Income Inequality Is Horrible

pikettyIndian intellectuals cannot make rapid-fire abstract associations. I can’t think of exceptions, but I am going to illustrate my point. In The New York Times, Manu Joseph has a “review” of Thomas Piketty’s “Capital in the Twenty-First Century. This is a reasonably intelligent guy, but this is, again, the usual nonsense:

“Some nights in India’s posh pubs, a live band plays Frank Sinatra’s “My Way,” and the beautiful people on the floor make gestures of poignant glory, as though they were standing on the summits of self-made success after facing great odds and the song were a tribute to their own lives. It is reasonable to imagine the bartenders suppressing a fit of laughter.”

Now, read these two arguments:

“Capital in the Twenty-First Century,” by Thomas Piketty, keeps India on the margins, but one of the book’s important arguments illuminates modern Indian society — that the influence of inheritance, which undermines true merit, has not diminished with economic growth. Instead, it has risen.”

“Just being recipients of a healthy diet and good schooling has ensured that hundreds of thousands of Indians have had an unbridgeable head start over hundreds of millions. In India, nourishment and education have the same effects as material inheritance — a form of capital whose returns are much higher than the national economic growth.”

Isn’t it obvious that these two arguments cancel out each other? When the economy grows, the basic needs of a child are more likely to be met. So, how is it possible that the influence of inheritance is higher when the economy grows?

For instance, in 1950, many children were severely malnourished. In 2014, this is rare. Even leftist economists admit that virtually every family can feed its children if that were a priority. Is it possible that the family matters more in 2014, when virtually every family can keep the wolf away from the door? In 1900, the family had a far more important role. Most kids died before they turned five. Even in the US, in 1900, 30.4% of all deaths occurred among children aged less than 5 years; in 1997, only 1.4% of the deaths were among such children. This itself is a reason to think that family matters less when the economy grows. It is surprising that an experienced journalist missed this.

Now, read some excerpts from the reviews of some decent western economists/academics. It is not my intent to shame this dude. I am merely illustrating how intellectually coherent arguments are made:

“My impression is that inequality has decreased as large countries like China and India have gotten wealthier. But, of course, their real incomes could be growing faster than Americans’ real incomes and income inequality could still be increasing. Start with a per capita income of $2,000 that is growing at 8% per year in poorer countries and a per capita income of $30,000 that is growing at 1% per year in richer countries. One year hence, per capita income in the poorer countries will be 8% higher, which is $160 more. One year hence, per capita income in the richer countries will be $300 more, which is, obviously $140 more than $160. So the gap will have grown. It will take a number of years before the absolute gap falls. By the way, there is one quick way to make sure that global inequality of income falls dramatically: for the richer countries to allow in an additional 50 to 100 million immigrants a year. I would be interested in Piketty’s take on both of the above.

Porter asks a good question:

“Might inequality in the United States be less damaging than it is in Europe because the very rich were not born into wealth, but earned their money by creating new products, services and technologies?”

Porter was implicitly, I think, getting at an obvious point: that large rewards for innovation give incentives for innovation. The innovation will help hundreds of millions of people who will never be really wealthy: think of how you gain from a computer and a cell phone.

Here’s how Piketty answers:

“This is what the winners of the game like to claim. But for the losers this can be the worst of all worlds: They have a diminishing share of income and wealth, and at the same time they are depicted as undeserving.”

Do you see what Piketty did? He didn’t answer. Not only did he not answer what I think was Porter’s implicit point–the large social value of the incentive to innovate–but also Piketty didn’t even answer the narrow question asked: is inequality less damaging because many very rich people earned their money by innovating?

What did Piketty do? He made it about what the “winners” “like” to claim, not about whether the claim is true. Had I been Porter, I would have followed with something like the following: Regardless of what they would “like” to claim, is it true?

Picketty’s Dodge On Income Inequality, David Henderson

Piketty’s book is being praised for its scientific worth, but also because he argues that 

Since the 1970s, income inequality has increased significantly in the rich countries, especially the United States, where the concentration of income on the first decade of the twenty-first century regained – indeed, slightly exceeded – the level attained in the second decade of the previous century.

Well, I am surely totally mistaken, but isn’t this a wonderful argument for not caring that much about inequalities per se (vis-à-vis, for example, inequalities as the result of perverse incentives, exploitation, legal privilege or political intrigues)? Piketty reminds his readers of the poverty and destitution experienced by the masses in the 19th century, painting a Dickensian picture of those times. Whatever we may think of bankers’ bonuses, is today’s situation, in the Western world, really comparable?

Ramblings On Piketty, Alberty Mingardy

When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.-Lawrence Summers

I don’t know of any respectable intellectual argument for Piketty’s policy proposal. In the comment section of previous posts I’ve only run across one argument that is even logical, and it seems so preposterous that it would be laughed at by most voters. The claim is that lack of thrift is a sort of disease. So if twin brothers make identical lifetime wage income, but one consumes that income early in life and the other consumes the exact same income (plus interest) later in life, the thriftier brother should pay a higher tax rate, because the one that blows his income while young on BMWs, parties, travel, motorboats, etc., has a mental illness. They rely on Greg Mankiw’s reductio ad absurdum attack on utilitarianism—that tall people like Mankiw and me would have to pay higher taxes because we are born with “good” genes. Except they take it seriously. (Disclosure: I’m both tall and thrifty.) I can’t quite tell, but I don’t think these people are joking. I wonder what principlePiketty chooses to favor a wealth tax over a progressive consumption tax?-Scott Sumner

It’s pretty obvious from the intense reaction to Thomas Piketty’s new book that the progressive movement is currently more focused on the “cheek-by-jowl” inequality that blights New York, Miami and LA, than the (diminishing) inequality between the incomes of Iowa farmers and Punjabi farmers. Keynes spoke of poverty as being “ugly,” and I think that’s right, but primarily a certain type of poverty. Poverty juxtaposed with wealth. That grates on our sense of fairness, especially where the poor are obviously trying very hard (say California farm workers.) If you are a nationalistic conservative, you might not be bothered by income inequality, but might find cultural diversity to be distasteful.-Scott Sumner 

If this is a sweeping generalization, think: Can you imagine a single Indian journalist or intellectual making such arguments? If so, name him. I would like to read.

Post Script: When I woke up, I noticed that there were around 100 notifications on Twitter, and 100 comments below my article on Modi. When I read those comments, I felt that I should pay for their education. I keep telling myself: “Read very, very carefully, people. This is trickier than you guys can even imagine.” My point was that the liberal media and the Intellectuals are unusually biased against Modi. My point was not that the liberal media and the intellectuals are biased against Modi. What does that mean? It does not mean that the liberal establishment should leave him alone. It means that they should hold everyone up to similar scrutiny. I doubt whether anyone noticed, except Vipul Naik. 😛 

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