Sentences of note

by on December 31, 2011 at 3:17 pm in Economics, Law | Permalink

But overall income inequality would likely have increased even in the absence of tax policy changes.

That is from the Congressional Research Service, here is much more.  For the pointer I thank Jason Fichtner.

CIP December 31, 2011 at 3:42 pm

Amazing how you manage to find the only intellectual crumb in this post that tends to support your prejudices.

Wimivo December 31, 2011 at 3:44 pm

Oddly fatalist, too.

Tyler Cowen December 31, 2011 at 3:56 pm

CIP, I don’t think you exactly understand the context of this point, read Alan Reynolds and get back to me.

CIP December 31, 2011 at 5:05 pm

Well, I did read one of Alan Reynolds papers on the subject, and if I accept his “adjustments” at face value, (a) Some of the inequality was already baked in in the 70’s and (b) Some estimates may exaggerate other increases in inequality.
The increase in inequality remains, and remains large.

More to the point, I don’t think Reynolds deserves to be taken seriously. I can’t critique his economics, but I know that in fields where I have expertise, Cato is a nest of liars, paid to propagandize.

CIP December 31, 2011 at 5:20 pm

Those not certain that Reynolds and Cato are channelling sacred writ might want to consult this response by Pikitty and Saez: http://elsa.berkeley.edu/~saez/answer-WSJreynolds.pdf

They critique his methodology, use of data, and conclusions.

Tyler Cowen December 31, 2011 at 9:18 pm

CIP you are still off, my post is a critique of Reynolds…

CIP January 1, 2012 at 12:03 am

Prof Cowen: “CIP you are still off, my post is a critique of Reynolds…”

OK, now I am confused. By “your post” do you mean Paul Caron’s article which you link and quote?

I agree with it, but I just thought that the one sentence you picked out was odd in that it contrasted with the overall message.

Willitts December 31, 2011 at 6:49 pm

Cato is a nest of liars, paid to propagandize

Ad hominem. You don’t deserve to be taken seriously.

Income inequality is inconsequential. Economic innovations create additional wealth. Most of that new wealth rewards the entrepreneur and his investors. A lot of that wealth pays the salaries of people who bring that innovation to the market. Some wealth is destroyed among competitors who failed to innovate, but the net contribution is almost always positive.

Those who added value to the economy received benefits.
Those who failed to add value to the economy suffered.
All is just in the world.

Those who speak of inequality aim to foment anger and envy to justify government action to “correct” something that’s not a problem. You wish to tax success and subsidize failure. You wish to punish virtue and reward vice.

You’re a statist hatemonger, oh, and a propagandist from a left-wing nest of liars.

Crawford Kilian December 31, 2011 at 9:04 pm

Income inequality is not directly a political or economic problem; it’s a public health problem with political and economic consequences. Over a century of research (cf Wilkinson, Marmot, Kawachi) has shown that within most modern nations income inequality causes physical stress in the *relatively* poor that results in shorter life expectancies, whether from increased rates of heart disease, self-medication with tobacco, drugs and alcohol, or violence. Hence the longer lifespans in narrow-gap countries like Japan and Scandinavia, despite much higher per-capita health spending in countries like the US.

It’s got nothing to do with anger and envy or taxing success. Maintaining a narrow income gap results in better conditions for the rich as well as the *relatively* poor–lower demand for healthcare and policing, and more demand for what the economy produces. Looked at objectively, maintaining a narrow income gap is just a cost of doing business that ensures the rich stay rich for a long time, and the poor don’t really feel poor.

Willitts December 31, 2011 at 9:49 pm

Crawford, whether income inequality matters depends greatly on the nation’s per capita income.

If we’re talking about a nation where per capita annual income is about $400 and there are a few people who are monstrously wealthy, of course you’re going to see that affect. Many nations lacking in both economic and political freedom present that result. But you’re not controlling for economic and political freedom.

On the other hand, if you’re looking at a developed country like the US, income inequality isn’t going to matter much at all with stress, health, etc.

If Mark Zuckerberg expands his Facebook empire and earns an extra billion dollars, I’m not going to start smoking three packs a day, downing a daily fifth of Jim Beam, eating corn dogs, and beating my wife.

Nobody in the inner cities are doing these things because of Mark Z either. They are making poor lifestyle choices for reasons completely unrelated to income inequality. Unlike the poor in other countries, our poor people are OBESE. They are getting fat because transfer payments are enough to keep them sitting on the couch eating corn dogs and watching TV. They don’t have to work. They have passed up practically free opportunities for an education. To be blunt, there is no excuse for failure in the US, and it isn’t by any fault of the 1%.

Mark Z created a product used by hundreds of millions of people, and he got rich doing it. That makes NO ONE worse off, unless you worked for or owned stock in MySpace. If you work for Facebook, own shares in Facebook, use its services, or have successful advertising from it, you are demonstrably better off. And Mark Z’s income is entirely irrelevant to your financial situation. He CREATED additional GDP, and he gets to consume a large portion of what he created. The extra GDP that Mark doesn’t consume is distributed to employees in the firm. His innovation resulted in the creation of Zynga, which created more jobs, more sources of entertainment, and more GDP. In no way, shape, or form does this wealth creation hurt ANYONE who doesn’t partake in it. I don’t even play Zynga games, yet I derive some benefit as their additional contributions filter through the economy.

If the wealthy few started to scarf up resources needed by the poor, then maybe there would be some negative impact. But I doubt Mark Zuckerberg is eating a corn dog right now. He’s not driving up the price of bread, milk, and eggs.

Gentrification of impoverished living areas could displace some poor people, but that’s a concern that is also largely unrelated to general income inequality. We saw gentrification during times of relatively stable income distribution.

When you talk about income inequality in the US, it is ALL about envy, class hatred, and redistribution. The focus on the 1% is precisely the old quip about democracy being two wolves and a sheep voting on what to have for dinner. It’s also precisely why we don’t live in a democracy, and why we protect private ownership rights as a fundamental national value.

Willitts December 31, 2011 at 9:54 pm

The longer lifespans in Japan and Scandanavia are more related to their genetics, lifestyle choices, and diets rich in fish. They also have low murder rates. It is a red herring to try to connect medical expenditures to life expectancy. Life expectancy is related to many things completely unrelated to health care quality, delivery, and access.

The US has one of (if not the highest) cancer survival rate which is a better measure of the quality of our health care system.

maguro December 31, 2011 at 10:00 pm

I wonder what Japan’s Gini coefficient would look like if they permitted immigration from the Third World on the scale that we do.

TallDave December 31, 2011 at 11:35 pm

Hence the longer lifespans in narrow-gap countries like Japan and Scandinavia

This disappears when adjusted for ethnicity. Japanese-Americans and Scandinavian-Americans live as long or perhaps slightly longer than their counterparts. The latter is pretty easy to see in the state-by-state LE numbers: the U.S. Plains states have some of the highest LE in the world.

has shown that within most modern nations income inequality causes physical stress in the *relatively* poor that results in shorter life expectancies, whether from increased rates of heart disease, self-medication with tobacco, drugs and alcohol, or violence.

That’s an awfully speculative line of reasoning. Seeing other people doing better than you is physically debilitating? Really?

It seems much more plausible that the pathologies listed cause lower income.

CIP December 31, 2011 at 11:58 pm

Well, at any rate I’m not a paid propagandist.

CIP January 1, 2012 at 12:38 am

Willit – “Ad hominem. You don’t deserve to be taken seriously.”

I notice you are a bit free with the “ad hominems” yourself, pal (“statist hatemonger, blah, blah, blah”).

Ad hominems, btw, are not a logical fallacy. They accuse one of being an unreliable witness. I can cite examples in the case of Cato’s climate propaganda. Where is your evidence for any of the accusation you made of me?

You are certainly under no obligation to take me seriously, humorously or otherwise, but you would impress me more with actual arguments rather than vague and largely nonsensical insults.

Willitts January 1, 2012 at 3:51 am

No, CIP, “ad hominem” is a logical fallacy. It is rejecting an argument because of its source rather than by disproving a premise or identifying an invalid logical form. That’s what you did with Cato.

I, on the other hand, explained in detail why income inequality doesn’t matter. My arguments are right there. Are you blind?

Then I called you what you are – a hatemonger and propagandist. That’s an observation.

JonF January 1, 2012 at 1:23 pm

Re: The US has one of (if not the highest) cancer survival rate which is a better measure of the quality of our health care system.

That is only true for a couple specific cancers (breast and prostate and maybe colon). It is not true of cancer in general, which is not a single disease anyway. but a constellation of diseases, bnot all of them closely related.

Also “survival” is a weasal word, and it can mean anything. What I would rather know about is the cancer cure rate: are people living to a ripe old age and dying of something other than cancer? Or are they still dying of cancer, just a few weeks later due to earlier diagonosis, or more aggressive life support in the final stage?

TallDave January 1, 2012 at 1:43 pm

One of the reports compares the statistics from Europe with those from the United States and shows that for most solid tumors, survival rates were significantly higher in US patients than in European patients. This analysis, headed by Arduino Verdecchia, PhD, from the National Center for Epidemiology, Health Surveillance, and Promotion, in Rome, Italy, was based on the most recent data available. It involved about 6.7 million patients from 21 countries, who were diagnosed with cancer between 2000 and 2002.

The age-adjusted 5-year survival rates for all cancers combined was 47.3% for men and 55.8% for women, which is significantly lower than the estimates of 66.3% for men and 62.9% for women from the US Surveillance, Epidemiology, and End Results (SEER) program ( P < .001).

http://www.medscape.com/viewarticle/561737

Willitts January 1, 2012 at 6:49 pm

John, there is no perfect or even adequate measure of relative health care quality. I offered one reasonable alternative to the completely assinine metric of life expectancy that is commonly used by left wingers.

There are too many factors contributing to average life expectancy that are entirely unrelated to health care quality or availability. A proper measure would focus on the success rate of medical procedures, however you want to measure success. And 5-15 year survival rates are the most widely used measures of successful procedures. They are adjusted for age and other causes of death. Survival isnt a weasel word at all – it’s industry standard. “Cure” is a weasel word.

TGGP January 2, 2012 at 1:36 am

By Wilkinson are you referring to Richard Wilkinson, co-author of The Spirit Level? Lane Kenworthy reviews here.

GiT January 2, 2012 at 7:09 pm

“No, CIP, “ad hominem” is a logical fallacy. It is rejecting an argument because of its source rather than by disproving a premise or identifying an invalid logical form. That’s what you did with Cato.”

An Ad Hominem is not a logical fallacy if appropriately applied to a valid argumentum ad verecundiam.

In general, whenever a discussion requires that one assume the truth of the facts people assert on the basis of their expertise concerning those facts, it is perfectly appropriate to present evidence of their insincerity in asserting facts about which they are supposedly experts.

TallDave January 1, 2012 at 1:33 pm

Here’s Reynolds.

http://www.cato.org/pub_display.php?pub_id=6880

Thanks for sharing Tyler, this makes an interesting counterpoint. Certainly it’s a knock against the “strong tax” argument that tax policy is responsible for the entire change.

Three potential causes of the increase in after-tax income inequality between 1996 and 2006 are changes in labor income (wages and salaries), changes in capital income (capital gains, dividends, and business income), and changes in taxes

That seems problematic. There really is not a clear delineation between labor income vs. capital income, as any entrepreneur can attest. It’s not unusual for those with high labor income to start their own company in order to better leverage their skills, partly precisely because labor income gains tend to be limited by what a company will pay you, so one would expect that the gains at the top of the distribution are seen more in capital.

I would argue globalization (bigger overall markets mean one person can sell his value-added proposition to more people) and a greater spread of productivity between the least and most productive is driving this, but it’s difficult to falsify claims one way or the other because of all the confounding factors at work, such as the moving tax picture Reynolds describes. (Dismal science!)

Also, as a side note on the whole subtext of undesirable inequality, I think it’s a shame measures like the Gini coefficient make little distinction between someone getting rich providing a service like Amazon.com vs. seizing resource wealth like Gaddafi did. It’s hard to imagine Gaddafi ever providing the value of someone like Bezos or Elon Musk.

snarky pseudonym December 31, 2011 at 3:44 pm

This may well be true, but if their legal analysis (which is supposed to be their core competency) is any indicator, I wouldn’t take the CRS’s affirmation as a good reason to believe it. GAO or go home.

anon December 31, 2011 at 5:29 pm

CRS’s core competency is not “legal analysis”.

CRS does employ a few lawyers, but it is really the research arm for Congress.

Many CRS reports can be found at Open CRS.

Daniel December 31, 2011 at 3:51 pm

“Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006. Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.”

David Wright December 31, 2011 at 4:17 pm

Note that in all surveyed years, the affect of taxes on income inequality, at least via the direct mechanism of reducing the income of the rich and poor disproportionately, was miniscule. Whatever non-miniscule effect on income inequality you hope to achieve through higher tax levels would need to come from the indirect mechanism of discouraging rich people from undertaking profitable activities they would otherwise have engaged in. Do advocates of the “we need higher taxes to make our society less unequal” line regard the second effect as an unfortunate but necessary and hopefully small side-effect, or as a core feature of their plan? I would be interested if an actual advocate of the line answered.

Jan December 31, 2011 at 4:53 pm

Sales, property and payroll taxes are not progressive. Some of these regressive taxes could altered to be slightly more progressive and reduce income inequality. Income taxes have an impact on income inequality now, although it is not large.

Primary function of taxation is to raise funds needed to support activities that benefit the citizenry. 90% of American workers saw their inflation-adjusted incomes go down since 1999, while the top 0.1% of tax filers saw their income almost double since 1996. This makes taxing the very rich at a slightly higher rate an excellent source of revenue that will not promote further reducing the real incomes of the middle class and will not discourage the “profitable activities” of the wealthy.

Willitts December 31, 2011 at 6:37 pm

The primary function of taxation is to raise funds needed to support public goods and services of which everyone consumes equally. It is not the function of taxation to pay for private goods and services.

90% of American workers saw their inflation-adjusted incomes go down since 1999, while the top 0.1% of tax filers saw their income almost double since 1996.

First of all, so what?!

Second, you’re focusing on too narrow a time frame. That period you selected contained two recessions.

Third, it is up to the 90% of American workers to increase their productivity to earn higher income. It is not anyone’s duty to do it for them.

Fourth, the top 0.1% in 1999 aren’t necessarily the same 0.1% as today. If their incomes are higher, it’s because they created goods and services with tremendous utility for millions or billions of people. They EARNED the right to possess the value THEY created.

Fifth, it’s none of your business what anyone else earns. It’s not government’s business either.

CIP January 1, 2012 at 12:24 am

Well, you are entitled to your world view, I suppose, however little founded it might be in law, history, or human nature.

You aren’t entitled to force it on everyone else. To address your proclamations each.

First – There is plenty of history to show that increasing inequality leads to oligarchy and tyranny. I, for one, don’t approve of either of those.

Second – Since 1970 is a longer time frame. Same result.

Third – Many are wealthy because they got the government to grant them some priviledge or other. Scarcely anybody is wealthy without the government holding their hand every step of the way. Patents, subsidies, exclusive licenses and other property by definition is the common foundation of most wealth.

Fourth – Great wealth is created by rent extraction, nearly always with the help of the government. Bill Gates didn’t “create” all that Microsoft wealth, he figured out how to extract rent, mainly from ideas created by others.

Five – Actually, if government is going to collect taxes, it must make it its business to know who earns what. If citizens are to pay taxes, they need to make it their business to find out what others are making – at least statistically.

Willitts January 1, 2012 at 4:03 am

First, there is plenty of history to show that oligarchy and tyranny lead to income inequality. Your arrow of causation is backward as is your thinking.

Second, I’ve already explained that the world is not a zero-sum game. One person’s gain is not another person’s loss. Wealth creation may widen the income gap, but it generally improves the quality of life for everyone.

Third, I never argued that government doesn’t grant privileges that enable people to amass wealth. That’s what we call a “straw man.” Patents are a legitimate incentive to address a market failure. Subsidies are also legitimate when there are positive externalities. Licenses or monopoly franchises are one way for government to extract a portion of monopoly rents. Innovation and competition is the foundation of most wealth, not exclusivity.

Fourth, great wealth is created by innovation, foresight, and good management. Bill Gates created great wealth by making an incredible product that was beneficial to all mankind. If anything, government inhibited his ability to concentrate wealth through antitrust laws – another legitimate power of government. I can’t believe you would consider Microsoft the product of “rent seeking.” US patent law was codified in our Constitution, hundreds of years before Gates was born.

Fifth, you must have had too much to drink because your fifth point is incoherent. Are you suggesting it is government’s job to have a State Secret Police?

Happy New Year.

David Wright December 31, 2011 at 6:57 pm

Thanks for replying, Jan. I just want to make sure I understand your take here. What I take you to be saying is this: I don’t care about income inequality per se. What I care about is increasing the services provided by the government, and to do that I need to raise taxes. To raise taxes in the way that least disturbs the status quo, I want to raise them on whatever income quintile saw the most gains recently. If that had been the bottom quintile, I would have been for raising the taxes paid by the poor. It just happens right now to have been the top quintile, so I choose to get my extra revenue from the rich. I believe that, however I change taxes, that will have very little effect on income inequality through either direct or indirect channels.

I actually think this is consistent and clear-sighted view, even though I don’t entirely share it, and I suspect many of the pundits currently bemoaning rising income inequality don’t share it either.

TallDave December 31, 2011 at 7:39 pm

Actually property taxes are progressive (those that own real property are taxed commensurately, and the poorest tend not to), and payroll taxes are supposed to be social insurance programs not redistributive.

Along with the many excellent points made by Willitts above, I would only just add the following two observations:

One, there is always going to be a minimum level of productivity associated with unskilled work (it may soon descend below zero marginal value within the OECD with advances in AI and robotics) which will generally not increase as fast as the ability of highly skilled workers/entrepreneurs to maximize their respective value-add. Thus an increasing spread in the distribution of incomes (or “income inequality”) should be expected in a society that is progressing toward overall higher living standards.

Two, purchasing power is still increasing in some important ways — MIPS per dollars, bitrate per dollar, mobile access to information, picture quality, social networking capability, and accessibility of information have all improved vastly since 1999. It’s somewhat difficult to quantify these gains but people have demonstrated their value (utility is in the eye of the beholder!) through their behavior.

JWatts January 2, 2012 at 4:56 pm

“One, there is always going to be a minimum level of productivity associated with unskilled work (it may soon descend below zero marginal value within the OECD with advances in AI and robotics)”

Since, I work in the factory automation industry this is something I’ve considered for years. As a society how will we cope if the equivalent of a High School diploma is essentially worthless. The stock answer has been, will send more people to college. However, it occurs to me that we might be close to maximizing the percentage of the population we can send to college while maintaining the value of a college degree.

So what do we as a society do with a situation of 50% of the population consisting of ZMP workers? On current trends alone, automated machines are becoming ‘smarter’ and easier to use.

How long before all driving professions are automatic? No truck drivers, cabbies, etc.
How long before no cashiers? Reference the earlier story.
How long before no postal employees?
Etc.

As a society we don’t have a good answer for that. Roughly speaking, the Left seems to prefer the Dole, the Right seems to prefer the Market. I don’t see either approach working realistically.

GiT January 2, 2012 at 6:47 pm

If you take it as a given that the market could lead to the creation of a a permanent class of ZMP workers, how could it go about fixing it? (other than through, effectively, a charity market in giving out the dole to the terminally ZMP?)

Funnily enough, the hypothesis is rather close to the Marxist prediction of the reserve army of labor. Part of the Marxist solution was neither the dole nor the market, but mandatory leisure time (the limitation and increasing reduction of the length of the working day.)

Anyways, I agree it’s a good question, and I’ve been interested in arguments to the effect that such a condition is impossible in the long run in the market. Intuitively, I can’t see a reason why the market would assure that people would always be able to offer positive MP. It doesn’t assure that any other potential input in the production process has greater than zero MP – all sorts of inputs become useless all the time. Clearly, the faith is that individuals themselves assure it doesn’t happen to them. But if that isn’t within their means (if everyone has to be exceptionally brilliant and talented) then…

TallDave January 3, 2012 at 4:55 pm

This is usually where I cite John Barnes’ novels.

50% ZMP isn’t really all that big a problem — as long as productivity keeps growing! In fact, I think it’s likely that at some point we will achieve 90% or greater human ZMP. It will be a different society, to be sure, but probably for most of us a better one.

8 December 31, 2011 at 4:31 pm

Income inequality grows domestically as income inequality declines internationally. Also, stop mass importing foreigners whose domestic ethnic group is at the lower end of the income distribution, if you are concerned with inequality.

Jan December 31, 2011 at 4:35 pm

I haven’t heard anyone argue that income inequality would have not have increased in the absence tax policy changes. Tax policy is but one contributing factor to income inequality. However, tax policy is certainly a significant contributor to inequality (or, the reduction in inequality).

“Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%.”

Willitts December 31, 2011 at 6:27 pm

No, you’ve heard lots of people say that because of the Bush tax cuts, income inequality increased to unacceptable levels. The people who made that statement never considered whether income inequality would have grown nonetheless. They never held all else constant when they made their post hoc fallacious argument.

Jan December 31, 2011 at 6:46 pm

I think the arguments I have heard point to the the Bush tax cuts as exacerbating the income inequality that has been rising since the 70’s, rather than actually creating it.

I’ve no doubt someone out there has argued this point, though–probably a person who thinks that all this billionaire innovation somehow hasn’t benefited the bottom 90%.

D January 1, 2012 at 6:25 pm

Mabye some people blame the Bush tax cuts for inequality, but I hear about their impact on the deficit much more often. Cheney didn’t say “inequality doesn’t matter.”

Emanuele December 31, 2011 at 6:58 pm

This post is just wonderful.

You start saying a sentence, 1: “Because of A, X grew too much.”

Then you noticed, 2: “Since even without A X would have grown, the sentence 1 is wrong”, an obvious logic fallacy: for sentence 1 isn’t important the value of X given !A, as long as X(!A) < X(A). The interesting part is that in the same article quoted here it's saying indeed that X(!A) < X(A), confirming the only condition needed for sentence 1.*
If X(!A) is positive or negative isn't interesting*, as you can see easily thinking one second about that. I suggest thinking to X as "the distance between the first and the second in a Nascar race" and A as "the first car used a nitro boost". As you can see, even if the first would have been quicker even without nitro, the sentence is perfectly fine. **

Finally, you complete the masterpiece saying that, since the 2 fallacy, whoever said 1 hasn't considered something completely irrelevant. Wonderful.

* one could add a condition of "X(!A)<X*", where X* is a "too much X" value. Being it subjective isn't of course possible to discuss it on a general case.
** I don't think they use nitro in Nascar, my only Nascar experience is from an old Amiga game. I was just guessing it was an example near to your experience.

Willitts December 31, 2011 at 11:05 pm

Nice try, Emanuele, but your entire argument is a straw man.

Here’s the problem.

1. People who bemoan income inequality are presuming that income inequality is per se unfair or inefficient. They are Begging the Question, and I deny them that premise.

2. People who say the Bush tax cuts caused or exacerbated income inequality are assuming that the previous tax regime was inherently more fair or more efficient. Given the inherent inability to make interpersonal comparisons of utility, I deny them that asserted premise too.

3. The article in question states that the tax cuts caused only PART of the increase in income inequality. Yes, indeed, the degree to which it increases income inequality matters greatly. First, your argument commits the Fallacy of Proportion. Are you going to complain about me sticking your right arm with a pin if someone else is cutting off your left arm with a saw? Second, voters have multidimensional preferences. Suppose a politically unbiased voter is judging candidates SOLELY on how their proposed policies will affect him. This voter is concerned about income inequality, and candidate X’s policies contribute to it to some degree. The voter’s likelihood of voting for X diminishes with the proposed policy’s impact on income inequality. For this voter, not only does the proportional impact of X’s policy matter, the weight he attaches to income inequality in his preferences matters. The people bemoaning income inequality AND attributing it to Bush’s tax cuts are attempting to heighten the subjective marginal impact on one dimension of the voter’s preferences AND the weight the voter attaches to this one dimension. This isn’t a logical argument – it’s an appeal to pathos.

4. The other reasons are NOT irrelevant. Income inequality could be increasing because of factors that could be unfavorably attributed to the very people bemoaning inequality. For example, if candidate X supports a higher minimum wage which would boost the income for a particular voter, candidate Y might retort that the voter might have his hours cut or lose his job entirely because of a higher minimum wage. The employer’s negative response to the policy is relevant to the discussion of the purported benefits of the policy in the mind of the rational, self-interested voter. The other factors need not be directly related to one market. Income inequality might be rising because of NEA influence over the costs and rules of public education, welfare subsidies that inhibit incentives for self-improvement, collective bargaining in manufacturing, international trade, etc. An unbiased, rational, self-interested voter would want to know the marginal impact of each and every factor contributing to income inequality to resolve any conflicts among his preferences.

Willitts December 31, 2011 at 6:24 pm

Of course it would!

When extraordinary people make extraordinary contributions for millions or billions of people, almost everyone is better off. The entrepreneurs become amazingly rich. Their customers willingly CHOOSE to substitute their consumption in favor of the innovation or to pay more for it.

Income inequality grows, but almost everyone is better off for it except for those competitors who failed to innovate. That’s the essence of creative destruction.

The people who ramble on about “income inequality” see the world through only one warped lens – There is a guy over there with lots of money. We need to take it from him and give it to people we want to see receive it.

Those people are mentally ill.

The Original Frank December 31, 2011 at 6:36 pm

The metric of inequality promotes envy, and nothing else. Over the long haul, what individuals have become worse off? The immigrants who skew the median downward? The single mothers who have done the same? Nothing against immigrants or single mothers, quite the contrary, but who has a right to richer people’s incomes, whether the rich made others better off or not? Don’t we own our income as individuals?

This is not to speak against a safety net–insurance for all, so to speak–but that has nothing to do with equality of incomes or outcomes.

TallDave December 31, 2011 at 7:23 pm

“Income inequality” is a bit of a red herring, because it implies that someone else getting rich makes me poorer.

I think this is loosely based in the fallacy of the zero-sum economy. In fact, if you aren’t getting rich by means of rentseeking, your wealth is probably roughly commensurate with the value you’ve provided to society though voluntary exchange. What we’re really talking about, then, is productivity or value inequality.

So, rather than ask why some people are getting richer than others, why not ask instead why some are so much less productive than others, and try to encourage them to be more productive rather than proceeding from the assumption that the rich are the problem? That’s been the American tradition, via the various self-help movements since the early 20th, and it’s a major reason why we have the highest living standards in the world. Social capital!

the spam robots are getting better and better December 31, 2011 at 10:25 pm

Why some are so much less productive than others? Because some, or rather most, didnt get the chance to participate in the greatest rent seeking industry the world has seen by going to an elite college to get into an elite financial institution to get access to some of that sweet sweet financial rent seeking.

Willitts December 31, 2011 at 11:11 pm

I didn’t get into an elite college or into a financial institution, yet I’m in the top decile of the income distribution.

I can explain most of my income by many years of hard work, education, experience, skill, duty performance, and relatively clean living. A part of it – not much – can be attributed to rent seeking, but the rent seeking wasn’t done for my benefit, per se.

TallDave December 31, 2011 at 11:52 pm

I believe my wife and I will actually break into the top 1% of overall U.S. HHI for 2011. She grew up in a Third World country, I went to a relatively unknown state school and worked 40 hours a week to pay my own way. We developed marketable skills and worked hard.

Although, I do agree there is a fair amount of rentseeking from the elite universities. But those rents come mostly from the government, finance can’t create Fannie Maes and Solyndras and too-big-to-fail on their own. There’s a network of corporate patronage between the regulators and regulated, in addition to the legalized insider trading in Congress. This is why we need to elect more Tea Partiers, they’re the only ones who will break the elite networks — mainstream Dems and Repubs just want their tickets punched.

GiT December 31, 2011 at 11:22 pm

I have trouble seeing what ‘income inequality’ “implies” other than that incomes are unequal.

Focus on income inequality no more implies belief in zero sum transactions as *the* source of income inequality than it implies belief in any other insipid one note explanation (like income inequality being a simple function of inequality in labor productivity).

But the rhetorical trickery goes a bit further. Apparently you’d like to go from ‘income inequality’ being a ‘red herring’ for zero-sum distributional outcomes to being a red herring about inequalities in the productivity of labor.

Which is all rather cute, because at the end of the concluding remarks we find: “Although earning inequality increased between 1996 and 2006, changes in wages and salaries appear to have had little effect on the increase in overall income inequality,” suggesting that changes in labor productivity had, well, little to do with the topic of discussion.

Further, a couple lines earlier in the abstract we find: “Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality.”

So then, the ‘largest contributor’ to ‘the increase’ was… capital, land, and stock ownership.

So much for not getting rich by means of rent-seeking.

At this point, who’s actually throwing out red herrings (by way of something of a straw man and an ad hominem – ‘those who speak of income inequality believe in this stupid thing’ … that they don’t actually profess) should be relatively clear. I’d suggest that it’s those who want ‘income inequality’ to read as ‘poor people are less productive than rich people.’ (Or, to put it differently, productive people are (relatively) rich and poor people are (relatively) unproductive.)

Willitts December 31, 2011 at 11:33 pm

You haven’t explained how wealth acquired through capital, land, and stock appreciation deprives anyone else of….well, anything.

AT LEAST try and tell me that the wealthy have bid up the prices of Cocoa Puffs, corn dogs, and two-buck chuck consumed by the poor.

AT LEAST try to explain that gentrification of low income neighborhoods removes some affordable housing or income generating opportunities from the poor.

PLEASE, AT LEAST try to explain in the slightest way that rich people becoming richer while the rest of us make due with flat-lined real incomes does us the slightest bit of harm.

Oh, my God, have you seen the price of Rolex watches lately! It’s getting so that we in the top 10% can’t get a break because of the greedy 1%!

Have you seen the price of Apple stock lately!? Brother, can you spare a share?

GiT January 1, 2012 at 12:06 am

Way to miss the point.

Why should I explain something I haven’t asserted?

Willitts January 1, 2012 at 4:06 am

So then, the ‘largest contributor’ to ‘the increase’ was… capital, land, and stock ownership. So much for not getting rich by means of rent-seeking.

No, you didn’t assert that at all.

And you don’t know what “rent seeking” means.

GiT January 1, 2012 at 4:18 am

And you apparently don’t know what rents are.

I asserted that the paper asserted that capital gains and dividends were the largest drivers of the increase in income inequality.

This is true.

I then suggested this is connected to rent seeking. It is connected to the definition of rents, the definition of rentier, and part of the original concerns with those who survive on the basis of rents as articulated in Ricardo, for one. It does not, I suppose, connect to the conceptually and analytically confused term ‘rent seeking,’ which has muddled the relationship between rents generally and the rents of rent seeking ever since Krueger’s paper coined the term.

TallDave January 2, 2012 at 10:43 am

GiT, even if we accepted your re-defining of rentseeking, you can’t assign my use of the term to your meaning, so your response to the below was just as wrong either way.

I think this is loosely based in the fallacy of the zero-sum economy. In fact, if you aren’t getting rich by means of rentseeking, your wealth is probably roughly commensurate with the value you’ve provided to society though voluntary exchange. What we’re really talking about, then, is productivity or value inequality.

Well, Willitts, I think we made a noble effort, but to be honest at this point he’s more or less descended to the level of trolling. A tragic waste of pixels.

GiT January 2, 2012 at 4:50 pm

I wasn’t ‘assigning’ my meaning to your use of the term, I was using the term in my own way, as I have since elaborated. I put that line in, in the first place, as an offhand remark. In retrospect I think you are right that it has amounted to a troll. I put the remark in because I, in general, find something very problematic about the standard use of the phrase by public-choice adherents, and I was just playing around with the meaning of a rent and implicitly drawing on ‘leftist’ (and Ricardian, but I digress) associations of rents with rentiers and capital accumulation and so on. In retrospect playing around with those associations amounted to a troll, because you decided to focus on my joke rather than my substantive point, which is that your allegation of talk of income inequality assuming a zero-sum economy is a strawman.

I did not intend for the final remark to become the focus of debate, but it has, which is mostly fine with me because it led me to look a into the history of the term ‘rent-seeking’, with which I was unfamiliar (though I was completely familiar with its intended meaning), and doing so has confirmed my suspicion that its standard use is conceptually confused. I hoped my decision to take that confusion seriously would have prompted you to engage more critically with your own vocabulary (rather than simply throwing stones at that of others), but apparently it has not, which is unfortunate.

I intended the focus of the debate to be on whether or not concerns with income inequality imply belief in a zero-sum economy, and whether or not we should always think about income inequality in terms of productivity – that’s why I initially spent the bulk of my text writing about that issue. The end of my initial post was simply to turn the attention to what the paper in question turns our attention to – capital, land, and stock ownership. This implicitly turns us to a well-worn debate between ‘leftists’ and ‘libertarians’ (and, further, between some left-libertarians and other libertarians) on the legitimacy of existing property distributions.

TallDave December 31, 2011 at 11:43 pm

Inequality generally connotes unfairness, a problem that someone needs to solve. If we said “the spreading out of the top end of the income distribution” that would have quite a different heft.

Also, I don’t think you understand what “rent-seeking” means. In economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. http://en.wikipedia.org/wiki/Rent-seeking

And yes, poor people are more or less by definition less productive.

Willitts December 31, 2011 at 11:55 pm

LOL, I was considering the Inigo Montoya response, TallDave.

I conceded the point and restrained my protest in deference to an expected lengthy diatribe which might have some legs and that I didn’t wish to rebut.

As deeply as government has penetrated our economy, I accept all premises of rent seeking. I don’t always accept the relative power of particular rent seekers though.

GiT January 1, 2012 at 12:50 am

If one were to read further in Wikipedia… “The term itself derives, however, from the far older practice of appropriating a portion of production by gaining ownership or control of land.”

I was referring to the meaning of the word rent, not the ideologically narrowed meaning of the word rent-seeking (which has rather distanced itself from what one would take the words ‘rent’ and ‘seeking’ to mean without the ideological baggage of their conjunction).

Willitts January 1, 2012 at 4:12 am

This is an economics blog, and “rent-seeking” has a rather clear meaning in economics. It has nothing to do with ideology. Economic “rents” are supra-normal profits, usually obtained through anti-competitive means. Rent seeking is obtaining such profits through manipulation of the political or economic environment.

Our Founding Fathers considered “innovations” to be conniving plots to subvert the law. Obviously we don’t use “innovation” in the same sense today.

Get with the program, sweet pea.

GiT January 1, 2012 at 6:56 am

Rent seeking has a rather confused (not clear) meaning in economics, the failure of public choice economists to emphasize this not withstanding. Some focus on the question of property rights makes this quite clear (considered in light of Krueger’s coining of the term and Buchanan’s attempt to define and distinguish it from profit seeking.) As it turns out theories of property/ownership rights (by means of which all profits and wages are realized) are themselves a form of rent seeking (demands for monopoly rights protected by government enforcement). This results in something of a logical explosion that rather confuses the simple, more intelligible issue of what income proceeds from labor and what income does not (the question which motivates the initial distinction of rents from other sources of wealth.) I could develop those points simply and clearly but it’s probably best to hold off on writing more unless it seems warranted.

TallDave January 1, 2012 at 12:32 pm

Sorry, but your response was nonsensical. Yes, the term derives from land rents, but when I say In fact, if you aren’t getting rich by means of rentseeking, your wealth is probably roughly commensurate with the value you’ve provided to society though voluntary exchange. I am no more talking about land rents than the term “dollar” in the U.S. budget refers to the antecedent Joachimsthalers.

So when you say So then, the ‘largest contributor’ to ‘the increase’ was… capital, land, and stock ownership. So much for not getting rich by means of rent-seeking. this is clearly a misunderstanding of rentseeking as generally understood in economics.

GiT January 1, 2012 at 6:11 pm

I’m perfectly well aware of the polemical meaning of the word rent-seeking. When those who love to bandy the word about don’t understand what rent seeking is, I don’t really care if my understanding of ‘rent-seeking’ is off their standard sense of the word.

For someone who thinks that the phrase ‘income inequality’ should be thrown out because it is used by economists in a misleading way, you are remarkably hostile to the suggestion that a term you use may suffer from similar problems. If you can’t figure out why I used the term as I did, then you’re just being dense. Since you seem unwilling to actually engage with the substantive points I’ve made and interrogate the meaning of your own terms (resting content to simply criticize the terms of others without submitting yourself to the same standards), I guess I’ll appeal to professionals to make the points for me.

To quote:

“As is clearly indicated in the literature the term ‘rent seeking’ must be used with some caution since it can also refer to activity that is not considered socially undesirable…. The distinction that emerges* between socially desirable and undesirable rent-seeking is that the latter seeks to obtain wealth without offering anything in return to the party who surrenders the wealth.” (Sisk – “Rent-Seeking, Noncompensated Transfers, and Laws of Succession: A Property Rights View. Public Choice 46.)

*Note that ‘emerges’ here is a rather funny choice of words. Contrast, later, with Buchanan’s use of the word ‘design.’ As it stands, ‘rent-seeking’ was most definitely designed to have its current valence, it did not spontaneously ‘emerge’ with that valence.

“The problem of identifying rent-seeking activity under real world conditions is shown in this article to be similar to that of determining monopoly waste and other market inefficiencies. It follows that rent-seeking waste can only be identified by substituting the observer’s own standard of value. Moreover, if an activity is a legitimate function of the state, it is held that the lobbying associated with instituting and maintaining the activity is not necessarily wasteful. Consequently, since the appropriate role of the state is normative, identifying a particular activity as wasteful must necessarily be based on norms that lie outside of economic theory.” (Pasour – “Rent Seeking: Some Conceptual Problems and Implications.” Review of Austrian Economics)

Now, put these two critiques together – rent-seeking is not necessarily wasteful, and identifying ‘wasteful’ rent seeking rests on normative, not economic, theories. Now, return to Buchanan’s explication of the term in “Rent Seeking and Profit Seeking.”

Note that he first attempts to distinguish the two on the basis of waste and surplus:

“The term ‘rent seeking’ is designed to describe behavior in institutional settings where individual efforts to maximize value generate social waste rather than social surplus.” (one might note the sly use of the passive voice here. Who is designing the term? Buchanan and Tullock, actually. Another thing to note is that ‘maximizing value in a way that generates social waste’ has little to do with what the word ‘rent’ actually means, but don’t let that get in the way of Buchanan’s designs. One might have thought the concept of a ‘negative sum-game’ would have fit that definition without butchering the meaning of the word rent.)

Now, apply Pasour’s point about the need to appeal to an external standard to identify waste and illegitimate monopoly.

So, let’s step to Buchanan’s second attempt to isolate rent-seeking from ‘profit seeking’ and ‘rent creating’ (a kind of profit seeking), which rests on this distinction (to paraphrase only slightly): rent-seeking is an example of ‘discovering a way to convince government to exclude all other entrants,’ while profit seeking is ‘discovering new commodities, services, or production processes.’

Note that this is already ambiguous, however, as excluding others can be a productive service (e.g. policing violence and theft), so the disjunction is not really tenable, and, as cited earlier, rent-seeking, insofar as it can be beneficial, can be, on Buchanan’s terms, a kind of profit seeking, exploding the attempt at a clear polemical division between the concepts.

One might note that the distinction fails in the other direction as well – some creative inventions – say, crack cocaine, or WMDs, or some evil scientist’s killer super virus, as arguably socially wasteful, would be, on Buchanan’s terms, a form of rent-seeking. One might note here, then, that the relevant conceptual distinction is not between the tortured categories of rent and profit seeking, but between negative sum and positive sum games.

So while the new definition of rent seeking taken alone begins to remove the normative bias built into the first distinction (moving beyond a negative/positive sum distinction), Buchanan goes on to double down on the first, polemical definition, claiming that ‘rent seeking’ involves a ‘net destruction of value’ and then explicitly defines the term ‘rent-seeking’ as ‘activity motivated by rent but leading to socially undesirable consequences.’ This simply begs the question of what counts as socially desirable and socially undesirable rents, or, rather, what monopoly rights generate surplus and which ones generate waste (to return to Sisk).

So, rather than persist in using a term confused by the ideological, polemical attempt to narrow the scope of ‘rent-seeking’ to those things of which Buchanan, Tullock, and co. disapprove, I find it more useful to preserve an analytically clearer meaning of a rent, associated with ideas of ‘unearned income,’ ‘passive income,’ ‘land rents,’ and ‘economic rents.’

An analytical distinction between the pursuit of income which proceeds from your own activity and the pursuit of income which you can earn without acting strikes me as more useful, clear, and untroubled distinction between what Buchanan terms ‘profit-seeking’ and ‘rent-seeking’ than the muddled use of the term by contemporary ideologues. Note that I do not presume that either of these is essentially good or bad, necessary or unnecessary.

Contrastingly, the distinction between negative and positive sum ways of getting income (wasteful vs. creative income-seeking) wears its normative implications with pride and maps neatly on to the distinction Buchanan attempts to torture out of a contrast between rent and profit.

TallDave January 2, 2012 at 10:09 am

I can see why someone who badly misunderstood what “rentseeking” means would like to pretend the meaning isn’t clear, but wouldn’t it be easier just to admit you made a mistake? If not, you can run over to Wikipedia (where it has a very bland, noncontroversial meaning) and set the world straight. Good luck with that.

At any rate, if we’re going to have a discussion about whether wealth is earned in a way that adds value, “rentseeking” is the usual term employed to describe pursuit of non-value-added income, which is why its a very bland and noncontroversial wiki. And even if we subsititute your definition, your argument would still be prima facie wrong as “capital, land, and stock ownership” are very often value-added.

(And no, I objected to the connotations of income inequality, not its widely accepted meaning.)

GiT January 2, 2012 at 5:38 pm

I did not badly misunderstand the term; I found (and continue to find) the common understanding of the term conceptually confused, and made a metonymic joke playing on the multiple valances of the word rent. In posting on an academic economics blog, I have no intention of using the wikipedia definition of an academic term, and I have no interest in bringing academic debates over the consistency and reference of the term to wikipedia, which is explicitly against its guidelines.

I am not ‘pretending’ the meaning is unclear, it is unclear, as evidence by my citations – just look at the Sisk quote, which is reviewing the state of the literature on the term, and asserts that the term must be used with caution because its scope of reference is unclear. Or consider Pasour’s argument, which implies that identifying anything as rent seeking requires normative judgment – and if anything is unclear, it is judgment about norms.

As to turning the debate to non-value added income, great, that’s what I was implying with my use of the term rent-seeking, and it’s great that in so redefining the debate you remove the unnecessary, ancillary proposition that such pursuits only occur via governments. I find it much more useful, clear, and analytically appropriate to frame our discussion in terms of positive, negative, and zero sum transactions as opposed to ‘rent-seeking’ and ‘profit-seeking,’ or whatever.

If we want to talk about non-value added income, capital gains can be both the product of adding value and the product of windfall gains, which are a form of non-value-added income, and so capital gains, can be such a gain, which is all my initial use of the term rent-seeking meant to imply. Obviously a windfall capital gain reflects an addition of value, but it does not reflect an addition of value by the person who receives income from the additional value. Note that I am not here saying that all capital gains are windfall capital gains.

As to being prima facie wrong, if capital, land, and stock ownership are only ‘very often’ value added, I’m not concerned with being prima facie wrong. I’m concerned with being ultima facie wrong, and the admission that sometimes this ownership is not value-added grants that whether or not such gains are earned is an open question. I’m concerned with how often ‘very often’ is, and whether it is, in fact, ‘very often.’

Not being in a court of law, but rather making a quick blog comment, I was rather uninterested in offering evidence for my position at face because my initial point was only to demonstrate that you are arguing that we should assume income is, prima facie, simply a result of productivity, when this is one of the central points of disagreement between leftists and libertarians. I was not engaged in prosecuting an argument, but in specifying the topic of discussion.

Leftists may be completely wrong with respect to their beliefs about what income is and isn’t earned, but if so they are not wrong about the economy being zero sum (which they don’t believe), but in assuming that certain types of income are unearned. I would posit that concern with income inequality among leftists is not based on the idea that the economy is zero-sum, but on the the idea that even in a positive sum economy people have income they don’t deserve, or earn. (Or, to put zero-sum differently, that some transactions within the economy are zero-sum, even if the economy is positive sum on net, just as, from a libertarian perspective, certain transactions within government can be positive sum, even if a given government is negative sum on net – presumably an ideal minarchist government would be positive sum on net).

This is to say that there is no reason to prima facie accept your attempt to elide this central bone of contention, which you have attempted to replace with the strawman position that lefists believe the economy is zero sum. This move is highly disingenuous, as it attributes a farcical position held by no serious thinker, as even the leftiests of leftist ideologies, Marxism, is predicated upon the idea that capitalism is a positive sum system – just read the Manifesto’s lauditory account of the increase in productive capacity ushered in by the overcoming of feudalism and the spread of capitalist competition, where Marx admits that capitalism brings about pareto improvements in income and living standards, and yet still argues against it (which reveals that he is concerned with more than real income and living standards, not that he is hopelessly confused – though he may also be that, for other reasons.)

GiT January 1, 2012 at 2:37 am

To address the other two points… that in general, on average, rich people are more productive than poor people, does not mean that for any given change in income, the cause is a change in productivity. That is to say, the sole driver of income is not productivity, therefore, any specific change in relative income need not be the result of changes in relative productivity.

Therefore assuming that changes in income inequality should bring us to think about productivity is to assume what needs to be demonstrated (just as assuming that changes in income inequality should bring us to think about unfairness is to assume what needs to be demonstrated). A change in income inequality is, a priori, neither unfair nor a result of ‘changes in relative productivity,’ even if changes in relative productivity necessarily lead to changes in relative incomes, and if, empirically, the bulk of income inequality is a result of inequality of productivity.

We’re dealing with metonymy in both the alleged case (change in income inequality = zero sum = unfair) and your case (change in income inequality = change in productivity inequality = fair). What the paper demonstrates is that (changes in income inequality = chiefly a result of changes in capital income and tax policy, not labor income) Whether those changes are a result of productivity or are unfair (or both, or neither) is an open question. What, by the terms of the paper, is not really an open question, is whether or not labor income is the source of the change.

If labor income has become increasingly supplemented by an increase in capital income as a means of rewarding labor productivity (stock options and so on), then maybe the labor income/capital income division does not map on to a division between ‘earned’ and ‘unearned’ income. But if that’s not the case, divergent labor productivity probably isn’t the culprit here.

Willitts January 1, 2012 at 5:00 am

In a competitive market, a person’s labor wages are equal to their marginal revenue product. MRP is a function of the price of the output one produces and the marginal product of one’s labor. So wage is a function of the value of your production and your contribution toward producing it.

The poor are generally poor because their limited skills produce low-valued products, and the marginal product of their labor is low. They can increase their wages by developing skills that either increase their marginal productivity or contribute to higher-valued products. There is a good reason why people with college degrees generally earn more than people without such degrees. A degree doesn’t guarantee high income, particularly if it’s a low-valued degree from a poor quality school. The degree also doesn’t compensate for laziness or a poor work ethic.

In a capitalist economy, you become rich by SERVING PEOPLE. Yes, by SERVING the needs and wants of others. Mark Zuckerberg is filthy rich because he gave 800 million people a better way to communicate with one another. He charges those people NOTHING. He gets paid from the thin margin of advertising.

Bill Gates became filthy rich because he put computing power into the hands of hundreds of millions of people. THAT is value, sir. The filthy bums shaking cups on the street corner aren’t worth the cost of their hides. They provide no services to anyone. They consume but don’t produce.

A person whose only skill is bagging groceries isn’t much better. It’s a nominal service, and it earns a nominal wage. Picking fruit, making hotel beds, cleaning rest rooms – anyone can do it. But not everyone can do what Andrew Carnegie, Henry Ford, Bill Gates, or Mark Zuckerberg did.

I’m in the top 10% of family income earners, and I earn very little from dividends and interest relative to my income. The vast majority of people have LABOR as their primary source of income. Compared to 100 years ago, high income earners get more of their income from actual labor than from returns on financial investments. Measures of income inequality are aggregates, and hence form arbitrary subdivisions. But the top percentiles are always going to earn more from financial investments than raw labor output because labor in and of itself isn’t worth much. Even highly-skilled CEOs don’t all make it to the top 1%.

The reason guys like Gates and Zuckerberg are rich is that their labor contributions are DURABLE. If a guy writes a great piece of software or a great book or a great song, many people in the future will buy it. It will generate income for many years. That’s the epitome of high-value labor. There are also reputational effects that enhance the value of one’s labor.

When Steve Jobs died, people compared him to Walt Disney. He wasn’t a great computer maker – he was a great marketer of computers. He met and exceeded the expectations of the fan base he created. On bare statistics, an Apple is an overpriced, overrated computer. Jobs sold an image, and created a cult of customers. He mastered human wants.

I reject your socialist metonymy of “earned” and “unearned” income. ALL income is earned. When a wealthy person makes a financial investment with surplus income, they are putting it toward its best use. Their investment decisions are “labor.” They don’t have to consume every last dime they earn. They can give it away if they want.

But the most important point is also the most elusive to you. It is THEIR money, not YOURS. They can do whatever the Hell they please with it. It is none of your damned business. Their earnings don’t deprive you or anyone else of a single dime of income. You consider taxed income as belonging to government by default. Hence, a tax cut is a deprivation from some other people. Your implicit sense of “ownership” or “control” over other people’s incomes is sickening.

GiT January 1, 2012 at 7:07 am

You have quite a knack for reading without understanding and asserting things dogmatically that are clearly inapplicable to reality – even those realities you yourself imagine to obtain.

“In a competitive market, a person’s labor wages are equal to their marginal revenue product.”

In the first instance this statement is simply not true without further qualification.

In the second instance this statement is irrelevant because we do not live in a world where the conditions necessary for making wages equal MRP obtain.

In the third instance we are discussing an article that focuses on income that does not derive from wages (and, in fact, my initial point was, quite simply, that the article, by its own account, concerns income beyond wage income and, in fact, claims to demonstrate that changes in wage income are not driving current changes in income inequality.)

In the fourth instance, if rent-seeking exists, and rent-seeking generates income, then by your own account a change in income inequality could be the result in a divergence in the skill at rent-seeking, as opposed to the skill at profit-making, and as such the observed phenomena could have absolutely nothing to do with your silly assertions about MRP and wages – which, again, gets back to my point.

Let me repeat a line from the post to which you are responding (but clearly have not even attempted to understand):

“A change in income inequality is, a priori, neither unfair nor a result of ‘changes in relative productivity,’ even if changes in relative productivity necessarily lead to changes in relative incomes, and if, empirically, the bulk of income inequality is a result of inequality of productivity.”

TallDave January 1, 2012 at 12:47 pm

the sole driver of income is not productivity,

No, but it’s certainly the most important factor. If this weren’t true there would not be such an obvious gap between unskilled and highly skilled work, nor between successful entrepeneurs like the founders of Google and the mass of failures, now would people chiefly attempt to alter their income by acquiring new skills (college, trades certifications). It’s a basic market function to provide returns for adding value.

It isn’t a priori, it’s empirically obvious. One does not assume the grass is green, one merely looks out the window.

The rich tend to have done things like found their own companies. That allows them to skew the distribution, particularly in today’s globally integrated markets. Labor is not the only source of new value!

GiT January 1, 2012 at 6:25 pm

I never said labor was the only source of new value. And when I use the word productivity I am not only referring to labor productivity, as will be important later.

As to everything else you wrote, I’m simply going to repeat myself for the third time. Think about what I’m saying, please.

“A change in income inequality is, a priori, neither unfair nor a result of ‘changes in relative productivity,’ even if changes in relative productivity necessarily lead to changes in relative incomes, and if, empirically, the bulk of income inequality is a result of inequality of productivity.”

Let me emphasize part of that: A change in income inequality is, a priori, not necessarily a result of changes in relative productivity, even if, empirically, the bulk of income inequality is a result of inequality of productivity.

Therefore, a specific change in income inequality can be the result of something other than a change in productivity. (like, for example, following Ricardo, an increase in the demand for fertile land, and its effect on the income of the landlords relative to the landless, or, following the anti-tax crowd, government redistribution of wealth.) The whole point of this paper was to decompose changes in income inequality into its constituent parts for the MARGINAL change from 1996 to 2006. The point was not to decompose the determinants of all income inequality in, say, 2006.

For someone posting on a blog called marginal revolution, you have a rather remarkable inability to pay attention to the margins.

TallDave January 2, 2012 at 10:18 am

I don’t know why you keep repeating a point about inequality stemming from sources other than productivity that no one disputes, or which part of “most important factor” is confusing you, or why you didn’t understand my points were in relation to the changes in the income distribution (“particularly in today’s globally integrated markets”), but based on the other thread in which you didn’t understand what rentseeking meant and then tried to invent a new definition for it which wasn’t applicable in the context you used it anyway, I’m guessing the problem is somewhere on your end.

GiT January 2, 2012 at 6:00 pm

And I don’t understand why you continue to talk about what the ‘most important factor’ in determining income is when the topic of discussion is what is the ‘most important factor’ in a specific marginal change in income.

If we were talking about the change in income inequality immediately after, say, a massive increase in government transfer payments from rich to poor, while productivity would be relevant over time insofar as this would affect incentives, the chief determinant of the change would not be productivity but the massive increase in transfer payments. And yet, apparently, you would still be running around saying that we should only talk about productivity when we talk about changes in income inequality.

My simple point is that the answer to the question ‘what changed income inequality’ is not always ‘productivity.’

In this case, the answer given is ‘changes in cap gains and dividends payments.’ The question then becomes what caused those changes. It could very will be productivity. It could also have been idle speculation on the basis of rent-seeking via government housing policy. If, to take the libertarian line, the housing bubble was a result of rent-seeking, and rent-seeking simply creates waste, and capital gains from 1996-2006 were largely a product of speculation on increasing asset prices, then the capital gains realized from 1996-2006 were not really the product of increasing productivity, but, rather, of profiteering off of rent-seeking behavior driving federal housing policy.

Of course, that’s idle speculation. It could also be productivity. But then we still have the interesting question of what kind of productivity. Increases in labor productivity? Possibly, as I suggested earlier, since increasing payment for labor through stock options would result in an increase in dividend and capital gains income. But possibly not, we could be dealing with an increase in capital productivity. In either case, knowing which kind of productivity is, presumably, helpful and useful information, and if labor productivity is stagnant while capital productivity is on the rise, then one might have some concern for those who have little access to capital and as such tend to rely on the productivity of their labor, since they’ll tend to be left in the lurch if the major determinants of increases in income are accruing to those who can get their hands on capital.

Willitts December 31, 2011 at 11:24 pm

That’s not a bit of red herring. It’s the whole red herring. A zero-sum economy is PRECISELY what they believe in. A dollar in someone else’s pocket is a dollar they can’t have or give. They refuse to acknowledge or accept the concept of wealth creation and the entrepreneur’s property right to a great share of the wealth he created.

Mark Zuckerberg took a lot of risks dropping out of Harvard to start Facebook. Sergey Brin and Larry Page took similar risks dropping out of Stanford to pioneer Google. A lot of highly-paid actors are high school and college dropouts. Many NFL and NBA players dropped out of college.

Roy Raymond graduated from Stanford Business School. He started Victoria’s Secret in 1977 and sold the business for $6 million in 1982. His second business venture failed in 1986. He jumped off the Golden Gate Bridge in 1993.

No one remembers the names of the many entrepreneurs who threw the dice and lost everything.

GiT January 1, 2012 at 12:10 am

Start by failing to understand what you’ve just read, continue with some ranting and raving about a mysterious ‘They,’ and then finish up with a list of meaningless anecdotes.

If you’re ever interested in talking to someone other than yourself let me know.

bob January 1, 2012 at 12:17 am

Most entrepreneurs lose everything.The worse the penalty for losing everything, the harder it is to have entrepreneurs.

Which is why evil socialistic policies like having a decent baseline health coverage would be good for innovation.

And I wonder how many NFL and NBA players ‘dropped’ out of college, instead of going to the pros early when the appropriate advisory conditions told them that they are projected to be first round picks, making 7 figures a year on average over the course of their first contract. Are you going to tell us that, say, Sam Bradford was a risk taker by leaving college early when he was projected to be the number one pick in the draft, even after only playing 3 games in his junior season? So very risky, to leave college for, at worst, a 3rd pick selection!

TallDave January 1, 2012 at 12:53 pm

We’ve had Medicaid for decades now.

The other side of that coin is to pay for socialist policies requires us to punish success, and to implement them requires us to degrade the free market systems in which innovation occurs.

No one wants to see suffering. The real question has always been: how much socialism can we afford?

D January 1, 2012 at 6:30 pm

“Punish success?” So for us to have interstate highways, we had to punish productive people?

TallDave January 2, 2012 at 10:25 am

Well, I believe interstate highways are something like 1% of the budget, but yes to the extent you fund them with taxes that increase with success, you are punishing success.

TallDave January 1, 2012 at 1:39 pm

Oh, and professional sports stars (at least, in terms of their sport-derived income) are highly skilled labor, not entrepreneurs. The difference between tens of millions of guaranteed money versus a startup like Facebook or Google could hardly be more stark.

D January 1, 2012 at 6:29 pm

Speaking as a serial entrepreneur for the last 15 years, I thank God that COBRA allows me to keep insurance from my last company. My self-employed sister literally cannot get insurance despite no major health problems. She had to join a state-backed program.

TallDave January 2, 2012 at 10:27 am

Really? In what state?

The ban on interstate competition has really broken the insurance market in this country.

Eric December 31, 2011 at 8:50 pm

“This house was already burning when W poured gasoline on it. Obviously the gasoline did not cause the fire, so we should continue pouring.”

The Original Frank December 31, 2011 at 9:42 pm

There is no fire, just a smoke making machine.

Willitts December 31, 2011 at 11:24 pm

+1

Rahul January 4, 2012 at 4:19 pm

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Rahul January 4, 2012 at 4:21 pm

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Rahul January 4, 2012 at 4:21 pm
Rahul January 4, 2012 at 4:23 pm

Link test MR

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