But what should we do? That's the question.Indeed it is. It's a monstrously complicated question, and because of that I put off answering it. But I'm going to take a crack at it here.
Part 1: The quality metric
Let us begin by taking note of an important fact: policy questions like this do not not and cannot possibly have an objectively correct answer. The reason for this is that people can legitimately disagree on what a good outcome for an economic policy looks like. There are myriad ways of measuring macroeconomic outcomes: total wealth. Mean wealth per capita. Median wealth per capita. Life expectancy. Different quality metrics lead to different policy conclusions. And there is no such thing as the One True Metric.
On the other hand, if you're going to claim to be rational, then you must be explicit about what your quality metric is, otherwise there is nothing against which to measure the success or failure of policy decisions. I think this explicitness is manifestly missing from most discussions of economic policy in the U.S. and this is the root cause of much of the intractable disagreements. If you don't agree on what a good outcome looks like, then of course you are not going to agree on policy.
So I'm going to start by describing what looks like a good outcome to me. Of course, this is only (and can only be) my opinion. I think the world would be a better place if more people adopted this point of view, but of course I would think that. I am, by logical necessity, more than a little biased in this regard.
I don't think that any simple statistic is a good measure of economic outcome. I think we need to be much more nuanced than that. Some of the usual suspects (like GDP) make not entirely unreasonable proxies for what we really ought to care about, but none of them are what we really ought to be caring about at root.
It is easy to illustrate this with an example: suppose some of the more extreme elements of the Republican party manage to sway policy to the point where they are able to re-legalize negro slavery in some of the Southern states. And suppose they source all of their slaves from Central African Republic (or Malawi, depending on who you ask) the poorest country on earth by GDP per capita. They pay a fair market price for them, enough money that all the usual macroeconomic indicators in the C.A.R. go up. (In fact, imagine that the C.A.R. is completely revitalized by the influx of capital from the slave trade.) And suppose that the ROI on imported slaves in the U.S. beats the stock market (that's not asking much nowadays). Let us suppose even that government regulations require a certain minimal level of human treatment and health care for slaves, rather like we currently do for livestock, and this leaves the slaves strictly better off than they would have been back in the C.A.R. So by every conceivable economic measure, importing slaves from the C.A.R. is a net win for everyone including the slaves.
Does that mean that slavery might be justifiable as an economic policy? Slavery has become so unfashionable nowadays that I have probably caused offense in certain circles simply by asking this question. But it was not that long ago — less than 200 years — that people fought and died to defend slavery on its merits as an economic policy. (Of course, many fought and died to defend it on political, social, and religious grounds as well, but that's beside the point.) The last Confederate veteran only died in 1959. At least some of the Confederate mindset is alive and well today.
This is not an academic question. The face of slavery has changed considerably since 1861, but it is actually alive and well today, even in the U.S. One could argue that slavery is bad because it ultimately does not maximize economic growth (or something like that), but that would be missing the point rather badly, which is: slavery would be bad even if that were not the case. Even if slavery did lead to undeniable across-the-board economic benefits, it would still be bad. (Note that one clue to this is the fact that in order to make the slavery story hold up you need a source of desperately poor people for whom slavery is potentially a step up.)
The badness of slavery cannot and must not be justified in purely economic terms, at least not as long as there are desperately poor people on earth. There is something else in play here, perhaps more than one something. There are myriad non-economic factors that one can mix into one's quality metric: Human rights. Fairness. Happiness.
My economic quality metric derives from my core belief that we should try to maximize the number of ideas in the universe. Because at the moment the primary habitat of ideas (as far as we know) are human brains, it follows that we should strive to maximize the number of human brains. But brains by themselves are not enough. In order to support a robust ecosystem of ideas, brains have to exist in an environment where they are capable of learning, of thinking about things, and, most importantly, of generating new ideas.
Slavery is not such an environment, which is why slavery is bad. Schools, universities and libraries (and national parks) are such environments, which is why they — and the social and economic structures that give rise to them — are good.
Part 2: Wealth disparities
I'm a big fan of democracy, capitalism, and free markets. But I am not a fan of these things for their own sakes. I am a fan because these things tend to bring about good outcomes according to my quality metric. Free market capitalism, for example, creates wealth more effectively than any other system we humans have been able to come up with. All else being equal, more wealth is better than less because it gives you more options. But wealth is not (by my quality metric) an end in itself, it is a means to (what should be) the end: the creation of a world where ideas can thrive.
Now, an awful lot of our wealth gets deployed in what I consider to be constructive ways. For example, we humans live longer and healthier lives than ever before, and that's a good thing because (you're going to start recognizing this theme after a while) long-lived healthy humans generally have more and better ideas than short-lived sick ones do. Famines are mostly a thing of the past: a good thing. We have cars and airplanes and the internet, which allow humans and their brains and their ideas to travel and intermingle in ways that would not otherwise be possible. All good things.
We also have peace. I know it's hard to tell from watching the evening news, but we are actually living in the most peaceful era in human history. There is reason to believe that one of the reasons for this is the spread of democracy. No two democracies have ever gone to war with each other. And peace is good because... well, you can fill in the blank here.
It is easy, then, to fall into the following rhetorical trap: democracy, capitalism, and free markets (which I'll start abbreviating DCFM) are all Good Things. But wealth disparities are an inevitable result of DCFM. Therefore, wealth disparities must also be a good thing (or at least not a bad thing, or at least a thing that we need to be willing to put up with in order to enjoy the fruits of DCFM.)
That this reasoning is fallacious is easy to see. It would apply equally well to, say, pollution, which is also an inevitable result of DCFM (unless we choose to do something about it). Just because something is a result of DCFM doesn't necessarily mean it's a good thing.
I believe that extreme wealth disparities are more like pollution than they are like libraries and universities. Why? Because extreme wealth disparities do not help to foster a robust ecosystem of diverse ideas.
We already live in a world where the concentration of wealth is snuffing out ideas. Yes, anyone can write an publish new ideas and put them out on the internet for everyone to see (just as I am doing right now). But as a practical matter, the vast majority of people are getting their input from a smaller and smaller number of sources. 90% of the media in the U.S. is controlled by six companies. In 1983 that number was 50.
This is not yet a catastrophe. Six is still better than one. But the trend is very worrisome.
What makes it even more worrisome is the positive-feedback effects that make wealth disparities more and more difficult to dislodge the larger they become. Wealth is power if one chooses to wield it that way. So, for example, I have Comcast internet. I hate Comcast. They are the worst company ever. And yet I do business with them. Why? Because I have no choice. Why do I have no choice? Because Comcast uses the money they get from me to hire lobbyists to influence state and local politics to make it all but impossible for effective competition to enter the market. And it's not just Comcast; the other big players do it too.
So are wealth disparities bad? Yes and no. They are indeed an inevitable by-product of DCFM, which on balance do vastly more good than harm. But, like pollution, if you get too much wealth disparity it can undermine a lot of the good the DCFM does and so, like pollution, I think we ought to try to do something about it. Also like pollution, I don't think it makes any sense to try to eliminate it entirely. But I do think that it's time for some emission controls, and that we can put them in place without killing the golden goose.
Part 3: Policy recommendations
The first step to any recovery is admitting you have a problem. The first step to addressing extreme wealth disparities is deciding that they are a problem. I've presented an argument here that they are indeed a problem with respect to some quality metric. Moreover, I've actually told you what that quality metric is. I think any discussion of this issue needs to start with those simple steps.
If you accept that wealth disparity is a problem then the solution is actually pretty straightforward: the economic equivalent of a catalytic converter is a progressive tax structure, which we currently don't have. At the moment we have a regressive structure that takes a smaller percentage of Warren Buffet's income than his secretary's. The main culprits are payroll and sales taxes, and the carried-interest loophole. So I'd eliminate those and adjust marginal rates on regular income taxes to be revenue-neutral but more progressive, i.e. I'd raise the top marginal rates. (I would also eliminate the mortgage interest deduction. It does nothing but distort the housing market. But I'd do it very gradually, over 30 years or so, so as not to shock the system.)
I would also impose a (very small) per-transaction tax on stock markets in order to discourage high-speed trading. The extra liquidity that HST provides is nowhere near worth the market distortions that HST gamesmanship introduces. I would happily wait two or three seconds longer for my trades to execute if it meant that there wasn't a quant shaving a few basis points off every transaction. I'd use the proceeds from this tax to fund basic research and education.
I would limit the ability of for-profit corporations to lobby politicians. I would get around Citizens United by passing an amendment to the dictionary act of 1871 stipulating that a for-profit corporation is not a "person" for the purposes of ascribing Constitutional rights to it.
I don't know if that would solve the problem, but I think it would be a step in the right direction. At the very least, I think it would be an experiment worth conducting.