:

"Some things, such as air, are extraordinarily difficult to deal with in this way."

Gee, David, ya think?

I actually laughed out loud when I got to his proposed solution:

"The simplest solution to such a paradox is to permit parties injured by air pollution to sue for damages"

And how exactly are you going to do that without a government?

> Once a government is in the picture, I can take your stuff without having to ever interact with you

Actually, I can do that without a government too. All I have to do is hire someone to take your stuff.

Don Geddis said...

Ron: "A more accurate title might have been, "Income inequality is not the totality of the problem, it is (among other things) a symptom of a deeper problem."".

Sure, a title needs to be short and concise and punchy, and can't include the full complexity of your position. The problem is that you "simplified" it so much, that your title became an accurate description of a position that you don't support, but one that a reasonable person (myself?) might take. So it's more misleading than perhaps you intended. (And also, the content of your post doesn't really support the interesting distinction between your title, and your actual position. It's an interesting case, to comment on how income inequality -- by itself -- might cause societal problems. I.e. the complete opposite of your title.)

"That reduces social mobility, which is to me the defining characteristic of the American dream."

I totally agree, that (economic?) mobility is the key to American success. But measured, static, income inequality has a very very weak correlation with economic mobility. If you were writing about the barriers to economic mobility, and proposing policies that would improve it, I'd be an enthusiastic supporter. But you instead try to take the shortcut of using the income inequality proxy. Unfortunately, most policies that directly address income inequality, do not help with economic mobility. (In fact, most of them make it worse.)

In any case, on this issue that actually matters, I disagree with you. I don't think at all that American economic mobility is dramatically less than it used to be. Yes, I understand the society in 3rd world nations of rich enclaves surrounded by armed guards, and I share your disgust and horror at that social outcome. But I don't agree that the U.S. has taken any steps in that direction. Growing US income inequality is not at all the same as a step on the way to a class-based society with threats of violence. You're connecting the dots in the wrong way.

[...continued...]

Don Geddis said...

[...continued...]

"That in no way contradicts what I said."

Well, you didn't explain the mechanism, so I had to guess. You said: "the ultra-wealthy are using their disposable income to buy political influence". So they aren't doing it by getting "their" candidates elected. How are they doing it? Maybe instead you meant things like lobbying and regulatory capture. Those are legitimate concerns, but again you need to be more explicit. When you just blame "income inequality", then that leads you to policies like progressive taxation and redistribution. Which "solves" income inequality ... but has essentially no effect on lobbying and regulatory capture.

It seems to me that you persist in the belief that (despite your title!) income inequality is a problem by itself (not just a symptom). But you aren't doing a great job of defending just exactly what you think the (non-symptom) problem is.

"http://lesterland.lessig.org"

Not compelling, sorry. That confuses correlation with causation. A candidate with policies that have broad popular support will find that the money arrives. "Lesterland" pretends that a tiny rich elite have homogeneous desires (and ones that are in opposition to the good of "the rest of us"). But the truth is that there are wealthy funders on all sides of any political issue. Not only that, but the links I presented above show that, when wealthy donors do attempt to purchase political power through campaign funding, it basically doesn't work. It's not a cost effective way to achieve power.

Outcomes different than you desire, is not at all the same as a tiny secretive elite running things for their own benefit, to the detriment of the vast majority of the public. That latter thing happens in developing nations ... but hardly ever in the US. (I'm talking here about getting candidates elected; again, industry-specific regulation is a different and more valid concern, but isn't related to income inequality.)

rrockethr said...

@Ron

> But it *is* a mechanism. If I have more money than you do, then I can buy more things than you can. If I have a lot more money than you do, then I can buy a lot more things than you can. And if the amount of money you have is barely enough to cover the basic necessities of life, then when it comes to political influence I can probably outspend you by many orders of magnitude. And then I can do things like, for example, get laws passed that make it impossible to discharge student debt in bankruptcy. And then I can provide you with a loan to cover your college tuition. And now I have a very reliable income stream from you. And that's just one example.

It is simply not a mechanism. I'm not saying that the process in not read and not happening, it is. But there is an important distinction between a precondition, and enabler, a resource from the process of the mechanism itself which requires it. If you ignore the distinction by this unintuitive semantic gymnastics, you might arrive at crazy solutions such as banning a useful, but hazardous to health chemical compound, instead of educating about its use, or more aptly preventing people to become famous by limiting free speech, because it enables them to exercise unjustly large influence on the society, instead of educating people to be responsible with their votes and money (fame is also part of a similar feedback loop), or even abolishing democracy altogether because the dangerous-ideas-popularity-value was measured to be higher than we remember it ever was and addressing in different way is just too outlandish of an idea. Last analogy was a bit extreme, and they all weren't perfect, but hopefully you get the idea.

rrockethr said...

@Ron [continued]

I forgot to note that if you claim that economic inequality is the mechanism, than it would have to keep functioning even if the system was perfectly immune to political corruption by money, a system which I think no one has proven to be impossible.

But then again, it isn't the mechanism. The level of economic inequality is more akin to the gas engine uses to run, rather than to the engine itself.

Peter Donis said...

@Ron: "MoF is also easy to dispense with."

Ok, at least I understand where you're coming from.

"how exactly are you going to do that without a government?"

I guess you missed Friedman's fairly in-depth discussion of how a private law system would work (with real-world examples).

I understand that it's hard to imagine how an entity but a government could do a lot of the things we're used to having governments do; but that's a failure of our imagination, not an argument for them being impossible without a government. But this is probably getting off topic for this discussion; it really belongs in a discussion of that separate post you spoke of, where you go into your suggested policies to deal with the issues under discussion.

"All I have to do is hire someone to take your stuff."

That's still retail instead of wholesale, if you take my meaning. With a government in place, you can hire a lobbying firm and take stuff from millions of people at a much lower transaction cost.

Ron said...

@Don:

> you "simplified" it so much, that your title became an accurate description of a position that you don't support

Fair enough. I changed it.

> You're connecting the dots in the wrong way.

I hope you're right.

> How are they doing it? Maybe instead you meant things like lobbying and regulatory capture.

Yes, that too. In addition to the effective veto power that I already mentioned.

Here's a data point:

http://bulletin.represent.us/boehner-tobacco-lobby-checks

There's also the elephant in the living room: no one has ever been prosecuted for the massive sub-prime fraud that very nearly cratered the entire U.S. economy, and left a lot of people destitute.

@rrockethr:

I'm sorry, but I could not make any sense out of your comment.

@Peter:

> I guess you missed Friedman's fairly in-depth discussion of how a private law system would work (with real-world examples).

No, I didn't miss it. He calls for arbitration. But that only works if the parties agree to it. In the case of a victim suing a polluter, why would the polluter submit to arbitration?

>> "All I have to do is hire someone to take your stuff."

> That's still retail instead of wholesale, if you take my meaning. With a government in place, you can hire a lobbying firm and take stuff from millions of people at a much lower transaction cost.

Sure, but enterprising criminals will surely figure out a way to scale the business model. They already do it in the real world; an anarcho-capitalist society would just make it that much easier.

In fact, if you think it through, an anarcho-capitalist society cannot be stable. People will necessarily band together into larger and larger groups for mutual protection. Those groups will have to organize themselves somehow so that they can act cohesively to defend themselves from other such groups. The organizational structures they create will have to be supported somehow. In the end you cannot possibly avoid re-inventing government and taxes in some form. If you don't, you will die at the hands of those who do.

Peter Donis said...

@Ron: "In the case of a victim suing a polluter, why would the polluter submit to arbitration?"

Because the alternative is having to defend his polluting behavior by force against everyone who is harmed by it. If that is more costly than submitting to arbitration (and modifying his polluting behavior to minimize his exposure to an adverse verdict), then he has a rational incentive to submit to arbitration, even in the absence of a government forcing him to do so.

"enterprising criminals will surely figure out a way to scale the business model. They already do it in the real world; an anarcho-capitalist society would just make it that much easier."

No, it would make it much harder, because scaling the business model requires centralization of power, which is exactly the opposite of what happens in an anarcho-capitalist society.

"In the end you cannot possibly avoid re-inventing government and taxes in some form. If you don't, you will die at the hands of those who do."

If this is true (and I'm not saying it isn't; the fact that, IMO, an anarcho-capitalist society would work better than what we have, if it could be made to work, does not prove that it can be made to work with humans as they are), to me it amounts to saying that we humans will end up evolving ourselves into extinction. I don't share your faith in democratic government's ability to avoid such a fate. But since a majority of voters are probably going to share your opinion rather than mine, democratic government is probably what we're stuck with. I just view that as a bug (possibly a fatal one), rather than a feature.

Ron said...

>> @Ron: "In the case of a victim suing a polluter, why would the polluter submit to arbitration?"

> Because the alternative is having to defend his polluting behavior by force against everyone who is harmed by it.

I see. So as long as the polluting behavior results in enough profit to hire a bigger army than the people they are harming can afford to hire, they can keep polluting. And you think this is as it should be. Have I got that right?

Peter Donis said...

@Ron: "So as long as the polluting behavior results in enough profit to hire a bigger army than the people they are harming can afford to hire, they can keep polluting."

In principle, yes. But you seem to think this is likely. Why? Remember that there is no government, so there is no way for a polluter to make a profit by buying a monopoly on some market from the government; he has to make a profit by actually providing value to people in free market trades. And he has to do it in a competitive market, so buying an army to protect himself is an obvious overhead cost that competitors can undercut him by not incurring. So if fixing his production process to not pollute is cheaper than buying the army, why would he buy the army?

(And note, btw, that in real world cases where government has forced polluters to stop polluting, a common justification is that fixing their processes to stop polluting was cheap anyway. So your implicit scenario of it being so expensive to stop polluting that it's cheaper to buy an army to defend yourself seems unlikely.)

Basically, what you're doing is assuming that an anarcho-capitalist world is what we would get if we just took our current world, with the structure of power that is currently in place, and abolished all governments. But that's not at all the kind of world that anarcho-capitalists are describing or envisioning. So the "anarcho-capitalism" that you're attacking is a straw man.

If you want to claim that the kind of world anarcho-capitalists are actually envisioning can't possibly come to pass, because there's no way to get there from our current state, as I said before, that may be true, but if it is, it means we humans are evolving ourselves into extinction.

Peter Donis said...

@Ron: "So as long as the polluting behavior results in enough profit to hire a bigger army than the people they are harming can afford to hire, they can keep polluting. And you think this is as it should be. Have I got that right?"

I should comment on this from another angle as well. There will always be people who want to prey on other people instead of doing productive work. Let's assume that the polluters you are painting a picture of here are such people. (Certainly there have been polluters historically who were.)

Do I think it is "as it should be" that such people exist? No, of course not. I would much prefer to live in a world where there were no such people. But that is a fantasy and always will be. Such people exist and we can't make them not exist.

The question is, given that such people exist, how can we minimize the damage they can cause? You believe that the best way to do that is democratic government. I disagree; I think that, all things considered, the damage that predators can do under democratic government is much worse than the damage they could do in the absence of government. (For example, I don't see how anything like the subprime crisis that tanked the world economy could happen in an anarcho-capitalist world; "too big to fail" organizations simply would not exist in such a world.)

But in the end, that question is an empirical question, not a normative one, so whether I think it is "as it should be" is irrelevant. Again, I would much prefer to live in a world where there were no predators and nobody had to expend scarce resources on combating them instead of creating value. But we don't live in such a world and never will. The best we can do is to minimize the cost of dealing with predators. I don't share your faith in democratic government being the best way to do that; but again, that's an empirical question, not a normative one.

Don Geddis said...

Ron: "no one has ever been prosecuted for the massive sub-prime fraud that very nearly cratered the entire U.S. economy, and left a lot of people destitute."

You and I disagree extremely strongly about this. The Great Recession was caused by unwise central bank tight money policies, not by subprime mortgage fraud. Whatever fraud you might uncover, attributing recession damages to that fraud is an error. Meanwhile, the direct damage from the "fraud" is harder to evaluate. Offering mortgages with no money down is not illegal (nor should it be). Bundling mortgages into derivative securities, with different traunches to diversify risk is not illegal (nor should it be). Assigning the top traunch a AAA bond rating may be arguable, but is not fraud. You are vastly overestimating who should have been prosecuted for subprime mortgages.

Mostly, because you incorrectly attribute the subsequent recession, to some prior mortgage fraud.

Ron said...

> Assigning the top traunch a AAA bond rating may be arguable, but is not fraud.

Fraud is "the intentional deception of a person or entity by another made for monetary or personal gain."

There is incontrovertible evidence that the people selling these bonds knew they were worthless and yet they represented them as low-risk investments, and some of them made tons of money as a result. If that's not "intentional deception ... for monetary gain" I can't imagine what would qualify in your mind.

Ron said...

>> @Ron: "So as long as the polluting behavior results in enough profit to hire a bigger army than the people they are harming can afford to hire, they can keep polluting."

> In principle, yes. But you seem to think this is likely. Why?

Because I need to buy protection for my property regardless of the motives of the people who try to take it from me by force. Unconditional cooperation is not an evolutionarily stable strategy. I need to protect myself against thieves somehow, so I have to hire an army regardless. The same army that I hire to do that can be used equally well to defend against people with legitimate grievances. The fewer resources I devote to mitigating externalities, the more I can put into defense, and vice versa. So anyone who tries to mitigate externalities will be at a competitive disadvantage to anyone who doesn't (because they will be more vulnerable to thieves).

See, that's the thing: armies are multi-taskers.

> what you're doing is assuming that an anarcho-capitalist world is what we would get if we just took our current world

No, I'm not assuming it. I'm *arguing* for it. Not the same thing.

> But that's not at all the kind of world that anarcho-capitalists are describing or envisioning.

Oh, I know that. That's one of the things that makes it such an infantile fantasy. If you want to effect change in the real world, you have to deal with the world as it is, not as you would wish it to be.

> we humans are evolving ourselves into extinction.

I doubt that very much. We're a pretty robust species.

> I don't see how anything like the subprime crisis that tanked the world economy could happen in an anarcho-capitalist world; "too big to fail" organizations simply would not exist in such a world.

You can't be serious. There would be nothing but monopolies in such a world. As soon as the power imbalance between competitors becomes large enough, it becomes economically advantageous to the market leader to deploy some of their excess resources to try to destroy their competitors so they can collect rents (c.f. Microsoft). Sooner or later, they will succeed. And then, unless they fall asleep at the switch (like Microsoft did) they can maintain their hegemony indefinitely.

The *only* possible mitigation against this is to grant individuals some inalienable source of political power, like a vote.

Don Geddis said...

Ron: "the people selling these bonds knew they were worthless and yet they represented them as low-risk investments"

The bonds were not worthless. That's your mistake. Many of them became worthless, as the recession progressed. But the actual correct value of the bonds, as they were being sold in the 2005-2007 time frame, is difficult to determine -- even today, with the benefit of hindsight! Rating the top tranche of a diversified collection of mortgages as AAA, is not absurd on its face.

Now, were there individual raters, who issued public statements that (at the time), they themselves did not believe? Surely true. Just as, in the late 1990's, there were lots of tech IPOs that were being sold and pushed by investment banks, where it later came out that the internal view of the stock raters didn't match their published analyses. The failure of the so-called Chinese wall between the sell-side analysts and buy-side analysts in brokerage firms.

Did mortgage raters in the 2000s, have the same sort of ethical lapses as stock analysts in the 1990s? Probably! For that matter, I would say that the entire brokerage industry, offering "stock advice" to their clients for the last 50 years, has arguably been a scam. Fama showed in the 1970's, with the Efficient Market Hypothesis, that an individual investor almost certainly should only invest in a low-cost stock market index, and not try to pick individual stocks. Yet the brokerage industry has earned billions over decades, offering stock "advice". Should they all be jailed too?

I agree with you, that some bond raters likely violated ethical standards, and probably should be prosecuted. It's a minor, tiny, industry-specific issue, though. Hardly worth us debating here. It has essentially no significant economy-wide consequences.

Peter Donis said...

@Ron: "I need to protect myself against thieves somehow, so I have to hire an army regardless."

Protection against thieves doesn't require an army. If police forces in developed countries seem like armies, that's because what they're protecting against is not thieves, but a criminal underclass whose existence is a result of various government policies. That kind of protection would not be required in the absence of government.

Protection against people with legitimate grievances, however, will require an army because, unlike thieves, people with legitimate grievances are creating wealth, not stealing it, so they have more resources and more incentive to use them. Furthermore, people with legitimate grievances might be in a position to offer positive sum trades that work out to be cheaper than hiring the army, something thieves cannot do.

"I'm not assuming it. I'm *arguing* for it."

I'm not sure I understand. Do you mean that you are claiming that the only kind of anarcho-capitalist world that is worth considering is what we would get if we took today's world and just abolished government in an instant, everywhere? That's ridiculous. First of all, it ignores the possibility of getting to an anarcho-capitalist world by small steps--in other words, by gradually convincing people that government is doing more harm than good in individual areas, so that they will voluntarily choose to limit the power of government in those areas, and continuing this process until we end up with less and less government across the board. Second, it ignores the fact that making decisions by universal fiat like this is exactly what anarcho-capitalists think is the root problem.

"If you want to effect change in the real world, you have to deal with the world as it is, not as you would wish it to be."

I agree. But thinking that democratic government will magically solve all coordination problems, and that giving people an "inalienable" right to vote will magically protect them from all predation, is just as much an infantile fantasy as thinking that a world without government will be free of coordination problems and predation.

My point is not that a world without government would be perfect, or that it would be free of coordination problems and predation. My point is that a world with government is no better, and might well be worse.

Peter Donis said...


(Second response since I went over the character limit...)
@Ron: "As soon as the power imbalance between competitors becomes large enough, it becomes economically advantageous to the market leader to deploy some of their excess resources to try to destroy their competitors so they can collect rents (c.f. Microsoft)."

Microsoft is a bad example because its main competitor, IBM, helpfully destroyed itself, not once but twice (first by licensing DOS, then by dawdling over OS/2 so that Windows could capture the market). Having a competitor that is that incompetent is not something a monopolist can count on.

Consider two other historical examples that tell against your claim here: Standard Oil and Alcoa Aluminum. Both of these "monopolists" did the exact opposite of extract rents: they used economies of scale to become so much more efficient than their competitors that they could sell at a profit at prices no one else could match. At least, until the government forced them to break up and become more inefficient.

"The *only* possible mitigation against this is to grant individuals some inalienable source of political power, like a vote."

This isn't mitigation, it's magic. Saying the vote is inalienable doesn't make it so; it just gives the powers that be incentives to game the voting system (e.g., electronic voting machines with hidden source code and no real auditability), or to bypass elected officials when making the actual rules that govern the society (most US Federal law is actually written by executive branch regulators, not legislative branch elected officials or their staffers--technically they are called "regulations", but they have the force of law, even though no legislator ever read or voted on them).

Also, giving everyone a vote, even if it really is inalienable, doesn't give the voter any actual power. Sure, I have an inalienable right to vote for candidates--all of whom are basically indistinguishable. The ones that are a little bit distinguishable--like libertarians who call for an end to the war on drugs--have no realistic chance of winning. The ones that are more distinguishable--like Ron Paul calling for an end to the Fed--are considered crackpots (Paul's positions on issues made him a complete nonstarter as a Presidential candidate).

Ron said...

@Don:

> The bonds were not worthless

Oh, give me a break. They were vastly more risky than they were represented to be. The sellers knew it, lied about it, and profited from their lies. That's fraud.

> I agree with you, that some bond raters likely violated ethical standards, and probably should be prosecuted.

Not just the raters. Everyone on Wall Street knew there was fraud going on.

> It's a minor, tiny, industry-specific issue, though.

Tell that to the people who lost their jobs and their houses.

@Peter:

> Protection against thieves doesn't require an army. If police forces in developed countries seem like armies, that's because what they're protecting against is not thieves, but a criminal underclass whose existence is a result of various government policies.

Good lord, where do you get these notions? Criminals are a result of government policies? That is the most ridiculous thing I have ever heard.

You know, you really should go visit Somalia. It is the closest thing on earth to the government-free nirvana that you yearn for. But you should go quickly because the forces of evil are working hard to establish a government there.

>> "I'm not assuming it. I'm *arguing* for it."

> I'm not sure I understand.

Sorry, I mis-read the statement you made that I was responding to. Let me try again:

> what you're doing is assuming that an anarcho-capitalist world is what we would get if we just took our current world, with the structure of power that is currently in place, and abolished all governments

Yes, I suppose that is true. What is the alternative?

> If you want to claim that the kind of world anarcho-capitalists are actually envisioning can't possibly come to pass, because there's no way to get there from our current state, as I said before, that may be true

I'll go further: I claim that even if you were able to establish an anarcho-capitalist nirvana, it would be unstable, and it would in very short order devolve into oligarchy.

I also think that most people who advocate anarcho-capitalism think this is OK because they believe they'd end up being one of the oligarchs.

Don Geddis said...

Ron: "They were vastly more risky than they were represented to be."

I disagree strongly with "vastly". A portfolio of hundreds of mortgages in different real estate markets, divided into tranches so that 90% of the mortgages need to default before the top tranche doesn't pay off ... is indeed a very safe investment. It would take a once in a century Great Depression for all housing markets across the country to simultaneously collapse, causing simultaneous defaults across diverse housing markets, and therefore putting the final tranche at risk. Which, as it turns out, is essentially what happened.

"Everyone on Wall Street knew there was fraud going on."

Same as dot-com IPOs in the 90's, and stock broker recommendations for a century. Yet you seem overly concerned about the mortgage ratings, compared to these other cases.

"Tell that to the people who lost their jobs and their houses."

Who, specifically? You keep stating things like this, but with no justification. How does an overly lofty rating on a complex MBS derivative, cause regular people to lose jobs or houses? Especially given that people are free to do their own research on risk. A bond agency rating an offering is just one piece of data, that always needs to be incorporated along with an investor's other data and concerns. (If anything, the additional credit available because of capital flowing into MBSes, allowed more people to acquire houses than would have otherwise happened.)

I suspect that you continue to make the assumption that mis-rating subprime derivatives somehow caused the Great Recession, and then people lost houses and jobs in the recession. Yes, that second part is true. But the first part isn't. Your "fraudulent" AAA MBS ratings didn't cause the recession. And so you've lost your story (unless you have another one) about why there's any connection between that, and people losing jobs and houses.

Peter Donis said...

@Ron: "Criminals are a result of government policies?"

Please read more carefully. I said the criminal underclass that requires military-style police forces to "protect" citizens against it is the result of government policies. (Basically a combination of affirmative action, welfare, and the war on drugs.) That is not at all the same as saying all criminals are the result of government policies.

"you really should go visit Somalia. It is the closest thing on earth to the government-free nirvana that you yearn for."

No, it isn't. It's the result of past governments in the region breaking down.

As a better example, try, say, some of the American Colonies during the early 1700's (Pennsylvania before the British Crown got interested in exploiting it for resources is a good example.) There was little or no central government, and there was more prosperity than in any of the colonies where the central government was powerful.

"What is the alternative?"

Getting there by small steps, as I described in previous posts: convincing people that government is doing more harm than good in some particular area (e.g., the war on drugs), so that they will voluntarily agree to limit the government's power in that area. Then doing it again, and again, and again...

"I claim that even if you were able to establish an anarcho-capitalist nirvana, it would be unstable, and it would in very short order devolve into oligarchy."

If this is true, then, as I've said before, we humans are basically screwed, because oligarchy is not a bad description of what we have now. It reminds me of Will Cuppy's remark in the chapter on Hannibal from his classic The Decline And Fall Of Practically Everybody: "Carthage was governed by its rich men and was therefore a plutocracy. Rome was also governed by its rich men and was therefore a republic."

"I also think that most people who advocate anarcho-capitalism think this is OK because they believe they'd end up being one of the oligarchs."

For the record, this does not apply to me. I don't want an oligarchy, and I certainly don't think I would end up as one of the oligarchs in one. As I said above, my only response if it turns out to be true that anarcho-capitalism would devolve into oligarchy is that we're screwed. Again, I don't share your faith in democracy as a way to avoid such a fate.

Peter Donis said...

Btw, Paul Graham has posted a simplified version of his essay on economic inequality that states the key points succinctly:

http://www.paulgraham.com/sim.html

Ron said...

@Don:

> Same as dot-com IPOs in the 90's

Seriously? You have evidence that people were selling dot-com stocks in the 90's as something other than highly speculative investments with large potential upsides (which is exactly what they were)? Because I would love to see that.

@Peter:

> convincing people that government is doing more harm than good in some particular area (e.g., the war on drugs),

Well, I'm certainly all for ending the war on drugs. But you are neglecting to take into account Ron's First Law: All extreme positions are wrong. Just because the government does some stupid shit, it does not follow that everything the government does is stupid shit.

Don Geddis said...

Ron: "You have evidence that people were selling dot-com stocks in the 90's as something other than highly speculative investments with large potential upsides"

Absolutely, no question. Remember, we're comparing it with AAA bond ratings on the top tranche of an MBS. AAA doesn't mean "no risk at all". It means "the least known risk of investment opportunities". You think those ratings were mislabeled, that the analysts offering the public ratings didn't actually believe there was as little risk as they claimed in public, and hence there was fraud.

You want a similar example in 1990's IPO evaluations. This is easy; there were many. Take, for example, Henry Blodget. He first came to fame in a positive light, "in October 1998, when he predicted that Amazon.com, an Internet stock which had been a public company for a year then trading at $240 and which many on Wall Street were bearish on, would hit what many considered an outrageously bullish one-year price target of $400. Three weeks later Amazon zoomed past it, gaining 128%." This is when "reasonable" people were saying that tech stocks were far overvalued, that Amazon at $240 was an insane overvaluation, Blodget suggested a 1-year target of almost double the price. People thought he was crazy. Then Amazon hit his one-year target three weeks later. During 1999, he was the most famous stock analyst in the world.

But then, by 2002 (post-2000 dot-com crash), Blodget's career unraveled. Now-disgraced Eliot Spitzer partially rose to fame based on prosecuting Blodget for offering public research opinions which were at odds with his thoughts expressed in private emails. Blodget is now barred from working in the securities industry for life. (Full disclosure: I was employed by Goto.com, one of the IPO stocks involved, during the period mentioned at that link.)

Peter Donis said...

@Ron: "I'm certainly all for ending the war on drugs."

Ok, good; we agree that there is at least one area in which the government is doing more harm than good.

"Just because the government does some stupid shit, it does not follow that everything the government does is stupid shit."

Agreed. And if, in the course of taking the small steps I described, we come across some areas in which people can't be convinced that the government is doing more harm than good, then the government won't be limited in that area. I did say before that I was making an empirical claim, not a normative one; I have a personal prediction for how the experiment would end up if it were ever actually run, but I could be wrong.

rrockethr said...

@Ron

Ok, fine, the simpler argument I made in the followup post: http://blog.rongarret.info/2016/01/income-inequality-is-not-problem-its.html?showComment=1451881113799#c7185665374789680997

What is more interesting is that I would agree with Don that you have fallen back on the idea you dismissed yourself by the title of your post, that economic equality is just a symptom.

I disagree that economic equality causes something (the political corruption feedback loop, PCFL from now), it's other things which cause something.
If everyone had literally the same income every month the PCFL would still function as people would still be able to exchange money, goods and favors (very important!), so that to me proves that economic equality is not a requirement for PCFL to function. Wouldn't you agree? I don't understand why you think relation of PCFL to economic inequality makes the it a problem, instead of just a measurement of metric, could you explain it please?

Rob Lewis said...

"unless taxes are high enough to discourage people from creating wealth"

This is egregiously disingenuous. Current levels of taxation are nowhere near high enough to discourage high earners. But the fact is that a lot of what these top-tier "wealth creators" do ought to be discouraged: zero-sum financial manipulations that create no wealth at all but transfer a nice rake into their own pockets. If you tell me that a finance industry that takes over 20% of all the profits of the entire economy is necessary to maximize the general welfare, I say you are either delusional or in the tank for Wall Street. We were doing just fine, thank you, when banking was a staid and boring business that accounted for maybe 6% of the economy.

Don Geddis said...

@Rob Lewis: "This is egregiously disingenuous. Current levels of taxation are nowhere near high enough to discourage high earners."

I think you missed the point. There was no claim that current tax rates in fact stop the creation of wealth. The claim instead was that, as long as wealth creation is possible, then it by itself will necessarily cause income inequality. Since we assume nobody wants to actually stop wealth creation, it must follow that perfect income equality cannot be a reasonable goal.

All that said, you're wrong in any case. Any level of taxation "discourages" wealth creation. It's a smooth spectrum of incentives. There is no magic tipping point, where small taxes "don't" discourage wealth creation, but suddenly at some level "discouragement" begins. The question is the magnitude of discouragement, not whether it exists.

As to whether a large finance industry adds value to the society, it isn't a compelling argument to merely say, "I don't understand what the value is, therefore we should eliminate it." Arguing from ignorance isn't a strong position.

Unknown said...

I've been reading your posts, and there are a number of things you all miss. wealth creation is not only cash creation. When a nation builds roads, that is wealth creation. It is an investment that produces more aggregate wealth. environmental regulation, preservation, safety regulations all tend to have the effect of producing more aggregate wealth when they save lives, save resources for future generations, improve health etc. A society's interest in wealth creation is pan-individual. We all have an interest in aggregate wealth and investment because it makes us each wealthier. Taxation is a means to give a society the ability to invest in ways that no individual or subgroup can invest.

When a state over-taxes, it damages individual enterprise and investment and thereby damages aggregate wealth. To produce optimum aggregate wealth requires an optimum taxation and investment strategy. this is not a perfect process.

The issue is not income inequality per se, but if the income inequality is leaving net wealth creation through wide social (state) driven investments off the table. just as over-taxation or over-regulation leaves individual investment opportunities off the table.

the way to think about these things is not in terms of $ but in terms of enterprise. Economies flourish when the tax strategies produce the greatest amount of government investment and risk reduction and the greatest amount of free enterprise.

As a matter of physics, the current wealth disparity means the cash locked up in individual accounts cannot be as quickly allocated to investment (wealth producing) opportunities when compared to a more even distribution income; because the number of nodes between every source of capital is limited. by constraining cash in fewer and fewer nodes, those nodes have a maximum number of investment transactions they can perform in any given year. higher levels of cash in more nodes create more investment transactions. for this reason, the middle class should always be accruing more wealth than the upper class because it increases investment (wealth creation) flow.

this is a numbers game. the wealthy simply cannot do as much investing as the middle class. And members of the the middle class also tend to have a better understanding of what is or is not in demand, reducing investment risk. demand always precedes supply. by reducing both demand and supply opportunities of the middle class through income inequality, the nation is less wealthy than it otherwise could have been. it is always the unmade investments that represent the biggest losses.

Don Geddis said...

@Unknown wrote: "wealth creation is not only cash creation"

Agreed. In fact, cash and wealth have essentially nothing to do with each other. The first is nominal GDP (NGDP), and the second is real GDP. The interaction between real and nominal GDP is a fascinating and complex topic in macroeconomics. But they're clearly very different concepts.

"It is an investment that produces more aggregate wealth."

No. Some wealth creation (like roads or houses) may also be investments, in that they provide a future stream of income (real or implied). But others (perhaps, like jewelry or art, or services like gardening or haircuts) are just one-time increases in wealth, with no future stream of wealth creation.

"Taxation is a means to give a society the ability to invest in ways that no individual or subgroup can invest."

This is an interesting concept, but I bet you would be hard pressed to prove that any specific idea "cannot" be invested in (except via government taxation). It is likely that there is almost nothing in this category that you imagine.

"if the income inequality is leaving net wealth creation through wide social (state) driven investments off the table"

But if there are essentially no investments that require state intervention, then income inequality doesn't have this downside that you imagine.

"As a matter of physics, the current wealth disparity means the cash locked up in individual accounts cannot be as quickly allocated to investment (wealth producing) opportunities when compared to a more even distribution income"

False. (First of all, it's economics, not physics). Now you're talking about cash (nominal) not wealth (real). Capital in a free market flows very quickly towards investment opportunities. Income inequality has essentially no effect on the efficiency of capital allocation.

You seem to be making macroeconomic claims, but you don't seem to have much background in macroeconomic theory. The economy doesn't actually function the way you seem to imagine. (Income inequality may be bad for other reasons, like perhaps Ron's political concerns. But not for the economic reasons you're attempting to point to.)

Unknown said...

Don, my arguments were about practicalities, not theoretical possibilities. For instance, local, regional, and national security and protection of rights are certainly things we do collectively in the form of governments. And while, in theory, a wealthy group or individual could provide security, it never seems to work out in practice.

The point I'm making is that governments can make certain kinds of investments well ahead of any particular individual or group because they can allocate the capital of everyone towards those investments. public education, highway system, space development, water systems, food safety, insurance regulation etc. These could all have been done by individuals or wealthy groups, in theory, but it would take much longer, and would likely never have the same broad reach as both taxation and regulatory powers employed by governments.

eg. wide spread food safety regulation produces greater health opportunities for citizens and greater protection and reliability for food purveyors when they adhere to standards. a safe and standardized food system allows the restaurant industry to flourish. but such a system requires taxation and regulation.

And perhaps I wasn't clear about the physical limitations of allocating income to investment opportunities. Yes, it appears that we can allocate wealth very quickly, but as free income accrues to fewer and fewer nodes, those nodes are constrained by their own physical limits in making investments. It takes time to make the decisions and do the paperwork to make investments. (I've seen some investments take years). simply by allocating greater income to the middle class, the number of investments that are made in aggregate goes up. individual deal sizes go down, but actual dollar investments go up.

If you've read any of Warren Buffet's writing on his investment problems, you'll see this deal making problem in high relief. Berkshire Hathaway simply cannot do deals below a certain volume. (i think their minimum deal volume is > $50 mil now). Which means for that firm, they are leaving money uninvested, not for economic reasons, but for physical reasons. Apple, Google, Microsoft are all firms in the same boat. They hold tons of cash they cannot invest because they simply cannot find and make deals in a timely manner, or manage them post completion. It takes the same time to do small and large deals and the small deals are not worth the physical effort of the deal makers.

High income earning individuals have exactly the same problem. They cannot spend the time or the energy to engage in smaller sized deals.

Cash from incomes goes to purchases and investments. As incomes go up, that transaction rate declines. Deal size goes up, but investment activity actually goes down. When you model it as network nodes, you see over time that some nodes acquire more and more income. But those nodes cannot redistribute that income into investments because of the physical constraints of time. It takes time to make deals. High income earners start to hold capital. In the real world this means non-liquid purchases as in art, jewelry etc.

in the aggregate, this cash hoarding means the economy is underinvesting. to increase aggregate wealth, increase income to the middle class, because the middle class produces the highest deal flow and, by shear numbers, creates greater wealth.


And in case my point isn't perfectly clear, look through all of human history. All historic economies with high concentration of income into a few hands were impoverished in aggregate. We see it in every poor country today. A few are very wealthy and everyone else is poor. It is the rise and robustness of a middle class that produces the greatest aggregate wealth. Because the middle class can make more investments of capital than any small elite that concentrates wealth. (and these investments happen at all kinds of levels from paying for education or buying a first car to starting a business or investing in the stock market).

Don Geddis said...

@Unknown: National security is getting a little off topic. We were discussing what leads to greatest economic growth. You yourself said: "wealth creation ... is an investment that produces more aggregate wealth ... Taxation is a means to give a society the ability to invest in ways that no individual or subgroup can invest"

We could talk about regulations and security and education and roads and space -- although, as a libertarian, I'm not even going to automatically concede these "simple" cases -- but that is not especially relevant to questions of economic growth under income inequality.

You seem to be under the misimpression that wealthy people need to make individual investment decisions. You show the difficulty of taking the proper time to make careful individual decisions, and then say "High income earners start to hold capital. In the real world this means non-liquid purchases as in art, jewelry etc."

The problem is that the obvious solution is that wealthy people simply hire other investment managers to make the individual investment decisions. Or just invest in a simple index fund. The fact that they own the wealth, in no way at all limits the amount of attention that can be devoted to deciding on the worth of a particular deal.

"A few are very wealthy and everyone else is poor."

You've misread the lessons from history. What matters is not income inequality, but instead it is lack of opportunity for the mass public. It is having a huge class of impoverished people (who are thus not productive for the nation).

The US is nothing like those historical examples. There is ample opportunity for all capable US people, regardless of the circumstances of birth, to achieve great wealth. Even the poorest classes in the US are vastly wealthy by historical standards. (The US is probably the first civilization in history where obesity is a greater problem among the poor than among the other economic classes.)

We're asking a different question. We're asking whether, if the poor classes are not starving, and the middle classes have plenty of both wealth and opportunity, whether there yet remains a problem if a small fraction of rich folks are very, very wealthy. Does the income inequality by itself, cause societal problems?

Or, could it be the case that allowing some folks to become very rich, actually benefits society even more than those individuals (since in the process of becoming rich, they generally create far more wealth for society than they are able to capture for themselves).

Ron said...

> The US is nothing like those historical examples.

Yet.

Unknown said...

Don, the revolutionary war was predicated on a middle class asserting it's own economic interests and TAKING, the property of a wealthy high income earning elite. The US was the first independent middle class country.

Security is always an investment. it may or may not produce great returns, just like other investments; but it's primary function is to prevent losses. The civil war was a contest between 2 kinds of economies. The arguments about slave states that preceded the war were primarily a disagreement about what kind of economic systems were best, not just for individual states, but for the nation as a whole.

Re-reading your responses, I wonder if you do see the difference between wealth and cash. GDP is not the same as wealth. China would seem to be a wealthier nation than the US. but it is not even close. It's road infrastructure is no-where near ours. It's inability to manage individual freedom and expression demonstrates how far they are from the kind of wealthy free enterprise we engage in. Fox news is a great example of an enterprise which engages in bashing the president, an enterprise that China could never tolerate.

Free enterprise, at all levels, and society wide investments are what produce wealth. Our built out infrastructure, built to satisfy a wide-spread interest of travel and distribution for everyone in the country, is only achievable by social organizations like states, willing to take a viewpoint on development that is greater than the life-span of individuals. Our public education is based on the same thing (even if it is crappy!) Food stamps, WIC, oil subsidies, electric car subsidies are all predicated on an idea of creating more aggregate wealth (like any investment, how well does it actually work?... and on what timeline?)

the libertarian viewpoint is important to understand and secure individual free enterprise. But it is incapable of considering problems and investments greater than individual life-spans. It's simply non-sensical to libertarian philosophy to consider investments made for future generations that may not even exist. However, when you think about society as a whole, these investments are the most important ones.

The nations founding was not just predicated on individual freedom, it was also predicated on securing that freedom for future generations. it was a security and free-enterprise question, for everyone, from the beginning.

when modeled, Income inequality is a natural outcome of transactions between nodes. but the danger of income inequality happens when it begins to depress the economic growth of the middle class. Without a mechanism (taxation) to produce society wide investments and a mechanism to insure that the middle class remains the dominant class for income accrual (again, taxation) any economy will eventually bifurcate into a rich and poor as capital accrues to those with the most income.

Over time, as assets pass from one generation to the next, the next generations interest is in asset preservation and expansion, while the founding generations interest was a more pure-free enterprise ethic. This shift in values has all kinds of ramifications for how investments are made and what opportunities are available for non-asset holding future generations.

I would like to hear your thoughts on what kind of taxes and government investments (expenditures) would be the best to make, at this time, for your great grandchildren. And when you think about that kind of problem, i suspect you will begin to sound less and like a like a libertarian. but perhaps you might slide more the other way, towards the ideas which found nobility.

Unknown said...

Don, I wanted to add that I am pro free enterprise. The drug war, for instance is bad for free enterprise, it's bad for learning, and it's systematically corrupted our political and judicial process and the political system of other nations.

But I think the national parks have a been a great preservation process that has produced far more wealth than could have ever been produced if we had let them become privatized or developed. What I'm arguing is that we, each of us, and all of us, have an interest in maximizing free enterprise and individual wealth accrual and in maximizing aggregate wealth accrual.

Instead of arguing for one or the other, I'm arguing for both. But to achieve both, means finding a balance of taxation and investment that produces the greatest possible wealth generation. And, based on the numbers, it appears we have been underperforming in aggregate because more and more income is accruing to the top.

In fact, there is some research beginning to show that bubbles occur because there is a surplus in investment capital. http://economistsview.typepad.com/economistsview/2008/10/does-wealth-con.html

My view is that the stronger the middle class is, and the more income it captures, the stronger the nation is as a whole. and the more robust the economy becomes. And the wealthier we all become. Why? because the investments made by the middle class are different than made by the wealthy.

Also the accrual of income to the upper classes results in investment opportunities for the middle class in terms of loans, or angel funding, etc. But more income accrual to the middle class means more middle class members form companies without loans or outside investors. And that changes the kind of investment opportunities that are possible.

yes, the wealthy hire people to invest their income, but what is different about that income redistribution when compared to having more income accrue to the middle class directly? those differences matter. This problem shows up in relief in the tech industry and in the movie industry. The funders are looking for sure wins, so they fund similar ideas in tech, or sequels in movies. But the new founders or the new directors have new ideas they want to try and inevitably face funding challenges. (ycombinator is wonderful example of "middle class" level funding of entrepreneurs).

it's not an either or, but a balance between promoting free-enterprise and growth, and encouraging the middle class with taxation and investment that broadens wealth.

Don Geddis said...

@Unknown: I see that you have lots of interesting ideas, but you're a bit all over the map. You touch on so many diverse ideas, that it's hard to pin you down on anything specific. We were, I thought, talking about income inequality, both as it relates to economic growth, and maybe to political power. But now you want to bring in "freedom of expression" as though it is a kind of wealth.

For sure, there are lots of things in society that are important and valuable, besides just economic topics. Slavery, racism, bigotry, women's suffrage, religion, gays, etc. etc. etc. It's hard enough to separate "nominal" wealth (cash) from "real" wealth (material things). If you want to start calling the entire structure of society "wealth", then I suspect the concept is too fuzzy to draw any strong conclusions.

"[China's] road infrastructure is no-where near ours."

I think you underestimate China. Their recent ability to construct new infrastructure (airports, high speed rail, etc.), dwarfs anything the US is able to achieve today. (Much of that is due to US environmental regulations, zoning laws, etc. ... but the point is that China is building this stuff, and the US is not.)

"oil subsidies, electric car subsidies are all predicated on an idea of creating more aggregate wealth"

I would say that you have a charmingly naive view of politics. The idea that taxation and spending is based on an investment cost/benefit analysis, is a wonderful fantasy. The truth is that politics works more by popularity and persuasion, and taking a little pain from a lot of people, in order to provide a media story of a concentrated benefit to an easily identified tiny group. Much of what the government does has a negative net utility.

"the libertarian viewpoint ... is incapable of considering problems and investments greater than individual life-spans.'

This is a bit rude and arrogant of you. You're obviously not a libertarian scholar, yet you claim to assert how libertarians think. Maybe you should be a little more humble about believing that you know what your opponents are thinking.

"the danger of income inequality happens when it begins to depress the economic growth of the middle class"

Sure, but I don't believe that is happening. You can't just point to income inequality itself. You actually need to complete the argument, and show that middle class economic growth is being depressed. I don't believe there's a connection.

" would like to hear your thoughts on what kind of taxes and government investments (expenditures) would be the best to make, at this time, for your great grandchildren."

I would like taxes that cause minimal distortion on economic activity; tax consumption, not wages, income, or wealth. Property tax is a good one (the tax doesn't affect the supply of land).

Government investments: national security, courts. Some redistribution to provide a social safety net for the most unfortunate in our society, probably via a simple basic income guarantee. Government expenses should be subject to cost/benefit analysis: make the best estimates about total costs, and total benefits, and do not implement a policy if costs are expected to exceed benefits.

The current US government works nothing like this.

Don Geddis said...

@Unknown: "I think the national parks have a been a great preservation process"

I agree.

"that has produced far more wealth than could have ever been produced if we had let them become privatized or developed"

On the other hand, I think you just assume this part, without carefully researching it. You clearly don't have a particularly good model of "what would have happened" in a counterfactual world without government intervention.

"based on the numbers, it appears we have been underperforming in aggregate because more and more income is accruing to the top."

Can you elaborate on this? I see no evidence that income inequality has caused any underperformance of wealth generation. What are the "numbers" you are referring to? What is your theory of the causal connection?

"bubbles occur because there is a surplus in investment capital"

"Bubble" is another fuzzy concept that has no coherent referent. It's not actually a meaningful economic term.

"because the investments made by the middle class are different than made by the wealthy."

I don't believe you. Show me evidence that the kinds of capital investments made within a nation, vary significantly based on the amount of income inequality in that nation.

"compared to having more income accrue to the middle class directly"

You and I agree on the goal of increasing middle class income. I don't think that the amount of upper class income has much relevance at all, to the goal of increasing middle class income.

You need to be sure that you aren't making the classic mistake of treating national income like a pie to be divided, where if the rich have "more", then the middle class must necessarily have "less". Economics works nothing like that.

"The funders are looking for sure wins, so they fund similar ideas in tech, or sequels in movies."

Just like you're not a libertarian, you're also not a funder. You don't actually know what they are looking for. I wish you would be less confident about believing you know what and how people think, who are not you (or anything like you).

"encouraging the middle class with taxation and investment that broadens wealth."

I agree with you, on encouraging policies that would increase middle class income and wealth. Ironically, many proposed policies to reduce income inequality, would actually have the effect of reducing middle class income and wealth. This is what you don't seem to grasp: that many of the hard choices, are because income inequality and middle class income/wealth often work in opposite directions. You need to decide which is more important to you. You have to choose.

Unknown said...

Don, I'll offer some examples they you asked for. Free expression directly leads to income. The Fox News example I gave is just one example how free expression is a good that can be exploited to produce income. The movie The Interview is another example.

Niagra falls is the national parks counter example.

While I do not work in Congress I've read CBO reports and know that CBA is done on all kind of expenditures and taxation regs and laws. I think it's actually the law that congress must do that analysis.

My point about the different investments different income earners make was clearly explained with the Berkshire hathaway example. Warren buffet doesn't invest in taco Carts.

I think the recent (40 year) trend in income redistribution is the counter example to shrinking middle income having a net effect that depresses GDP. The real issue is how can we know, or how can we tell, which levels of income distribution are optimum for maximum GDP growth?

Because obviously some levels are demonstrably bad. Many policies, especially security and freedom policies, really do suppress the growth and development of the middle class, and thus suppresses GDP. The countries with the best security, both nationally and individually, with the best freedoms of expression and free enterprise are the wealthiest and have the most robust economies. liberties are not as easily separated from economic activity as we like to think.

I am curious to know when you think income accruing to the top does begin to impact overall GDP perfomance.

Don Geddis said...

@Unknown: "Niagra falls is the national parks counter example."

You need to do more than just mention a current situation. You also need a plausible counterfactual story, of what you think "would have happened" otherwise.

"I've read CBO reports and know that CBA is done"

Yes, the report is required. That doesn't at all mean that policies which are approved necessarily correspond only with positive cost/benefit predictions.

"Warren buffet doesn't invest in taco Carts."

Buffet is a particular active investor, with a particular specialty. There are other professional investors with other specialties. None of this has anything to do with how high income earners (who are NOT professional investors) choose to passively (NOT actively) invest their savings. You're making a claim that income inequality causes different types of society-wide investments. I don't believe that, and pointing to a particular specialist professional investor isn't relevant to the question.

"The real issue is how can we know, or how can we tell, which levels of income distribution are optimum for maximum GDP growth?"

Yes, of course. I think income distribution, by itself, tells you essentially nothing about GDP growth. Instead, there are policies which encourage GDP growth, and policies which inhibit it.

Just to be concrete about it, a policy which allowed the rich to continue to grow in wealth, but which explicitly suppressed the middle class, would obviously suppress GDP growth (and also increase income inequality). On the other hand, a society of complete meritocracy, where each individual created whatever wealth they could, would maximize GDP growth (and also increase income inequality). Both approaches would increase income inequality; one would suppress GDP growth, and one would enhance it. Hence, merely stating that inequality increased, tells you nothing about whether GDP growth was enhanced or suppressed.