
Why inequality matters (2014) - rgbrgb
https://www.gatesnotes.com/books/why-inequality-matters-capital-in-21st-century-review
======
betocmn
More recently, Bill and Melinda created a useful report on this - "Examining
Inequality" [1].

The biggest take away: "Where you are born is more predictive of your future
than any other factor", which has been discussed on HN too [2].

[1]
[https://www.gatesfoundation.org/goalkeepers/report/2019-repo...](https://www.gatesfoundation.org/goalkeepers/report/2019-report/#ExaminingInequality)

[2]
[https://news.ycombinator.com/item?id=20993456](https://news.ycombinator.com/item?id=20993456)

------
pydry
>But rather than move to a progressive tax on capital, as Piketty would like,
I think we’d be best off with a progressive tax on consumption.

Except consumption taxes are naturally regressive.

If Bill really wanted a progressive tax I think he probably would have
suggested more naturally progressive taxes (like property or capital gains)
rather than the one tax that has to be massively hacked in order to not be
extremely regressive.

~~~
chordalkeyboard
The problem is that consumption represents value that is lost whereas savings
and investment cause value to multiply. When you tax consumption you encourage
investment in capital which makes more value available for everyone in the
market. When you tax property or capital gains you siphon value from
investment and encourage consumption, resulting in depletion of value.

~~~
rsj_hn
I disagree that savings causes value to multiply -- that's reversing
causality. Investment creates savings, not the other way around, and the
relationship between investment and consumption is complex. It could be the
case that a decrease in consumption results in a decrease in investment --
firms don't invest more when their sales are flagging.

It could also be that an increase in consumption leads to a decrease in
investment, but the conditions for this are more limited.

Overall, growth in consumption tends to go with growth in investment in modern
free economies.

In other economies, for example, export led economies that practice forced
savings, there is a general policy to tax consumption and subsidize
investment. That may or may not work out. It often works out in the short term
but not the long term. It works better for small economies that can export a
surplus than for large economies that have a hard time exporting the surplus.
It can also destabilize the rest of the world.

In the modern world, the most precious commodity is demand, not investment,
and suppressing demand is generally foolish.

~~~
chordalkeyboard
> I disagree that savings causes value to multiply -- that's reversing
> causality. Investment creates savings, not the other way around, and the
> relationship between investment and consumption is complex. It could be the
> case that a decrease in consumption results in a decrease in investment --
> firms don't invest more when their sales are flagging.

Savings is deferred consumption, as a basic identity it merely represents
value that is not consumed. This is what would happen if someone put cash
under the mattress (discounting inflation/deflation). However most people put
savings in a bank account (which traditionally pays interest and was long ago
transformed into a form of low-risk investment) and the savings multiply at
the interest rate because the bank loans their deposits out and those deposits
are paid back with interest.

I’m not sure what you mean by “investment creates savings.” What is being
invested, if not value that has not been consumed (i.e. savings)?

> It could also be that an increase in consumption leads to a decrease in
> investment, but the conditions for this are more limited.

Consumption and investment/savings are mutually exclusive and collectively
exhaustive. There is a scarce amount of resources and each unit can be either
consumed (in which case it disappears) or saved/invested.

> Overall, growth in consumption tends to go with growth in investment in
> modern free economies.

It seems we are using different definitions for these words. I am using
standard economic definitions. What definitions are you using?

> In the modern world, the most precious commodity is demand, not investment,
> and suppressing demand is generally foolish.

I’m not sure I understand what you mean. Demand without means of exchanging
for the object of the demand is a bad thing. Demand is only good when the
person demanding can pay for the thing demanded, otherwise their demand is not
met or they are the recipient of a charity or welfare.

~~~
rsj_hn
> "and the savings multiply at the interest rate because the bank loans their
> deposits out and those deposits are paid back with interest."

No, this is false. Banks do not "loan out deposits". A deposit is an IOU from
the bank. It is a liability of the bank. _Like all IOUs, they are created out
of "thin air"_. The only difference between a bank creating an IOU and you
creating one is that the bank must meet strict regulatory requirements to do
so. Those requirements are primarily that the asset on the other side of the
deposit ( _your IOU_ ) meets the lending criteria of the bank. Usually this
involves some collateral and an ability to pay, together with some portion of
risk capital held by the bank, which is usually a government bond equal to a
percentage of the value of the loan not otherwise pledged for some other loan.
Alternately capital can constitute a long term loan borrowed by the bank --
exactly what is considered capital and how much capital must be pledged by the
bank is controlled by regulation. See, for example, Basel 2 regulations.

So if you wanted to create a bank, all you would need is some capital, say a
million bucks, and you are good to go to start making loans. That million
bucks could support 100 million in real estate loans, for example. You don't
need to wait for anyone to deposit anything, and the amount people deposit
does not go into the decision of whether you as the bank can make a loan. This
doesn't mean the bank has no lending standards, but checking on how many
deposits are in the bank simply is not done as part of the decision tree to
make a loan or not, because it is irrelevant.

As long as the bank believes the the risk adjusted return on your stream of
payments will exceed the obligation of their IOU, and as long as they have a
sufficient amount of capital pledge to cover a percentage of the loan (usually
a few percent, again depending on the riskiness of the loan. A non-
collateralized business loans requires more of a capital pledge than a
collateralized loan) they will go ahead and issue the IOU and create a deposit
in your name at the bank for the amount of the loan. Then you can use that
deposit at the same bank to pay for the investment you want. Banks create
money out of thin air (but not willy-nilly). The amount of money banks create
is not constrained by how many deposits they have -- rather the lending of
money creates deposits.

Fun Fact: Government borrowing also creates deposits -- enough deposits to buy
the bonds the government sells when it borrows. This is why governments can
(operationally) always borrow (although it may not be a wise policy for them
to do so).

So again, you are reversing causality. Loans create deposits, not the other
way around. Deposits, in and of themselves, create no loans.

Money deposited in a bank is "dead money" if not spent by you, and does not
fund any investment and thus does not create any aggregate savings. You are
merely depriving someone else in the economy of income. The investment happens
elsewhere, and hopefully the amount invested is enough to cover everyone's
savings demands (see below).

> "I’m not sure what you mean by “investment creates savings.”"

The sum total that an economy spends on investment is equal to the sum total
that ends up being saved, regardless of how much people in the economy _wanted
to save_. You, as an individual, can of course choose to put a portion of your
income in the bank instead of buying some good, but that decision deprives the
seller of the good of their income. So while individuals can choose how much
of their income to save, their individual decisions in aggregate also
determine how much income they earn. If too many people try to save at the
same time, total income is reduced and they fail to save. So whether or not
the individuals in an economy _succeed_ in reaching their savings targets
depends on whether a sufficient amount of investment occurs or not. So you
better hope that there is enough investment happening in the economy to meet
everyone's savings goals otherwise some people will fail to meet their
targets. (Laid off people tend not to achieve their savings targets.)

Thus it is investment that determines savings, not the other way around. This
is what I mean by "Investment creates savings."

> "I am using standard economic definitions. What definitions are you using?"

I am using standard economic definitions. I don't think you are using standard
definitions (see below).

> "Demand without means of exchanging for the object of the demand is a bad
> thing. Demand is only good when the person demanding can pay for the thing
> demanded"

Demand is defined as the _willingness and the ability to pay_. Just wanting
something in a store window you can't afford is not demand. That is a wish.

The ability to pay is determined by your income, which falls if everyone tries
to save at the same time. Therefore the spending of money, whether by directly
making investments in the sense of purchasing real capital goods, or directly
purchasing newly produced consumption, is a key part of determining income and
thus setting demand. Merely abstaining from spending money and letting your
financial savings sit idle in a bank deposit does not cause anyone to purchase
an investment good, because banks don't lend deposits and deposits don't
create loans (see above).

~~~
dannyobrien
I’m genuinely curious from where you’ve developed this position that loans
create deposits. My own understanding matches that of the person you’re
replying to, and I’d like to read more on your alternative point of view. Do
you know any books that expand on this idea?

~~~
rsj_hn
This is common knowledge for people who work in banks, or understand how banks
work. The idea that you go to a bank to borrow a million dollars, and they put
you on hold as they wait for a million dollars to be deposited by some
stranger is, well, bonkers. How could that possibly work? Does that match
anyone's experience? Has anyone been turned away from a loan because the bank
"ran out of deposits"? And how would you explain investment banks that don't
even accept any retail deposits but make huge amounts of loans?

It's just a very odd belief and I can't understand why econ texts don't
describe this correctly. Yes, the full answer is a bit more complex, but
surely econ textbooks can spend a few pages explaining this stuff. It's not
_that_ complicated.

But then again, economists historically have not done well with understanding
the financial system -- it seems to be a blind spot, as evidenced by their
performance in the great financial crisis. There are alt economists like von
Mises and the Austrian school that really harped on loans create deposits, but
mainstream economists tend to ignore how the financial system works.

For literature, I'd take a look at this educational primer published by the
Bank of England. In general you need to turn to literature published by the
banking industry. Here's a link:

[https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-
bulletin/2014/money-creation-in-the-modern-economy)

Here is a quote:

"In the modern economy, most money takes the form of bank deposits. But how
those bank deposits are created is often misunderstood: the principal way is
through commercial banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the borrower’s bank account,
thereby creating new money.

The reality of how money is created today differs from the description found
in some economics textbooks:

* Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

* In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.

Although commercial banks create money through lending, they cannot do so
freely without limit. Banks are limited in how much they can lend if they are
to remain profitable in a competitive banking system. Prudential regulation
also acts as a constraint on banks’ activities in order to maintain the
resilience of the financial system. And the households and companies who
receive the money created by new lending may take actions that affect the
stock of money — they could quickly ‘destroy’ money by using it to repay their
existing debt, for instance."

------
ikeboy
It's interesting to read this nuanced and economically informed take with his
more recent post saying we should raise taxes on capital.

See [https://www.gatesnotes.com/About-Bill-Gates/Year-in-
Review-2...](https://www.gatesnotes.com/About-Bill-Gates/Year-in-Review-2019)

Reading them side by side, it really seems like his more recent opinion just
wasn't thought out, which is surprising given that he clearly thought about
the topic 5 years earlier. My guess is he decided to support what he felt was
going to be supported by mainstream Democrats anyway, instead of the
economically correct views he clearly understood in 2014.

~~~
throwawaw
What differences did you see? They seem essentially similar. The exception
being:

> We should shift more of the tax burden onto capital, including by raising
> the capital gains tax, probably to the same level as taxes on labor. (2019)

vs

> I agree that taxation should shift away from taxing labor. It doesn’t make
> any sense that labor in the United States is taxed so heavily relative to
> capital.

> But rather than move to a progressive tax on capital, as Piketty would like,
> I think we’d be best off with a progressive tax on consumption. (2014)

He does seem to have reconsidered the utility of a yacht sales tax.

~~~
ikeboy
Yes, the difference is he switched from being against higher capital taxes to
in favor.

------
erentz
Coincidentally just watched Capital on NetFlix. It’s not a great watch, but a
decent way to absorb an abridged version of the book. Pairs well with The
Social Dilemma for a documentary night. Mark Blyth is an economist with plenty
of content on YouTube that touches on similar topics.

For adjacent book recommendations I highly recommend Goliath by Matt Stoller
on the subject of capital and monopoly power in the US over history.

------
dang
Discussed at the time:
[https://news.ycombinator.com/item?id=8464532](https://news.ycombinator.com/item?id=8464532)

------
dgellow
What are the reasons for the US to not already have a VAT? That’s one of those
things that seems to be agreed upon by almost every country in the world but
not the US.

~~~
nine_k
Is there a reason why the US economy still grows while most of the rest of the
world, and EU in particular, stagnates? Maybe not stymied demand plays some
role in it.

~~~
dgellow
Check the map at [https://en.wikipedia.org/wiki/Value-
added_tax](https://en.wikipedia.org/wiki/Value-added_tax).

Where all those countries stagnant before the virus? Of course not.

------
mrpopo
Why should we believe that Bill Gates has a valuable opinion on wealth
inequality and its causes?

His point on 1780 rentiers just doesn't hold since most of the wealth in the
world was created since the 1950s.

Also, Bill Gates's favored solution, a tax on consumption, will not do
anything to counter the problem of exceedingly wealthy people who have so much
money that they can't spend it all, even with a "lavish lifestyle".

~~~
babesh
Because the data he presents and his argument is a good one and your logic is
shete.

His argument is that dynastic wealth doesn’t persist in the United States. If
it did, then wealth would STILL have accreted to renters even if most of the
wealth was created since the 50s.

Furthermore you didn’t bother reading or noticing that he is in favor of an
estate tax.

~~~
fiblye
> His argument is that dynastic wealth doesn’t persist in the United States.

America doesn't really have people who've been billionaires for 7 generations.

But America does have people who were born into enough money to never have to
worry about finances ever, had children with the same benefit, and had
grandchildren in similar circumstances. Plenty of people in politics are the
son or grandson of a line of rich politicians. Plenty of comfortable
millionaires got their start from a lineage of inherited wealth.

It's not enough money to rank on Forbes 400 and build private castles that'll
last centuries, but it's definitely wealth and status being passed down. It's
safe money. Many people who became billionaires aren't there through safe,
steady, risk-free financial management.

~~~
chordalkeyboard
How are families preserving wealth for generations, if they aren’t engaging in
safe, steady, low risk management of their wealth?

Even if you ignored inflation, how much cash would someone have to accumulate
in order to sustain a middle-class lifestyle for their family for multiple
generations, if they weren’t investing and managing those investments?

~~~
babesh
\- Investing in their kid’s education in a broad sense (attitude, career).

\- Marrying well i.e. marrying smart and successful people so that your
progeny’s genes are the best they can be.

The British aristocracy was famous for doing this. Marrying old blood to new
blood. However, many cultures do the same. That is why marriage was so often a
negotiated affair.

~~~
chordalkeyboard
This is true. They invest in the education and socialization of their children
so their children can go get good jobs and earn big paychecks in a well-
paying, low-risk industry. However that is not the same as living on
accumulated wealth for generations.

~~~
babesh
True but the above compounds over time.

------
supernova87a
I'm fairly moderate, maybe even becoming a bit conservative in my old (hah)
age, but even I agree that inequality is causing problems. And all the
economists with their Friedman-esque theories didn't properly anticipate how
angry this issue can make people. I guess the 2nd order effects of the free
market 50-75 years into a stable and wealthy evolved society were too far
ahead to realize.

We need to address it for our own self-preservation or it may become one of
those issues that dooms what has been a good system.

I have to see the problems of inequality manifesting in concrete ways, because
otherwise the _concept_ of it isn't a priori bad to me. As people create
wealth (a good thing), just the fact that others haven't managed to isn't a
problem to me. That is inevitable and happens with any system. But when it
gets to this level, it is causing problems:

\-- Wealth accumulation allowing people to buy 2nd homes or more (esp.
investment homes), in really expensive places partly with speculative goals,
which makes it harder for not just the poor, but everyone in general,
especially young people, to afford housing (and not even talking ownership,
but rentals)

\-- the ability of people with wealth to choose to back symbolic causes with
money, at little cost to them but with great cost to the targets of those
causes. It cuts both ways mind you, so don't be so glad to embrace this point.
I think of the (admittedly mundane) example of people donating $10k to random
people on crowdfund sites to buy tents for the homeless because of the
symbolism of it, that then litter the streets of other people's cities.

\-- Related to that, the political discourse becoming more mirroring of the
economic situation, in that people's attention gets focused on (and distracted
by) the growing extremes of society. It's hard to resist. They dominate the
headlines and discussion. Political opinions of the ultrawealthy and their
companies, rare but attention-getting exceptions to the norm. On the more
silly end, people's dumb luxo-rich envy feeds on instagram making people upset
and setting unrealistic expectations...

\-- And finally, vague but real: the new serfdom/perpetual servitude that
people with bad education, or back luck early in life are condemned to because
they can't do anything to dig out of a $15/hour job serving relatively rich
people who are angry at the shoddy level of customer service these days... I
actively see this in people I employ.

It's a problem. Not to say we need to abandon capitalism, and not to say that
any of the current solutions out there would fix it in ways without unintended
consequences. But it is a problem needing attention and some smart solutions
put forth that can get people to realize it's our own necks on the line if we
don't.

~~~
8ytecoder
Except for the fact that it’s been the root cause for every revolution in
history.

~~~
refurb
Inequality was the root cause of the American revolution? Inequality in
personal freedom and political power, maybe.

------
mjfl
As time goes on, some people will continue the same way of life as before,
think of the sentinelese islanders, while the richest people will experience
continuously accelerating quality of life gains. Thus, inequality is
guaranteed to increase as prosperity increases. Is this inherently evil? I
don’t think so.

~~~
mrpopo
The sentinelese (as well as all farmers in low-income countries) are directly
impacted by environment degradation caused by the richest people experiencing
"accelerating quality of life". Thinking that our way of life is not impacting
others is inherently evil, yes.

~~~
Nasrudith
Except it isn't a straightforward relationship between production and
environmental degradation. The 'how' matters quite a bit namely in terms of
efficiency. To pretend that producing a new genetic therapy is the same as
grazing one million more goats is asinine.

The awkward truth is that we have always had an impact on others even back in
ancient times wrongly considered isolated arcadias in tune with their
environment. Mega-fauna didn't become extinct from running out of food but
from humans running out of them as food, and the Sahara fertilizes the Amazon
rain forests.

~~~
mrpopo
> To pretend that producing a new genetic therapy is the same as grazing one
> million more goats is asinine.

You're the only one pretending that?

Of course, 0-impact is impossible, except the scale at which we are destroying
our environment is unprecedented. Hunting of mega-fauna has occurred over
thousands of years. Two-thirds of the world’s wildlife has been lost since
1970 (70 years) :

[https://www.euronews.com/living/2020/09/10/wwf-proposes-
plan...](https://www.euronews.com/living/2020/09/10/wwf-proposes-plan-to-
fundamentally-change-the-way-that-we-deal-with-the-loss-of-nature-)

------
AtlasBarfed
No mention of providing for the basics of existence. Of course it's an
economic post by someone far removed from such concerns beyond advocating for
policy from their extremely high tower built on inequality.

The pitchforks wouldn't be sharpened nearly as often if the basic humanities
in first world nations were minimally guaranteed: food, water, shelter,
medical care.

But the US isn't really a first world country. It seems to be straddling the
boundary with the old second world, particularly the USSR: military power
projection, effectively a single party with respect to the politically
connected/rich, vast inequality, functional contempt for the common man
despite propaganda.

It does have food on the shelves, unless the paper thin warehousing of the
modern supply chain is disrupted.

