Optimum Income Inequality

by Dave Schuler on March 5, 2014

There’s an interesting op-ed on inequality from Thomas Edsall in the New York Times today. In the op-ed Mr. Edsall takes note of the work of economist Richard Freeman suggesting that there is an optimum level of economic inequality from the standpoint of economic efficiency with inequality less than the optimum or greater than the optimum producing less economic growth than might otherwise be the case, creating a curve of outcomes reminiscent of the Laffer Curve. Here’s the part I think we should mull over:

Freeman argues that the costs of excessive inequality are high: “Inequality that results from monopoly power, rent-seeking or activities with negative externalities that enrich their owners while lowering societal income (think pollution or crime), adversely affect economic performance. High inequality reinforces corruption by allowing a few ‘crony capitalists’ to lobby politicians or regulators to protect their economic advantages. When national income goes mostly to those at the top, there is little left to motivate people lower down. The 2007 collapse of Wall Street and bailout of banks-too-big-to-fail showed that inequality in income and power can threaten economic stability and give the few a stranglehold on the economy.”

Let’s put that in terms of concrete actions and policies. Creating monopolies—like the cable companies, for example—produces less economic activity. Bailing out banks produces less economic activity. Bailing out automobile companies produces less economic activity. Innovations of the sort that the financial sector engaged in not all that long ago (“activities with negative externalities that enrich their owners, etc.”) produce less economic activity. Rent-seeking of the sort exemplified by the scandalous farm bill recently enacted into law by the Congress produces less economic activity. Giving your bundlers sweetheart loans for their ill-conceived sustainable energy projects reduces economic activity. Subsidizing the healthcare sector produces less economic activity.

Now, I can see how people (politicians, especially) feel the need to do all of those things anyway, for reasons other than economic efficiency. Fair enough. At some point don’t you either a) need to come up with a way to replace all that economic activity you’ve decided to sacrifice or b) just acknowledge that all of the jobs lost due to cronyism, rent-seeking, and so on just had to be sacrificed because you can’t make an omelet without breaking eggs?

{ 12 comments… read them below or add one }

... March 5, 2014 at 12:04 pm

To answer your last question, no, they do not need to do those things. What are the people gonna do? First, it’s not like the news is going to frame any stories in the manner that you have. Second, the winner-take-all political system’s duopoly has no interest in framing things that way, not really. (Romney and Ryan talked about Obama’s economic inadequacies, but when looking at Ryan’s budget they largely wanted to spend even more than Obama, while cutting taxes and driving the budget deficits even higher. But even the voters that care about those things didn’t care enough to actually look at the proposals.)

So they can continue on in this way until this truly IS a third world country, and an actual bloody revolution comes along. That is something for their grandchildren or great grandchildren to worry about.

steve March 5, 2014 at 4:32 pm

All those things are not equal. The financial sector shenanigans outweigh all of the others put together. You leave out (I know it wasnt meant to be exhaustive) important things like the sweetheart tax cuts many of the wealthy get. The consolidation in the media. It seems pretty reasonable to me to think that you reach a tipping point where too much inequality is inefficient, and immoral. I think this might be the expected outcome of democracy and capitalism combined. Not sure how to correct it w/o going too far the other direction.

Steve

jan March 8, 2014 at 9:13 am

Our ‘Recovery,’ depicted in one chart entitled — Five Years of “Progress” Notice the robust lines, indicating “Personal Income” and Jobs Growth,” something that is being superficially addressed, for political reasons, by calling for the raising the minimum wage. Will this really be the antidote for expanding job opportunity and closing the gap of income equality?

TastyBits March 8, 2014 at 5:17 pm

@jan

… , by calling for the raising the minimum wage. Will this really be the antidote for expanding job opportunity and closing the gap of income equality?

What is going on is that the economic models have broken down completely. The stimulus package failed beyond the error limits, and it cannot be explained within the model. Hence, the model is very wrong.

The minimum wage, income inequality, raising taxes, etc. are all subterfuge to distract from the gigantic issue that the economic model of the left is a failure, and the conservatives keep going for the distractions like the good lap dogs they are.

Christina Romer is one of the few intellectually honest economists out there. She admitted that the model did not work how it should have, and they would need to study it more. When she has something to say, I expect it to be thoughtful. I may not agree, but I can respect intellectual honesty.

The remaining on the left are either too stupid to understand what has occurred or are trying to cover what has occurred. Apparently, the big brains on the right have not been able to figure out they are being hustled.

The only reason for a living wage at the minimum wage is because you are stuck at minimum wage, and the only reason you are stuck at the minimum wage is because the economy is stuck. The economy is the issue not the minimum wage. You do not fight over the minimum wage. You reframe the argument over the economy.

Income inequality is an even easier argument to reframe. The economy has been stagnant for the bottom, but it has been gang busters for the top. You argue over which policies caused the problem.

You will note that the left has been preparing for this argument. They have been seeding the argument with the Bush tax cuts. This has not been haphazard, but this is not the source. Where it is popping up is from third or fourth hand sources, but thing usually have a reason for being pushed into public debate.

Why no conservative thinker has taken on this challenge is a mystery to me. I can only guess that they understand little about what the pontificate about, and therefore, they have no idea of how exposed the liberal economic model is.

This is why understanding concepts and how those concepts fit into a cohesive philosophical framework is vital to making an intellectually honest and logically sound argument. Syllogisms are not robust enough to withstand a robust debate.

jan March 8, 2014 at 8:08 pm

Tasty,

As far as I’m concerned the integrity of the political class has broken down. The left has gotten more disingenuous, disgusting, dangerous by the day, while the right appears impotent, naive, petulant beyond words. DC, it seems, has become a central cafeteria for food fights and Senate leaders calling ordinary citizens liars, rather than a place where serious, thoughtful policy is constructed for the good of the whole.

In the current administration, it has become particularly vexing in that it’s all about dividing the masses into sub-divisions of race, gender, and class to get the most votes for the next election. There is, however, such a pathetic regard for the people — especially the middle class — even though the lip service from the left generates enough air currents to fuel hurricanes, in supposedly looking out for this shrinking, over-taxed, dying-on-the vine demographic.

In the meantime, real issues of the day, like jobs and the economy are deflected, as the left’s political attention is focused on weather changes, racial whining, and supporting kids being locked into under-performing schools to protect teachers’ union jobs. Obama continues to enlarge his latest poll-tested 10/10 minimum wage issue, as Kerry espouses GW as the biggest threat to mankind, with Putin marching into Ukraine, the rest of the Middle East in upheaval, and terrorism ratcheting up everywhere.

Oh yeah, then there’s always that nagging problem of exploding, unsustainable entitlement programs, and almost a 7 1/2 trillion deficit that just keeps growing in a never-ending tepid economical climate. Hospitals and medical personal are under stress from the PPACA regulations. Millions of people have had sudden health insurance policy cancellations. But, the uninsured, the pivotal group this one-sided fiasco was created for, are so far not interested in nor buying into the whole PPACA plan.

Nonetheless, the far left democratic band plays on, and says it’s all for our own good. So, suck it up, and keep quiet. Eventually, we are all supposed to fall into line and like it. I guess that’s our new, improved, advanced model of freedom and self determination under the social progressive paradigm.

jan March 8, 2014 at 8:11 pm

typo correction – 71/2 debt, not deficit

TastyBits March 9, 2014 at 12:22 am

@jan

My economic comments are only tangentially connected to politics. Leftist ideology is failing on many fronts, but it is failing at the foundations. If you do not recognize where the fault lines are occurring, you will not know where to attack the structure.

The left have won many recent battles, but the foundation of their ideology was built upon sand. The PPACA is crumbling, and presently, it cannot be implemented because of politics. The entitlement programs will eventually have the eligibility requirements changed.

Of course, you must have a firm understanding of your own ideology before you can attack your opponent’s ideology. What the right does not understand is that instead of whining, big government could be pushed back, but it takes more than talking points and slogans.

Dave Schuler March 9, 2014 at 8:11 am

The left have won many recent battles, but the foundation of their ideology was built upon sand.

Could you expand a bit on that, TastyBits? The PPACA has ideological, theoretical, and practical problems but the practical problems are the ones most in the news.

IMO the fundamental problem with Democratic Party policy preferences right now are that however good they might be in theory they founder on practical implementation.

TastyBits March 9, 2014 at 10:58 am

@Dave Schuler

Liberal policy, especially the more leftist, eats away at the economy. It devours wealth, and hence, it destroys the means of wealth creation. In order for these policies to work, they require an expanding supply of money plus credit and a growing economy. These allow the negative effect of liberal policies to be masked.

The PPACA must work as a whole or it cannot function. The exchanges need a certain number of individuals to operate, and the cancellations were designed to drive those people into the exchanges. When the website did not function properly, this has weakened the PPACA.

The website problem was not caused by the PPACA. It was caused by the overextension of those who have won many recent battles. They believe that the government would be better at managing a task they had absolutely no idea of what it entailed.

The PPACA cannot be implemented because of the political costs, but this was always going to be a problem. The architects were academics or non-politicians, and later, the insurance companies were included. None of these people were ever going to run for office. The politicians threw in a few goodies to try to sell it but not nearly enough.

The PPACA has a three year bailout provision for the insurance companies, and it may have been enough to float the thing. The extensions are going to put it past the bailout limit, and I doubt it is going to get any additional provisions if the bailout ever gets approved. There may be additional provisions for the insurance companies.

The PPACA is the crown jewel of liberal philosophy, and potentially, it could set back that philosophy years. Democrats needed a lousy economy to get it passed, but a lousy economy is killing it. If President Clinton could have gotten it passed, the economy would have masked any problems.

As to Democratic Party policy preferences, few can stand on a positive economic basis. Hiring more teachers has a negative economic impact. This is usually masked, and because the economy is growing, a positive multiplier is proclaimed. We now know the truth.

Theoretically, firing teachers should have a positive economic impact, but due to Democratic Party policy preferences for the regulatory regime, they would not be able to easily start new businesses competing with existing businesses, especially the Tech Industry.

As part of a more comprehensive discussion, I believe that many of the present structural problems are the result of both parties, and the present economy is still being affected by the 2008 financial crisis. The various government programs are keeping people afloat, and otherwise, the numbers would resemble the 1930′s.

jan March 9, 2014 at 11:24 am

“What the right does not understand is that instead of whining, big government could be pushed back, but it takes more than talking points and slogans.”

Tasty,

Wasn’t that already at least implied when describing the right as “impotent, naive and petulant?”

Regarding the imposition ideology has on both parties, both seem guided by what they want rather than realistically perceiving what they actually have cultivated and gotten under their ideological beliefs. Consequently it becomes impossible for them to conduct an honest oversight into the end result of their policies, making necessary, constructive changes along the way.

What is done instead is to deny the obvious, and keep hoping for something better as either one side or the other plods down the same path. It’s that old definition describing insanity, and IMO that is what more often than not happens in situations of governance where winning elections becomes the primary purpose, versus actually doing something helpful and productive for people from all walks and persuasions of life.

Also when pure ideology rules the day, sound bites, red meat rhetoric, catering to the party base becomes the priority, while seeking and addressing salient problems stays quietly in the back ground of policy-making, so as not to rock any boats. This is seen time and time again in allowing: our entitlement programs to languish, headed for the cliff of insolvency; rationalize our debt travesty which only flourishes, unchecked; to ignore flaccid government programs, overlapping bureaucracies, as government continues to add layers more; and our populace to engage in alienating, exhausting infighting, as we tune the pipes of contentious issues both parties harp on — abortion, gay marriage, global warming, and so on — leaving SS, medicare/medicaid, tax reform either superficially alluded to or totally off the table.

jan March 9, 2014 at 12:59 pm

Tasty,

Where I take special issue with democrats is that they rely on big, inflexible structures to coral people into dependency group-think allegiance. Once a program, a way of doing something, is in place, democrats are not eager to change it.

Schools, then must always remain under the thumb of union dominion, no matter how low students’ performances or enthusiasm to learn recedes. Just look at NYC eliminating charter schools, demonstrating higher learning curves in math and English, in order to ameliorate teacher unions’ fear of academic competition. Screw the parent’s who can’t afford better or private schools for their kids! Turn away from out-of-the-box innovation, in order to placate a tired but loyal democratic constituency!

The health care industry is being groomed in the same way, where powerful centralized government decides what is best for you, not the individual. Therefore, they can label plans, freely chosen, paid for and fitting individual needs, as sub par, along with arbitrarily delaying implementation of government touted better plans from going into effect until important election dates are long gone. IOW, nothing is being changed in the unpopular PPACA, only conveniently, and some say ‘unconstitutionally, delayed for political purposes. That is such an unmitigated crock of leveraging political power while crushing individual choice!

Democrats say they are the empathetic ones who ‘help’ people in need. IMO, they mainly help people stay in need, not doing much of anything to help people get out of their needy circumstances. Statistics prove this to be true, as poverty, middle class income levels, low-income unemployment and dependency on social programs have only worsened under the implementation of democratic ideology. Giving away money and ‘things’ to people, though, does not substantially lead to bettering oneself or even encouraging self-improvement, only cementing more dependency on others.

Finally, social progressive government may compassionately talk about ‘growing’ the economy, by leveling the playing field of income equality though their income redistribution philosophies. However, their impractical idealism usually tenders a greater number of rules, regulations and fiscal demands onto businesses that, in real time, discourages economic growth along with any significant higher paying job opportunities. The EPA, for example, has become especially powerful and tyrannical, under the current administration’s expansion of their perimeters, giving them an iron, unrealistic grip of influence to wield onto business, often times asking for upgrades that haven’t even been invented yet, that must be complied with in order to even stay in business. This is applicable to so many industries involved in manufacturing or yielding low-cost energy. Consequently, we have national policies encouraging business flight abroad as they raise the costs of living here at home.

It’s all crazy….

TastyBits March 9, 2014 at 5:25 pm

@jan

You still do not get it. Pop some popcorn, sit back, relax, and enjoy the show.

The PPACA is a white elephant for the Democrats. They can never kill it without admitting it was a mistake, but they can never implement it without paying a heavy political price.

If a Democratic president can extend the implementation, a Republican president can also. Which party is going to allow it to be implemented?

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