Response to Paul Graham’s “Income Inequality”

Mr. Graham’s overarching theme in “Income Inequality” is that eliminating inequality would reduce incentives to start businesses or innovate. He’s right that at (a certain margin) this would happen. Fortunately, no serious voice or party on the American left is advocating for that; that’s either a Strawman, plainly disingenuous, or a serious misinterpretation of what’s been proposed. Disagreements exist on optimal marginal tax rates, and at what margin disincentive effects kick in, but few credible sources on the left deny the existence of this margin. Instead, we argue that the rates we now in the United States are far from optimal, and need to be changed; we’re talking about about reducing inequality it to levels that are not abyssal. Americans as a whole support a much more equal distribution of wealth, as Michael Norton’s work shows. That alone is telling. We also argue that we’re missing vital social programs to re-enable social mobility and reduce or eliminate poverty.

Even in Europe, which is far more generous in terms of social welfare provision has some level of wealth inequality; it also still has rich people, though fewer than the United States, and fewer billionaires.

What many of us want is for more people to be able to get rich, even if it’s not quite as rich as they are able to get now. Imagine a country of tens of millions of millionaires and multi-millionaires (right now the number of people with at least a million is around nine point six million), even more “multi hundred-thousand” aires, and some one-hundred-thousand aires. There would plenty of rich people, lots of people in the middle, and some at the bottom (but the bottom would be far less punishing than it is now.) This is only one possible configuration.

The process of governing is a process or adaptation to circumstances: regulation and de-regulation; centralization and decentralization; changing tax rates, and so on. Todays proposals, too, are an example of that formerly normal process. No is talking about making the pie perfectly equal, eliminating private property, or or anything even close to it. We’re proposing a strengthened social democracy. A third New Deal. Like FDR, many of us want capitalism saved from itself. If you accept, as I do, Cowen’s contention that hypercompetitive meritocracy and the Superstar effect is leading to a bifurcation of society, then the only way to ensure a good standard of living and a reasonable division of political power is by reducing inequality of outcome along with inequality of opportunity (and that reducing the latter requires reducing the former); the most skilled, the most innovative, and the hardest working would still get the top rewards, but everyone else would enjoy a decent standard of living and political power. As bifurcation and lopsidedness of the rewards increases, progressivity of taxation and redistribution will need to follow.

Mr. Graham makes several statements that shows that he understands important parts of the problem (poverty, mobility), but his analysis is incomplete (and credit to him for writing addressing the issue in a thoughtful way— more people in power should be doing the same.) Instead, the picture looks more like this:

1) Massive wealth inequality distorts policies towards the preferences of the rich (http://faculty.wcas.northwestern.edu/~jnd260/cab/CAB2012%20-...,http://www.demos.org/stacked-deck-how-dominance-politics-aff..., Affluence and Influence), so reducing inequality does more than just give people more mobility; it allows government to more accurately reflect the will of the people. It’s democracy-enabling. Massive inequality in wealth breeds massive inequality in political power. Some argue that this is a confusing of proximate and root causes, but it isn’t: no amount of mobility or opportunity can fix this particular one, only inequality reduction itself.

2) As Hayes discusses in “Twilight of the Elites” (which I believe every single American should read), we’ve learned that basically everyone in the US has accepted the current notions of meritocracy, social mobility, and equality of opportunity. What is currently not well-accepted is that in order to achieve anything like equality of opportunity and social mobility, you need more equality of outcome in the first place. One can express this as “reducing poverty”, but that’s just a reframing of the same idea. We are in fact talking about redistributing money from the very rich and giving it to the not-rich, one way or another, to improve EoOpp and SM. That reduces inequality by definition.

3) Massive inequality itself increases social distance, which is partially reflected in #1. When all one sees, knows, meets, etc. are other wealthy people, one may wind up becoming disconnected from the plight of the non-wealthy. They become an annoyance, invisible, or irrelevant, which is reflected not only in policy, but also in self-reinforcing cycles of disinterest and disconnection in the realm of social relations. Inequality has to be reduced somewhat to reduce that vertical social distance.

4) When we speak of inequality reduction, it can be understood as “wealth range compression.” The top go down, the bottom go up. Many analogize chopping off the top and putting it at the bottom, but the compression metaphor works better, in my opinion.

5) Some worry (like Acemoglu) that US inequality subsidizes other nations in terms of innovation. I think Edsall and others have demolished the argument, and its was largely facile in the face of facts like Sweden having invented the ultrasound, the pacemaker, and AIS (an advancement of GPS) or Denmark having invented the loudspeaker, Bluetooth, and Insulin. You could even argue the opposite: a society that gives people a better safety net (Peltzman effect) combined with an entrepreneurial culture will produce more, not less innovation.

The recommendations for remedying this are fairly tame in the European / Scandinavian context, mostly because fewer of them have internalized ideas like “taxation is theft” or “everything that happens to you is your own fault.” We should regard the following as non-controversial:

  • Marginal tax rates at the top of 50% (France is even higher and still has rich people) and policies to make sure the rates stay progressive
  • Closing tax loopholes, forcible repatriation of stashed offshore assets, fully funding the IRS, and eliminating (for real) tax havens and their usage
  • Debt-free higher education (full rides, living stipends, the works)
  • A real universal health system, not the patchwork monster that is the ACA
  • No games with inheritance taxes
  • Non-punitive, non-humiliating policies to help the poor like a GBI or expanded automatic welfare provision
  • Not gutting social security (though if we had a real GBI, we wouldn’t need this. Not likely to happen anytime soon, though.)

Above all else, we need a cultural change. A change that finally rejects the doctrines of:

  • dog-eat-dog
  • every man for himself
  • lift yourself up by your bootstraps
  • everything that happens to you is your own fault / The Just World Fallacy
  • taxation is theft
  • government shouldn’t be in the business of providing services
  • privatized risk for everything

If we were to implement the whole of Sanders’ platform, for example (most of which I agree with, a few items I think are questionable), we’d still be to the right of a Denmark or Sweden(!) We’d be slightly to the right of what we had during the Great Society.

This would be a return to sanity and basic living standards, and a serious step towards social mobility. Hardly the stuff of Galtian nightmares.

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