Brad DeLong on inequality

…On the global level, it is difficult to argue that inequality is one
of the world’s major political-economic problems. It is hard, at least
for me, to envision alternative political arrangements or economic
policies during the past 50 years that would have transferred any
significant portion of the wealth of today’s rich nations to today’s
poor nations. I can easily envision alternatives, such as Communist
victories in post-World War II elections in Italy and France that would
have impoverished nations now in the rich North.

I can also envision alternatives that would have enriched poor
nations: Deng Xiaoping becoming China’s leader in 1956 rather than 1976
would have done the job there. But alternatives that would have made
the South richer at the price of reducing the wealth of the North would
require a wholesale revolution in human psychology.

Nor should we worry a great deal that some people are richer than
others. Some people work harder, apply their intelligence more
skillfully or simply have been lucky enough to be in the right place at
the right time. But I don’t see how alternative political-economic
arrangements could make individuals’ relative wealth closely correspond
to their relative moral or other merit. The problems that can be
addressed are those of poverty and social insurance-of providing a
safety net — not of inequality.

But on the level of individual societies, I believe that inequality
does loom as a serious political-economic problem. In the United
States, the average earnings premium received by those with four-year
college degrees over those with no college has gone from 30 percent to
90 percent over the past three decades, as the economy’s skill
requirements have outstripped the educational system’s ability to meet
them. Because the required skills acquired through formal education
have become relatively scarcer, the education premium has risen,
underpinning a more uneven distribution of income and wealth.

Ceci Rouse and Orley Ashenfelter of Princeton University report that
they find no signs that those who receive little education do so
because education does not pay off for them: If anything, the returns
to an extra year of schooling appear greater for those who get little
education than for those who get a lot.

A greater effort to raise the average level of education in America
would have made the country richer and produced a more even
distribution of income and wealth by making educated workers more
abundant and less-skilled workers harder to find — and thus worth more
on the market.

Likewise, America’s corporate CEOs and their near-peers earn 10
times more today than they did a generation ago. This is not because a
CEO’s work effort and negotiation and management skills are 10 times
more valuable nowadays, but because other corporate stakeholders have
become less able to constrain top managers and financiers from
capturing more of the value-added.

Similar patterns are found elsewhere. Within each country, the
increase in inequality that we have seen in the past generation is
predominantly a result of failures of social investment and changes in
regulations and expectations. It has not been accompanied by any
acceleration in the overall rate of economic growth. For the most part,
it looks like these changes in economy and society have not resulted in
more wealth, but only in an upward redistribution of wealth — a
successful right-wing class war.

Comments

The whole argument against inequality seems to be based on the idea that wealth generation must be a zero-sum game. Yes, some societies have been designed to fund the rich at the expense of the poor by keeping them virtually enslaved, but by and large, they are the third-world countries that have failed to advance the wellbeing of their poorest people.

Likewise, America's corporate CEOs and their near-peers earn 10 times more today than they did a generation ago. This is not because a CEO's work effort and negotiation and management skills are 10 times more valuable nowadays, but because other corporate stakeholders have become less able to constrain top managers and financiers from capturing more of the value-added.

Search and replace "CEO" with "actor" or "sports star". Equally true, but somehow less of an issue for liberasls....

Err Jonathan Biggar... Can you read? Did you even TRY LOOKING UNDER THE FOLD?

"The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it."

I don't know. I am not a big supporter of various "psychological" reaasoning behind transforming money into happiness etc. But once we have started that, let's go further. Do you really value money that you get for nothing as much as money you have earned through your work, applying your abilities? One reason why I am against using such transfers excessively is because they make people lose sense of value, making them think that things are "for free". Such transfers are often used much less efficiently than money you have really earned. Then, although the marginal utility of wealth of a rich person is lower than the marginal utility of wealth of a person who receives the transfer, it may be that the total utility gain is negative, simply because the recipient of the transfer wastes the money inefficiently.

I know many such cases from personal experience in my country (surely, it is anecdotal evidence, but quite abundant). I don't know whether there has been any research on that in the U.S. If there is any, I would like to see it.

Does that include distributing it to, say, drug addicts or compulsive gamblers? And by the way, let's say there are around 300 million Americans and Bill Gates is worth 10 billion dollars. Do the math.

Anyone who refuses to admit the mere possibility of interpersonal utility comparisons probably doesn't have all that much idea what they're talking about. (Or is using words in a way that makes the claim trivially true, but almost entirely uninteresting.)

I just love how he came up with an exact amount of wealth needed by Gates, et al. 5%, on the nose. If you leave then with 6%, they'll be fat and lazy. But God help you, if you take 96% of their wealth away, forget it. They might just leave and take their innovations somewhere else...

put another way, de long surely believes in margins, why not here?

LisaMarie, how do you morally justify limiting the redistribution to the US? The poorest US resident is substaintially better off than the world's median.

-dk

Beyond a certain point, the only thing the next billion dollars is good for is status among peers: having more money than the next billionaire.

If it were possible to tax all the billionaires equally on a flat tax basis, then taxation would not destroy their incentive; all the billionaires are still on a level playing field, and still desire to have more status than each other.

The trouble is that the world has more than one tax regime, and because the billionaires want to be richer than each other, they will, insofar as it is possible, try to be in polities where they are taxed less.

How about this way :

Bill Gates, Paul Allen, Steve Ballmer and the other millionaires and billionaires of Microsoft are wealthy and **justly brilliant**. But only the first 15 percent of their *brilliance* can be justified as essential for entrepreneurship and enterprise. The next 85 percent of their *brilliance* would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to use any portion of it.

Is Delong talking about wealth redistribution merely because its technically possible ?

I'm all for improving the education system, but the constraint on educational improvement is not that Bill Gates or I get to keep too much of our own money.

Search and replace "CEO" with "actor" or "sports star". Equally true, but somehow less of an issue for liberasls...

Well, it's much less of an issue for me, anyway. That's because I believe that the incomes of athletes and entertainers are vastly more market-based than those of CEO's. In other words, if someone wants to pay Julia Roberts $20 million to be in a movie that's because they believe she will generate at least that in profits, and the person paying the $20 million is the one whose money is at stake.

With CEO's the people setting the pay scale do not have so much of their money at stake. They are directors, which is to say they hold well-paid sinecures at the pleasure of the management whose salaries they set. Doesn't seem like the same thing at all.

Bill Gates and Warren Buffet are giving away most of their wealth. Does that mean they agree with Brad DeLong?

Let's take 95% of Brad DeLong's net worth, which I'm sure looks obscene to 90% of the world's population, and distribute it among them.

And then we'll come for you...

What a funny thread of comments. Data-free analysis, as they used to say. Apart from B. Rosser who actually has an important historical data point to share.

An easy start would be better corporate governance. The SEC really needs to give shareholders more control over directors.

Hmmm. I dont think, Bill Gates, Balmer and Allen would have that Billions if it not for market distortions introduced by patents and other government interventions. Fat chance they could have earned it without that.

In that sense, I challenge anyone to come up with a claim to say that 5% of what they have now is not enough of an incentive for innovation and research, that unless those government interventions grant them that extra 95% too, they wont work.

[That is not even getting into the crux of the problem that there are few real innovations done by MS. The inside scoop among MS engineers is that the Clippy in MS office is the only one. Most of MS patents are really anti-competitive legal weapons, rather than for any real innovations]

Does not matter. The question is whether if the patent/interventions had been different, and they could earn/accumulate only 5% of their income/wealth all along, would they have stopped?

The same wealth would have been created, but the distribution of it would quite different.

1. Martin:

Facts=leftism? I read plenty of fact and reasoning above, certainly much more than Delongs 150 year old nonsense.

2. “the incomes of athletes and entertainers are vastly more market-based than those of CEO's.†

The people who set the pay for the CEO’s are often literary the same people who set the wage for athletes. Lack of stake has nothing to do with this. If anything the lack of stake is an important reason to (in general) pay CEO’s more than athletes, since unlike the athletes they tend to play around with other peoples money.

The reason most other people accept atheletes and singers more easily than CEO:s is that the folk-marxism module does not set in for atheletes/singers, who operate outside the regular market.

3. IRONY ALERT:

During the period of 1940-65 the US had racial segregation in the south, and certainly faster growth than any period after 1981. What does that tell you?

Do you think the 1940-65 period is, eh, representative? Start when the depression ends and stop when the expansion is over? Really convincing. The 1970s had high taxes and low growth, so what? The 80s lower taxes and high growth.

Nothing in this kind of exercise suggests that taxes or segregation are not bad for society.

4. “DeLong is not calling for the redistribution of 95% of Gates's wealth. He's saying that we should improve the education system.†

The US already has the second (after Norway) highest per capita spending on education than any other nation, and second or third highest share of the population that go to college. There is no evidence what so ever that educational investments after this margin, or even far below, have had or will have much effect on poverty.

In 2005 AER two papers investigated the massive public expansion of education in Scandinavia in the 1950 and 60s. The effects on income was 1.4% in one case and around 5% in the other. That’s it! Almost everyone who has the cognitive skills for it gets enough education in the western world.
You people need a little less Krugman/Delong re-articulating social democratic rhetoric and a little more sense from Murray.

Well, it's much less of an issue for me, anyway. That's because I believe that the incomes of athletes and entertainers are vastly more market-based than those of CEO's.

Then your issue is not inequality. You have more faith in the judgement of Hollywood execs than Wall Street execs. In and of itself, it's just an opinion, and while I disagree, I probably wouldn't bother commenting. However, that opinion becomes an issue (to me) once you start agitating for the government to fix what you perceive as someone else's error in judgement.

It can be dressed up anyway you like it, but it's still the politics of envy.

> A greater effort to raise the average level of education in America would have made the country richer and produced a more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find -- and thus worth more on the market.

Vouchers, anyone?

I am quite relieved that most people here ahve already done a good job pointing out the inanity of Delong's analysis. One addition: do we tax Bill Gates at 95% once and give everyone a dollar, or do we give him a 95% tax rate and watch how quickly our growth rate slips to zero? If we only steal his money once, I doubt we'll provide much happiness to everyone else, if we do it regularly you can bet that he will feel the pinch against his incentive to grow.

Really? All this is talking about taxing or redistributing!. Why should government interventions like patents end up distributing all the wealth created to Bill Gates in such disproportionate fashion?

How much of his wealth is due to this intervention in the market to his advantage rather than everyone else?

Bill Gates "earned" wealth! Indeed. He just ended up with that much because the laws were rigged in his favor.

If the laws were different, then he would end up keeping less, and others more.

"Clearly none of Gates, Allen, or Ballmer thinks that the billions they've already is all they need to reward them entrepreneurship, because they're all working mighty hard to earn more billions in new ventures rather than resting on the laurels of the wealth they've already created for society in consumer surplus. "

As near as I can tell, Gates has pretty much stopped working and spends his time trying to give his money away. It's complete nonsense that lots and lots of money is the only thing that got Gates to work; on the contrary, lots and lots of money is the one thing that got Gates to stop working.

"Well, it's much less of an issue for me, anyway. That's because I believe that the incomes of athletes and entertainers are vastly more market-based than those of CEO's. In other words, if someone wants to pay Julia Roberts $20 million to be in a movie that's because they believe she will generate at least that in profits, and the person paying the $20 million is the one whose money is at stake."

Actually, quite the opposite. Can you justify your claim that there is a perfectly competitive market for Julia Roberts? Is that not the very definition of monopoly? As far as I know, no one can replace her specific skills (the same is valid whether we think of acting, sports, etc...). Your reasoning is accurate when you point out that she will make at least that much in profits, but in the market for CEO, you'd expect shareholders not to systematically pay above equilibrium prices for a specific CEO. I haven't read any of the research on the subject and it is possible that there is a significant misalignment of incentives between shareholders and CEO (the whole principal-agent problem), but your claim that the market for actors or sports stars seems to be severely flawed, as far as I'm concerned.
For the most part, I think it's a cultural thing. In Portugal, for example, while people happily agree to indirectly pay football stars' wages, they resent them for getting so much comparatively to the average wage. Recently, a tax-exemption for these athletes (justified on the grounds that it was an extremely short-lived profession) was revoked, on the grounds that their high salaries did not justify the tax incentive. Obviously, the vast majority of players make nowhere near the higher incomes (in fact, there seems to be a very small premium for the short timespan of the profession) and they were severely penalised by the revoking of the exemption.

That will probably make them think twice before ditching school to play football.

Can you justify your claim that there is a perfectly competitive market for Julia Roberts? Is that not the very definition of monopoly? As far as I know, no one can replace her specific skills (the same is valid whether we think of acting, sports, etc...). Your reasoning is accurate when you point out that she will make at least that much in profits, but in the market for CEO, you'd expect shareholders not to systematically pay above equilibrium prices for a specific CEO.

There is a competitive market for Julia Roberts in that there are lots of actresses looking for work. It is not exactly an example of a perfect market. but there are other choices, just as there are choices among CEO's.

My point is that when deciding to hire Roberts the studio exec is influenced by the likely box value of her appearance in the film. When paying CEO's the board is heavily influenced by their own relationships with the CEO, which includes the fact that the CEO generally controls who is on the board. s for shareholders, whether they would pay equilibrium salaries or not is irrelevant, because they have absolutely no say in the matter.

You have more faith in the judgement of Hollywood execs than Wall Street execs. In and of itself, it's just an opinion, and while I disagree, I probably wouldn't bother commenting. However, that opinion becomes an issue (to me) once you start agitating for the government to fix what you perceive as someone else's error in judgement.

No. It has nothing to do with judgment. It has to do with incentives. I think the Hollywood execs have an incentive to get it right and the boards of directors have strong incentives to overpay. I do think government should do something about it, horrifying as that strikes you. Yet strangely, what I think government should do is try to restore market principles to CEO compensation and corporate governance in general by, among other things, making it much easier to nominate challengers for board seats and giving shareholders a stronger voice in compensation. I would argue that anyone who claims to "believe in markets and property rights" ought to agree.

The shareholders are the owners, remember?

Excuse me, but why limit the distribution of Microsoft's(and other corporations and wealthy men) riches to U.S.Citizens alone? Why not all the world? It will It's not like just U.S.Citizens alone helped Gates, et al acquire that wealth. There are people all around the world that work for Microsoft and consume Microsoft's products.
And like somebody already pointed how did he come up with the 5% and 95% distribution? Why not, 1% and 99%? 1% of Gates' wealth will go a long way in satisfying most of the material needs one has. DeLong can keep 0.5% of it for coming up with the idea and facilitating distribution(or acting in place of the government) and give us all the rest of 99%.

I cannot imagine an Economist would say some stupid thing like that; and why Tyler think it's a good counter point to his column beats me.

I want to add something about interpersonal utility comparisons. I agree with those who think you can't make interpersonal utility comparisons, but disagree that this has some interesting consequences. The problem comes from assuming that utility refers to something that actually exists.

In the typical formulation, you start with preference orderings that meet certain constraints (transitive, etc.) and it turns out that the ordering can be described by a scalar function called utility. Any arbitrary function will do, so long as it meets the right constraints (if X is preferred to Y then U(X) > U(Y), etc .) You don't even need diminishing marginal utility, so long as you have diminishing marginal rates of substitution.

The problem is that people tend to conflate utility (which is a non-unique mathematical construct designed to describe the preference ordering) with something like happiness (which is a psychological state) or well-being. It's quite obvious that we can compare happiness and well-being across people in at least some cases (depressed people are less happy than others; Bill Gates is better off than a Nigerian subsistence farmer with HIV).

Utilities can't be compared across people because utility isn't unique. But this has no implications because utility doesn't correspond to the psychological states (or objective levels of well-being) that we want to compare.

Let's consider what Bill Gates is doing with most of that 95 per cent. Here is the Gates Foundation link:

http://www.gatesfoundation.org/default.htm

(or look up the url on Google if you are understandably nervous about following what could be a bogus link.)

Dividing that money among Americans would increase world inequality, not decrease it.

The contribution of philanthropy to human welfare is grossly underestimated. And it's not just the direct wealth transfer. What about the demonstration/shaming effect on other rich people. And the entrepreneurial/outside the box options for a philanthropist - who does not have to convince a government bureaucracy to fund a new idea? How many institutions, artists, inventors, scientists in history have been supported by rich patrons? Philanthropists can experiment with new ideas and approaches, that do not have an established political constituency.

The zero-sum static approach to inequality is not very persuasive to me.

I like brewster's point that no one is acknowledging. From a libertarian prospective it's a question of do two wrongs make a right? You're all 'defending' Gates right to keep his billions against anti-libertarian meddling, but some different anti-libertarian meddling substially helped him acquire his billions. In an utterly free software market, Microsoft probably would still have become a great company, but no where near the Goliath it is.

I am disturbed by a couple of aspects of DeLong's missive:


Nor should we worry a great deal that some people are richer than others. Some people work harder, apply their intelligence more skillfully or simply have been lucky enough to be in the right place at the right time. But I don't see how alternative political-economic arrangements could make individuals' relative wealth closely correspond to their relative moral or other merit.

Perhaps I am being too sensitive (heaven forbid) but the comparison that leaps to mind is that some homeless drug-addict is of more moral or other merit than, say, Bill Gates? I suspect that DeLong could have phrased things to better effect.


A greater effort to raise the average level of education in America would have made the country richer and produced a more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find -- and thus worth more on the market.

Isn't the ignorance simply breathtaking? The distribution of skills has been known for a long time to be roughly normal. There are only so many highly educable individuals around. And, by the way, there are many positions available for people who do not have what it takes to get through four or more years of college and post-grad education which earn very good incomes. Positions like plumbers and other trades. Throwing money at the 50 percent of the population with IQs from 100 down is not going to turn out more programmers, engineers, bond traders and the like. Indeed, throwing more money at the 84% who have IQs below 115 is unlikely to do much either.

Given that they are billionaires, have substantial mean and great tax lawyers, I predict that some substantial fraction of these people will work out a deal with a cooperative country to avoid paying these taxes. A good example of this is George Soros. His wealth comes from trading profits, which he places from off-shore banks. These tax-havens allow him to compound his wealth tax-free. Kind of like 401(k) accounts but with all his money. I am not a tax-lawyer, but if I was a billionaire and they were coming from 95% of my wealth, I guarantee you I would figure out a way to have that income not taxed.

Kind of mean but...

"Brad DeLong and other overweight economists earn good money from public institutions and are big eaters and obese. But only the first 50 percent of their calories can be justified as a dietary requirement for healthy living. The other 50 percent would create much more happiness and opportunity if it were provided to starving U.S. citizens or others than if they were to consume any portion of it."

http://www.poorandstupid.com/chronicle.asp

I find the focus on Gates a bit bizarre. Yes, he
donates lots of money to charity, as does Warren
Buffett. When you are that much in the public eye
for being at the top of the heap, the pressure is
great. But what about Larry Ellison, who is building
a mansion that will probably be a tourist trap by
the end of this century the way the Hearst mansion is?
What about all these bling bling sports stars, not
to mention the actors and actresses? Are most of these
folks giving away lots of money in charity? Not like
Gates or Buffett, for sure.

Tino,

Actually, growth in the US South accelerated after
segregation ended, especially relative to the rest
of the country. It was not the only factor, improved
transportation, lower wages due to low unionization,
and some would argue the spread of AC, all contributed.
But there is considerable and serious literature that
suggests that indeed, segregation held back the South
economically while it was in place. A good source on
this is the presidential address by the late Mancur
Olson to the Southern Economic Association, published
in 1983 in the Southern Economic Journal. So, if this
argument is right, it means that the higher US growth in
1940-64 (should have been 64, that was when the "Kennedy"
tax cuts came in), was in spite of the slower growth in
the South due to its racial segregation.

Also, my point is that growth can happen even if some
pretty substantial redistribution is going on, even if
it is done by taxes. As you can see by the remark by
liberty above, who clearly did not read the comments
carefully enough, there are plenty of ignorami around
on this blog who are perfectly willing to mindlessly
repeat this propaganda that "where there are tax rates
that high (and little growth)," to quote liberty from
above, duh.

Again, I do not support returning to such a ridiculous
tax code. I think the US would be better off in many
ways if the level of inequality were lower than it is.
However, I think a more European approach to this, see
the work of Peter Lindert on this, would be better. That
is, do the redistributing by handing the money out for
specific purposes rather than through sharply progressive
taxes. Or, better yet, get rid of the back-scratching
way that CEO salaries are set as well as other unnecessary
monopolistic elements in the economy that exaggerate the
incomes of the top slice of the distribution.

--abundant and less-skilled workers harder to find -- and thus worth more on the market.--

Not when there's 100 million sitting on your southern border.

Of course, there is also the untold billions that have disappeared from the Commonweal due to the criminality, fraud, extortion, exploitation and profiteering of folks like Jack Welch, Dick Cheney, Eric Prince, etc.

But somehow conservatives have no problem with that...

Nor do the liberals with the unions......

Liebowitz and Margolies in Winners, Losers, and Microsoft did the only empirical study I know of relating PC software market success to magazine reviews of software quality. They found that well-rated products repeatedly displaced lower-rated incumbents, and that there was a "serial monopoly" with the best-rated product dominating at all times. This was true for all products, not just Microsoft's. It's worth remembering that Lotus 123 was "locked in" when Excel defeated it, WordPerfect was "locked in" when Word defeated it, etc. The only difference between MS and its rivals was that during periods when MS products dominated, prices were lower. While there is undoubtedly some friction associated with wanting perfect compatibility with other users, the notion that users are "locked in" to MS products is very misleading.

"Liebowitz and Margolies in Winners, Losers, and Microsoft did the only empirical study I know of relating PC software market success to magazine reviews of software quality. They found that well-rated products repeatedly displaced lower-rated incumbents, and that there was a "serial monopoly" with the best-rated product dominating at all times. This was true for all products, not just Microsoft's. It's worth remembering that Lotus 123 was "locked in" when Excel defeated it, WordPerfect was "locked in" when Word defeated it, etc. The only difference between MS and its rivals was that during periods when MS products dominated, prices were lower. While there is undoubtedly some friction associated with wanting perfect compatibility with other users, the notion that users are "locked in" to MS products is very misleading."

Excel was considered a significant upgrade for some people, because it was somewhat easier to use (point and drool interface). At the time, it sold at roughly the same price, or possibly cheaper than it's competitors.

I can speak to word vs. word perfect specifically, because my wife was a devoted word perfect user. She gave it up because it became unstable with newer windows versions, and finally switched to word which she *hates*.
Microsoft specifically used Windows to leverage it's office software, by denying access to important calls and internal information to other companies. And I'm quite sure this resulted in lower satisfaction ratings for Word Perfect because it crashed more and couldn't do certain kinds of inter-program interaction as successfully. But I can tell you with 100% certainty that my wife didn't switch to word because it offered her more value, she switched because the upgrade rat-wheel took value away from her preferred solution. That's not creating wealth, it's creating rents.

BTW, did you ever try to uninstall Internet Explorer and use something else as your default browser in Windows 98 or NT?

Around the time the DOJ started investigating Microsloth, they stopped much of this practice, but that was after they had largely cornered the market and driven nearly all of the serious competition either out of business or into other markets.

I'm not saying that every dollar ever spent on computer software is a rent, but a lot is. Particularly upgrades. I believe that a fairly large share of the innovation in the software industry in the last 20 years has been in how to keep generating revenue from your customer base once you have them without offering significant new value.

Great comments, Michael, although I think it serves us better if we avoid labels like "Microsloth." (Or Micro$oft , Windoze, etc.) As much as their tactics may rankle us, people will receive the arguments better if we stay away from name-calling. :-)

A remark from a Scandinavian context: there seems to be a vast ocean of cultural differences regarding the issue of individualisme vs. communitarisme. In Norway "we" believe the indivdual and his/hers sucess is to a large extent a product of structures in society. Hence the individual owes a lot to society (and hence the relatively high tax levels). We have an extensive welfare society believing that safety is an important precondition for productivity. This has also been proven, with Norway having one of the highest productivities and a GDP per capita higher than the US. So equality can be the answer...

The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it.

資金を増やそうとするのに不動産投資をするのが手っ取り早い。日本で不動産で東京 賃貸をさがすのはきわめて難しくシステム開発は日本の会社が良い。

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