
Is There an Ideal Amount of Income Inequality? - Maro
http://m.nautil.us/issue/52/the-hive/is-there-an-ideal-amount-of-income-inequality
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whatyoucantsay
Some income inequality is due to rent-seeking behaviour and some is due to
variance in productivity. In an ideal world the first source would be
eliminated, but a question remains:

Is there an ideal amount of productivity inequality?

Even with 100% tax rates, the productive can find dimensions where it is
possible to earn more, usually fame, status, non-taxable goods and political
power.

~~~
golergka
Why do you see rent-seeking as something to be eliminated?

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yorwba
Rent-seeking is the attempt to profit from economic activity without
contributing anything of value to said activity. I.e. you could eliminate the
rent-seeker and the only effect would be lowered costs due to them no longer
collecting their cut.

Of course pure rent-seeking is pretty rare, and most middlemen do provide at
least some value e.g. doing market research and helping interested parties
find each other. But in some cases they gain an entrenched position and start
taking larger cuts purely because they can. An ideal free market would correct
that through emergence of a competitor, but in the real world that is often
prevented through lobbying for regulations in favor of the rent-seeker.

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richardknop
Isn't entire retirement / pension system based on rent-seeking? Only tiny
amount of people make enough money that they can stop working and retire
without having to extract / take cut from economic activity / labour of
younger working people (and cheap labour in developing world). How would you
handle pensions other than rent-seeking via investment?

Plus, as the population of western world is aging and there are more and more
old people and less productive young people, the rent-seeking will only get
worse. Much more people will be retired and will depend on getting cut from
productive working people who will be squeezed more and more (higher taxes,
longer hours, lower or stagnating wages). This can be alleviated to a degree
by western corporations being global and exploiting cheap labour in third
world but even that will be exhausted once the developing world catches up to
western standard.

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yorwba
Sure, if you look at old people and young people separately, it appears that
old people only take money out of pension funds and young people only pay into
them. But the whole point is that young people eventually become old people.
Old people receiving payouts isn't rent seeking, it's time-delayed
compensation for their previous contributions.

The changing demographics are certainly a problem, but assuming the population
trends continue, today's young people aren't particularly worse off. Their
pension contributions may be used for more than one old person, but once they
become old themselves, the next younger generation will be in exactly the same
situation.

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indubitable
Something I always founds surprising is that so few people seem to consider
effective tax rate on disposable income as an indicator of fairness. For
instance many people think a flat tax would be, even if undesirable, fair.
Everybody pays let's say 10% tax so it must be fair. But individuals aren't
taxed like companies, they're [generally] taxed on their gross income.

So let's say a person is spending $2k a month on their basic necessities -
housing, healthcare, insurance, transportation, and a little bit of
entertainment. And now consider two people who spend the exact same amount.
One earns $30k and the other earns $90k. The person earning $90k has $66k left
at the end of the year after accounting for 12 months * 2k of spending. The
person earning $30k has $6k left. The $90k earner is left to pay $9k in taxes.
That's 9/66 = 13.6% of his disposable income. Pretty close to the nominal 10%
rate. But the person earning $30k has to pay $3k. That's 50% of his disposable
income! That 10% for all isn't exactly fair, in effect.

I think this disparity is a much easier way to consider tax brackets. And I
think it's a politically easier sell to both sides of the aisle, than the more
abstract notions of this article. Citizen A earns $x and citizen B earns $y.
They both, on average, pay the exact same share of their disposable income in
tax. I think it's pretty hard to argue against that, yet the tax brackets this
implies would also help inherently tackle extreme levels of inequality.

~~~
wallace_f
In general, a reasonable axiom of public policy is to focus on correcting
negative externalities and unjust outcomes while minimizing interference in
well-functioning free markets. Your idea is nice, but we already have mortgage
tax credits and have seen the negative effect that has had on the economy.

What's more, is who gets to decide what is a necessity. Once upon a time I
flew to Australia, bought a commercial van, a surf board, and converted it
into a camper and travelled a loop around the country. I was by definition
poor and homeless, but I was in heaven. I don't think this would qualify for
any tax breaks under your plan. In this way your plan creates a complex tax
code that does not align with me maximizing my utility function.

There are vast benefits to simplifying the tax code, and I would argue a
better version of your idea is to guarantee a basic income to everyone.

BI won't work for everyone, such as the truly disabled, but it's a more
efficient way of reducing inequality for the truly poor, and more capable of
maximizing individual utility functions.

I know you will say "but who will produce useful goods and services," but at
the moment I would wager far less than 30% of the population produces useful
commerce. The labor participation rate is only about 60%, and many jobs don't
produce anything useful. For example, police officers in Utah that settle for
0.5MM for unconstitutional injustices are draining taxpayer funds. Wall St is
completely out-of-control. Bureaucracy, military-congressional-contractor-
complex, healthcare insurance companies... There is an extroardinary amount of
waste.

BI would also benefit the economy by increasing aggregate demand. It would
stimulate investment by providing a safety net for indivisuals deciding to
retrain or invest in education.

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WalterBright
> BI would also benefit the economy by increasing aggregate demand.

That would require that taking something from A and giving it to B would
increase aggregate demand. I don't see how that can be.

> It would stimulate investment by providing a safety net for indivisuals
> deciding to retrain or invest in education.

This safety net may encourage people to drive around Australia in a van who
would otherwise work, reducing investment.

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wallace_f
>That would require that taking something from A and giving it to B would
increase aggregate demand. I don't see how that can be.

It has been observed in historical data that the MPC for the poor is higher
than for the rich--who are more likely to engage rent-seeking behaviors--which
increases AD.

>This safety net may encourage people to drive around Australia in a van who
would otherwise work, reducing investment.

Once in France I observed toll workers who take a euro from you to use the
toilet were often of quite unhappy appearance. I heard "well its good because
it gives them a job."

If you truly believe spending a year doing a mundane job that could easily be
automated, or long-hours in MS Excel making "fat stacks" on Wall St, much of
the lawyering, tax accounting, lobbying, etc, has more inherent virtue than
surfing in Australia than we disagree on first-principles about human dignity.

What is the point of doing anything if it does not make people able to be
happy, avoid suffering, and live into the future?

If your concern is that nobody will produce anything useful: I would really
bet that more than 30% of the population would want to live on more than a
basic income for their entire life.

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nickpp
While I agree with you about the human dignity issue, I believe that a
horrible, really bad paid job is an incredible, underestimated motivator.

A basic income which allows me to do something fun is quite the demotivator
for doing anything more.

The problem is that improving yourself in order to raise you place in society
usually sucks: endless learning, boring repetition, countless tired, lonely
evenings.

Why would anyone go through all that when they can surf in Australia living in
a van off basic income?!

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dragonwriter
> A basic income which allows me to do something fun is quite the demotivator
> for doing anything more.

I disagree that this is generally true (all of human history shows that humans
generally want to continually gain both improved material position over time
and more than those they see around them if there is an avenue to do so.)

Moreover, that's a rather distant theoretical complaint, anyway, because a
basic income that provides anything more than the kind of marginal existence
provided by American public welfare programs now (but with fewer disincentives
to work) is probably far outside the ability of the economy to sustain without
enormous technological progress.

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wallace_f
>is probably far outside the ability of the economy to sustain without
enormous technological progress.

FWIW we already spend nearly $10,000/person on transfer payments, welfare,
housing, health, etc.

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dragonwriter
Yes, people getting that much in _outside_ income annually are usually still
recieving some of those payments and subsidies, and _still_ living pretty
marginally. The idea of a sustainable, near term, more-than-marginal UBI is a
pipe dream.

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wallace_f
From the article:

>"How Much Inequality Is Fair? Mathematical Principles of a Moral, Optimal,
and Stable Capitalist Society, [...] perfect inequality, which has a definite
mathematical form."

Income inequality does not have a "perfect mathematical form."

Since the stoics, clever folks adept with maths have realized that 'math/stats
is the best way to lie or convince people you are right.'

Why? Because people trust in the intellectual rigor of maths. But while the
language of maths is fundamental to our universe, formulating an argument with
maths does not necessitate correctneas. even the hugely-influential economist
Keynes, and others, believed that 'human behavior cannot be reduced to
mathematics.'

Economics is currently, and has been for a century, trying to formulate as
much as possible in the language of math, but we're consistently in
disagreement and wrong. That is because Economists are almost always without
the virtue of being able to do controlled experiments.

If you wanted to know the 'definite mathematically ideal' amount of
inequality, you would first need to put forward a hypothesis which also
defines ideal. "X is ideal for maximizing aggregate utility" is a reasonable
hypothesis. Then for your experiment you would need many planet earths, and
some way to to precisely measure people's utility.

This is all impossible. And as such, we would be wise to treat the current
state of economics like that of 19th century medicine: somewhere between
interesting-possibly-helpful and hogwash.

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sh33mp
My view for the longest time is that most of mainstream Economics is best seen
as "argument by rigorous analogy". The post-Samuelson heavy emphasis on math
has allowed for really rigorous analogies, and at least provides a common
language for discussing economics rather than wild philosophical/sociological
speculation, but in the end analogies are only as good as their original
abstraction.

That said it should be noted that there are parts of Economics that do work
really well when applied (e.g. certain market mechanisms where profit-
maximizing rational agents are a reasonable assumption.)

My biggest concern with Economics is that there is too much money in
Economics. Unlike something like Physics or Chemistry, there are too many
stakeholders with significant financial resources that have an interest in
having the mainstream thought lean one way or another and the big Economic
systems are too complex for "wrong" theories to be definitively "debunked".
I'm not insinuating any academic misconduct, but what is considered
successful/fruitful/popularized research is surely affected by money, in terms
of funding departments, funding research, or well-financed employment at
various institutions. Think taxes, financial regulation, discretionary
monetary/fiscal policy, and so on. You will probably find that the "boring"
parts of Economics like education, food and transport to be relatively level-
headed. My advice for anyone interested in any Economic theory is to ask of
any claim 1) Who are the stakeholders, who stands to gain? 2) How easily is
the claim falsifiable?

And of course always remember the Gell-Mann Amnesia effect.

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wallace_f
>You will probably find that the "boring" parts of Economics like education,
food and transport to be relatively level-headed. My advice for anyone
interested in any Economic theory is to ask of any claim 1) Who are the
stakeholders, who stands to gain? 2) How easily is the claim falsifiable? And
of course always remember the Gell-Mann Amnesia effect.

Yea, I think that is good advice.

I would just say those fields you listed are good, but maybe not best
examples: something like Management Science/Applied Maths has a lot of useful,
yet very boring, techniques for business, such as linear optimization.
Education, food and even transport also has politics.

The economic "science" circling around the Fed is one day going to be seen as
more egregious offense than the Nobel Prize given for the lobotomy procedure.

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jhanschoo
Whereas inequality is traditionally easy to measure, people are more
interested in equalizing forces. I think that we are less concerned about
inequality if there is an assurance that our lives should regress to a
comfortable mean given that we invest reasonable time in socially-useful work.

~~~
dwaltrip
How could such a thing happen? How do we prevent highly skilled individuals
from producing great value for their societies and then receiving the benefits
from that? 100% tax rate? That sounds incredibly draconian.

I'm not arguing that our current situation is ideal, or that we can't do a lot
more to provide greater opportunity for all and raise the floor for everyone.

But complete "equality of outcome" seems to go against all of my understanding
of the dynamics through which the universe actually unfolds over time. I can
only imagine it as a very unstable state that is held in place through immense
effort and force.

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jhanschoo
I think I have miscommunicated. I'm saying that an ideal society should be one
where mishaps and bad deeds are assured to result only in a temporary poor
quality of life, and that good deeds result only in a temporary good quality
of life. That is, there is negative feedback, or homeostasis.

Poorly-regulated capitalism doesn't provide that. Capital begets capital as
capitalists become more able to invest in high-risk high-reward projects,
leading to a positive feedback loop that is an anti-equalizing force.

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js8
The theory looks interesting but overall, however it reminds me of things like
NAIRU, which is basically a justification of unemployment. Maybe there is some
idea there which can explain why people perceive fairness as they do (why we
evolved that way), but that's perhaps about it.

The problem is, the unemployed person doesn't care whether or not the NAIRU as
a model is fair. They already have their one shot at life, going on right now.

So, I think we shouldn't care what the curve is, and focus on the extremes on
both sides, because both are bad. Poor people have it bad for obvious reasons,
and that should be enough moral justification to not have them at all. Too
wealthy people are bad because money translates to power, and this power can
be misused.

But I agree with the author that we should have progressive taxes, but also
basic income (and I think Norway is close on both).

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stretchwithme
Income inequality is a function of how many technologies there are for
multiplying one's efforts and how many of these people use. Web apps,
manufacturing, broadcasting, e-commerce, etc. People who don't leverage any of
them can't sell to the world. Those who leverage all of them make billions.

Even people who use cars, trucks, ships, block and tackle, nail guns, etc.,
make more than those who do everything with their hands.

If we want to reduce income inequality, we have to educate people to
understand and take advantage of technology. It is the key to prosperity.

And, since there will always be people who don't multiply their efforts with
technology, income inequality will only keep increasing. But quality of life
for even those at the bottom will keep on improving.

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tmnvix
I think you'll find that many seriously wealthy people tend to make more money
from owning things than they do from producing things.

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owlmirror
How can you make money from something without producing? I own things and
would love to know this recipe for infinite wealth.

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richardknop
Real estate / land. Buy a bunch of condos and rent them out. You have
basically infinite passive income (yes those buildings won't be there forever
but relative to your lifespan it is infinite, probably will provide income for
your family for several generations) without having to produce or do any
labour / work. There is maintenance / repairs to be done but that can be
outsourced to a real estate / concierge service.

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throw2016
This is like asking is there an ideal amount of crime? The bigger question is
what kind of society do you want to build?

If you want a stable society you will work towards ensuring people have decent
income, possibilities to grow and overall wider distribution of income. The
alternative is oppression when people react to their conditions.

There is no point having a few people capturing the wealth of and productivity
of a society. Yet you are already born into a society with rent seekers and
individuals who hold a huge amount of wealth. The top 1% already control the
economy and assets.

Discussion about inequality then is moot as it only perpetuates an illusion of
control and freedom to decide the issue when there is none.

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thisisit
Betteridge's law of headlines applies and mostly the answer is "No".

I am not sure of the exact word but it's like a transaction with a used car
salesman. The transaction can never happen at an "ideal" price. Car Salesman
will always overvalue the utility while the buyer will always undervalue the
utility.

~~~
dredmorbius
"The Market for Lemons", Akerlof.

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tanilama
Ideal income inequality should shut up most people's mouth.

