The Compatibility of Freedom and Equality (13): More Income Equality Makes Us More Free

Another reason not to worry too much about the supposed incompatibility of equality and freedom is the fact that an equal level of monetary resources promotes freedom. Money in the form of a relatively decent income allows us to choose from and engage in a wide variety of activities. It makes it possible for us to buy the commodities and services we want to buy, and consequently do with them what we want to do. (Of course, within the legal limits that determine what can be commercially traded and how traded goods can be used; e.g. we can’t buy people, and we can’t use the guns we buy to kill people). As a result, we have a wider choice of life plans and more means to pursue our chosen plan.

This is freedom in one sense of the word: more choice. Freedom in another sense, namely the ability to do what we want without interference, looks absolutely anemic compared to this. After all, what good is the absence of interferes when the world we live in offers us only very few options or none of the monetary resources to choose and pursue options. This freedom from interference is hardly valuable, if it is freedom at all.

So, if we agree that monetary means promote freedom in a certain sense of the word because these means broaden our sets of choices, then I guess we’ll also agree that a more equal distribution of money, wealth and income promotes freedom: it gives people who receive more money in the new, more egalitarian distribution more freedom, without necessarily diminishing the freedom of those whose resources are diminished in the new distribution. The monetary freedom of the rich isn’t necessarily reduced after income redistribution and after reductions of income inequality, because of diminishing marginal utility. The ability to buy a fifth yacht doesn’t increase anyone’s freedom in any sense of the word. And taking away this ability doesn’t reduce anyone’s freedom. On the contrary, if the monetary means that could have been used for this fifth yacht are instead given to a number of other people who don’t have a lot of money, then these means will benefit the freedom of those other people, and aggregate freedom will have increased.

So that’s a good reason to reduce income inequality. However, it’s probably not a good reason to eliminate income inequality completely, for four reasons. First, even if, ideally, people have a right to the same extent of monetary freedom as it is defined here, that doesn’t mean they should have the same amount of money. In order to be able to do the same things and have the same choices, different people need different amounts of money. The handicapped, for instance, may need more than average.

The second problem with equal money is that it would mean deep and frequent violations of property rights, and property rights are important, perhaps just as important as freedom (and no, property rights and freedom are not the same thing: the former are a means to interfere with the freedom of others, namely the freedom of others to use goods that belong to you).

A third problem created by equal income is related to incentives. And finally, equal income doesn’t combine well with considerations of desert (one definition of desert is that people deserve different levels of monetary wealth for their contributions to society, culture etc.).

We could react to these different considerations by framing the issue as one of value pluralism: income equality and freedom are important values, and so are desert and property. The difficulty would then be to balance these different values which, it turns out, are sometimes contradictory. That would mean limiting the equalization of income at some point before total income equality, at a level that is compatible with respect for property rights (also limited), with due consideration of incentive problems (also limited), and with recognition of the moral value of desert (also limited).

There’s possibly some Gini value that would hit this balance. This Gini value of x gives a level of income inequality at which monetary freedom is maximized for a maximum number of people. A value lower than x (the lower the Gini value, the more equal the income distribution) resulting from higher levels of income redistribution would not increase the monetary freedom of the poor because the amount of money taken from the rich has become so high that it doesn’t just eat away at marginal utility but also produces disincentives high enough to reduce the size of total social wealth.

We could try this kind of delicate balancing between redistribution on the one hand and incentives produced by rewards for deserving actions on the other hand. (Alternatively, we could also drop income equality as a value and instead focus on a so-called sufficientarian approach in which we would try to give people enough monetary means to achieve a certain level of freedom – freedom as it is understood here – regardless of the means and freedom of the people at the top of the income or wealth distribution. However, I’ll leave that option aside for the moment).

However, there are some problems: we’re dealing here with a somewhat strange notion of freedom. Freedom is obviously much more than the use of monetary means to choose and pursue goals. Also, we don’t want to promote consumerism. The problem with consumerism is that the truly important parts of life can’t be bought, and that focusing on consumption tends to sideline those important parts. It also has ecological disadvantages.

And another problem I already mentioned: some people will be worse off if money is equalized because they need comparatively more money just to have the same capabilities. Hence, rather than equalizing money we should perhaps equalize capabilities.

More posts in this series are here. More on income inequality here. And here‘s a related post about the link between poverty and freedom.

Income Inequality (25): And Economic (In)Efficiency

As I stated before, economic theory suggests that income inequality is a necessary price to pay for economic efficiency: unequal rewards incite those with talents, skill and perseverance to innovate and to be productive, so they can reap higher benefits. Ultimately, this serves the welfare of the whole of society (a process which is then caricatured in trickle down economics). The mirror image of this is reductions of inequality that take away incentives for doing well, and that therefore result in economic inefficiency and less prosperity for all.

Tyler Cowen has framed it like this:

Redistribution of wealth has some role in maintaining a stable democracy and preventing starvation. But the power of wealth redistribution to produce net value is quite limited. The power of wealth creation to produce net value is extraordinary … We should be putting our resources, including our advocacy and our intellectual resources, into wealth creation as much as we can. (source)

But is that really true? There is some evidence that reducing inequality through redistribution actually promotes wealth creation. What’s the mechanism? Sam Bowles claims to have identified one element of it:

Inequality breeds conflict, and conflict breeds wasted resources … [I]n a very unequal society, the people at the top have to spend a lot of time and energy keeping the lower classes obedient and productive. Inequality leads to an excess of what Bowles calls “guard labor”. (source)

More about that effect here and here. Other parts of the mechanism through which inequality impedes and equality promotes growth may be the following:

Poverty causes credit constraints. This stops the poor investing in businesses or education; the low aspirations caused by poverty can have the same effect. … Inequality can create the threat of redistribution which can blunt incentives to invest. Or it can lead to state interventions – such as the minimum wage – that harm wealth creation. … The backlash against wealth-creating processes such as globalization, offshoring and private equity in the UK and US are founded in the view that they create inequality. If we had better redistribution mechanisms (say, a basic income) such backlashes would be reduced, and the wealth creation process enhanced. (source)

That sounds persuasive and I want to see some evidence. In the meantime, it’s perhaps a bit glib to announce that “the power of wealth redistribution to produce net value is quite limited”.

The Causes of Wealth Inequality (13): Deliberate Policy?

Some say that the increase in income inequality in countries such as the U.S. has been the result of deliberate government policy. That’s quite an accusation. It’s not controversial to assume that tax policy under right wing governments tends to be less burdensome on the rich, and that social welfare policy under such governments tends to be more stingy. If you look at it like this, it’s not crazy to argue that right wing policies can aggravate income inequality. But it’s quite another thing to claim that right wing governments use these policies in order to deliberately aggravate income inequality. That accusation is incompatible with right wing ideology, which claims that the preferred policies also and ultimately help the poor (trickle down economics etc.), and that left wing policies supposedly favoring the poor are in fact self-destructive (unemployment benefits create labor disincentives, taxes create production disincentives, etc.). However, it’s possible that this ideology is just a smokescreen for anti-poor policies. But I guess that’s somewhat difficult to prove.

If we look at the tax rates, it’s true that the rates for the wealthy tend to go down under Republican presidents:

In 1979, the effective tax rate on the top 0.01 percent (i.e., rich people) was 42.9 percent. … By Reagan’s last year in office it was 32.2 percent. (source)

However, things aren’t as simple as that:

From 1989 to 2005, … as income inequality continued to climb, the effective tax rate on the top 0.01 percent largely held steady; in most years it remained in the low 30s, surging to 41 during Clinton’s first term but falling back during his second, where it remained. The change in the effective tax rate on the bottom 20 percent (i.e., poor and lower-middle-class people) was much more dramatic, but not in a direction that would increase income inequality. Under Clinton, it dropped from 8 percent (about where it had stood since 1979) to 6.4 percent. Under George W. Bush, it fell to 4.3 percent. (source)

The tax rate for the rich dropped somewhat around 2005 following the Bush tax cuts, but all the tax effects over the last decades taken together don’t really make a good case that tax policy is the major cause of rising income inequality. So it’s even more difficult to make the case that tax policy was part of a conscious strategy to aggravate inequality. The increase in inequality has been too big compared to the possible impact of taxation. That’s corroborated by the fact that pre-tax inequality in the U.S. rose faster than after-tax inequality.

What’s interesting, however, is that pre-tax inequality in the U.S. tends to rise much faster under Republican rule. So inequality can still be the result of policy, but policy expressed in other ways than taxation. Other policies that may have contributed – deliberately or not – to rising income inequality are anti-labor union policies, decreases in the minimum wage, etc.

More posts in this series are here.

Racism (15): Does the Stigma of “Acting White” Explain the Racial Achievement Gap in Education in the U.S.?

In many areas of life, different racial groups in the U.S. achieve unequal results. African-Americans earn less, are more likely to be in prison, are more often ill etc. So it’s no surprise that there’s an achievement gap in education as well.

At nine months old, there are no detectable cognitive differences between black and white babies. Differences emerge as early as age two, and by the time black children enter kindergarten they are lagging whites by 0.64 standard deviations in math and 0.40 in reading. On every subject at every grade level, there are large and important achievement differences between blacks and whites that continue to grow as children progress through school. Even accounting for a host of background factors, the achievement gap remains large and statistically significant. (source)

While the education gap seems to be closing, it remains wide. It’s likely that other multicultural societies face the same kind of problem. Racists have an obvious explanation: racial inferiority! Anti-racists have an equally obvious but more convincing explanation: racists! But apart from the effects of lingering racist discrimination there’s also a more interesting cause of the education gap: the stigma of “acting white“, causing minority students to suffer from the negative prejudices of their ethnic peers. Roland G. Fryer has looked at this, and found that it can explain a lot.

“Acting white” is a kind of negative peer pressure. Black peer communities impose costs on those members who are perceived to be “acting white” (or are trying to “act white”). The criticism of “acting white” and the costs imposed on those who are believed to “act white” lead to the avoidance of behavior that is seen as the traditional prerogative of whites. The avoided behavior can be quite harmless, for instance wearing clothes of a particular brand that is believed to be typical of whites, or giving your children certain “white” names. But the avoided behavior can also undermine people’s education, for example when people are discouraged to use standard English, to read books or to achieve high grades. (And even the seemingly harmless habit of giving your kids “black” names can result in harm. It’s known, for instance, the employers regularly discriminate people with “black” names while processing job applications).

The individuals exposed to all these kinds of negative peer pressure have a disincentive to invest in their education. They deliberately underachieve in order to avoid social sanctions. Naturally, the degree of the disincentive depends on the nature and the level of the costs imposed: those costs can be the threat of rejection, ridicule etc. Different people will suffer different costs and will perceive the gravity of the costs differently, but as long as there is a perceived trade-off between acceptance and authenticity on the one hand and achievement on the other, there will also be an achievement gap.

Fryer measures the impact of the stigma using social popularity, number of friends and friendship patterns plotted against school grades. His results clearly show an inverse relationship between grades and popularity for non-whites.

Not surprisingly, the effect of “acting white” is more severe in integrated schools than in predominantly black schools. The reason is the higher level of competition between communities and the perceived threats between groups:

In an achievement-based society where two groups, for historical reasons, achieve at noticeably different levels, the group with lower achievement levels is at risk of losing its most successful members, especially in situations where successful individuals have opportunities to establish contacts with outsiders. Over the long run, the group faces the danger that its most successful members will no longer identify with its interests, and group identity will itself erode. To forestall such erosion, groups may try to reinforce their identity by penalizing members for differentiating themselves from the group. The penalties are likely to increase whenever the threats to group cohesion intensify. (source)

This explanation of the causes of the “acting white” stigma, based on the desire of groups to preserve their identity in the face of external threats to their internal coherence, is more convincing that the two major alternative explanations:

• Blacks have developed a culture of investing themselves in alternative pursuits rather than in education because historically academic achievement was the prerogative of whites. This explanation reeks of historical determinism.
• Blacks have developed a culture of “victimology” and deliberately engage in cultural sabotage. This explanation can be perceived as racist.

“Acting white” explains a lot but surely not everything. It’s likely that the racial poverty and income gaps also contribute to the education gap, as do patterns in family structure, incarceration rates of black fathers, school quality etc. Stereotype threat can also play a part. As well as some good ol’ racism, of course.

The Causes of Poverty (39): The Bee Sting Theory of Poverty

Why are people poor? A cursory investigation almost always blames the poor for their own poverty. Poor people seems to make stupid choices all of the time. They are disproportionately likely to have children while in their teens, to be an unmarried mother, to drop out of school, to abuse drugs, to commit crimes etc. Non-poor people also engage in this kind of irrational behavior but the costs to them are much smaller. So rationality would tell poor people to stay away from such behavior. The fact that they don’t leads many to conclude that poor people are especially irrational, perhaps even dumb.

Many conservatives often adopt this causal theory of poverty, although not always in those terms. Perhaps it’s a reaction to liberals who tend to situate the cause of poverty far away from the poor themselves, e.g. racism, capitalism etc. Both camps, however, remove responsibility from the discussion. If you’re too dumb to escape poverty, you’re not likely to magically develop the responsibility to take your life in your hands. And if outside forces as powerful as racism and capitalism make you poor, no matter how strong your sense of responsibility, you’re not likely to win.

A multicausal understanding of poverty seems closer to reality: dumb choices, lack of effort and responsibility and outside forces all contribute to create and maintain poverty, in different measures for different people. It’s likely that poor people aren’t different from anyone else in this respect: everyone makes dumb choices, lacks responsibility in key moments and suffer the brunt of outside forces, the poor just pay a heavier price. They have smaller margins of error, so they suffer disproportionately from the errors they make. And their reserves and defenses are weaker, so the impact of outside forces is stronger. And we shouldn’t forget poverty traps as a cause of poverty: the more you’re down, the more difficult it is to get up again. Partly because of material reasons (for example, the trap of the ghetto or the vicious circle of poverty and ill health), but also because of psychological reasons:

A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The more of a painful or undesirable thing one has (i.e. the poorer one is) the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems. …

If, for example, our car has several dents on it, and then we get one more, we’re far less likely to get that one fixed than if the car was pristine before. If we have a sink full of dishes, the prospect of washing a few of them is much more daunting than if there are only a few in the sink to begin with. …

[B]eing poor is defined by having to deal with a multitude of problems: One doesn’t have enough money to pay rent or car insurance or credit card bills or day care or sometimes even food. Even if one works hard enough to pay off half of those costs, some fairly imposing ones still remain, which creates a large disincentive to bestir oneself to work at all. (source)

This is a classic example of a poverty trap: being poor makes you poorer. People just get overwhelmed by problems and their ability to cope suffers. It’s not just that they are dumb or irresponsible; they’re simply overwhelmed. All of us would be, even the smartest and most responsible among us.

It also means that, as Charles Karelis has argued, there’s something wrong with the disincentive argument about help to the poor (giving them help reduces their incentives to do something about their situation, like giving unemployment benefits reduces the incentive to find a job). Things may actually be the other way around:

Reducing the number of economic hardships that the poor have to deal with actually make them more, not less, likely to work, just as repairing most of the dents on a car makes the owner more likely to fix the last couple on his own. (source)

The Ethics of Human Rights (29): Should Taxation Be a Tool For Economic Efficiency or For Social Justice?

Taxation is a recurring theme in political discussions between people of the left and right. People of the left see taxation as a tool for social justice. They tend to prefer rather high taxation rates and a progressive taxation system:

• High taxation rates bring in revenues that are large enough to enable the government to spend on programs and transfers that are designed to promote social justice: unemployment benefits, poverty reduction policies, education, healthcare etc.
• Progressive taxation rates are just because they impose relatively (and not just absolutely) higher taxes on people who are more able to pay, and, in addition, reduce income inequality and hence realize another goal of social justice.

People on the right usually favor low tax rates and a non-progressive taxation system (either a proportional system in which everyone pays the same share of their income, or a regressive system in which everyone pays more or less the same amount in taxes). Rather than on social justice, they focus on the economic effects of taxation.

• They reject high taxation rates because they claim that these high rates discourage people and are a disincentive to hard work, effort and investment. Because high rates limit effort and investment, they also limit productivity, innovation, international competitiveness and job creation.
• They also reject progressive tax rates because high tax rates for high incomes discourage those people who work relatively hard (they work hard supposedly because they earn a lot) and who are most likely to innovate, to be productive and competitive and to create jobs.
• However, they don’t necessarily favor regressive taxes because they are equally hostile to high tax rates for low income people, albeit for other reasons. High taxes for low income people discourage them from entering the labor market and hence inflate unemployment. Still, they claim that the worst damage is done by high taxes on the higher incomes, which is the reason they reserve particular scorn for progressive taxation systems. Because high tax rates for the wealthy punish the most productive elements in a society, the whole of society suffers. More productive people will limit their productivity because they don’t want to fall into a higher tax bracket, and the money they pay in taxes can’t be invested in the economy. High tax rates, especially for the rich, have an unacceptable cost in terms of economic efficiency. Keeping taxes low, on the contrary, and allowing wealthy people to use their money in the economy, will ultimately benefit everyone (this is the so-called Trickle-Down theory).

Of course, this distinction between left and right is a caricature. Most people on the left are also concerned about economic efficiency, and most on the right are not insensitive to questions of social justice. The extremes are hardly ever encountered in real life: no one wants to limit taxes to such an extent that economic efficiency is promoted but no money is left for justice, and no one wants to put tax rates at such a high level that there is ultimately no more economy to tax. (The latter concern is expressed in the famous Laffer Curve arguing that beyond a certain level of tax rates government revenues in fact decrease instead of increase. At very high rates there is no longer any incentive for a rational taxpayer to earn any income and hence tax revenues will decline while tax rates increase. However, it isn’t clear what “very” in the previous sentence actually means and where exactly the tipping point is situated).

Personally, I believe that the concerns of both right and left are justified and need to be balanced, and that too much focus on either the element of efficiency or justice is detrimental to the other element. On the one hand, there’s only so much money a government can raise without wrecking the economy, and justice isn’t only about spending money (there can even be perverse effects such as unemployment traps, welfare dependency etc.). On the other hand, there’s only so much an efficient economy can do to realize social justice all by itself and quasi-automatically (remember the invisible hand…). To quote Matthew Yglesias’ sarcastic comment on the skyrocketing incomes of the U.S. top 400 earners in the decades leading up to the 2009 recession:

As is well-known, the Top 400 are considerably more talented than the rest of us. And [the] decline in their tax rates has created exciting new incentives for them to apply their talents. And that, in turn, is why the 2000s were a so much more economically successful decade than the 1990s, not just for the Top 400 but for the rest of us as well. Thanks to their skyrocketing incomes and falling tax rates, we’re currently [during the 2008-2009 recession, FS] all enjoying the fruits of prosperity, rapid growth, and low unemployment. Thanks rich guys! (source)

A similar sentiment is expressed in this clip from the Daily Show (skip to the 4th minute or so).

I believe taxes in the U.S. are relatively low and can be raised without too much harm to economic efficiency. The resulting government revenues could then be spent on improving the social safety net and promoting social justice. It’s difficult to imagine for a European that a country such as the U.S. doesn’t offer health insurance to millions of its citizens. Also, unemployment benefits are quite stingy in the U.S., both in terms of eligibility and duration: only one third of the unemployed qualify for benefits and only for 26 weeks (extendable during recessions if the Republicans don’t object, as they infamously did beginning of 2010).

The system of unemployment benefits could easily be improved without perverse effects or harm to economic efficiency. And there are other areas of possible improvement as well.

However, as a European in Europe, I think there’s a strong argument that the social safety net in Europe (at least in some countries) has harmed European competitiveness, labor market participation and innovation.

Still, is there evidence of this? What do the data say about high tax rates harming economic efficiency, in Europe and in general? Is the conservative case against taxes as strong as it seems? I’m afraid not. There’s some evidence that the effect of reasonably rather than extremely high rates on economic efficiency is minimal at best. Here’s more evidence from Lane Kenworthy about the U.S. and other affluent countries (always keeping in mind that correlation doesn’t imply causation and that the absence of a large negative effect of high taxes doesn’t preclude the possibility that lower taxes would have had a large positive effect). One measure of economic efficiency is economic growth. If we plot economic growth rates for the U.S. against tax rates for the wealthy we see that higher tax rates lead to more growth. But of course there can be catch-up effect: higher rates producing their effects only years later. That’s taken into account in these graphs, which also show that an international comparison doesn’t prove that countries with higher tax rates have lower growth.

If we have a look at the data about the effect of high tax rates on unemployment (another conservative concern), we also see that we shouldn’t panic about taxes.

Now, if there is no good reason not to tax at a moderately high level, based on concerns about economic efficiency, the question remains whether there is a good reason to tax based on social justice reasons. Given the caveat that social justice isn’t all about government spending (I argued <a href="http://here that it is primarily about something else) and that such spending can in some cases have perverse effects (see above), I do believe that some spending is necessary in some cases, and that relatively high tax rates are necessary to produce the revenues required for this spending.

Again following Kenworthy, I believe that relatively high tax rates are acceptable and even necessary to create the revenues required for social justice policies, but that progressive tax rates in themselves don’t do the job of reducing income inequality, contrary to what is often claimed as a justification for progressive rates. That doesn’t mean that we shouldn’t reduce income inequality (it’s quite high in the U.S.) – there are good reasons to try. It just means that progressive taxation in itself won’t do the job. The important thing is to have high tax revenues which can then be spent in transfers and services that reduce income inequality and achieve other goals of social justice. Yet, I still think a progressive system is required, not because of its supposed effects but simply because it is just in itself, compared to proportional or regressive systems. A person with more income can afford to pay, not merely more in an absolute sense but more in the sense of a larger share of his or her income.