Beyond spite and envy…

Some of the best and brightest econbloggers are having a debate on whether there are negative externalities associated with wealth inequality, and whether these might merit government intervention to remedy. Unfortunately, the debate has gotten lost in a colorful, but unhelpful, discussion of “spite” (on the part of rich people) and “envy” (on the part of the poor). However entertaining this may be, it quite misses the point.

Very large wealth inequality has a huge, tangible negative externally in all existing political systems that has nothing to do with idiosyncratic emotional reactions. Wealth inequality leads to large, utility-destroying errors in public policy.

In the real world, under democratic capitalism, stalinist communism, feudal monarchies, you name it, there is a strong correlation between actual wealth and political power. (Under some systems this might be masked by differing institutions of wealth and property, but facts on the ground proved Comrade Stalin to have a nicer car than Comrade Sven.) Correlation is not causation: In some systems political power precedes wealth, and in others wealth brings with it the capacity to garner influence. Nevertheless, the relationship is strong, everywhere. The wealthy always have disproportionate political power.

Wealthy people — and I mean the best intentioned wealthy people, not the corrupt — make political decisions to improve the world as they see it. The greater the degree of wealth inequality, the greater the difference between the world those at the very top experience and the experience of the vast majority. This leads to errors in judgement, policy changes that improve the world the rich live in while harming the world that the not-so-rich inhabit, and very large utility losses when the not-so-rich are numerous. The best intentioned of the wealthy may try to mitigate this by reading, thinking about the less fortunate, etc. etc. But these exercises are a poor substitute for experiencing the world as most people experience it, and suffering the consequences of poor leadership directly. And power correlates with wealth much more than it correlates with diligence and skill in understanding the world beyond ones own experience.

Utility losses due to misguided generalizations of their own experience by the wealthy and powerful may be inevitable. But quantities matter. A society in which “the wealthy” represent a large fraction of the population who live not to differently from the less wealthy will make fewer and less costly errors than one in which a realtively small, very wealthy group lives very differently from the rest.

From the great spite and envy debate…


9 Responses to “Beyond spite and envy…”

  1. guest writes:

    Sorry, but your argument is inconsistent with published research. See ‘What Makes People Think Like Economists? Evidence on Economic Cognition from the “Survey of Americans and Economists on the Economy”.’

    From the abstract: “people think more like economists (1) if they are well educated, (2) if they are male, (3) if their real income rose over the last 5 years, (4) if they expect their real income to rise over the next 5 years, or (5) if they have a high degree of job security. However, neither high income nor ideological conservatism have this effect. My findings for education, gender, and income have close parallels in political science: on tests of objective political knowledge, the better educated and males score higher, controlling for numerous other variables, and the independent effect of income is minor.”

  2. guest writes:

    By the way, I should have included the proper cite:

    Caplan, B. (2001) What Makes People Think Like Economists? Evidence on Economic Cognition from the Survey of Americans and Economists on the Economy, Journal of Law and Economics, 44, pp. 395-426.

    See also:

    Caplan, B. (2002) Systematically Biased Beliefs About Economics: Robust Evidence of Judgemental Anomalies from the Survey of Americans and Economists on the Economy, Economic Journal, 112, pp. 433-458.

  3. David Wright writes:

    The general thrust of responses to Brad have been exactly the same as yours: that his spite and envy theory, whatever its sociological merits, is an utterly hoakey justification for progressive policy.

    My own contribution was to point out that what Brad calls spite is actually a positive externality, and thus should be encouraged by government policy. It’s the envy part, which Brad seems curiously dis-inclined to discourage, that is the negative externality.

    Others have pointed out other problems with his reasoning. Like the fact that, in a world with smaller inequalities, those inequalities could generate just as much envy as the larger inequalities do today.

    I must say, I don’t think your alternative justification for progressive policy is much better. While there is much debate about the appropriate level, there is obviously widespread support for some level of progressivity in government policy. Why is that? Perhaps we should all ask our friends for their favorite justification.

    I think that the justification, for most people, comes down to a notion of utility. Most people believe that the happiness an extra dollar gives a rich person is less than the happiness it would give a poor person. Of course, as an economic idea, the notion that one can objectively compare different people’s utilities is utterly discredited. But as a ethical idea, it still seems to enjoy great support.

  4. Guest — I’m not suggesting that wealthier people think like economists. I’m suggesting that wealthier people have experiences and concerns distinct from, say, very poor people, and that this affects their political behavior, even when they are doing their best to work towards a “greater good”. To cite a rather stale debate, it’s fairly clear that for wealthier Americans, taking into account comfort, privacy, and the opportunity cost of time, purchasing an automobile is a better value than paying high taxes for public transportation. For a very poor person with little capacity to monetize her time, the cost of purchasing and maintaining a car, paying a widely-shared, even non-progressive, tax might be win the cost/benefit analysis. Both individuals, thinking microeconomically and extrapolating their own experiences, would support different policy choices. Both policies would find the support of smart economists. But one group is far more likely than the other to have their judgements define public policy choices.

  5. David — Thanks for commenting. Can you tell me what you think sucks about my “alternative justification for progressive policy”? Do you think, as guest above seems to, that there is no difference in policy views that correlate with wealth? Or do you just find “standard” arguments more convincing?

    The marginal-dollar-is-worth-less-to-a-rich-person argument is the most common view in support of progressive taxation. But I wasn’t trying to argue for progressive taxation, per se. I was trying to suggest that a situation in which different groups have very different public-policy-sensitive interests, and in which a small group has disproportionate influence over public policy, is likely to lead policy choices that are utility-destructive in the aggregate (problematic as it is to try to add up everybody’s utilities), and that this scenario is a negative externality of wealth inequality. Do you disagree? I’m not trying to propose solutions, or support progressive taxation as an ideal “Pigouvian” remedy.

  6. David Wright writes:

    Steve: Thanks for responding. I don’t dispute that the rich have different policy objectives than the poor (duh :-)), nor do I dispute tha the rich have more political influence than the poor (also duh :-)). I merely dispute that these observations can be used to justify progressive government policies.

    The reason that I am sceptical that interventionary government policies can successfully be used to counteract the influence of the rich is that, precisely because of their political influence, the rich can hijack interventionary government policies. Thus we have a mortgage interest deduction that subsidizes a lot of luxury housing but can’t even be claimed by someone who pays less than ~$10K/year in mortgage interest. Thus we heavily subsidize public universities, which educate a lot middle-class children and very few poor children.

  7. David — I agree entirely with you. In fact, you are making (much more straightforwardly) the point I was trying to make all over again. Most “interventionary government policies” are, as you put it, doomed to error and subversion, so long as a relatively small proportion of the population has disproportionate political influence and dramatically different experience and interests than the vast majority. That precisely is the negative externality imposed by wealth inequality.

    Where to go from here is hard to say. Once wealth inequality takes hold, using government to address it is like telling a man with injured legs to walk to the hospital. If he can do it, he’s not hurt very much; if he is badly injured, the solution can’t work. The last time the United States faced serious wealth inequality, addressing the problem took a devastating depression, the threat of real sociopolitical upheaval, and a war that created a sense national unity and purpose. Today the problem is again real, and it is poised to get much worse. (Read Mankiw’s “spenders/savers” description of the (lagged!) effect of government borrowing on inequality, and think about the behavior of the administration he worked for.) As the group for which government is an effective agent becomes small, policy-related disutility increases, and normal economic and political competition gives way to uglier variants. That extreme inequality not an easy problem does not absolve us from having to address it.

  8. guest writes:

    Actually, most public choice theorists would agree that interventionary government policies (such as income redistribution) are doomed to error and subversion *period*. It has little to do with wealth per se – it’s a matter of small priviledged groups being more able to overcome collective action problems to the detriment of diffuse interests.

  9. guest — no argument there. concentrated wealth is just a special case of groups able to disproportionately influence policy in ways that may not be consistent with “the greatest good for the greatest number”. but in practical terms, it’s an important special case.

    policy may always be a sausage factory, but some sausage factories are more sanitary than others. privileged groups are a problem to the degree they are effective at manipulating policy, and the degree their interests differ from a diffuse “public interest” (again, a problematic notion). wealth concentration exacerbates both of these factors. small, very rich groups are more able to organize and manipulate policy than a large moderately affluent group. small, very rich groups are likely to have larger differences from the general public than a broad “upper middle class”.

    “good” policy can survive a lot of inequality, and that’s the American way. these things are matters of degree. it seems to me we are approaching some limits.