Thursday, March 06, 2014

Rising Economic Inequality…Does it Matter?

A new report from the Economic Policy Institute shows rising levels of income inequality in all fifty states. From 1979 to 2011, the top 1% saw their income rise 128.9%, while the bottom 99% saw their income increase by a mere 2.3%. To see how your state compares...Try this interactive from the Economic Policy Institute.
My friend and fellow futurist/scifi fan John Mauldin weighs in on the rising use of the word "inequality." He starts with what former Treasury Secretary Larry Summers was getting at in last week’s Financial Times op-ed:
Rising-economic-inequality"The share of income going to the top 1 percent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. Family incomes have not risen as fast as productivity. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy."
Mauldin comments: "That thinking assumes that if income inequality is rising, the top 1% is getting richer at the expense of the working class, because it assumes production still heavily exploits the relatively unskilled labor that most Americans can provide through hard work. It does not discriminate between value-added labor and value-added information and innovation. As I argued three weeks ago, the gains from the Information Age have been unevenly distributed throughout the economy. This is a structural problem in the sense that the productivity gains from the first two Industrial Revolutions are essentially thoroughly distributed through the economy. All workers saw their incomes increase along with increasing productivity for the 200 years of the Industrial Revolutions. Yes, entrepreneurs, innovators, and knowledge workers saw their incomes rise faster, but a rising tide of productivity lifted all boats.
MauldinEconomics"While populist politicians, mainstream economists, and envious market watchers would like to brand billionaire inventors like Tesla CEO and PayPal Founder Elon Musk, Facebook CEO Mark Zuckerberg, or eBay cofounder Pierre Omidyar as modern-day robber barons, they haven’t really robbed anyone. The emerging class of billionaires is creating value that did not exist before they arrived, and they’re doing it with relatively small teams of highly skilled knowledge workers. And they deserve every penny they earn.
"On the flip side, a growing majority of our labor force is responsible for a much smaller percentage of economic output. Their wages are stagnant because more people are competing for a shrinking number of jobs."
Mauldin admits: "Eighty-five people have as much money as do the poorest 3.5 billion. The top 1% have almost half the liquid wealth that has been accumulated in the world. There are 1,426 known billionaires, and gods know how many additional kleptocrats and people who have managed to maintain some semblance of privacy."
== Alas, it does not wash ==
Okay, here's my middle of the road response. I do not mind sharing the world with billionaires.  I know several on a first name basis -- and that plus $4 can get me a small latte. As long as they got their wealth on an even playing field, by organizing teams of engineers to deliver wonderful goods and services, “good on them.”  All of that applies to the tech moguls John gives as examples. Only…
does-inequality-matter… only John cherry-picked the very very best examples of self-made billionaires who got it all the way I just described.  Notice that he never mentioned the far greater numbers of New Oligarchs who leveraged inherited positions of dominance in an economic sector to squelch fair competition, or  Wall Street cheaters including those in the cartel-cabal of "seated members" of equities exchanges, or those who pay little or no royalties on resources extracted (with subsidies) from public lands, or those who slow down the economy by acting as Adam Smith described lords doing throughout history… passive "rent-seeking." Which utterly demolishes the lie called "supply side 'economics'."
Oh, there's one more thing about the list of examples of good billionaires that John supplied…. they are nearly all Democrats, who have joined Warren Buffett saying "raise my taxes" so that a society that's mostly flat and open can keep supplying the brilliant engineers who made… them… rich.
There is an IQ test for the rising aristocracy.  Can you spell the word "tumbrels" and do you really want to keep reflexively doing what dullard lords did in every other society before ours, pushing for oligarchy -- rationalizing reasons to ignore how much more power angry mobs will have in the coming era, than they did in 1789 Paris?
== Help from the good/smart zillionaires == 
ZILLIONAIREOh, the here are smart moguls out there, who can spell and even see where the world is heading, and act in its (and their own) best interest!  I've long said that we, the people, have an ace up our sleeve, in this generation's struggle to prevent an oligarchic putsch.  That ace is the loyalty -- to our Enlightenment -- of many "good billionaires." See: Things Only a Zillionaire Could Do to Save America.

Those who got rich fairly, via great new goods and services developed by appreciated engineers and artists, and who feel grateful to an open and egalitarian and generally-flat society that is socially mobile and welcoming to fresh competition. Every generation -- especially of Americans -- has had to refresh markets and such, by retaining the competitive creativity of capitalism and the allure of wealth from innovative goods and services -- while finding clever ways to prevent a return to feudalism, while leveling the playing field just enough for the next wave of smart new competitors.  The balancing act recommended by Adam Smith.
Giving-pledgeSee list of billionaires who have committed to the Giving Pledge -- to dedicate the majority of their wealth to philanthropy, including Paul Allen, Bill and Melinda Gates, Joan and Irwin Jacobs, Elon Musk, Nicola Berggruen, Mark Zuckerberg...
Now see this article about how one billionaire retired investor is forging plans to spend as much as $100 million during the 2014 election, seeking to pressure federal and state officials to enact climate change measures. The donor, Tom Steyer, a Democrat who founded one of the world’s most successful hedge funds, burst onto the national political scene during last year’s elections, when he spent $11 million to help elect Terry McAuliffe governor of Virginia.
All right, my admiration seems partisan.  Seems. But I don't like him because he's a democrat.  I like him because he wants to divert destiny from calamity. Because he can see what's in his own self-interest and his kids… and therefore ours. And the only place Rupert Murdoch has ever steered us has been over cliffs.
==And Finally==
PEACE-WELFARE-STATEThere are glimmers of signs that some voices on the right want to move away from the murdochian madness.  I have cited the folks at The American Conservative.  Now comes a glimmer of cogency that was published from the belly of the monster itself -- the American Enterprise Institute, suggesting that conservatism "declare peace on the social safety net."  
I am boggled as much by the venue as by the brash reasonableness of the offer to negotiate and to stop waging war upon the poor..  Could it be that more of the smartest folks on that fringe are starting to realize what Tea Party Populism might become, if the lower middle class starts waking up and turning off Fox?

32 comments:

Anonymous said...

Well said, Mr. Brin. We'll see who is listening ...

Tacitus2 said...

From a previous attempt at economic stabilization:

"If the excesses perpetrated by persons of unlimited and frenzied avarice could be checked by some self-restraint—this avarice which rushes for gain and profit with no thought for mankind; or if the general welfare could endure without harm this riotous license by which, in its unfortunate state, it is being very seriously injured every day, the situation could perhaps be faced with dissembling and silence, with the hope that human forbearance might alleviate the cruel and pitiable situation. But the only desire of these uncontrolled madmen is to have no thought for the common need. Among the unscrupulous, the immoderate, and the avaricious it is considered almost a creed to desist from plundering the wealth of all only when necessity compels them."

Edict of Diocletian 301 AD

Tacitus

Keith D. Halperin said...

Dr. Brin: It would be an inaccurate analogy to equate today's economic conditions with those of the FDRs Times, and I am too unfamiliar with the politics of the Gilded Age/Progressive Era to know what combination of forces allowed TR and the Progressives (Heard 'em at the Fillmore in 1970- not too bad a band.) to curtail the power of the "Robber Barons". Do similar forces exist today, and if so, how do you propose they might be marshaled to curtail the power of the "New Robber Barons"?

Anonymous said...

Now comes a glimmer of cogency that was published from the belly of the monster itself -- the American Enterprise Institute, suggesting that conservatism "declare peace on the social safety net."

Unfortunately, this "glimmer of cogency" that you linked to was copyrighted in 1989--a year after you won your Hugo for The Uplift War. This pretty much predates the current right-wing insanity you speak so much about, being the last year of Reagan's presidency. I fear it has already been sent to the dustbin of conservative thought.

--A. F. Rey

Unknown said...

The challenge central to economic inequality and competition is that money is both an output (the rewards of winning an ostensibly fair competition) and an input (something that makes it easier to compete in the future). The economy is like the Olympics in which athletes win not gold medals, but advantages (e.g. seconds of head start) for their next events. And these advantages are even cumulative. In these circumstances inequality cannot help but be harmful and 'level playing field'-distorting even if the (initial) rewards are acquired without cheating.

Tony Fisk said...

Something of interest. Perhaps more suited to the last post, but I guess the usual suspects can see it here just as easily:

Australian Centre to track and remove satellite debris (it *was* clean up Australia day last sunday)

locumranch said...

I take exception to the claim that wealth is capable of creating 'value' in a direct or intrinsic fashion. It cannot. Directly, it can only be said to create the appearance of value.

The direct generation of wealth from wealth is a confidence game (think BitCoin & quantitative easing) that uses inflation to increase the monetary supply without a concomitant increase in material resources, leading to the creation of more less-valuable monetary units and a classic economic bubble.

The creation of actual value would have an opposite 'deflationary' effect. There would be LESS money in circulation relative to available material resources, meaning that fewer monetary units would have more value, buying more material resources rather than less.

It therefore follows that wealth and value are conditional concepts, meaning that you can say that 'the presence of value (IE. material resources) can lead to the presence of wealthy billionaires, but you cannot say that 'the presence of wealth (and/or billionaires) leads to the presence of value' because the appearance of wealth created by wealth is an inflationary illusion. In other words, wealth can follow value but value does not necessarily follow wealth:

If V, then W. If W, then not-V

Of course, wealth can create value by indirect non-inflationary means— if it takes the form of an investment which gives others the means to produce new or additional material resources — but this approach is not as ‘profitable’, certain or 'sure' and it is therefore less attractive to investors under our current inflationary economic system.

Best

reason said...

Even the "good" billionaires, get their money because of excessively generous intellectual property rights, giving them a monopoly. This is "mining" the commons, of accumulated human ingeniuity just as much as those granted overcheap access to resources on public land.

Tom Crowl said...

Great article!

An idea for thinkers:

UNIVERSAL SNAP: Food Stamps for the rich AND the poor.

Consider... since we apparently even feed death row inmates... there's some understanding that we don't favor starvation even for the worst.

While I can imagine the idiot brigade would assume this would lead to financial destruction...

in fact there would be no net cost* to the society... and it would be much cheaper to administrate.

*Modern monetary Theory may be helpful for understanding this
http://en.wikipedia.org/wiki/Modern_Monetary_Theory

Its very practical in any society with ubiquitous electronic payment systems and simply a variation on 'basic income' ideas and seems appropriate for any society well able to feed its own people.

Tom Crowl said...

From wikipedia

MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities per se.

I contend that:

The self-serving mistake that the FED/Government is and has been making... is not understanding that all money creation cannot be absorbed in productive investment at all times.

and when imbalances in wealth and other natural forces both limit immediate growth potentials and incapacitate the ability for the non-expansive (i.e. maintenance) needs to be satisfied...

such currency creation will only exacerbate the concentration problem... and becomes a zero-sum exercise in musical chairs.

Or at least it might be worth thinking about since I'm faking it all the way.

Anonymous said...

Dr. Brin,

I've been reading your blog for awhile now, and there is something I can't figure out. What is the difference between you and a Clinton Democrat? Not that I have anything against Clinton Democrats, I happen to be one myself, but why not just own it?

NoiseOfKnowing

Tom Crowl said...

I can't help but note however that 'food stamps for all' could never get the support of the 'Christian Right'...

since as we all know... one of Jesus' central ideas was that when encountering need we should ignore them because they're obviously bums and its just not our problem.

Jonathan S. said...

Noise, can you give us a rigorous definition of a "Clinton Democrat"? It seems a hopelessly nebulous term to me.

Robert said...

And now, to be the Contrarian, here's a brief science tangent concerning the use of silk screws to fix bone fractures - so we may soon be seeing silk used to "stitch" bones together instead of metal screws. :)

Rob H.

LarryHart said...

Dr Brin quotes John Mauldin:

"On the flip side, a growing majority of our labor force is responsible for a much smaller percentage of economic output. Their wages are stagnant because more people are competing for a shrinking number of jobs."


He states it as if this is a mere fact rather than the entirety of the problem itself.

Good billionaires who create wealth out of nothing deserve to keep much of that wealth, but they do not (necessarily) deserve to own the means of survival of everybody else. If there are a shrinking number of jobs--that is, a shrinking amount of human labor that is necessary to make the system work--does it follow that fewer people deserve to live? Because that's the inevitable conclusion to this line of thought.

Alex Tolley said...

The emerging class of billionaires is creating value that did not exist before they arrived, and they’re doing it with relatively small teams of highly skilled knowledge workers. And they deserve every penny they earn.

Just changing the subject from "does inequality matter?" (it does) to "are there robber barons or not?" (there are some, but that is mostly irrelevant)



Alex Tolley said...

@MMT - given that it is not exactly accepted economics - why would you stating that it is true be of any importance?

Alex Tolley said...

"...wealth created by wealth is an inflationary illusion...". Seriously?

Perhaps you might want to work through what wealth is, and how it might generate more. It seems that you have a very narrow definition that you are using to support your point, one that appears to completely ignore the actual economy.

David Brin said...

Oh. Just walked in from flying home from WashDC where I keynoted a conf on privacy and spent another day, all day in Pentagon meetings. Whew. Beat.

Yes, I am IN EFFECT and pragmatically a "Clinton Democrat"... of the DLC almost-blue-dog variety which means strong defense, pro-some experemental nuke power...a list of common themes.

But there are differences too, and what I absolutely hat is being FORCED to one-stop shop, politically. I would much prefer to be able to split ticket, the way I used to, now and then. There are certain issues wherein I'd be libertarian and others (a few) a Goldwater Republican.

It terrifies me that we have to depend on the dems to provide ALL political sanity in the U.S. What if - in a cluster of ways - they decide to go crazy too? Or start to resemble the strawman that Hannity claims them to be? There ARE some components of the demoparty who --if they got a lot stronger -- would frighten me a lot.

So yes, that's how I vote right now -- and fight hard to persuade others to vote. But I am not a happy citizen.

David Brin said...

Rupert Murdoch’s media group received a $882m tax rebate from Australia last year in a revelation that is likely to reignite the debate over how much tax is paid by international corporations.

http://www.theguardian.com/media/2014/feb/17/rupert-murdoch-receives-882m-tax-rebate

Tony Fisk said...

Here's some pithy commentary on the man Murdoch did his best to get into power.

Paul451 said...

Not sure if David has seen this:

While people bicker and fight over whether and how much police should be able to use always-on numberplate readers, another industry has been quietly installing them in every vehicle, accumulating billions of "reads" in massive databases (est. 40% of all US vehicles each year), and selling access to dataminers, such as banks, insurance companies, private investigators... and, to show what nice chaps they are, offering free unlimited access for the police.

http://betaboston.com/news/2014/03/05/a-vast-hidden-surveillance-network-runs-across-america-powered-by-the-repo-industry/

Interesting "inequality" aspect, because public housing is typically open lot, while wealthier have garages, and ultimately entire gated communities, so the poor tend to be much more "documented" than the rich.

Still, it's not all bad news. One day we'll all be dead: http://www.npr.org/blogs/krulwich/2014/02/26/282516133/is-planet-earth-under-new-management

Paul451 said...

Oh, speaking of the Krulwich blog: You know how you sometimes "wander" around Google Earth, seeing weird shapes or building layouts and thinking "I wonder what (or why) that is?" Well apparently astronauts do that with the real Earth...

http://www.npr.org/blogs/krulwich/2014/03/05/285315313/is-that-someones-house-what-astronauts-can-see-looking-down

locumranch said...

Since my definitions of 'wealth' and/or 'value' appear to "completely ignore the actual economy", I will defer to Alex to provide definitions of greater economic relevance, ones that prove that wealth creates value in a direct fashion, no depreciation intended. We can discuss the meaning of the 'actual economy' phrase at a later date.


Best

Robert said...

Wrote this up for Facebook but I figure it's amusing enough to share here as well. Interestingly, the only response so far is not from the 2nd Amendment folk, but someone wondering if they should give burn cream to that crowd or worry that it is actually accurate:

Small note on this Facebook image going around calling for gun owners to post said image to oppose Facebook's crackdown on gun sales using Facebook. One thing gun owners protest is any effort to require identification for gun ownership as it's against their Constitutional Right (despite the fact they are all for Voter Identification cards which violate the Constitutional Right of people to vote). But do you realize that by posting on a public online social network that you own a gun, you have just told every spying agency out there you are a gun owner, and thus created a voluntary gun ownership identification card?

If a "Red Dawn" movie scenario ever happened, the foreign government knows who has the guns and will kill you and confiscate said guns. If the U.S. government goes all authoritarianism on us, you just told THEM that you own guns. So your act of protesting Facebook and protesting gun owner identification cards is in fact providing every world government, pro- and anti-U.S., with knowledge you own a gun.

And it's already too late to undo this. Well done.

Iv Libahrt said...

Great article!

IMHO, unwarranted rights assertions have frequently generated revolts. Forceful, confident statements of "I claim the continent!" or "I own the air (you breathe)" are quickly rejoined with push-back. Patent policy instituted to generate invention has often been used to maintain, increase, and extend monopoly and unproductive, extractive rent-seeking. Attempts to restrict America's freedom have occurred ever since the days Great Britain tried to regulate John Hancock's rum and on down through the overly broad protection given the Selden auto patent (which could have squelched Henry Ford's moving production line and the invention of the modern age) to the present. Today, rent-seeking is frequently found in the many financial middle-men and political power brokers insisting, through our regulatory institutions, on "touching our money," doing nothing but inserting themselves between input and output, and generally adding unneeded friction to our economic machine. In the end, it is all unsustainable, and hopefully the "god of our economic machine" will shake itself free of its parasites as it did once before: "We hold these truths to be self-evident, that all men are created equal...."

Thanks again! And thanks for your thought leadership in this on-going battle of ideas.

Iv Libahrt said...

And my earlier concern is doubled when I think of the ramifications of inherited (vis a vis created) wealth using its money to purchase government, setting up the rules to sustain itself in power. "I know not what course others may take; but as for me...."

David Brin said...

okaaaaaay these books actually exist

http://themetapicture.com/these-books-actually-exist/

Alex Tolley said...

@locum - simplified story. The scenario is a pre-paleolithic tribe of hominids. They scratch out a living by constantly hunting and foraging. The leader has accumulated dried meat (how doesn't matter). [Why dried meat? Because we can be sure its nutrition value cannot be inflated away, so it always retains its value unless spoiled].

The leader wants to increase his wealth of dried meat, if only because he realizes he cannot hunt much longer, or that game is getting scarcer, and he wants a cushion of food to rely on. So he asks Ogg, the smartest of his tribe, if he would stop hunting and foraging and devise a better way to hunt game. In exchange for Ogg not finding food to eat, he will give Ogg food from his stash instead. Ogg manages to break the smooth stones they have been throwing at game and knap them into spear points. Attaching them to thin branches, he makes a spear that have increased range and killing power. The tribe kills more game and the leaders stash rapidly increases.

Alternatively, the leader does a deal with Ogg so that Ogg's kills are shared with the leader.
Making the transaction more modern, Ogg approaches the leader and offers to repay him 10x in dried food for teh loan of food while he figures out a better way to hunt.
And even more modern - Ogg does deals with tribe members that he will give them his invention if they pay him now so that he can pay off the leaders loan in full.

Note, the last example is exactly what happens in the exchange markets. The leader's wealth has increased 10x without anything changing at the moment of transaction. Wealth has apparently created new wealth out of thin air. But this is underpinned by a real change in the tribe's economy. Spear hunting has increased productivity, making everyone wealthier. If Ogg dies or otherwise fails to deliver the improved hunt method, there will be winners and losers. Who will win or lose depends on which transaction scenario occurred. It should also be obvious that this is a basic economic stimulus story.

Our modern world is vastly more complex, but the underlying story is the same. Wealth can create more wealth, with durable values.

I leave you to pick this apart and explain why your theory is correct.

David Brin said...

-Cosmos: A Spacetime Odyssey premieres tonight on Fox ENTERTAINMENT (not "news") at 9/8c Give it ratings! Get your crazy loved one hooked! http://www.complex.com/tech/2014/03/cosmos-a-spacetime-odyssey

Anonymous said...

Alex – you don’t appear to understand locumranch’s argument. What s/he says spot on and I’m glad to hear someone post it, as it seems largely forgotten, especially in financial markets.

Locumranch said that wealth can only create the appearance of value, which is true in an economy that relies on currency. In your example you use meat, which is not currency but has direct value. Fortunately, you also bring in the idea of “future meat” so that you do get away from real value enough to compare with locumranch’s argument. As a note, Locumranch was not in any way saying that investments don’t create wealth.

When Ogg decides to offer 10x meat to the leader, he does not create value at that moment (the leader is not instantly 10x richer), he creates the appearance of value for the purpose of making the deal. The leader believes in the value of Ogg’s services based on past experience and so decides to accept the contract. In reality, he’s losing his store of meat without knowing if it will pay off. The value is unknown at that point (it’s also not very smart of Ogg to make such an offer, but we won’t go there). If you said that the tribe was 10x richer before Ogg delivered, that would be a lie. That is what is meant by the appearance of value, the creation of inflation (1 meat is now worth 10x meat), and the indirect creation of wealth.

That’s really as far as I can take your analogy since it doesn’t deal with money but with bartering… the meat will always hold the same intrinsic value, but money does not.

The awesome point locumranch made (I think!) was that a billionaire does not add value to the economy by virtue of being a billionaire. You always have to ask what value is being created, if any, not how much money is being generated. If you assume that money has intrinsic value, then we’re setting ourselves up for disaster.

The current wealth inequality is largely being affected by the creation of false value, which David Brin did not directly address but tangentially addressed. For example, credit default swaps, which make money on money that doesn’t exist… and is not viewed as “cheating” but instead “money creation” or “new value”. Additionally, services that do not provide any value such as insurance, monopolies that inflate value like telecomm companies, free trade agreements that destroy value like in manufacturing (job loss was mentioned in this article), and various politically motivated transactions that were addressed by Brin.

Sorry for co-opting your discussion there, locumranch, but I agree with you 100% and I hope it’s okay that I put my own spin on things.

-b

Anonymous said...

David,

I am probably agreeing with you in substance, but disagreeing on tone...

The problem is not inequality or with the "height" of wealth. If someone makes money by adding value to others it is a win/win. I am all for zillionaires as long as they get their wealth fairly in a positive sum way. Full stop.

I am totally opposed to privilege, cronyism and rent seeking. These are problems, and are extremely destructive rather than constructive.

What I do not agree with in any way, shape or form is that the way to attack privilege seeking is to target the successful. This is a category error.

I am against privilege seeking in all its manifestations. This includes the privilege of a working class laborer gaining privilege over a less experienced potential worker, or of a taxi driver keeping out competition (as examples of the other extreme presented for balance, not emphasis).

Stated again, I am against privilege and zero sum activities. I am not against the wealthy, and being wealthy in no way proves one has exploited others, nor does not being wealthy prove the absence of exploitation.

Inequality of outcome is not a problem. It is both necessary and good. It is a feedback mechanism, without which the system self destructs. Exploitation is a problem, and is one which makes society substantially worse off.

Roger