Fresh off a bracing debate over whether politics dictates income inequality economics bloggers now are taking on the nature of relative wealth—as the “mysterious, vowelless” knzn notes, “We have the usual dramatis personae, with Brad DeLong and Greg Mankiw in the leading roles, Jane Galt as the female lead, a cameo appearance by Chris Dillow, and Mark Thoma in the role of messenger (and let’s not forget Tyler Cowen…and now Gabriel Mihalache...and…and…and…”
As was the case with the previous debate, Paul Krugman seems to have started things with NY Times column arguing that politics is the reason why wages have stagnated and benefits decreased as productivity has increased: “What we see today is the result of a quarter-century of policies that have systematically reduced workers’ bargaining power. The important question now, however, is whether we’re finally going to try to do something about the big disconnect. Wages may be difficult to raise, but we won’t know until we try. And as for declining benefits—well, every other advanced country manages to provide everyone with health insurance, while spending less on health care than we do.” Having previously argued that conservative politicans have worsened the gap between rich and poor, he calls for “smart, bold populist” politicians to come along and remedy the problem.
Economist Brad DeLong responded with skepticism that we could find politicians capable of effecting such change, but in the midst of that he made these comments, clarifying the problem Krugman was laying out in his column: “I’m enough of a believer in CPI bias to want to say ‘real compensation for male nonsupervisory workers has stagnated since 1973’—I think it has grown, but only very slowly, and much less rapidly than productivity.
On the other hand, I’m enough of a touchy-feey sociology-lover to believe that a good chunk of the utility the rich derive from their conspicuous consumption is transferred to them from the poor: the happiness America’s working poor and middle class derive from the compensation distribution—given their compensation, the compensation of the rich, and the lifestyles of the rich and famous—seems to me to be certainly less than that of their counterparts back in 1973.” In other words, even if wages aren’t really stagnating (because the CPI is a flawed measurement tool) middle class and lower class people feel as though they are because they are falling behind relative to the rich and superrich. In the zero-sum game of social comparison, relative wealth matters more for happiness than absolute wealth—we don’t compare ourselves to the starving poor when we evaluate how well we are doing; we compare ourselves to our neighbors or, unfortunately, the unrealistic idealized versions of people (stars—they’re just like us!) we see in the mass media. Such comparisons keep us striving and keep the consumer economy growing, but it also keeps us unsatisfied with whatever wage we get; and if our compensation increases can’t keep pace with those above us (as has been true under recent Republican administrations), these feelings of dissatisfaction are likely to worsen. DeLong sees this as a transfer of utility (in the form of self-satisfaction) to the rich from the poor.
Greg Mankiw finds this unacceptable. “I am uncomfortable making envy a basis for public policy.” In other words, mind your own business and don’t worry about what other people have and we’ll all be happy with whatever benefits a growing economy parcels out to us. In other words, the only negative externalities gross inequality has is what we let it have by being bugged by it. (DeLong in a followup, argues that if it’s “envy” for the poor to be upset by inequality, than we must recognize it as spite that drives the rich to conspicuous displays of consumption—Knzn points out that the emotionalism of both terms is not helpful.) According to Mankiw, larger minds overlook such things as relative wealth, congratulate the superrich on their superrichness, and put their own nose back to their own grindstone. (In a followup post, Mankiw suspects his attitude might derive from his more magnanimous view of human nature.) If we are bothered by, say, our boss’s salary doubling while we get a 3% increase, it’s because we are envious, sinful wretches. If we’re troubled that there can be no minimum wage increase without a massively disproportionate cut of the estate tax for the megawealthy, ditto. At Marginal Revolution, Alex Tabarrok takes this perspective to its logical conclusion. Not only is it your fault for feeling envious, but you should be taxed for it to discourage you from such a mentality, that unfairly inconveniences the rich for their incidentally having more stuff than anyone else.
Jane Galt concurs, arguing that we shouldn’t make everyone poor so that no one feels left out. She makes the somewhat ludicrous (possibly only half-serious) comparison of wealth to beauty: “Beauty, like wealth, is relative—it benefits its possessor only insofar as they are lovelier than the women, or handsomer than the men, around them. Presumably, if we disfigured all the good looking actors in Hollywood, and the models in New York, and . . . well, heck, let’s slash the faces of everyone who’s better looking than I am.” But wealth, unlike beauty, can be seen as amassed at the expense of others via exploitative practices. Beauty is more likely to be regarded as a gift that comes at no one else’s expense (unless you see a cabal of interested parties manipulating society to change its definitions of beuaty to suit certain elites and to be responsive to alterations money can buy). So relative differences in beauty may not inspire feelings of injustice the way unequal distributions of the fruits of increased productivity do (except perhaps when the beautiful qualities in question are a proxy for money, as they often are). As Chris Dillow explains, the problem is not envy but injustice. Knzn explains this in stately economic terms: “The creation of conspicuous wealth, by its very nature, uses up resources that could be used for other purposes. Indeed, wealth might be defined as the ability to command resources, and therefore, the more resources that are used to produce conspicuous wealth, the more effective it is. By contrast, the process of flaunting one’s pulchritude, etc., while it may use up some resources, is not inherently resource-intensive. And certainly, such endowments, to the extent that they are truly endowments, don’t require resources to create.”
Galt sees wealth redistribution policies as a way of “making people suffer” rather than a way of making other poorer people happy, as if the CEO who makes $10 million rather than $15 million can be said to be suffering (or that his or her earnings are a matter of “honesty…hard work and delayed gratification” for that matter). Right or wrong, those in favor of redistributive policies don’t accept the Horatio Alger version of why the rich get richer and they don’t see wealthy people as suffering if some of their wealth is redistributed for the benefit of society—to reduce the overall need for a gated-community–approach to life that stems from extreme gaps between rich and poor. This is a way of escaping Galt’s zero-sum-game view of the economy that regards inequality as inevitable—the futility argument, from Albert Hirschman’s taxonomy of reactionary rhetoric—and redistribution as the politics of envy and nothing more. (Galt also tries changing the subject by saying, Sure, the rich enjoy the benefits of invidious comparison, but that’s nothing compared to the status games academics play—which is true, but beside the point.)
Mankiw relates disputes over relative wealth to envious anti-Americanism:
From a global perspective, Americans are the rich guys on the block. Some foreigners may think we Americans live the expensive and ostentatious lifestyles we do (rather than spending much more money on foreign aid) as “a way of making other people feel small and unhappy.” But few Americans perceive our own motivations this way. Instead, we view ourselves as lucky to be in an economic system that promotes economic prosperity, and we enjoy our higher consumption not because it is conspicuous but because ipods, flat screen TVs, and high speed internet connections give us utility. Most Americans would probably be delighted for other countries to achieve higher standards of living. I know I would.
But Americans haven’t achieved their economic superiority by accident—we may have earned it through better planning, hard work, and ingenuity, but at some point we also used leverage to accrue more of the benefits of global growth to ourselves at the expense of the contributions other nations have made to global productivity. It isn’t envy, but the perception of unfairness that matters here; that the injustice manifests in trivial arbitrary tokens of conspicuous consumption like fancy cars and whatnot shouldn’t fool us into thinking the issue, the perceived unfairness itself, is trivial. It is in fact what makes Americans increasingly take a gated-community view of the world, calling for impractical and borderline racist anti-immigration policies. One way of mitigating the unfairness is for the rich to be less ostentatious—this seems unlikely, if Galt is right and status competition is evolutionarily hard-wired into our behavior. But perhaps the other way is for policy to not be biased in the rich’s favor, as Krugman suspects it is. Even if the policies don’t correct all species of income inequality, the perception that we as a society are trying to helps mitigate the sense of injustice and blunts the envy and spite of inequality and its various displays.