Mindblowing inequality isn't just unfair but inefficient! McCain needs an economics lesson. |
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Many people beleive that there had to be a trade-off between social justice and efficiency; that the persuit of the former will inevitably have to come at the expense of the latter. Yet, social justice and efficiency tend to correlate highly. Welfare efficiency and social justice are both perpetuated by redistribution. Those of you who have been reading me blog, already know that I am quite passionate about income distribution in this country - so you may already be familiar with the stats (CBO & IRS are the main sources for those stats btw). Also, note tham I am going to be on vacation next week, so I though I leave with something interesting. Since I just completed a rather big research project and the semster has just come to an end, you can look forward to a lot of interesting posts once I return! Now, let me explain why injustice and inefficiency correlate so strongly, First, let me explain social justice real quick: according to Miller (1999) it consists of three components: need, desert and equalty. Needs are just that: needs - in a just distribution of resoucres all basic needs neccessary for individual development are met; deserts are rewards for contributions to society - they should equal one's contributions, i.e. what you put in, is what you get out; equality here describes the idea that citizenship is to be distributed equally, i.e. no is to be degraded to the status of being a second class citizen. The distribution of household income in the U.S. lends itself as an example for why redistribution is necessary for the sake of efficiency and social justice. While inequality decreased during the Keynesian consensus when the top marginal income tax rate was set in excess of 70% (Wilson, 2002), the trend has since reversed. Between 1947 and 1979, while modern liberal fiscal policy was virtually unchallenged in the U.S. (Clark, 1998, pp. 98-102), the mean gross family income of the top 5% increased by 86%, compared to 99% for the top quintile overall, 114% for the fourth quintile, 111% for the middle quintile, 100% for the second quintile and 116% of the bottom quintile, compared to 81%, 53%, 25%, 15%, 9% and -1% between 1979 and 2005, respectively (Hartman, 2008). Figures for the pre-tax income distribution of households since 1980 were similar to those of families (Miller, 2007). According to Yellen (2006) in her Economics of Governance Lecture at the University of California, Irvine, since the 1970s "growth [in real income] was heavily concentrated at the very tip of the top, that is, the top 1 percent." In 2005, the top 1% earned roughly 20% of all gross household income, with a mean of $867, 800. The top 0.1% saw incomes in excess of $1.6 million and earned roughly 7.5% of all income. The top 0.01% earned 3% of all income (Saez, 2007). With a decline in tax rates the same trend has manifested itself in after-tax household income. Between 1979 and 2005, the top 1% saw its mean net household income increase by 176%, compared to 69% for the top quintile overall, and 29%, 21%, 17%, 6% for the remaining quintiles, respectively. In constant 2004 dollars, the absolute increase in mean income of the top 1% for this time span amounts to over half a million dollars, having jumped from $314,000 to $867,800 (Aron-Dine & Sherman, 2007). Meanwhile, "the bottom 60% of U.S. households earned only 95 cents in 2004 for every dollar they made in 1979" (Cypher, 2007, p. 120). Overall, since 1979, the share of pre-tax income of the top 1% doubled; the share of the top 0.1% more than tripled and the share of the top 0.01% almost quintupled (Saez, 2007; see figure 2). This allocation of resources is inefficient as significant opportunity costs arise. For example, the Bush tax cuts, which lowered the top marginal tax rate from 40% to 35.6% (Wilson, 2002), cost roughly $250 billion per year. As of December 2006, these cuts have cost $1.2 trillion and contributed to 51% of the deficit incurred by the Bush administration (Fielder & Kogan, 2006). There are other uses for these funds, however, from which society can derive more utility. Funding is desperately needed to repair the nation's ailing physical plant. In 2005, the American Society of Civil Engineers gave the U.S. infrastructure a grade of D. Drinking and waste water systems were graded as D-. According to the society, "congested highways, overflowing sewers and corroding bridges are constant reminders of the looming crisis that jeopardizes our nation's prosperity and our quality of life." An estimated $1.6 trillion will be needed in repairs over the course of four years. David Leonhard of the New York Times (2007) asked himself the question of "What $1.2 trillion could buy." A universal pre school program, doubling of cancer research funding, a global immunization campaign and treatment for every American suffering from untreated heart disease and diabetes top his list. Yet, by letting the very rich keep a greater share of the nation's resources, the Bush administration has foregone all of the benefits American society could have derived from a better infrastructure, health care and education system. Thousands of lives could have been saved had the Bush administration not lessened the redistributive effect of the American welfare state. Even if these tax cuts spurred growth, though that seems doubtful and skepticism among American economists prevails,[1] these benefits are likely outweighed by the harm imposed upon society by the large opportunity cost of letting the rich get richer (Price, 2005; Aron-Dine & Kogan, 2006; Gale & Orszag, 2003; Price & Ratner, 2005). The opportunity cost that result from not taxing the rich adequately and expanding social services violate the needs component of social justice and a widening disparity between the top 1% and everyone else violates the deserts component of social justice. It is easy to see how spending less on social service and infrastructure will result in a more uneven playing field and the failure to universally provide second generation rights. People need a sound infrastructure, education and other social services to live productive and fulfilling lives. If, however, the infrastructure deteriorates and many diseases, such as heart disease and diabetes, go untreated, not everyone's needs are met; violating the needs component of social justice. The violation of the deserts component can be illustrated by comparing the incomes of the most esteemed and highly educated workers to those of the top 1%. Both professors and lawyers are among the most admired professions in the U.S. - second only to physicians and a "department head in a state government" (Gilbert, 1998, p. 40). Both professions require intense and lengthy training and their ranks are commonly filled with the most educated 2% of adults (U.S. Census Bureau, 2008; U.S. Department of Labor, 2007ab). Yet, their median earnings fall far short of the rich. In 2006, the median income for a professor was $73,000, ranging from $59,000 for an assistant professor to $99,000 for a full professor (U.S. Department of Labor, 2007a). The median salary for a lawyer was clocked at $102,000 in 2006 (U.S Department of Labor, 2007b). According to these statistics the average household in the top 1% earns as much as twelve professors or eight lawyers combined. A household at the bottom of the top 0.1% earned as much as 22 professors, or 16 lawyers combined. The mean income of the 400 richest Americans in 2007 was $214 million (Herman, 2008); 2,931 times as much as a professor and 2,098 times as much as a lawyer. By contrast the gap between these highly skilled professionals and the median full-time, year-round employed worker, age 25+, who made $41,000 in 2006 and is most likely not a college graduate, is much smaller (U.S. Census Bureau, 2007a). Unless the difference in income between these groups is equal to the difference in contributions to society (which seems doubtful), the gaping inequality between the top 1% and everyone else violates the deserts as well as the needs component of social justice. So there you have it, undertaxing the rich leads to a gian waste of resoucres and injustice. But don't take my word for it; just condier that more than three quarters of economists have been reaching this very same conclusion for over 70 years. This is why most economists are Democrats and McCain, who supports making the Bush tax cuts permanent, is not likely to have many AEA (American Economics Association) and APSA (American Political Science Association) members behind him. Hillary might have blown part of her support among economists and political scientists with her idea for a gas tax holiday. Obama on the other hand, seems a wise choice. As usual, here are my references:
Notes: [1] See Tobin (1992) for an excellent critique of "supply-side" policy and Chait (2007) for a journalist covering economists' take on the Bush and Reagan tax cuts. Trackback(0)
Comments (4)
  written by CenterLeftLiberal, May 30, 2008
"I have never been a 1-percenter myself, but I know a few and they have earned their money by hard work and long hours and are extremely generous with it."
I am talking about people w/ 7-figure incomes (less than 1% of the population actuall). In a society where a fireman usually earns $60k & a physician $150k, no can EARN over a million. True, there is inefficiency in govt. depts. as there is w/ large corporations; both are buraucracies and can be difficult to deal w/ (I have some bad experience w/ customer service at AT&T for example). Yet, social security does manage to keep millions of seniors out of poverty (50% would fall into poverty w/o the SSC checks comings; vs. only about 10% currently). I have lived in Germany and remember their universal health care system (which is actually not nationalized) - there was far less paper work and virtually no red tape at all. All I as a patient had to was go to doc of my chosing, get the the treatment I need and give my insurance card to the receptionist beforehand. The govt. made sure that my insurance covered everything and keeps cost down (look at the cost of health care in Germany vs. the U.S.; the get the same care as we do here for a lower price). Thank you acknowledging my good intentions, but have to insist that these millions of dollars currently being allocated to a few individuals could be put to better use. To use my rhetorical question, what is a better use of $1 million, giving to to someone who already earns $5 million a year, or letting the state spend it on education or infrastructure? U.S. history has shown that high tax rates on the top 1% don't affect growth very strongly (even if I tax earnings above $1 million at say 50%; investors still stand to make huge earnings). Even if you call the govt. a middle man; running a society is not the same as a business - in some cases the middle man (govt.) can acutally improve things (evidence clearly indicates that govt. successfully reduces poverty AND mortality). I also doubt that "Many professors go from student to professor and try to teach economics to other students without having participated in the very economy." Becoming a professor is not easy: it is extremely competitive (look at the low percentage of tenure & full-time employment among CSU or UC faculty). I think one of the big disagreements between the two of us is the role of "bookknowledge." I think public policy is the kind of issue that is best decided by taking empirical evidence into consideration; by learning the macro-micro theories and then seeing how all the different agents (including govt. preform). As you might now, I used to be a libertarian myself, until I actually did just that. Once I learned all the economic theories and took the best evidence and observations into account, I could not longer adhere to a laissez-faire doctrine. The theories and empricial evidence unambigously suggested to me that govt. can in certain cases (note that I'm only calling for internvetion in a few instances) can improive efficiency and improve upon the market determined allocation of resources. report abuse
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 written by Glennsopinions, May 30, 2008
I think you may not like the 7-figure incomes because of the bad press that several CEO’s have received for raping a company and leaving with big severance packages. There are now a few of them in prison also for their actions (Enron, World Com). 99% of CEOs are good people.
If a person, a doctor or a fireman is not happy with what they are getting paid, they can do what many do. Go elsewhere. If on the other hand, the fire department or the hospital cannot find anyone to fill those positions, they will have to raise the pay. If you don’t let the market work that way, then you are artificially holding down wages. As a side note, some like to say wages are stagnating. When I run the numbers, the position I first began in pays about the same as it did 40 years ago, so that wage has stagnated. But what did I do? I worked hard, was promoted, had to move to different areas but I increased my salary. When I retired, my finishing wage was probably the same as someone else in that position 40 years ago when adjusted for inflation, but was I stagnating? I also made some wise investments. People let themselves stay in the same position year after year after year will not markedly see their wages improved, even if forced by legislation. The worker must have initiative to move up for that to happen. And yes, they sometimes have to move to another area of the country to improve. The Native Americans use to do that, sometimes thousands of miles, but somehow, here in modern times we now believe that the “game” should come to us rather than us seeking out the “game”. But that’s another discussion. I will never endorse anyone stepping in and assigning comparative worth to a job. Let me tell you about a friend of mine. You would know the name. You would know the company. He earned about $55 million in 2007 (8 figures) and he gives much of that away. That right now must make blood shoot out of your eyes but let me finish. He was named CEO of his current company at the annual rate of $1.00 (one dollar) per year. The company had just filed chapter 11 when he began and he express doubts to me if he could bail this one out it was so bad. His earnings are tied directly to how much the company would earn. If the company did not make any money, he was not going to either. This was quite a bit of stress on my friend. His brown hair turned gray and began to fall out. But he recovered and so has the company. This company had nearly worthless stock and now it peaked as high as $192 per share before settling back recently at $102 recently. This company employed 211,000 people at the time he took over. There were some layoffs, but now after the recovery, it now employs 315,000 people. The average wage in this company is $18.38 per hour. Had the company failed, probably the other companies that would have taken over existing units would not have picked up ¾ of those 211,000 people. This company pays out about $11.5 BILLION dollars in annual payroll plus about $124 MILLION in benefits. His salary accounts for just .45 percent of their total payroll expenditures. And how much in income tax did he pay that he otherwise would not have? (About $12 million in federal and state income taxes after deductions like for charity). You many not think he is worth $55 million per year, but I bet I can find 315,000 people who would disagree with you. (Of course, he will earn less this year because of lowered company earnings, but guess what. The employees all get a cost of living raise). A lot of Lakers fans would probably debate you on Kobe Bryant also. Extremes everywhere. May I suggest some reading? “Where Have All the Leaders Gone” by Lee Iaccoa? Available on Amazon.com. Hmmm, with some revisions, this might make a pretty good post on it’s own. Center, you are an interesting person, and I apologize for letting my temper go awry some weeks back …… If we ever meet up, dinner is on me. Cheers. report abuse
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written by Glennsopinions, May 30, 2008
One final thought before I go for a few days again ... You mention that government has inefficiencies as do some businesses.
A government that is inefficient and needs more money to survive, just raises taxes. A business that is inefficient and needs more money goes out of business as they can't raise prices and remain competitive. report abuse
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I have never been a 1-percenter myself, but I know a few and they have earned their money by hard work and long hours and are extremely generous with it. In fact, they are the ones I go to on an annual basis for donations to Veterans issues and they are very, very, very generous but they also target their donations according to their individual preferences.
In business, we always strive to eliminate costs and inefficiency in the system. One of those extra costs and inefficiencies is the middleman. This is one reason why all your major retailers have their own massive distribution centers as opposed to using an independent wholesaler. It is more efficient.
You are advocating that the government become a bigger “middleman” when it comes to telling the rich how to spend their money. Look at the huge bureaucracy that we have today that takes three times the resources and does half the work that private business does. You think government is efficient? Have you ever dealt with government regulations while operating a business? Have stood in line at the Post Office (no it is not entirely privatized and is subsidized by the US Government). Have you been to the DMV, Social Security Office, Department of Social Services, and Department of Veterans Affairs? Have you dealt with any of these departments? If you waited in line at your local retailer like this, you would shop somewhere else. But there is no competition and we have to deal with this. I can only imagine universal healthcare. I qualify for VA healthcare, but I buy my own so don’t have to deal with it. In my own way, I feel it leaves more for those who can’t afford their own.
The 1-percenters give huge amounts of money to private charities. It does a lot of good, In the case of our Veterans; the money is used to help those in need while we are navigating the government red tape. Eliminate the tax deductions, take the money for government use and you will see such charities dry up and we will have an even more severe problem.
Many professors go from student to professor and try to teach economics to other students without having participated in the very economy they are trying to teach about. Can you imagine teaching about brain surgery without ever being in the operating room? Or teaching about being an airline pilot without ever flying one?
I believe you have a good heart and I sincerely hope you are not going to be one of those.