How Important Is Inequality?

My post last August on “Inequality Talk is About Grabbing” got 215 comments, which may be a record. In that post I tried to explain why most inequality talk focuses on the small part of inequality that is financial inequality at a given time between the families of a nation. I suggested that the reason is that we think we could grab lots of money from the rich without much pain to the rest of us.

Recently Piketty’s book has induced lots of folks to express deep concern about the same sort of inequality. Piketty says rising inequality is due to owners of capital getting higher returns than the economic growth rate, and recommends taxing capital. Yes that would greatly reduce the total amount of capital in the long run, and therefore also cut future wages and wealth, but gosh darn it inequality is harmful enough to be worth paying such a huge price to reduce it. This is a crisis and something must be done! So say Piketty’s loud chorus of fans.

But consider what a more expert source says is the real reason of rising (between-family within-nation at-a-time) inequality:

In summary, the authors attribute the growth of household inequality to three interacting forces. The first is rising returns to education. Earnings across educational classes have become more polarized. The second factor is increased positive assortative mating. People with similar socioeconomic backgrounds tend increasingly to marry each other, exacerbating income inequality. Third, the increase in married female labor force participation has heightened inequality, and has also made women’s earnings an increasingly important determinant of household income inequality. (more)

Do you think those who thought rising inequality was a crisis justifying our destroying lots of long run capital also think it important enough to justify reducing education, assortative mating, and female work, if those are the causes? Yeah, me neither. And that’s what you’d expect if grabbing is more the motive here than cutting inequality.

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  • Doug

    Ask anyone on the street about policies that reduce inequality by making everyone poorer, but with the rich losing slightly more than the poor. Who would possibly support such ideas? Only a maniac or someone with highly out of the norm values.

    Yet Pikkety and others campaign against inequality solely for inequality’s sake. Pikkety claims that the r-g differential is bad in and of itself, regardless of the levels of r and g alone. His objective function has a negative weight on inequality alone. By simple math there is some subset of the above purely destructive equalizing policies that he must favor.

    This demonstrates that there’s a clear distinction between caring for the poor, and caring about inequality. Those deeply concerned with the poor may support policies that make the poor better off, even at the expense of making the rich much worse off. Those policies may even have a side effect of reducing inequality. But only inequality crusaders would support a purely destructive equalizing.

    • IMASBA

      “Ask anyone on the street about policies that reduce inequality by making everyone poorer, but with the rich losing slightly more than the poor. Who would possibly support such ideas?”

      You would if you answer “no” to the following question: “Would you move from a free country to a crime ridden, corrupt military dictatorship for 10% more personal income?” But considering the Swedish economy functions well there’s a whole lot of wiggle room (if you take the US as the reference point) before reduced inequality begins to chip away at total wealth or the wealth of the poorest.

      Money = power, that’s the moral of the story people like Piketty are trying to tell. You think it doesn’t affect you if fabulously rich people receive an increasing share of your nation’s total income? Wait until they own all the hospitals and decide for you if you can have an abortion or not or wait until they provide 99% of the donations of homeless shelters and make those shelters adopt a policy where only homeless of a certain religious faith get offered help, or wait until they own pretty much all the real estate in your town and can force you to pay absurd amounts of rent. And oh yeah, whenever a start-up has a good idea they’ll crush it in its infancy. Even Adam Smith warned about this.

      • Doug

        Sweden isn’t a good comparison to the United States. Sweden’s a highly homogenous, highly cohesive small Northern European country. Sweden’s best highly capitalist counterpart is Liechtenstein. (Incidentally when counting the House of Liechtenstein that country has the highest wealth gini coefficient in the world).

        And look, Liechtenstein’s GDP per capita is nearly three times Sweden’s. (Incidentally they also have a much lower crime rate, putting the lie to the notion that inequality creates crime). Furthermore relative to its size Liechtenstein has many more people trying to move there than Sweden.

        Your dreaming of some sort of steam-punk fantasy that has no basis in reality. The most highly capitalist nations, Liechtenstein, Hong Kong, Singapore, Monaco, aren’t hellish theocratic nightmares, but the more desirable pieces of soil on this planet.

      • IMASBA

        Monaco and Liechtenstein aren’t countries, they’re banks/casinos with a piece of land around them.

        Sweden is a proper country with a population in the millions. i don’t quite know what you mean by “homogenous”. Sweden has a large population that can’t exactly trace its ancestry to the vikings. Germany and the Netherlands, and hell, even Canada are also more equal than the US

      • TGGP

        Sweden’s population is about 80% Swedish. The largest other ethnic group is Finns, who are roughly 3% of the population. Compare the United States, which is about 16% hispanic and 13% black, without the white population having any single country of origin providing a clear majority. In terms of size, the U.S has a population over thirty times as large as Sweden, and of course distributed over a much larger area. The U.S is a rather unusual country, and hard to compare to others.

      • IMASBA

        The US counts people a bit different from everyone else. When a Swede has 3 grandparents who were born in Sweden and 1 who was born in Spain they would definitely call that person a Swede. An American with a single “brown” grandparent is called hispanic or black and that is then meant to distinguish them from some mythical mainstream white American. If Afro-Americans haven’t become Americans in the centuries that they’ve lived there and if people who are indistinguishable from English or Germans are registered as “hispanic” then your definitions are meaningless.

        A true American divide exists between the cities and the those outside the cities. Btw. why do Americans seem to have such a problem believing a country is doomed to have many social problems when not everyone is of the same skin color? Are Americans even aware of the huge ethnic diviersity of Canada and Australia, the gaping cultural divide between Flemish and Walloon Belgians or that 5% of the German population can trace the majority of their family lines back to 20th century Turkey?

      • TGGP

        There is the historically self-fulfilling “one drop rule” for blacks, hispanics are a more complicated story. It is not an official race, but rather the only official ethnicity (I guess not hispanic is the other catch-all). The official rule for qualifying as hispanic in the U.S though is just whether you personally identify as one (Tony Mendez is an example of someone who does not even though his father was Mexican).

        Canada is somewhat diverse, but it (like Australia) has a merit/skills-based immigration system. It tends to get more high-earning asian immigrants. America is importing poverty. My understanding is that Turkish Germans do tend to be poorer than average, but they’re only about 4% of the population. And it’s not just in America where ethnic groups may differ in socioeconomic outcomes for very long periods of time, Greg Clark’s recent “The Son Also Rises” has a lot on that (although ethnic homogeneity doesn’t negate his findings since he analyzes families). Even things like the racial divide in incarceration are not unique to America, as Julius Uzoaba has pointed out.

    • Code Name Cain

      I haven’t read the book but from everything I’ve heard, including a lecture on the book by Piketty himself, Piketty views the r-g differential as bad not in and of itself but because it contributes to creating an oligarchy. Those who have the most wealth will use that wealth to influence politics and to further stack the deck in their favor.

      In short, Piketty views inequality as bad for democracy and social mobility. If that’s true, and it seems likely to me that it is, then redistribution is something that we should consider apart from its first order financial impact.

      • RobinHanson

        And should we also consider reducing education, assortative mating, and female work?

      • IMASBA

        Is the plight of a banker receiving a few million $ less per year really comparable to that of a woman who is told she’s not allowed to have a job just because she’s a woman? Also I’ll bet you female work has much less of an impact on the huge income difference between the richest and poorest members of society.

        Or let me reverse your argument for you: if more inequality is a good thing then why stop at barely taxing capital, why not consider have slavery, that’ll get inequality going really well? Then again parts of your EM scenario are basically slavery…

      • brendan_r

        -You’re talking morals; “plight”. Robin’s talking efficiency.
        -You’ll “bet us”? Well argued.
        -Robin never said inequality was a good thing. Strawman; point-missing.
        -Slavery? Hitler too?
        -How many times does Robin need to say his EM analysis is purely about prediction?

        You’re becoming a troll.

      • IMASBA

        I was demonstrating Robin’s fallacy: “if you’re not willing to do horrible thing x to solve a problem then you shouldn’t use much less horrible thing y either”. And he basically makes up that x would make more of a difference than y.

        I’m talking utility and utility takes into account plight. Robin literally said less inequality than there is today would lead to reduced purchasing power for the poor.

      • brendan_r

        No, he said: higher taxes on capital today>lower growth>lower future wages.

        OK, so let’s grant that banning assortative mating and female work is much worse than 80% cap gains rates.

        But we regularly nudge things we don’t feel comfortable banning. And we nudge based on moral intuitions.

        My bro is a perfect SAT score physicist who used to date regular girls in high school. During/after grad school he’s dated only surgeon track med students.

        Does this concentration of genetic endowments outrage anybody? It ought to outrage a consequentialist.

        Remember, there is a symmetry to this situation in the left half of the bell-curve.

        This situation is simple enough that after it’s pointed out to people they’ll admit that it increases inequality dramatically.

        But they won’t feel outraged. Why selective moral intuitions about inequality?

        Anyway, I dunno if Robin’s right. But you miss his point entirely.

      • Code Name Cain

        While I don’t believe we should do those things, I also don’t believe they are the primary driver of inequality.

        However, let’s suppose those things are what’s driving inequality. So what? If inequality is undermining democracy it would still be wise to take steps to reduce the financial differences between parties even if the way those differences were achieved were just.

      • Stephen Diamond

        Inequality talk isn’t only about grabbing; it’s also about insult to status. Insult to status is a disutility. How huge, I think you’d agree, is typically underestimated.

        The reason to level status by leveling wealth rather than restricting opportunity is very simple. Surely you would have seen it weren’t this an area where you are deeply biased. Your suggestions impose additional status insults.

      • Doug

        There’s much less economically costly ways to level status than redistributing wealth. Female beauty disparity probably produces as much if not more status inequality as all wealth inequality. Women famous for being beautiful are universally of higher status than women famous for being rich. Passing laws requiring women to wear modest dress and refrain from beauty highlighting makeup (much like how the Amish appear) and clothes would lessen the impact of this status inequality.

        This would almost certainly involve much less economic deadweight loss than taxing capital. Yet we see next to no support for this type of policy. That’s because unlike wealth redistribution it doesn’t involve any grabbing only leveling.

      • IMASBA

        I wasn’t aware there are supermodel PACs lobbying to only have healthcare and education for beatiful people… Money has a much closer and stronger correlation with power.

      • Doug

        Really? When was the last time a person of significantly below average attractiveness one national office. Look up statistics about how frequently the taller candidate (one of the prime markers of male attractiveness) win elections. Read studies about how biased interviewers are towards more attractive candidates. Hell, just look up history, how many times did women find themselves in position of high power or influence when their prime qualification was their beauty.

      • IMASBA

        The difference is just much smaller. An average looking person can become president, beauty alone doesn’t get you that much further and beautiful people don’t organize politically.

      • Stephen Diamond

        You simply ignore my (obvious) argument that behavioral controls themselves inflict status injuries. (Think Moslem veils, since large indignities make the point more clearly.)

      • Doug

        Taxing capital and wealth is also a form of behavioral control. It alters the economic decisions people make. Why does taxing or regulating dress constitute a “status injury” but taxing or regulating capital does not. Do you have a justification beyond a gut sense that controlling people’s personal dress is just plain wrong?

      • Stephen Diamond

        Taxing wealth is much more impersonal. Do you see capitalists appearing humiliated by taxes?

        Without that “gut sense” that regulating personal dress to diminish personal attractiveness is an insult to status (and generally, without a sense of what is an insult to status), it’s simply impossible, given present knowledge, to comment or theorize about status-related matters. It shouldn’t be a purely personal sense–here we have the mass reaction to the Muslim veil among people asserting their dignity.

        Have you considered that you might not grasp the grievances related to inequality because you lack a “gut sense” of what constitutes indignity? (Same for Robin.)

      • IMASBA

        “In short, Piketty views inequality as bad for democracy and social mobility.”

        Yup, that’s precisely it and he really isn’t the first to say that.

        Redistribution for the sake of redistribution actually doesn’t even have to be the government catering to special interests groups (the government giving the money to people who meet politically interesting conditions), it could simply take the form of a basic income or education and healthcare budget, pretty much leaving the free market intact even though huge sums of money are transferred.

    • TheBrett

      Ask anyone on the street about policies that reduce inequality by making everyone poorer, but with the rich losing slightly more than the poor.

      Did the confiscatory top tax brackets of the 1950s and 1960s make everyone poorer to an undesirable degree? No, they didn’t. You’re vastly over-estimating the importance of the truly massive returns available on capital income and regular high pay towards greater gains in productivity and economic growth overall, assuming it’s important at all.

      • Doug

        You’re arguing against a point that my original post didn’t make. I never mentioned any specific tax brackets or the elasticity of labor or capital. My point was much simpler.

        If you care about inequality for inequality’s sake, there are certain hypothetical policies you must support that make everyone poorer, but in an equalizing manner. Note that this doesn’t mean you’d support any destructive equalizing manner. But for any and all people who care about inequality in and of itself, there is a non-zero amount of overall destruction they’d accept to bring about a fixed reduction of inequality.

        Many people might support reviving 1950s tax rates and not be inequality crusaders. The issue isn’t about tax rates, the issue is that a value system that supports reducing inequality for its own sake produces absurd conclusions.

      • TheBrett

        If you care about inequality for inequality’s sake, there are certain hypothetical policies you must support that make everyone poorer, but in an equalizing manner.

        I don’t really care about inequality for inequality’s sake. I can think of other areas where there is inequality of income and I don’t really care (like in professional sports), because it’s basically harmless. I care about it in the broader nation-wide sense because I think it has negative political and social consequences.

      • Doug

        Yet can you show any firm evidence that increasing inequality *causes* any negative social consequences? Or do you just take such belief at face value because it validates your ability to look like a caring, altruistic, concerned citizen?

        All human civilizations throughout history have lived with high levels of inequality, most much higher than modern Western societies. Even in primate troupes its observed that a small clique of members usually controls a disproportionate amount of resources. Inequality, of power, wealth and status, seems quite necessary, at least at some level for normal functioning of human society.

        On the other hand attempts throughout history to seriously and forcefully reduce inequality frequently lead to widespread destruction and loss.

      • IMASBA

        “But for any and all people who care about inequality in and of itself, there is a non-zero amount of overall destruction they’d accept to bring about a fixed reduction of inequality.”

        Yes there is, what’s the problem with that? Of course I’m willing to give up a portion of my income to have less crime, corruption and more of a democratic voice and more social mobility.

        “the issue is that a value system that supports reducing inequality for its own sake produces absurd conclusions.”

        As does the opposing value system, you just have to avoid taking things to the extreme: no one hear is arguing for a 0.0 gini coefficient.

    • Stephen Diamond

      Ask anyone on the street about policies that reduce inequality by making
      everyone poorer, but with the rich losing slightly more than the poor.
      Who would possibly support such ideas? Only a maniac or someone with
      highly out of the norm values.

      To be clear, I don’t favor abstract equality for its own sake, but I still want to point out that your analogy is misleading: it conflates loss aversion with egalitarianism.

      If you ask the man in the street whether he would favor egalitarian policies that made everyone’s future less rich, I think many sane people (whom I nevertheless disagree with) would trade future social wealth for greater equality. (They’re called populists.)

      • Doug

        Fair point.

  • ckp

    >Do you think those who thought inequality was important enough to justify destroying lots of capital in the long run also think it important enough to justify policies to reduce education, prevent assortative mating, and keep women from working? Yeah, me neither.

    I’ve heard the assortative mating one argued, at least.

  • Stephen Diamond

    My understanding of Piketty’s thesis (based on secondary sources) is that he would deny that taxing capital reduces growth. He argues from a Keynesian, demand-side perspective, where increased aggregate demand is the long-term determinant of growth. (I suspect that to a demand-sider, your trickle-down supply-side economics would appear equally absurd. It doesn’t seem an easy question.)

    If he slights the supply side, you have never (to my knowledge) even gestured toward the demand side.

    • rob

      Demand side arguments for long run growth can only possible make sense if you are arguing that countries are usually demand constrained, which unless you are talking about Japan for the last 20 years is an extremely dubious proposition.
      Demand policies are about short run fluctuations, it makes little sense to bring them up when talking about economic growth. In addition given that the federal reserve is properly doing its job, then nothing matters for demand side policies to begin with as the fed should offset any changes.

      • Curt Adams

        Concentration of wealth creates a profound and chronic demand shortage, because the extremely wealth simply can’t spend what they have. Money is based on exchanges of favors and goods; when some of the actors no longer want the favors but just a big pile of money the system breaks down. Even in countries where there’s not much concentration of wealth on an individual basis, you get the same effect from concentration of wealth on a corporate basis.

      • brendan_r

        Inequality has *NOTHING* to do with aggregate demand.
        -NGDP is way too volatile to be explained by inequality changes
        -Ex: US 1970’s
        -Ex: Japan’s abrupt shift from high to low NGDP growth mode in 1995
        -Also, changes in NGDP growth/variance modes are almost always associated with monetary regime changes; not changes in inequality.
        -Ex: Many countries adopted 2% inflation targets in early 1990’s, and saw an immediate, and permanent response

        The inequality reduces AD argument is pathetic.

      • Stephen Diamond

        That underconsumption diminishes aggregate demand is a basic Keynesian assumption, and it represents the economic mainstream today.

        The question is whether in the long-term prospective aggregate demand is the driving force of economic progress.

        The theory that backward countries don’t develop because they are socially unable to elevate the standard of living of the masses is alive and well. It seems the only way to make sense of the basic historical pattern that countries unable to elevate the standard of living of the masses because of social/political reasons (e.g., a society dominated by rich landowners) don’t develop–why economists insist that land-reform (for example) is a vital part of development effort.

        Put simply, capital doesn’t look to expand (in the long-term) without the prospect of an expanding consumer base.

      • TGGP

        “Keynesian” economics is not the economics of Keynes. Keynes arguably believed in long-run problems caused by excessively high interest rates (anything above zero, according to Meltzer’s interpretation), but mainstream “Keynesian” economics treats aggregate demand as merely posing problems for the short run. Nominal prices should adjust in the long run. More recently some folks have discussed the possibility of “secular stagnation”, but that’s hardly textbook “Keynesianism”.

      • brendan_r

        You swapped under-consumption for inequality.

        Do you accept the rate of NGDP growth as a proxy for AD? If so, then explain how inequality accounts for the dramatic shifts in NGDP I described.

        NGDP was extremely high and variable in the 1970’s. Was inequality oscillating all over the place? Did Japan get hit by an inequality shock in 1991 and 1995?

        I’m not an economist, so I’ll leave the theory alone. But there’s some basic empirical facts that shatter the supposed inequality-AD link.

      • Stephen Diamond

        You can’t “shatter” the inequality-AD link without understanding the economic theory behind the claim (or at least, relying on those who do understand it).

        The under-consumption/inequality link is a basic Keynesian claim.

        Underconsumption isn’t the only factor influencing growth, and in the short term, it isn’t often the dominant one.

        Robin is an economist. Why does he never say anything about Keynesian claims? Does he think he can simply ignore them (or rely on his followers to support him based on wikipedia)?

      • brendan_r

        That country NGDP growth modes regularly and abruptly shift by huge amounts, precisely when their Central Banks adopt new policies is strong evidence that AD is not driven primarily by real factors, in the long-run. That NGDP between 1985-2007 remained in a 4.5-6.5% range, as the Fed preferred, even as inequality as soaring, is more strong evidence. I’ll worry about theory where data is messier and less conclusive.

        I prefer not to talk about what different camps think about X, because I’d rather focus on the specific, but I think you’re flat wrong that mainstream New Keynesians think AD and inequality are linked. People like Stiglitz do. Krugman criticized him for it.

        Robin doesn’t say much about Macro period, not just Keynesian macro.

    • Ben Southwood

      Which Keynesians believe aggregate demand is important in the long run?


    Robin you disappoint me here. You bluntly state that taxing capital more than it is taxed now leads to less total capital, while this is by no means certain, especially given how little capital is taxed today in most of the developed world (especially when you look at effective taxing). You then go on to just assert that less total capital automatically means less purchasing power for the poor and middle class. I wonder what you would say to someone who reverses your argument: “taxing labor means less total labor which is bad for purchasing power”.

    I cannot believe you seem to think income inequality in the developed world is primarily something between the upper middle class and those below them. That may be true for select countries in Northern Europe but it is definitely not the trend, especially not in the US where inequality is massively fueled by the extremely rich. Particularly the share of total income going to the richest 1 percent and 0.1 percent has gone through the roof and that cannot be explained by doctors increasingly marrying others doctors instead of nurses. No, it has much more to do with someone making millions off of investments paying a lower tax rate than a minimum wage employee.

    Why inequality is important, even if the poorest boats rise a little, is something Piketty answered in one of his interviews (I believe it was for Foreign Affairs): economic inequality means inequality of power (political and otherwise) and that leads to less freedom for the masses and ultimately an oligarchy that will damage society (by reducing social mobility, locking down innovation, increasing crime). That is by no means a novelty view, I’ve had the same view for years as has have some real “expert sources”.

    • Doug

      “economic inequality means inequality of power (political and otherwise) and that leads to less freedom for the masses and ultimately an oligarchy that will damage society (by reducing social mobility, locking down innovation, increasing crime).”

      Is there any evidence that a concentration of political power leads to any of these things? Less freedom for the masses? In Western society drug and prostitution laws are most highly supported by the lower classes, whereas legalization is most highly favored by the rich and educated.

      Reduced social mobility? Greg Clark pretty much demonstrated that inter-generational social mobility is invariant across political systems. Feudal Europe, highly capitalist 19th century Europe and modern day social-democratic Europe have the same inter-geneational social mobility (about 0.8-0.9 correlation).

      Locking down innovation? At the very least the wealthy have much higher savings rate than the rest of the population. Since investment is a necessary perquisite to innovation, the default conclusion would be that higher wealth concentration leads to a faster innovation rate. Unless there’s concrete evidence to the contrary there’s no reason to disregard this basic economic conclusion.

      All of these things people are linking to inequality, they’re linking with very little thought, consideration or evidence. The logic simply seems to be A is bad, and B is bad, therefore A probably leads to B. No where do most people even making these arguments even entertain, let alone evaluate, they contrary hypothesis of inequality producing positive social outcomes.

      • IMASBA

        I don’t which studies you’ve been smoking but it’s pretty established that inequality affects social mobility. In another comment you criticized a person for pointing out personal experience with poverty and ineqaulity matters. I think you should gain some experience and then see if you still wonder whether (high) inequality has negative effects on society. As a European who received state-subsidized higher education to climb on the social ladder I can guarantee you that things are different than they were in feudal times.

        I do not understand why you think only concentrated investment through shareholding leads to innovation: when I buy a computer do I not give money to people who make computers, allowing them to innovate?

        P.S. Piketty’s larger point isn’t about current inequality, it’s that left to its own devices inequality continues to grow and can reach ridiculous levels.

    • Ben Southwood

      Capital is taxed pretty substantially in the developed world (income tax on dividends, cgt, corporation tax, income tax on savings interest) especially when the optimal tax on capital is probably close to zero.

      • IMASBA

        in the case of corporate it’s at the very least sketchy to portray that as a tax on capital (it could simply be forwarded to the employees or consumers, at least in part). Taxes on dividends are ridiculously low and of course there’s a double Irish-Dutch sandwich among other options making effective tax rates really low compared to taxes on labor or for that matter the taxes on capital that ordinary people pay.

      • Ben Southwood

        1. It definitely doesn’t fall on the consumers. It does fall substantially on employees, about 55% according to the average empirical study in a literature review I wrote ( That number isn’t great because most papers out there don’t give an easily identifiable number, and because many top theorists question the validity of the methodologies (and point to a higher burden on capital). But 45% is substantial, and since quite a lot of corporation tax is received by treasuries around the world, a fairly big burden is borne.

        2. In your original post you said capital taxation was “low” which is debatable. But comparing it with labour income taxation is a whole different issue because much (I think most) capital is bought with labour income (i.e. not inherited). Thus when you are taxed on its income, you’re being taxed twice. An illustration of this principle can be found (also see the comments for some interesting debate)

        3. I think this is the best introduction to the principles of optimal taxation, if you’re interested in the subject

      • IMASBA

        “It definitely doesn’t fall on the consumers. It does fall substantially on employees, about 55% according to the average empirical study in a literature review I wrote”

        I wouldn’t know, I think it can’t really be measured without having a second Earth to experiment on. None of it matters though when there’s tax havens, ample deductions money moving tricks (like the sandwich).

        “since quite a lot of corporation tax is received by treasuries around the world, a fairly big burden is borne.”

        It’s only several percent of GDP in most countries and that contains a lot from small businesses.

        “(I think most) capital is bought with labour income (i.e. not inherited).”

        Most capital is made from existing capital (inheritance is only one of multiple ways for that). Sure someone once made a hand-sized snowball through labor but most of the giant snowball crushing villages as it rolls down the hill at terminal velocity did not come from that hand-sized snowball. Progressive taxation would minimize taxing ordinary people’s saving accounts.

        “Thus when you are taxed on its income, you’re being taxed twice.”

        You’re taxed on the income derived from capital, so you get taxed just once on every bit of income. Note that spending your money n something else also leads to additional taxes being paid by someone.

      • Ben Southwood

        I guess there’s a Hansonian point here to be made questioning why non-economists believe themselves so easily able to reason about economic questions with very little expertise. Some of these points are economic consensuses.

  • Robert Koslover

    Never underestimate the collective power of envy. I think this old Twilight Zone episode may be relevant to your question:

    • IMASBA

      Is envy really always a bad thing? If people perceive an unfairness in the reward/punishment system doesn’t that give them the right to envy those who receive the rewards?

      Abusing the negative connotation people have with the word “envy” is abusing the “farmer values” (as Robin would put it) of those people to get them to do your bidding. I guess not really different from a bronze age leader who invents a sky god, who sends people who envy others to hell, to justify his lavish wealth while his people toil and starve. Foragers would never put up with such BS, so the foragers were exterminated but now there values are cropping up again en masse.

      • Robert Koslover

        Just to clarify: Yes, I know it’s a fictional example, but in regard to the Twilight Zone show I cited, do you feel that the Government (that is, in the story) was justified in the socially-equalizing actions that they took? If not, then how about if they had been less extreme about it, such as (for example) merely amputating one of the child’s limbs? Or perhaps something else? For example, perhaps the young lad should be denied admission to a good school so that someone less-qualified could go instead? Am I wrong to suspect that this last option would sound especially appealing to you? I mean, it’s all in the interests of fairness, right?

      • IMASBA

        “Am I wrong to suspect that this last option would sound especially appealing to you?”

        You are wrong. It’s not about total equality in all aspects, it’s about the negative results of inequality. Financial inequality is the catalyst that, at first, greatly exaggerates many other forms of inequality and then replaces them. Unchecked financial inequality destroys democracy and social mobility. It is in highly unequal societies that very talented young people can’t get education because their parents aren’t rich enough. Being rich is also a uniting factor among the rich because protecting those riches leads them to similar political and economic positions. Being intelligent or beautiful isn’t something that can just be taken away from you by innocent looking policies or practices. The process of becoming rich also pre-selects for certain personality types, uniting rich people even further, while this is not the case for beautiful people and less so for intelligent people.

        I would be against people buying bionic or genetic enhancements that greatly reduce their IQs if those are not affordable to the general populace or provided at an affordable price by the government (it’s also such things we have to keep in mind when discussing financial inequality in the future).

  • TheBrett

    Didn’t this study come out months ago and get pretty heavily criticized? The EPI pointed out that the rise in assortative mating happened before 1980, which tends to be problematic because the massive rise of income inequality in the US happened primarily in the 1980s and 1990s (not coincidentally the periods following major reductions in income and capital taxation as well as the loosening of restrictions on financial sector activity).

    Yes that would greatly reduce total amount of capital in the long run, and therefore also cut wages and wealth, but gosh darn it inequality is harmful enough to be worth paying such a huge price to reduce it.

    As Piketty pointed out, the period of convergence when the returns of capital were close to or even less than the returns on labor were periods of extraordinary growth and prosperity in the rich countries.

    And of course, there’s the political impact. More egalitarian rich societies have higher social trust, less crime, and less corruption – see the Scandinavian countries, or even Canada by comparison.

    • Doug

      “More egalitarian rich societies have higher social trust, less crime, and less corruption – see the Scandinavian countries, or even Canada by comparison.”

      Norway: Homicide rate: 2.2/100k – Gini 25.8
      Finland: Homicide rate: 2.2/100k – Gini 26.9
      Sweden: Homicide rate: 1.0/100k – Gini 25.0
      Denmark: Homicide rate: 0.9/100k – Gini 24.0

      Luxembourg: Homicide rate: 0.8/100k – Gini 30.8
      Switzerland: Homicide rate: 0.7/100k – Gini 33.7
      Hong Kong: Homicide rate: 0.2/100k – Gini 53.3
      Singapore: Homicide rate: 0.3/100k – Gini 48.1

      • TheBrett

        Still pretty good overall, especially the first four are countries as opposed to either city-states or isolated, small mountain countries that doubled as tax havens. And the Canadian example applies as well – 1.6 vs the US 4.8, and 32 vs the US 45.

      • Doug

        Except there are plenty of states in the US that have the same homicide rates as Canada: Mass., Idaho, Iowa, Vermont, Minnesota, Utah, Maine and New Hampshire. All of them have 40%+ Gini coefficients, significantly above Canada.

        US crime rates are overwhelmingly driven by ethnic minorities (do the states in the above list seem very diverse to you). Canada and Scandinavia simply have far fewer minorities than the US. Similarly ethnic minorities have much higher crime rates in Canada and Scandinavia as well. That’s why Nunavut has 10 times the homicide rate of Canada, and in Sweden 50% of 5+ year prisoners are immigrants.

      • Stephen Diamond

        Wouldn’t the pattern be best explained with a two-factor theory: social cohesion decreases with economic inequality and with social diversity.

        These results both seem well-established. They both seem, as well, entirely intuitive.

    • Peter David Jones

      And economically neutral factors link assertive mating don’t explain why there is so much less inequality in countries not affected by Reagamomics/Thatchernomics.

  • anon

    Assortative mating is on the rise? I would have expected the opposite.

    • TGGP

      Why? A lot more people attend college, that’s a common source of assortative mating and its social importance seems to be increasing.

  • stobiepole

    I would not expect anyone who doesn’t build analog audio equipment to be upset about the quality of modern switch-mode power supplies. But to me, they’re the worst things in the world: they generate lots of RF noise and are a pain in the arse to have to design around. But to anyone else, they’re an improvement on the old transformer-based designs, being cheaper and smaller and more efficient.

    Neither do I expect a financially secure American male of Anglo-Saxon origin to be terribly concerned about inequality.

    Overcoming bias, indeed. I read your blog because you sometimes say insightful things. Other times, you say very dumb things (we all have this in common). Usually, the dumb things are rooted in assumptions which I am sure seem perfectly reasonable to you. Yet, to someone who does not share the same confidence in the validity of these assumptions, they seem very much a product of insularity and déformation professionnelle. This is my perspective, of course, but I am not making any big claims about overcoming bias, only about understanding it.

    • Doug

      “Neither do I expect a financially secure American male of Anglo-Saxon origin to be terribly concerned about inequality.”

      Telling someone that they don’t have a right to an opinion on a subject because of their race is never a good way to start off an argument…

      • stobiepole

        And there we have it, folks. Mentioning socio-economic privilege in the context of a discussion about whether or not inequality is important is…impolite?

      • Doug

        Robin made no claim that would hinge on his personal background. He made claims based on economic facts, evidence and theory. He wasn’t arguing from personal experience. Whether Robin was a white rich male, a wise Latina woman or a twenty foot tall Martian, these claims would be the same.

        So far Robin presented carefully constructed studies and reasoning firmly rooted in economic science. Your counter-argument has consisted of an irrelevant anecdote about audio equipment, an appeal to racism and some vague hand-waving about unspecified assumptions.

      • stobiepole

        So one’s experience (or absence of experience) of inequality has no bearing on one’s opinion about the subject? I am suggesting that is not the case, and that claiming otherwise is based on social distance rather than any kind of objectivity. Do I need to explain what an analogy is to you?

      • Curt Adams

        It’s almost amusing that somebody’s arguing with you on this – given that a major point of this blog is that people hold beliefs to curry favor with other people, not because they’re true!

      • Silent Cal

        I think the idea is that attacking someone for being biased by their background without making any substantive arguments on the topic is impolite. Surely you want to reserve the right to criticize if a rich white male says “Of course this poor black woman thinks inequality is a big problem.”

        We’re all biased by our backgrounds. It can sometimes be pointed out in a productive way; if, for instance, you had said “There’s a psychological harm to within-nation inequality, and I suspect your background causes your intuition to undercount that,” that would be a legitimate contribution. But you have to offer a way for your interlocutor to fix eir reasoning, not demand they throw it out and accept your conclusion.

  • Curt Adams

    Investment is, if anything, improved by higher wealth taxes. We had a higher investment rate in the 50’s with 90% income taxes and high capital gains taxes than we do now. The claim that taxes rduce investment is a theoretical idea assuming utility maximizers with perfect information and doesn’t hold up empirically (not a surprise with those assumptions.)

    • RobinHanson

      You aren’t going to get many finance or economics experts to agree with the claim that taxing capital generally increases its quantity.

      • Curt Adams

        Probably not, but until economics starts being scientific and not theological discussions based on thoroughly discredited assumptions, who should care?

        For the very wealthy who are targeted by the proposed wealth taxes, there just isn’t going to be much of an indirect effect because they can’t consume a substantial fraction of their wealth. Their goal in life is to have more money than other extremely rich individuals and that particular Red Queen race doesn’t change if they have or get less as a group.

        Transferring money from the rich to the government would be expected to benefit society because the rich are basically engaged in status games and even benefit from harming other competitors while the government is mostly driven to provide communal goals.

      • stobiepole

        To me these are not things that need to be discussed in terms of economic theories, nor should they be. Medical professionals have clear ethical principles which they are meant to abide by, including both avoiding maleficence and beneficence. I’m not against technocracy on principle, but to argue that significant and potentially very socially damaging policies should be enacted based on theories clearly not quite ready for prime time is not consistent with the principles of medical ethics, at least. The ethical leeway economists are given, to reduce living human beings to data points to be manipulated seemingly without conscience or consequence is distressing, and should be discouraged if not wholly retracted. It’s pig-headed hubris dressed up in a lab coat.

      • Ilya Shpitser

        There is no single “government” actor. Governments are composed of multiple actors, many of which have “communal goals” only distantly, if at all.

        The amount of money “the rich” spend on superyachts, etc. is tiny, considering. You have to worry about firm actors, whose motivations are, again, not so simple.

      • Curt Adams

        I understand all the agency issues. But, factually, modern Western governments do a pretty good job of controlling agent problems. Medicare is far more efficient that private insurance, our army is very impressive against conventional warfare, we can get around remarkably well in cars, etc. There are big issues at the political level, but, all the same, you’re going to see more benefit from the government spending money based on political goals than on the Waltons trying to be richer than the Kochs and the Kochs trying to be richer than the Waltons *at the same time*.

      • RobinHanson

        You say you don’t care what the experts think because the subject isn’t a science. Yet you want us to believe what you say – why shouldn’t we also refuse to believe you for exactly the same reason? If no one knows anything, then you don’t know anything.

      • Peter David Jones

        If Curt is saying the experts are insufficiently empirical, he could consistently claim to know better by being more empirical.

      • IMASBA

        As has been pointed out before the idea is about progressive taxation. Capital can escape the high taxes if it becomes decentralized. A bunch of middle class people receiving dividend from a pension fund escape the high taxes that a billionaire investing his wealth would have to pay. the taxation is only done at the final recipient level so also inter- and intracorporate investment capital 9corporations investing in themselves or other corporations) escape the high taxes as does “investment through sales” (consumers buying stuff from a business).

  • ThaomasH

    Before concluding that taxing the income or assets of high income or asset persons will reduce growth, you need to consider how the revenue is used. Suppose it were used to subsidize asset accumulations by low income or low asset people or reduce the corporate income tax or the wage tax or invest in high yielding infrastructure projects.

    • Matthew Martin

      Who said the point was to generate revenue? The goal of a progressive wealth tax is to give the non-rich the advantage in capital markets. Redistribution happens off-budget in the market place. No revenue is required, and done right, none is generated.

      • ThaomasH

        I agree that the objective of a wealth tax is not to raise revenue per se, it would produce revenue (some of which would be productively invested otherwise.)  Whether aggregate growth was greater or less with the tax would depend on how the revenue was used.

  • Matthew Martin

    A progressive tax on capital could reduce inequality without necessarily reducing capital in the long run:

    Also, while it’s true that poor people are slightly less likely to be college educated, and that therefore increased education would decrease inequality slightly, this effect is pretty small. There is still massive inequality even among only college-educated people. The other social factors you mentioned are basically the same story–they influence inequality in the sense that there exists a statistically significant correlation, but none of those things account for much of the overall variation in wealth at all.

    • RobinHanson

      You seem to disagree with the NBER paper I cite.

  • Luke Parrish

    Lots of capital in existence nonetheless seems to generate a lot less utility when hardly anyone owns it.

    We would probably be better off if everyone owned a tiny sliver of every firm. Then the bigger and more efficient the firms get, the more money would be available to more people to spend and/or invest as they see fit.

    Obviously, reducing the amount of capital by taxing and spending should be a bad thing for growth, all else equal. But considering that much middle class capital tends to be tied up in smaller firms that go out of business easily when outcompeted by larger firms, the net effect of economic growth (when tied to firm size growth, which itself seems to be inevitable in the long run due to efficiency gains) seems to be a transfer of capital ownership from the less wealthy many to the more wealthy few.

    That transfer is obviously a negative factor (all else equal) because less wealthy people have roughly the same amount of good ideas (and vastly more, cumulatively) relative to wealthy people, and lacking wealth prevents them from developing their ideas. Fewer people with wealth to invest means fewer risky and novel approaches to business and engineering problems being explored, which in turn means less economic growth from interesting tech and business developments.

    Moreover, making only a very few people wealthy forces larger amounts of the total consumption to go through a narrow decision bottleneck that reflects the boring preferences of a small demographic. It also causes some kinds of goods to be produced on a much smaller (and less efficient) scale due to lack of demand.

    Government subsidies on things like healthcare and higher education are probably the main reason they actually do get produced on viably high scales despite being far beyond the budget range of most citizens when these subsidies are not taken into consideration. It is hard to be sure how many other industries are suffering impractically small scales and inadequate consumer networks because they not only missed the government subsidy bandwagon, but the demographic wealthy enough and interested enough to support them was too small. Even considering those industries that thrive on government subsidies, one has to wonder if a wealthy and broad consumer base would be a better source of revenue (insisting on less wasteful practices, perhaps).

    Cryonics is an example of a potentially very lucrative and high value industry that has fallen by the wayside for many decades due to lack of wealthy-interested consumers and specific subsidies. Although it is affordable by most with the help of life insurance, one must plan ahead for this if one is not fairly wealthy, which apparently makes most people not even consider it — resulting in much higher costs and lower quality/reliability than could otherwise be achieved. Space tourism / habitation might be another good example of an industry so afflicted. Fewer people with wealth available to spend makes it less possible for industries requiring substantial individual consumption to become established in the first place, which keeps their costs high.

    • Ben Southwood

      One big benefit of diversification of assets is that there is less incentive to subsidise any particular sector in the economy.

      For example, in the UK (and San Francisco) it is very difficult to get permission to build new houses, or increase the density of existing development. One crucial reason for this, at least in the UK, is that the groups with houses are politically powerful, and the value of their houses would fall if more were built.

      If these people owned all their wealth in an ETF, then if anything the government would have the opposite incentive since stocks would rise if economic growth jumped from extra housebuilding.

      (Of course this doesn’t mean this diversified wealth should be more equally spread, as you argue.)

      • Peter David Jones

        IANAE. Could someone explain why taxes on capital (for instance, on inherited tax) should automatically count as the destruction of capital? Wwould that not depend whether the proceeds are treated as income or used to fund projects.

    • RobinHanson

      The whole point was that rich people save a larger fraction of their income, which over time creates more capital and makes more inequality. If you spread the capital around, you get less savings and so less capital later.

      • Luke Parrish

        That may be true if you redistribute income in a discretionary form, but you can get around that by requiring that the income from this particular source mostly not be spent on anything other than new capital. Ownership of an asset need not equal control of its disposition.

        So for example, say we have a public savings fund, equally owned by all citizens (shares being non-transferable). The only part of the income that would be sent to the citizen for spending or reinvestment at their discretion would be a very small portion of the growth roughly identical to the percentage spent on consumption by a typical person with high income — the rest being, by law, continually reinvested in the fund.

        In such a scenario, it seems like there should be equal growth in capital over time as there would be if wealthy individuals owned the capital.

      • Stephen Diamond

        The whole point was that rich people save a larger fraction of their
        income, which over time creates more capital and makes more inequality.
        If you spread the capital around, you get less savings and so less
        capital later.

        But this hardly describes the present situation, where huge amounts of wealth are withdrawn from circulation (and productive use) for financial speculation and where these huge “savings” cannot find productive outlets–as with the mortgage crisis, dumping capital in unproductive investments?

        Isn’t it clear that we face no dearth of savings but, rather, a lack of investment outlets? There is, actually, an overproduction of capital.

      • IMASBA

        Does it matter much whether Bill Gates invests $10 in Wal Mart or Average Joe buys a $10 bottle of whiskey from Wal Mart?

        Bill Gates investment could only be better if large, concentrated injections of capital are better, but why would that be the case (one could even argue that lots of smaller injections from people who are actually vested in the products itself is closer to the ideal free market, or, dare I say it, a prediction market)?

      • Peter David Jones

        If you spread it around indiscriminately, maybe.

        It remains the case that revenue from capital gains taxes can be targeted as, eg, seed capital for small businesses.

      • Luke Parrish

        I don’t think targeting small businesses or anything complicated is necessary. Say you put a bunch of tax money in a diversified, low-risk ETF and pass a law saying it cannot be spent for 100 years, after which it is to be equally distributed to everyone. This ought to grow capital faster during the mean time than leaving it in private hands (where it might be spent on consumption or lost on risky ventures).

  • John_Maxwell_IV


    I’ve always suggested that we optimize for economic growth with libertarian economic policies for a century or two, then convert to socialism and redistribute the fruits of our suffering.

  • Anonymous

    What boggles me about the inequality discussion is that no-one is really concerned about the real inequality problem: that between people living in the western world and the people living in the third world countries.

    • IMASBA

      I am. The two subjects are also very much intertwined in the real world: efforts to reduce inequality in the world have really been hampered by rising inequality in poor countries (the rich in those countries taking a disproportional part of the high economic growth). I’d be willing to sacrifice growth, or part of it in rich countries to bring poor countries alongside, but only IF those efforts really help the poor and middle class in those poor countries.

      • Cahokia

        I think it would be a mistake to sacrifice growth in the rich countries, because in effect that would mean accepting lower rates of technological development. It would ensure that Paul Ehrlich would win the Simon–Ehrlich wager and that we’d end up suffering from resource scarcity in the future.

      • IMASBA

        If reduced growth would cut through some magical barrier below which technological progress becomes too slow then that can be solved by increasing research funding relative to GDP.

      • TGGP

        Technological progress is not some simple input/output mechanism where you insert money in one end and get progress out the other. As Hanson has explained in his long-run future posts, technological progress will eventually just end.

      • IMASBA

        “Technological progress is not some simple input/output mechanism where you insert money in one end and get progress out the other.”

        Of course not, but it is to the extent that rich countries intentionally foregoing (part of) their economic growth would hurt technological progress. That part of technological progress that is not coupled to GDP growth would not suffer from less GDP growth either so that’s not the part Cahokia and myself were referring to.

        “As Hanson has explained in his long-run future posts, technological progress will eventually just end.”

        Sure, but not this century and a century of the currently rich countries foregoing (part of) their economic growth is enough to bring the vast majority of very poor people to a high standard of living.

      • TGGP

        I don’t think the parts are quite so easily separable.

      • IMASBA

        Well, if research subsidies would stay the same and global growth would stay the same (remember it’s about slower growth in the rich countries to make faster growth in the poor countries possible without increasing the global consumption of energy and natural resources) I’d say we should be really close to the same level of technological progress. You wouldn’t really have to know what belongs to which part, it would sort itself out since global consumer spending would be roughly the same so private sector innovation doesn’t have to slow down.

      • TGGP

        Again, I don’t think technological progress is a simple function of research subsidies. And the consumer spending of the first and third world (or even upper and lower classes within the first world) are not equivalent. “First adopters” subsidize technological advance, and are typically among the more affluent first-worlders. Redistribution has incentive effects, which admittedly could be blunted if it came in the form of a per-capita head tax, but that’s typically only discussed in economic theory and never mentioned as a political possibility.

      • TGGP

        My understanding is that recent decades have been among the best for poverty reduction, largely because of what’s happened in China.

      • Stephen Diamond

        Pretty much exclusively because of what’s happened with China. Although there’s a lot of inequality in China, there are also tremendous efforts underway to reduce it. The Chinese understand that social solidarity–even continued economic growth–depends on an expanding consumer market. And they maintain the key economic resources under state ownership!

        Whereas, countries with minimal concern with equality (like India) stagnate.

        [Added.] Accordingly, the U.S., controlled by big capital, is militarily “pivoting” to Asia–against China, illustrating that the drive to oligarchy (in the U.S.) is incompatible with long-term international growth (even with world peace).

      • TGGP

        My understanding is that poverty has also significantly decreased in India, though to a much lesser extent than China. And China has an extremely high savings rate, their growth is not driven by consumption.

      • Stephen Diamond

        Right, it hasn’t been driven by consumption; but they recognize that it will increasingly have to be.

      • brendan_r

        If China collapsed, Stephen would say: see, inequality and high savings rates are incompatible with growth.

        If China keeps booming, Stephen says: see, China is committed to eventually not being among the highest savings, most unequal societies in the world, thus their growth boom continues. (Rational expectations and all that.)

      • brendan_r

        “illustrating that the drive to oligarchy (in the U.S.) is incompatible with long-term international growth (even with world peace)”

        Right, because Soros and Gates and Koch and Buffett are closet imperialists.

      • IMASBA

        I wasn’t saying poverty wasn’t reduced. I was saying poverty could have been reduced much more if more of the rewards of rapid economic growth had gone to the poor and middle class. China is, as Stephen Diamond mentioned, a bit of a special case: they are indeed the source of most poverty reduction (not that strange for such a big country though), their gini coefficient already exceeds that of the US but they do care about inequality precisely because they see it as a threat to stability, security and long term development and are taking steps to limit inequality. Other developing countries have a huge problem with inequality: they rely so much on the rich for economic growth that their rich would have to be astronomically rich for their poor and middle class to profit enough to have something similar to current Western living standards.

    • Cahokia

      Nobody’s concerned with First World/Third World poverty?

      Where have you been? Are you unaware of the massive NGO complex which millions of Westerners donate to because they are aware of this inequality? If you live in the U.S. or Europe and donate to an organization working against poverty, malnutrition, and infectious disease in Africa, you’re certainly aware of this inequality.

  • Peter David Jones

    Since there are fairly wealthy countries with significantly lower inequality than the US , it appears there are things you can do about inequality, that aren’t economically disastrous,

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  • Ronfar

    What it taxing capital primarily transfers capital stocks from private hands to the government, rather than reducing the total capital stock?

    • IMASBA

      The idea is to transfer the capital to the less wealthy individuals, not leave it with the government. An elegant solution would be a basic income for everyone (including the rich) over the age of 18 who is a citizen of the country. With the size of that basic income coupled to GPD and (adult) population size. Many governments would probably lose influence over their citizens compared to the current situation and those society would simultaneously become more equal and they’d have a hard theoretical limit on inequality. Pretty much anyone from libertarians to socialists could find something positive in such a solution.

  • Danny

    I wish people – including Robin – would be clear on the distinction between
    i) inequality of “earned by working” income
    ii) inequality of all income (including interest, property income, dividends etc)
    iii) inequality of wealth
    iv) inequality capital gains
    And yes of course there are grey areas. But it seems to me the inequality of household capital gains is almost certainly much more extreme than the inequality of “earned” income.
    Citing studies which state that factors leading to an inequality of “earned” income are the result of uncontrollable or even benign social trends is not a satisfactory response to concerns about inequalities of unearned income, wealth or capital gains.