

Ask PG: Is growing income inequality in the US a sign of health? - jshen

In 'Mind the Gap' you said, "I'd like to propose an alternative idea: that in a modern society, increasing variation in income is a sign of health. "
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pg
For people who haven't read that essay, I should explain that one of the
points in it is that there are two distinct ways to get economic inequality in
a society: an ancient zero-sum game where a ruling class appropriates wealth
generated by a large number of peasants, and a newer form that is not zero-
sum, where some people become richer than others by generating wealth faster.
For various reasons, people who write about economic inequality tend to
conflate the two sources. But whereas the older sort of economic inequality is
bad for societies, the second is, if not in itself good, a sign of a good
thing: variation in productivity. (The reason variation in productivity is a
good thing is that if you have no variation in productivity, it is very
unlikely that the reason is because everyone is highly productive.)

For more details, see <http://paulgraham.com/gap.html> and
<http://paulgraham.com/gh.html>

So your question becomes, do I think that the economic inequality we see today
is increasingly of the old form rather than the new form? No, I don't see any
evidence of that, not in the US.

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jshen
Thanks for taking the time to answer, and I completely agree with the framing
of the two types. The reason I asked is that it's hard for me to believe that
the rise in CEO pay is a result of a rise in productivity of said CEOs.
Another example would be wall street, they are taking a larger and larger cut
of the pie, but I can't see how they are adding to the pie commensurate with
their increasing rewards.

In short, this seems like the old form to me.

The counter points are of course Jobs, Zuckerberg, The Waltons, etc. But it
feels like these are not the majority case, but I admit I don't have any hard
numbers on this.

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pg
It's clearly _possible_ for CEOs to be worth the sort of money they get paid.
E.g. Steve Jobs. If I had started a company and wanted to retire, and was
looking to hire someone to run it for me, I would have no problem paying the
right person 5% of the total revenues, or even more.

From what I've seen (and I am old enough to remember the old days), the main
cause of the rise in CEO pay is that CEOs are now the equivalent of free
agents in baseball.

The hedge funds are an interesting case. I'm not absolutely sure about this,
but I suspect they are irrelevant, because while they don't create wealth,
they don't confiscate it either, at least not in the old way.

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ivankirigin
Why don't hedge funds create wealth? How do they do it less than, say, DST or
any other investor?

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pg
I'm not 100% sure where investors fit in, but my current hypothesis is that
"pure" investors (i.e. people who supply only money) are like armed forces:
they do not themselves create wealth, though they can sometimes create an
environment in which it's easier for other people to.

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olegious
Depends on what the inequality is caused by, if it is caused by a shrinking
middle class, then no, it isn't a sign of health. If the middle class isn't
shrinking but the rich are making more money, then I'd argue that it could be
a sign of health.

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triviatise
It may be a sign of a healthy market, that ultimately can become unhealthy to
the society. So it depends on which aspect of the US you are looking at.

As people get disproportionate amounts of money, they get disproportionate
amounts of power that they can then use to distort the rules of the game. When
there is a small but very wealthy class (say .1% of the population owns 80% of
the net worth) then maybe the rest of the population can become oppressed.

It is difficult to get good stats on this, but this site has data that
suggests since 1983, the top 20% have improved their lot at the expense of the
bottom 80%.

Income isn't really a good way to measure the gap. If someone makes 500K/year
and spends 100% of it on non-assets, they are just returning their money back
into the system.

It is actually a complex problem to determine if the changes are good or bad,
if wealth vs. income is the right measure, and what percentile groups make up
the "elite"

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pchristensen
It's probably too coarse of a measurement. In the same essay he says there are
two ways to accumulate wealth: create it or steal it. Increasing numbers of
wealthy people don't necessarily mean more wealth is being created.

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Peaker
That's a false dichotomy, unless you define every zero-sum game in economics
to consist of theft.

~~~
jshen
Right, are the continually rising CEOs salaries theft or a sign of health?

