
What do economists say about inequality? - chwolfe
https://www.washingtonpost.com/news/wonk/wp/2016/01/14/what-silicon-valley-doesnt-understand-about-inequality/
======
coffeemug
_> Taken together, they make the case that Graham -- and others who wave off
inequality as inconsequential -- has misread what's happened in the American
economy._

It's like everyone who read PG's essay (even respectable journalists!) lack
basic reading comprehension skills. Paul never waved off inequality -- he
merely pointed out that measuring inequality is measuring the wrong thing, and
that we need to have a slightly more nuanced view of the world. I haven't seen
a single rebuttal yet that actually responds to the arguments in the essay,
instead of a straw man argument PG never made.

~~~
wfo
Yes, every single person who disagreed with him just misinterpreted him and
"lacks basic reading comprehension skills". Even people who are better writers
than him. The only people in the universe who read him correctly are those who
agree with what he has to say. What a coincidence. Can I use this technique
next time I write something and people disagree with me?

Extreme economic inequality is always, inherently a bad thing for any
capitalist society. This is the point he, well, he doesn't argue against it,
he just claims it's wrong without argument. He writes an essay as a hyper-rich
person about how it's okay for him and people like him to be hyper-rich. He
misunderstands the entire debate with a silly woodworking analogy (if one
woodworker makes no chairs but owns a woodworking factory and another makes 10
chairs but owns nothing who makes the money?).

He describes reasonable attitudes (understanding that while not 100%
technically accurate, in a very real way money IS a zero sum game in our
society) as fallacious without argument.

He brushes off 'rent seeking behavior' as just a few bad apples in the income
inequality bushel whereas in the article here we see it's actually the vast
majority (86%) of the reason for inequality. He threatens to hold society
hostage by suggesting founders will 'go galt' if they can't reap obscene
profits and ascend to wealthy capitalist overlord status by inventing the next
instagram for dogs.

He really misunderstands the entire crux of the issue. Rent-seeking behavior
is essentially synonymous with capitalism. In capitalism, wealth is the
best/only way to generate more wealth. Just having wealth immediately leads to
rent-seeking behavior; you use your capital and leverage to profit off the
labor of others.

It really reads like 'I'm a millionaire but I'm one of the good ones because I
gamble on people who write iPhone apps' self-defense piece and most people who
read it see it like that.

I really like almost all of PG's essays, just not this one.

~~~
gnarbarian
The problem with this article is it derives the innovation derived growth from
patent statistics (14% of rising inequality). Then it simply assumes the rest
is due to rent seeking.

This is pretty laughable when it comes to software. I'd argue that all
software patents are a rent seeking behaviour using regulation to thwart
competition.

rent-seeking is bad. but more regulations exasperate this problem by creating
higher barriers to entry for disruptive startups. Rent-seeking isn't a symptom
of capitalism, it's a symptom of the way lobbyists exploit our legislative and
regulatory institutions.

I think it's feasible for there to be regulations that discourage anti-
competitive practices and reduce barriers to entry but it's nigh impossible to
get it passed with the lobbyists in the way.

------
danmaz74
I'm no big fan of Laffer curve - and especially the stupid way it was used to
justify the position that lower taxes are the right answer to every problem -
but using a similar approach with inequality could help.

With total inequality, everybody starves and dies except the few mega-rich,
and not even the mega-rich would be happy as nobody would be able to produce
the luxury things they enjoy spending their riches on.

With total equality, productivity and innovation plummet, because most of
those who are able and willing to work more and/or better resent the
freeloaders that enjoy what the actual producers produce without putting in
the effort, and become demotivated.

So, obviously, _some_ inequality is good for society, but _too much_
inequality is bad. Western societies have been moving towards higher and
higher inequality in the last 30 years - incidentally, also thanks to the
Laffer curve.

At some point, too much inequality is bad not just for "social justice", but
also for business. Have we already passed that point? If so, shouldn't we do
something to stop the trend? And what?

What PG is maybe missing is that startups aren't the main engine for creating
inequality, but excessive inequality is going to create problems, and we can't
just ignore those problems because a policy to limit those problems could also
limit the number of unicorns created in SV.

~~~
dnautics
Why do you think that inequality is driven by the Laffer curve? (I'm not a fan
of laffer curve arguments either) Prior to 1920 there was basically zero
income tax, and it's hard to argue that in the preceding era, especially
1850-1920, inequality was on the rise. Hell, one segment of the population
OWNED another segment of the population.

If you ask me, inequality is generated by the regressive theft of wealth from
the poorest segment of the population by a state-run policy of increasing the
cost of living. This artificial increase also drives the middle class into
various forms of asset-based investment which effectively socialize corporate
risk, while disproportionate amount of the gains go to the "capitalist"
classes.

~~~
randcraw
??? I't _VERY_ hard to argue that inequality wasn't on the rise in America
between 1850 and 1920. Why did unions first arise ca. 1910? Why did the
progressives and antitrust policies also start then? Indeed, 1850 to 1920 was
the heyday of robber barons and the worst corporate excesses in America. With
the new century, it soon became evident to _everyone_ that economic
inequalities were wildly out of control and something had to be done. Not
unlike the rising tides of Trump and Sanders in 2016...

As to the end of human ownership as a benchmark for the rise of equality... in
practice, the Civil War did little to end the inequalities that arose from
slavery in America. Jim Crow reigned in America for another hundred years, at
least.

~~~
dnautics
You're making assertions without any evidence. There are other reasons why
progressive policies took hold, as in, basic awareness of alternatives to
social inequality due to a decrease of it in general. It's not like a
plutocratic equivalent of "robber barons" did not exist prior, they were just
aristocrats, and so their theft of capital from the lower classes was accepted
as a social norm, a part of the "social contract", if you will.

If you look at economic indicators, you will find the numbers do not support
your assertions. The best compiled data on this can be found in Schumpeter's
"Capitalism, Socialism, and Democracy" \- income inequality in the US was
relatively static if not improving over this time period, and this is in spite
of also receiving many many economic refugees from abroad in several waves of
immigration.

~~~
bobwaycott
> _There are other reasons why progressive policies took hold, as in, basic
> awareness of alternatives to social inequality due to a decrease of it in
> general._

You cannot be serious. Progressive policies did not emerge in late-19th-
century America, much less take hold, because there was a decrease in social
inequality in general. This is the exact opposite of what the historical
record shows us. Progressive policies emerged out of an increasingly wider
recognition of social, political, and economic inequalities nationwide in the
latter 19th century. This is what prompted farmers to band together with the
labor movement to fight the railroads and banks, movements that were
inherently critical of capitalism itself, and not just inequality of condition
or remuneration. It wasn't a decrease in social inequality that fueled the
drive for expanding suffrage. I simply cannot understand how one can hand-wave
progressive achievements away when each of them were, sometimes violently,
fought for and only secured after _years_ , sometimes _decades_ , of effort.
America has been very reliable in making people work very hard to gain
equality.

> _It 's not like a plutocratic equivalent of "robber barons" did not exist
> prior, they were just aristocrats, and so their theft of capital from the
> lower classes was accepted as a social norm, a part of the "social
> contract", if you will._

I'm beginning to wonder if you've studied much history at all. In what periods
of modern history have aristocrats and "their theft of capital from the lower
classes" been "accepted as a social norm, a part of the 'social contract'..."?
Definitely not much since the 17th century in many Western nations. And always
shakily before then, requiring either a balancing act on behalf of the
aristocrats, or blatant displays and threats of force to protect it. Even when
it wasn't subject to outright rebellion against its existence, it has always
been a problem, and never been simply accepted.

> _If you look at economic indicators, you will find the numbers do not
> support your assertions. The best compiled data on this can be found in
> Schumpeter 's "Capitalism, Socialism, and Democracy" \- income inequality in
> the US was relatively static if not improving over this time period..._

This is absolutely false.

There are a plethora of historians and economists one can read further to
understand these historical trends--Claudia Goldin, Thomas Piketty, Emmanuel
Saez, Robert Margo, Simon Kuznets, Wojciech Kopczuk, Tony Judt, and many more.
Until the interwar decades of the 20th century, income inequality was shown,
as far back as a century, to have done little but rise. It's not even a fact
disputed by any serious economist or historian of the period.

------
beat
There is an air of defensiveness to pg's original essay. It's saying "Hey, we
are producing extreme inequality, but we're doing it by actually making
valuable stuff, so don't blame us!" And his solutions, which are generally
ignored by the critics, make sense. But, as this article points out, he missed
a core assumption - in his defensiveness about the productive inequality of
Silicon Valley, he missed that the vast majority of the growth in inequality
comes from nasty rent-seeking behavior. He acknowledged that such behavior is
dishonest and kind of criminal, but he failed to acknowledge its scope. So the
WP article has a fair criticism here.

Unfortunately, the WP article also couches its fair criticism in the usual
point-missing, inflammatory finger-pointing crap that most critiques of his
essay have done. It could have risen above on the strength of its facts, but
it chose the mud. Sigh.

~~~
beat
Addendum: Sticking to pg's solutions, we could address the rent-seeking via
regulation, without harming either founders or VCs. It's not that hard to tell
the difference between a a liquidation event and a bonus.

------
joelrunyon
Anyone else's brain about to explode when reading these "responses" to things
that PG never actually said.

All he said was that inequality isn't the problem per-se. It's the symptom of
a bunch of other issues and if you just try to address equality on it's own,
you're going to completely miss the underlying causes.

~~~
david927
I find your assessment of what he said to be generous, but even in that, he's
still a multi-millionaire saying, "Sure, let's fight poverty but not in a way
that affects that the rich (people like me) are getting richer."

If he was half as clever as you're trying to make him, he would have just
focused on the "underlying causes" and left the rest alone.

~~~
joelrunyon
No - he's asking people to correctly identify the problem first.

~~~
david927
But he never correctly identifies the problem; he doesn't spend any time on
the problem. He simply shoos us away from inequality, which given his income
bracket smacks of conflict-of-interest.

~~~
joelrunyon
He can be corrective without having to identify it himself.

Just because he explains that something isn't the problem, doesn't mean he's
obligated to identify all the root causes himself.

He's simply pointing out a flaw in people's logical processes.

~~~
david927
_He can be corrective without having to identify it himself._

Can he? Because the last I looked, he has failed so dramatically in whatever
he was trying to do that now that not only has he been vilified, lacerated and
destroyed in the press -- but inequality is even more on the radar than it was
before.

------
bitmadness
He didn't say we need inequality, he said that some inequality was an
inevitable byproduct of a robust startup ecosystem and technological progress.
In other words, inequality itself may not be desirable per se, but it is a
side effect of things that are very desirable.

~~~
eigenvector
Did you read the article? It addresses that assertion by indicating that
research shows only a small fraction of inequality is actually caused by
innovation. It turns out Graham's intuitive assumptions about what causes
inequality don't agree with the data. The overwhelming majority is caused by
rent-seeking behaviours - the "bad" causes of inequality Graham dismisses as
small relative to startups. Here's a relevant section:

"When the math cleared from their analyses, the economists estimated that 14
percent of the increase in the share of income going to the top 1 percent of
Americans between 1975 and 2012 "may be explained by an increase in
innovation." The economists say those increases are temporary, they generate
economic growth and they're associated with stronger upward mobility. Those
are all good things. Point, Graham.

If you take that as a proxy for the Silicon Valley effect, though, you're left
with a problem: 86 percent of the recent inequality increase can't be
explained by innovation. You're also stuck with the fact that startup
formation for tech companies has been falling for more than a decade even as
inequality has been widening, and not rising, as Graham implies. Total venture
capital funding remains well below late-1990s levels, even before you adjust
for inflation, according to data from the National Venture Capital
Association.

In light of all that, it's difficult to conclude that startups are mostly
driving the income gap."

Furthermore:

"Other recent studies also suggest high levels of rent-seeking are driving
inequality. Brian Bell and John Van Reenan, a pair of economists in Britain
(which resembles the United States in many ways when it comes to inequality),
reported in 2014 that increased bonuses for bankers accounted for two-thirds
of the growth of top 1 percent incomes in Britain after 1999. There are all
sorts of reasons to believe that premium financial sector pay is almost
entirely rent-seeking; the British paper would suggest that at least two-
thirds of inequality could be linked back to "bad" sources, in other words."

~~~
michaelkeenan
I didn't remember PG writing anything about startups mostly driving the income
gap, and I just searched the essay and didn't find it. Here's what PG wrote
about the proportions of each group causing income inequality:

"But while there are a lot of people who get rich through rent-seeking of
various forms, and a lot who get rich by playing games that though not crooked
are zero-sum, there are also a significant number who get rich by creating
wealth."

It's unclear what the WaPo writer is responding to when he says "it's
difficult to conclude that startups are mostly driving the income gap."

The writer also has this odd paragraph: "If there is middle ground between
Graham and this body of research, it's the idea that policymakers shouldn't go
after inequality with blunt instruments, like big tax hikes just for the sake
of soaking the rich. Perhaps, instead, they should target rent-seeking, which
economists agree is bad for everyone who isn't a rent seeker."

This doesn't look like a middle ground; rather, it's what PG suggests: "if
there are people getting rich by tricking consumers or lobbying the government
for anti-competitive regulations or tax loopholes, then let's stop them. Not
because it's causing economic inequality, but because it's stealing."

And: "startups aren't the problem, [the problem is] corrupt practices in
finance, healthcare, and so on."

(But it's a long essay; please let me know if I've missed parts that support a
different interpretation.)

~~~
eigenvector
I honestly think PG and the WaPo writer are in agreement: encouraging
innovation and entrepreneurship is good and shouldn't be targeted by new
regulations, rent-seeking behaviour is bad and should be targeted by
regulators.

For PG, the former (startups) is clearly a huge source of wealth, whereas the
latter is just a proposition. In the quote you cited, he literally qualified
the idea of corporations engaging in anti-competitive behaviour with "if", as
if this is some unproven supposition. It's clear he thinks startups are the
larger effect.

For the WaPo writer, rent-seeking is most of the inequality growth and
startups are a small piece. But this writer has some data to backup his
assertions, while PG doesn't. I understand where PG went wrong - he's a
startup investor. He's surrounded himself with startups for the last decade.
Intuitively, he overestimated their impact relative to, say, banker bonuses,
something he doesn't encounter regularly. That's natural.

~~~
michaelkeenan
> he literally qualified the idea of corporations engaging in anti-competitive
> behaviour with "if", as if this is some unproven supposition.

I don't think that's the right interpretation of that phrase. PG has been
complaining about rent-seeking corruption for over a decade:

"[Buildings are ugly because of] the notoriously corrupt relationship between
the government and construction companies." \-
[http://www.paulgraham.com/usa.html](http://www.paulgraham.com/usa.html), 2004

"[Corruption includes] construction firms that fund politicians' campaigns in
return for government contracts, or rich parents who get their children into
good colleges by sending them to expensive schools designed for that purpose."
\-
[http://paulgraham.com/inequality.html](http://paulgraham.com/inequality.html),
2005

"There are a lot of people who get rich through rent-seeking of various forms,
and a lot who get rich by playing games that though not crooked are zero-
sum...[There are] corrupt practices in finance, healthcare, and so on. Once
again, that is exactly my point. The problem is not economic inequality, but
those specific abuses." \-
[http://paulgraham.com/ineqold.html](http://paulgraham.com/ineqold.html), 2016

I think ghufran_syed's interpretation, using 'if' in the logical sense, is
correct. (I think it was a poor way of expressing it.)

> It's clear he thinks startups are the larger effect.

I think he had plenty of opportunities to say that startups were the larger
effect, and he didn't say that. This sentence would have looked different if
he'd meant that: "But while there are a lot of people who get rich through
rent-seeking of various forms, and a lot who get rich by playing games that
though not crooked are zero-sum, there are also a significant number who get
rich by creating wealth."

If startups were the larger effect, the natural way to end that sentence would
have been "most get rich by creating wealth." His version was longer and
wordier.

For what it's worth, I didn't get the impression that he thought startups were
the larger effect, which is why the WaPo article sent me searching for
something I might have missed.

------
socalnate1
The "short version" of Paul Graham's inequality essay is much better than the
original.
([http://www.paulgraham.com/sim.html](http://www.paulgraham.com/sim.html))

~~~
Zikes
This version seems much easier to parse. Nobody would care about the super
rich if they felt secure and stable in their own finances. Right now a growing
number of people do not, and mostly for reasons that are out of their hands.

Fix the causes, not the symptoms. Make health care affordable, raise the
minimum wage to a living wage (and for gods sake tie it to inflation or
something so we're not debating it all over again the next time it's 20 years
out of date), eliminate predatory lending practices, fix education costs, etc.

~~~
davidw
> Nobody would care about the super rich if they felt secure and stable in
> their own finances.

That's probably not true. People are envious creatures, and relative status
matters too. I don't believe that that should guide policy, but it's still
something to be cognizant of.

~~~
Zikes
That's at the extreme. Sure people will always be jealous of the rich, but
there's a big difference between everyday jealousy and getting your house
repossessed by the bank that got bailed out with your tax dollars a few years
earlier after said bank contributed to the financial recession that caused you
to miss your mortgage payment and sink into a spiral of debt and payday loans.

------
leeleelee
I'm inclined to think that very, very few people (including myself) really
know:

(a) What exactly is income inequality? Can you define it with some type of
formula or methodology? Are we using the gini coefficient, atkinson index,
decile ratios, etc? Article authors mostly use vague references to "income
inequality" and "the top 1%" and "the rich get rich and the poor get poorer"
etc without really knowing what they are talking about.

(b) Once we've defined what exactly we're talking about, now let's talk about
it's effects...positive or negative. Is this bad because money is pooled up
and not being spent on consumer goods? Is it bad just because people think
it's unfair? How is all of this extra income at "the top" being used? Invested
into stock markets, into private startups, sitting in a bank account, buying
yachts, etc? Where is all this extra income flowing to?

(c) Next, how do we measure the effect of inequality (b)?

(d) If we fix inequality, does it automatically fix the negative effects from
(b) above? Or is it possible that inequality is only _correlated_ with the
supposed effects from (b) and there does _not_ exist a _causal_ relationship
like we thought?

I am continually frustrated when I see articles getting passed around social
media and getting in the heads of "regular people" when the article author
doesn't really know what they're talking about, the person reading the article
doesn't understand what they're reading, and the end result is emotionally
charged people angry at the world for some [maybe real or maybe not] reason
that they probably can't even articulate.

------
davidw
The actual article seems a bit better than the title, which misconstrues pg's
point.

~~~
dang
At this point putting pg in the title is a form of linkbait, but if someone
can suggest an accurate, neutral title that includes him we can change it
back. In the meantime, since the substance of this piece is about what
economists say, the title can say that.

------
jtlien1
The inequality is more apparent than real. I enjoy watching videos of Dallas
from the 1980s. They were the richest oil men in Texas. But look real close...
They are using dial telephones. They could have had expensive radio phones in
their cars, but who would they talk to? The couldn't even order a pizza. The
entrepreneurial culture that led to cell phone being universal wasn't there
yet. It is the NETWORKS that make us all rich compared to where we were
decades ago.

~~~
dhimes
Are you talking about the TV show? I didn't watch it (too busy with college)
but was under the impression that it was fictional TV drama.

------
staunch
From the original essay:

> _Closely related to poverty is lack of social mobility. I 've seen this
> myself: you don't have to grow up rich or even upper middle class to get
> rich as a startup founder, but few successful founders grew up desperately
> poor. But again, the problem here is not simply economic inequality. There
> is an enormous difference in wealth between the household Larry Page grew up
> in and that of a successful startup founder, but that didn't prevent him
> from joining their ranks. It's not economic inequality per se that's
> blocking social mobility, but some specific combination of things that go
> wrong when kids grow up sufficiently poor._

Someone paid a small fortune to buy Larry Page the same elite credentials that
billionaires buy for their children, and it was the critical component in his
success.

Others spent fortunes buying the same elite credentials for Bill Gates, Paul
Graham, Mark Zuckerberg, Drew Houston, Sam Altman, Peter Thiel, and most other
"successful" Silicon Valley founders/investors.

All of these people are smart but that's not why they're rich. They're rich
because they had elite credentials which gave them access to resources and
opportunities that 99% of people do not receive.

The pie for elite credentials is (intentionally) fixed. Less than 1% of the
population gets them, very few poor people do, and yet these people control
most of the wealth and power throughout the U.S. They dominate Silicon Valley
as if they were in an official alliance.

People on the top of the pile don't complain about getting stepped on, or even
see what all the fuss is about.

~~~
apsec112
"Someone paid a small fortune to buy Larry Page the same elite credentials
that billionaires buy for their children, and it was the critical component in
his success."

Larry Page went to a public high school (East Lansing High School) and a
public university (University of Michigan).

"Others spent fortunes buying the same elite credentials for Bill Gates, Paul
Graham, Mark Zuckerberg, Drew Houston, Sam Altman, Peter Thiel, and most other
"successful" Silicon Valley founders/investors."

Three and a half out of the six people you named went to public high schools.

What Paul Graham said about this question:

"Closely related to poverty is lack of social mobility. I've seen this myself:
you don't have to grow up rich or even upper middle class to get rich as a
startup founder, but few successful founders grew up desperately poor. But
again, the problem here is not simply economic inequality. There is an
enormous difference in wealth between the household Larry Page grew up in and
that of a successful startup founder, but that didn't prevent him from joining
their ranks. It's not economic inequality per se that's blocking social
mobility, but some specific combination of things that go wrong when kids grow
up sufficiently poor."
([http://www.paulgraham.com/ineq.html](http://www.paulgraham.com/ineq.html))

~~~
staunch
Some of them went to public high schools disproves nothing I said. And I'm not
sure why you quoted the same piece of text I did.

Most don't seem to disagree that Silicon Valley is elitist, they just don't
seem to think it's a big deal.

------
graeham
Anyone else find irony that this is published in the Washington Post, which is
owned by Jeff Bezos (founder/ CEO of Amazon)?

------
noobermin
The article has some good points, but it has some weak arguments, specifically
its "evidence" for correlation between executive pay and union membership as
evidence that workers are paid less, that's somewhat of a jump. Also, there's
this

> Total venture capital funding remains well below late-1990s levels, even
> before you adjust for inflation

 _You mean the dot-com bubble????_ Not the best thing to compare to...

Regardless of these, the article makes a good point, specifically with the 86%
of income gains that are "not explained" by entrepreneurship...may be the goal
shouldn't be attacking income inequality specifically as much as it should be
rent-seeking.

------
marknutter
> They looked at levels of innovation (as measured by a particular kind of
> patent production) across individual states over time. They found a
> significant relationship between increased innovation in a state and the
> increased income share of the top 1 percent of earners in the state.

Are you F'ing kidding me? Patent production? Since when has looking at patent
production been an accurate measure of innovation in the Valley? This is a hit
piece, pandering to the tired narrative around "income inequality".

~~~
oldmanjay
Economists have to use something to make it seem like they themselves are
being productive. Which voodoo would you prefer they use to measure the
unmeasurable?

~~~
civilian
I'd prefer they be honest with themselves and use crystal balls.

~~~
gnarbarian
Economists are like meteorologists, they can always explain why they were
wrong yesterday.

I pity them really. They desperately want to make a solid argument derived
from data, but the data they used and the way the split it between innovation
derived growth and rent seeking derived growth is spectacularly wrong.

------
guelo
A lot of commenters here are missing the point that inequality is bad because
the 1% can't spend all that money which causes a drop in aggregate demand and
slows down the economy.

------
judah
>> "Research suggests Graham is both overestimating the importance of startups
to inequality and underestimating the damage high inequality can inflict.
Researchers from the University..."

I choose to draw my views not from politically-charged academics and their
statistics, which can be made to prove most anything.

Instead, I align my views with those who have actual experience in creating
wealth and building the economy. PG knows his stuff. His realistic view of
inequality fits neither the political agenda of academia nor the agenda of
this article's author. For this reason, the author demonizes PG as a "big-shot
venture capitalist."

~~~
PythonicAlpha
To denunciate researchers as having a "political agenda", because their
opinion does not fit into the own political agenda, does not sound very honest
to me.

~~~
judah
They are pushing a political agenda -- leftist views on inequality -- and are
doing so in line with the vast majority of academics in Europe and the United
States[0].

[0]:
[http://heterodoxacademy.org/problems/](http://heterodoxacademy.org/problems/)

~~~
judah
Sometimes, ideas become accepted because there is so much evidence in support
of them that it would be perverse to believe otherwise (e.g., the Earth is
round).

Other times, however, ideas become widely accepted, even entrenched, without
any real evidence. Such entrenched beliefs often arise because they support
particular political or moral agendas; if the beliefs are falsified, the moral
agenda will be threatened.

The academic views on inequality fall firmly in the latter category.

