Inequality: Facts and Values

There were a number of interesting comments on my last post. I want to address some of the critical ones.

To recap, my post argued the following points:

1) Some people are doing extremely well in today’s economy, a large number are worried or struggling, and a growing class is experiencing desperate privation. This situation demands some legitimating explanation.
2) It is hard to demonstrate factually that the top 0.1%, which has seen a near 400% increase in its income since 1980, has become four times more valuable to the economy since 1980.
3) So defenders of this vast inequality argue that those in the middle and lower classes deserve to work harder and to make do with less.

Let’s take criticism of each step of the argument in turn.

1) Legitimation: Some want to stop the conversation at point 1, arguing that there is no need to legitimate inequality, and no way to fairly or efficiently remedy it. For example, some libertarians a) believe that there is no level of inequality that demands legitimation.  I have also heard objections to redistribution based on the idea that b) any governmental effort to redistribute income is doomed to be counterproductive, due to the incompetence or venality of legislators and bureaucrats.  Let me take each point in turn.

a) Inequality as a non-problem: Let me again try to divide this into two responses, based on the level of inequality we are facing:

i) Global Inequality: For some commenters, even the extremes of global inequality are not a problem that merits coordinated governmental attention. Commenter Promethefeu insisted that, in general, the extraordinary wealth of the richest both results from and reinforces a global economic order that is gradually improving the lives of everyone. This simultaneously descriptive and normative claim also fits comfortably with Promethefeu’s view that the resources of the planet are either literally or constructively inexhaustible.

I do not agree with these claims. In several posts in our Law & Inequality category, I have described the work of Thomas Pogge, who has argued that trade rules set up by the governments of wealthy countries and elites in many poor countries (with rich natural resources) have contributed mightily to the crushing poverty of the world’s most vulnerable billions. (I’ve also linked to the book Thomas Pogge and His Critics, which features some critiques of Pogge that I ultimately find unconvincing.)

To what degree is economic life zero-sum?  The more I read about natural resources, the more I’m convinced that we may have already hit peak oil, and that other energy options will not be able to perform the functions it has played in our economy with the same degree of cheapness and safety.  (Kunstler’s book “The Long Emergency” has a good chapter on this; Bill McKibben, Tim Jackson, and Paul Gilding also offer evidence.)  Limits of the earth’s carrying capacity are also a staple of conservative Malthusians.  I don’t share their policy prescriptions; I just bring their analysis up to make it clear that there is not a simple left/right divide on the issue.  Extreme inequality lets those at the top feed their cars by starving the poor.  Less dramatically: driving safety also gets distributed based on purchasing power (and if you don’t believe me, check out Debra Satz’s new book).

If there were evidence that the extraordinary accumulation of capital in the top 1 to 10% were leading to much more research on how to solve the energy, food, and health dilemmas created by a coming age of scarcity, I’d have to reconsider my position.  One question for those who disagree with me: is there any evidence that would lead you to reconsider your position?

ii) US inequality: This is a tougher case for me to make than the global case, because income is much more compressed in the US than it is globally. It is probably better to be among the poorest 10% of Americans than it is to be living at the median wage in a desperately poor country.  Nevertheless, there is a lot of evidence that high inequality in a developed country hurts everyone in that country–not just those at the bottom.  So even if redistribution is not Pareto-optimal at the very moment it occurs, it eventually improves the welfare of all, on average.

Again, values can trump these facts: someone who only wants to think about “process,” and not the pattern of distribution it generates, won’t be upset by global extremes, much less US levels of inequality.  But I don’t think it’s possible to be a purely process-oriented economic thinker, especially if you view economic transactions as legitimately “market-oriented” to the extent they are distant from the state. Give me a sector where someone has achieved great or near-great wealth, and I can easily point to several instances where that person, his company, or his industry has vastly benefited from state intervention.  (The work of David Cay Johnston, James K. Galbraith, and Alperovitz & Daly is only the tip of an iceberg of evidence supporting this point.)

Even as pure a libertarian thinker as the early Robert Nozick insisted on justice in rectification in addition to justice in transfers and acquisition.  Moreover, it is inconsistent for a libertarian thinker to argue simultaneously a) that the state has engaged in a monstrous series of favors to various groups and b) we must suddenly end state intervention in toto, thus allowing those with ill-gotten gains to consolidate and press their advantage in the new order.  There has to be a period of rectification, and for me, much of that rectification will focus on inequality that was generated by the endless series of state-corporate mutual favors that produced a goodly number of our richest, from the robber barons to the current Forbes 400.  Laissez-faire “shock treatment” is good for creating Russian-style oligarchies, but has never achieved the type of pure and free market that its supporters tout.

b) Government is the problem, not the solution:  This last point leads to what I think is a much stronger critique of my position on inequality: that government is too captured to address the problem meaningfully.  Extrapolating from Arthur Okun’s “leaky bucket” theory of redistribution, a critic of redistribution might predict that a Medicare program is always going to be aimed more at enriching doctors and hospitals than helping patients.  Loopholes fecundate in the tax code.  Defense spending succors one boondoggle after another.

However, those who push that position are also consistently enabling the “wrecking crew” that makes government so dysfunctional. Medicare Part D could be much less costly if private insurers were less involved and government made full use of its bargaining power.  In the debt ceiling fight, it was the anti-revenue absolutists who fought to maintain loopholes on things like corporate jets and carried interest.  Anyone who proposes large cuts in defense spending will face a Dolchstoss strategy from the opposition.

2) Has the Top Tenth of One Percent Become Four Times More Productive?: We can see from this chart that, if we exclude the outliers in the top 0.01% (who earn an average of $27 million annually), households in the top tenth of one percent earn, on average, about $3.2 million annually.  Adjusted for inflation, this is a nearly 400% increase in income since 1980, an era when median wages stagnated.  Most of the revenue proposals now on the table would increase the top tenth of one percent’s payments of taxes by 1 to 10 percent. So let’s assume the hardest case for me: a 10% federal tax raise, or about $320,000 for the median taxpayer in this group, to help pay for the mix of programs presently funded by the US government. Is that fair?

Again, it all depends on the context.  Sure, there are some brilliant managers, inventors, and professionals who deserve every cent of their millions.  But there are also a lot of people I think we’d all acknowledge are merely lucky, passive rentiers, expert exploiters of contacts and connections, and blatant copiers of value-draining business strategies (like pollution, tax arbitrage, evasion of labor and health standards, etc.).  I cannot tell you how many examples like this I come across as I teach cases in various IP and health law topics, or research deregulation. For just two examples, consider the interactions of private equity barons and nursing homes, or the software patent arms race.

But I admit that it’s probably very difficult to conceive of an empirical project where we could reliably code the various top 0.1% incomes as “valuable/deserved and productive” vs. “mere copying or an exercise of power.”  So let’s again take the toughest case for me: imagine the 10% tax were only imposed on the best of the top 0.1%.  Let’s say they took home (and I’ll be very rough here) about $1.75 million as opposed to $2.1 million.*  Is that really so troubling, compared with, say, the extreme discomfort of the neglected quadriplegics, poor children suffering dental pain, or abandoned elderly left to fend for themselves in the wake of an austerity budget?  Even if we assume that only 20% of the taxed income filters through to worthwhile social ends, even if the bucket of redistribution is that leaky, I’d still endorse it.

Note: I am not taking the easy road of dismissing the marginal spending of our top 0.1% as wasteful.  As much as I like Umair Haque’s blogging, I don’t think that this is necessarily a representative picture of the spending habits of the very rich, or a merited response to the group as a whole:

[A] playhouse for the super-rich . . . can easily cost more than the average income of the people formerly known as “the middle class.” [It is] described in an eyebrow-raising New York Times piece[:] “[at the home of] an oil company executive, and his wife, Kristi, a Playboy model turned blogger, is the $50,000 playhouse the couple had custom-built two years ago for their daughter[.]”

If $50,000 seems a bit off for that kind of purchase, don’t worry — other playhouses in the piece went for as much as a cool $250k.  [This item] is a peculiarly apt metaphor for what’s gone wrong with the economy today: the super-rich, whose gains reflect little social value creation, have gotten richer — and are hyperconsuming the stuff of idle, yawning luxury with an appetite that makes Caligula look like a blushing bride.

I am not penning a jeremiad about wasteful spending; I’ll leave that to Robert Frank.  Rather, I am combining concern about relative and absolute poverty.  High levels of inequality may be all right if those at the bottom have some guaranteed minimum of shelter, health care, food, education, and chances to prove themselves capable of joining those at the top.  But that does not describe the US, and I have a sense that in an age of scarcity it may be hard for any country to sustain very high levels of inequality and reliably prevent privation for those at the bottom.

3) Justifying Immense Gains at the Top by Stigmatizing the Economy’s Losers: I don’t think there were many comments on this point, but I think it is critical to the post.  What I find most disturbing about the current inequality debate is the growing momentum behind the idea that the poor simply don’t deserve much action on their behalf. (Or, in more detached terms, that any effort to raise their estate must be part of a centuries-long world-historical process that we need be in no hurry to rush.)  I think there is a growing pressure to reduce the cognitive dissonance of a world increasingly divided into ever-richer rentiers and the hopelessly disenfranchised.  We need to be very careful about buying into any narrative that would label certain people as “producing nothing,” or “unemployable because currently unemployed.”  But as long as there are massive gains at the top and stagnation or decline for middle and lower class Americans, those will be very tempting ways of explaining/justifying our economy.

A concluding thought:   When I began this response, I was hoping to neatly separate out the differences about values that we may have, and the types of factual disputes that are more amenable to conclusive settlement.  But as I write it, I more deeply appreciate truth’s debt to values.  How we explain inequality will have a lot to do with how much we value the work of the wealthiest (and the relief of the suffering of the poorest), and those valuations will in turn inevitably inform the explanations of inequality we propose.  I believe that, in fact, the very wealthy owe a great deal of their net worth to the government that all of us (and our forebears) support (and built), and that as a matter of value we should care more about an inclusive and resilient future than immediate discretionary consumption in the present.

I think those facts and values add up to a more progressive tax system and more dedication of government funding to infrastructure, conservation, and improvements in health and education.  The very wealthy have benefited disproportionately from past investments.  In an era of historically low tax rates for the wealthy, and looming austerity and infrastructural decline, they need to invest in a common future.  I am afraid that those who fail to demand this reflect Adam Smith’s diagnosis of a “disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition.” I hope that public debate on redistribution can proceed on the basis of more fair-minded dispositions.  There are heroes and geniuses, looters and loafers, in all social classes.

*Based on William Domhoff’s figures, I’m conservatively assuming the effective tax rate on the top 0.1% is about 35% (that is, that the marginal rate dominates, that state taxes and deductions cancel out, and that dodges like the carried interest rate are relatively rare). As Domhoff notes, that’s not a safe assumption for the very top: “the effective tax rate on high incomes fell by 7% during the Clinton presidency and 6% in the Bush era, so the top 400 had a tax rate of 20% or less in 2007, far lower than the marginal tax rate of 35% that the highest income earners (over $372,650) supposedly pay.”

Frank Pasquale

Frank is Professor of Law at the University of Maryland. His research agenda focuses on challenges posed to information law by rapidly changing technology, particularly in the health care, internet, and finance industries.

Frank accepts comments via email, at pasqresearch@gmail.com. All comments emailed to pasqresearch@gmail.com may be posted here (in whole or in part), with or without attribution, either as "Dissents of the Day" or as parts of follow-up post(s). Please indicate in your comment whether or not you would like attribution, or would prefer your comment (if it is selected for posting) to be anonymous.

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7 Responses

  1. When it comes the alleged productivity of the very top of the wealth distribution, even if it’s impossible or answer the question in absolute terms, comparative analysis can tell us interesting things. That’s why I like the way you framed this part of question in terms of 2010 versus 1980: the structure of the economy and the distribution of wealth have changed in those thirty years, and people with a fair range of moral and economic theories might be able to reach agreement on those two comparative states of the world, even if they part ways about the absolute justice or injustice of either. We could similarly try to compare 2010 in the U.S. to 2010 in other countries, or to other times and places. Is the distribution more or less skewed than in the U.S. in 1890, or Rome in 150, or China in 1600, etc? And what role do and did the super-wealthy play in those economies? Were they investing, politicking, and acting in ways that made others better or worse off, and to what extent was their wealth a matter of factors possibly within their control (individually or collectively) or of matters obviously beyond their control? Hard questions to answer fully, but easier questions to answer comparatively.

  2. Much food for thought with many very valid points. I’m paying more and more attention to this issue myself, weighing the disparate views on the subject. However, I at this point still reject the validity of zero-sum economics (and the belief that poverty is a necessary consequence of other’s wealth) because I reject the premise that economics is based solely on limited resources. As you know more than most, there are whole sectors that are not dependent on physical commodities. Maybe we will run out of materials to make iPads someday, but there will always be new market demands for software and the myriad financial and legal tools to make it viable in the larger context. And even when the commodity is physical, it is not apparent a zero-sum model is the cause of disparity. The case in point is global hunger, where we produce nearly twice the food we need and yet whole populations are on the verge of starvation. This would be an end-game scenario for the model, and yet the supply and demand levels show us we are not at that point. In the end, my challenge is to rise above the blame game altogether. You say the poor are being vilified, when I see it much more common the other way around. We live in different anecdotal worlds, but this should not keep us apart from meaningful dialogue.

  3. Brett Bellmore says:

    “So defenders of this vast inequality argue that those in the middle and lower classes deserve to work harder and to make do with less.”

    I must confess that I have yet to encounter anybody making this argument. I would however argue that the greatest, and most burdensome, power inequality most people encounter is the disparity in power between average people and the government, not the wealthy. And every move to reduce inequality between private citizens represents an increase in that form of inequality.

    In fact, I suspect that growing inequality in the private sector is a result of growing power of government giving people with political leverage the power to grant themselves advantages. Take the case of Columbia seizing that neighborhood to expand their campus: All the wealth in the world would not have permitted Columbia to do that, they managed it because they had political clout.

    So, we need to find a way to address the contribution political power makes to income inequality. This won’t happen if we’re not awfully careful not to increase the absolute power of government in the process.

  4. Another excellent post on the topic. But sadly, I think there’s a problem which is sketched as follows.

    1) Either you’re preaching to the choir (“and values add up to a more progressive tax system and more dedication of government funding to infrastructure, conservation, and improvements in health and education”), which does little good.

    2) Or you’re talking to an audience which doesn’t share your values (umm, see Brett Bellmore’s comment for an example). This doesn’t seem to work well.

    So, what’s the solution? I don’t know. This is a blog comment, not a manifesto.

  5. PrometheeFeu says:

    @Brett Bellmore: I have encountered some people who actually believe that the poor deserve to be poor. The story was rarely market based: If they were more deserving the market would have given them more money. (A common confusion between what one deserves and one’s marginal productivity within a certain set of prices) More frequently, it was something along the lines of Calin’s double-predestination: God would never hurt good people so poor people must be bad people and they will probably go to hell. (A position that was prevalent in the catholic upper class in the Philippines where I spent some time) I’ve always found both arguments quite ugly and misguided.

    @Frank Pasquale
    “If there were evidence that the extraordinary accumulation of capital in the top 1 to 10% were leading to much more research on how to solve the energy, food, and health dilemmas created by a coming age of scarcity, I’d have to reconsider my position. One question for those who disagree with me: is there any evidence that would lead you to reconsider your position?”

    My position on redistribution is not just based on empirical evidence. There is also a certain amount of ideology. So if indeed inequality led to overall lower standards of living, I would be more likely to consider inequality a necessary evil for a society to remain free rather than something that should be abolished or reduced.

    As to the evidence that would lead me to believe that inequality causes lower standards of living in and of itself, that would be hard because of the difficulty of disentangling the effects of inequality with a variety of other factors. I think it would most likely come in the form of a micro analysis where the relevant factors could be accounted for. Primarily, I would need to see inequality disentangled from corruption. The rich usually have greater access to a powerful government which means they can often have policies implemented which redistribute in their favor. Pulling that effect out would be very difficult.

    “There has to be a period of rectification, and for me, much of that rectification will focus on inequality that was generated by the endless series of state-corporate mutual favors that produced a goodly number of our richest, from the robber barons to the current Forbes 400.”

    The problem here is what you summarize in b: The government is captured. As a result, their implementation of such a rectification program would most likely lead to further distortions with new and different politically powerful beneficiaries. This is compounded by the fact that any rectification would be hard to calculate even by start well-intentioned neutral parties. Consider the following hypothetical: if many generations ago your ancestors had a local monopoly on sugar which they used to amass a fortune. Today, you have grown the family wealth by investing the family fortune in a series of web start-ups. What if any of what you have is ill-gotten?

    “However, those who push that position are also consistently enabling the “wrecking crew” that makes government so dysfunctional. Medicare Part D could be much less costly if private insurers were less involved and government made full use of its bargaining power. In the debt ceiling fight, it was the anti-revenue absolutists who fought to maintain loopholes on things like corporate jets and carried interest. Anyone who proposes large cuts in defense spending will face a Dolchstoss strategy from the opposition.”

    This is the problem with policy-making in a second-best world. You want to reach the first-best, but the path between the status-quo and the first-best might be much worst than the status-quo. So what do you do? I would like to vote for a libertarian who will implement the policies I think are better, but I can’t. I have to settle for someone who implements bad policies that look like they could one day be transformed into the best policies. Is that better than voting for the ok policies that look like they will not lead to future improvement? I honestly do not know.

    Now, to be fair. I am not an opponent to all forms of redistribution. My problem however is with extreme poverty, not inequality. I don’t care how many cars Bill Gates has, but I am uncomfortable with people dying on the streets.

  6. @Brett — Yes, I think some of it borders on straw men, or at least the arguments of the other extreme. As for PrometheeFeu, to say some poor do NOT deserve where they are by their constant choices is a denial of the reality all around us. I know too many people who will never be middle or upper class no matter how much money or opportunity you throw at them. I don’t think it unjust to let them be, and in fact think it foolish if not unethical to do so instead of focusing on those who will take the responsibility once given a hand up.

    Another angel: Pareto’s principle was originally used to show that 20% owned 80%, whereas it also applies that 20% do the work that produces 80% of the value. This would offend a Marxist to the point of rage, but I think the truth is in the middle, where SOME, but not all of the 20% who own the wealth are the of the 20% that created it the most.

    But Brett touches on what I now suspect about the REAL cause of disparity, and it is twofold:

    (1) Wealth accumulation is due to massive government collaboration with special interests using cleverly crafted “regulation” to dis-balance fair, free market mechanisms.

    (2) A growing, UN-working poverty class encouraged and perpetuated by well-meaning but self-defeating social programs.

    If you live in an elite neighborhood, I’ll guess you’ll see the former, but if you live in a “lower” class neighborhood (such as myself), the latter is apparent in spades.

    My real frustration is that politicians use class warfare to make things worse. Everywhere I look deeper at the bills and arguments, I see talk about “taxing the rich” really targeting the whole middle and upper classes (and not the top .1% ironically), whereas those whose mantra is that tax cuts always benefit the rich, the reality is that most cuts affect the whole middle class. It’s a bait-and-switch, vilifying the fewest voters in lip service, while most of them (the middle class) do not know they are the ones being targeted.

  7. BTW, my apologies for various typos … I’m being torn from the keyboard intermittently by my wife who tells me we have a guest, LOL.