record inequality

[Munger]

Re: record inequality

ASH,

Let me approach this theoretically, and see if we agree or disagree on that level.

In my value system, I'm not even O.K. with someone who works hard earning $155,000/year (your example) while another person who works hard (or wishes to work but cannot find work) cannot afford "basic" necessities for their family. There is a finite pie, and if one person gets a big slice while another goes wanting, I consider the one getting the big slice sucking the life out of the latter, albeit not necessarily intentionally being a parasite.

What do you think?

My thinking is the income should be more fairly distributed along the lines of value of labor. So, if your labor is worth more than someone else's labor, you should be more compensated.

I feel there is a fundamental problem with the tendency of capital to accumulate and grow through no effort of its holder. My simple solution is to redistribute excess wealth upon the death of the holder (something like 0% redistribution up to $1,000,000, then 10% up to $2,000,000, then 20% up to $3,000,000 and increasing until you get to about $10,000,000 and you take all of it after that).

As for redistribution, I would give it to all remaining humans by simply taking that money out of the money supply.

[dcarrigg]

Re: record inequality

Complexity provides jobs in the service sector. It has been especially powerful enabler of the FIRE economy. A major question of the last century was what would provide jobs as manufacturing/farming became more efficient. FIRE expanded in the void. I was struck by a comment made a few decades ago by a USSR refugee. He was gobsmacked by the complexity of things in America from insurance to tax forms.

Exactly. You stated this far more succinctly than I. Thank you.

[metalman]

Re: record inequality

Exactly. You stated this far more succinctly than I. Thank you.

complexity creates division of labor creates demand for specialization creates jobs. but... complexity does not create value and reduces productivity.

more evidence of 3rd world coming to the usa... the fire econ equivalent of the service workers who open doors, drive cars & perform other tasks that the ave. citizen can do on their own.

[raja]

Re: record inequality

I'm afraid I don't agree. I think you and I are starting from different (moral) axioms, and have therefore arrived at different conclusions.

Indeed, I think this is a severe problem. However, I think it is a practical problem rather than a moral problem, and I only think it is a problem to the extent that it is a cause of other sociological problems; it is not in and of itself a problem.

That's one solution. I think taxing and redistributing is possibly the most efficient way to move wealth from rich to poor. Alternatively, you could raise the value of labor relative to capital, through regulation, and create conditions in which the poor "earn" more (although I think that would shrink the size of the pie, and harm the purchasing power of lower-earners). Those are the two realistic solutions which I find most palatable. The two other possible -- but horrific -- solutions include a quasi-feudal distribution of wealth and power (the rich control the poor using the state's monopoly of force), or a revolution in which the poor effect a redistribution by violence. Thankfully, I think either of the violent scenarios are not especially likely, because democracies have already demonstrated that the vote works as a safety valve. We are definitely going to get more socialism, because when there isn't a 1-to-1 relationship between political power (a vote) and what you pay into the collective pot (taxes), that's what inevitably happens. However, it's going to turn into a much more acrimonious contest once the national credit runs out, and we have to start paying full price for our redistribution. Right now, we're not just redistributing from the rich to the poor; credit is letting us redistribute the productivity of foreign countries to ourselves based upon the promise of redistributing from the future to the present. Just imagine what will happen when we have to pay for current expenditures entirely out of our own current productivity.

One example of an appealing solution that I doubt is realistic is to increase the size of the pie by such a large amount that even the sliver that the lowest-earning segment owns is adequate to support a decent material standard of living. (That, believe it or not, is one of the things I wrote on my college entrance essays, when I still thought I was hot shit: I wanted to study science so that I could discover something that created so much material wealth that even the "poor" would have plenty. Ah, youth and optimism...)

I think that from a practical standpoint, something like this may indeed result. My theoretical solution to the problem that Munger pointed out about a future world in which machine labor renders a great majority of humans redundant is a form of communism in which the state owns the machines, and citizens each receive a fraction of the national production (see Munger's thread about the economically-redundant). That wouldn't work at all in any economy that relies upon the profit motive for productivity (i.e. in any economy that has ever existed yet), but if we're going to get all science-fiction "what if" and posit a world in which machines account for the entirety of economic productivity, then maybe a communist utopia would make sense.

However, let me say that from a moral standpoint, the idea of an "economic bill of rights" seems like a perversion of the concept to me. I think it is very significant that the original Bill of Rights was about things that the state would not do to circumscribe individual liberty, rather than positive actions that the state was obliged to do to provide material benefits to individuals. It is very significant that forbearing to use the state's monopoly of force to restrict enumerated freedoms of the individual costs the parties to the social contract nothing, and benefit all equally. That you would suggest redistribution from some individuals to other individuals -- a transaction that has material costs and unequal benefits -- could be some type of "right" means you have a very fundamentally different understanding of the philosophical foundations of government than I. Rather, I see such measures as a practical necessity, but hardly a right.

I think your definition of "deserving" is the willingness to work, and my definition is based upon the material value of what is actually produced by said work. Also, the $155k-a-year set is a different crowd than the folks with yachts and Rolls-Royces (and I was originally pointing out the difference between the top 5% and the top 0.1% or 0.01%). Still, even if we don't agree upon the moral assumptions which underly this debate, I do see how your opinion makes sense given your values. And, based upon your many posts, I think we agree on much else.

ASH,

Perhaps a greatly simplified example would serve to elucidate our apparent differences on "moral axioms" . . . .

There are 3 men stranded on a desert island: Stronger, Smarter and Average (J6P).
The only food is coconuts, and there are just enough produced to sustain the three men.

Stronger came from a rich family, so he feels entitled to more coconuts than the others. After all, he must be superior if he is rich, and thus more deserving . . . and it's what he's used to anyway.
So Stronger says, "I'm going to take as many coconuts as I want, and you better not try to stop me or you'll be sorry."

Smarter fears Stronger, so he devises a plan to get enough coconuts to survive -- he trains a monkey to secretly bring him coconuts at night, and Stronger does not catch on to the scheme. Smarter even manages to obtain more coconuts than Stronger, which and he buries the excess for a future day.

Average fears Stonger, too, but he isn't as bright as Smarter, so he becomes undernourished, ill, and eventually dies as a resulting of getting less coconuts than he needs to survive.

Smarter believes that he could team up with Average, and perhaps overpower Stronger . . . but he doesn't want to take the risk. He also could share his extra coconuts with Average, but he likes the security of having a stash. So, Smarter does nothing to help Average. "After all", Smarter thinks, "it is all Stronger's fault, so why should I suffer."

IMO, this is basically what happens in human society, although the story is obviously a vast simplification.

My value system dictates that the coconuts should be shared equally so that all may survive, and the thing to do is force Stronger and Smarter to share by whatever means necessary. On the other hand, if there are excess coconuts, those may be taken by dint of harder work, intelligence or other individual factors. (I think communism is unworkable, and absolute equality is an illusion.)

I think we should strive to achieve a society in which all who contribute can secure Life, Liberty and the Pursuit of Happiness. The chance to pursue happiness requires some material basics, however, and I don't think our society is providing those now because the rich have taken more than their fair share of coconuts.

I would be interested to learn your moral stance, as I could not glean it from your post.

A few additional comments:

** I think moral problems are practical problems -- they only seem different outwardly.

** Although I haven't done the math, perhaps letting the top 5% have 30% of the wealth instead of 60% would be a solution from "a practical standpoint". No need to wait for a far-off future where all work is done by machines.

** I do not think that an Economic Bill of Rights is a "perversion of the concept". With the 13th Amendment are we not circumscribing the rights of slave-holders to own slaves? How is this different from circumscribing the right of big bosses to have wage slaves? . . . . it's only different in degree, not in intent. Hasn't Hudson referred to the road down which the wealthy elite are now taking us as Debt Serfdom?

[Ghent12]

Re: record inequality

ASH,

Perhaps a greatly simplified example would serve to elucidate our apparent differences on "moral axioms" . . . .

There are 3 men stranded on a desert island: Stronger, Smarter and Average (J6P).
The only food is coconuts, and there are just enough produced to sustain the three men.

Stronger came from a rich family, so he feels entitled to more coconuts than the others. After all, he must be superior if he is rich, and thus more deserving . . . and it's what he's used to anyway.
So Stronger says, "I'm going to take as many coconuts as I want, and you better not try to stop me or you'll be sorry."

Smarter fears Stronger, so he devises a plan to get enough coconuts to survive -- he trains a monkey to secretly bring him coconuts at night, and Stronger does not catch on to the scheme. Smarter even manages to obtain more coconuts than Stronger, which and he buries the excess for a future day.

Average fears Stonger, too, but he isn't as bright as Smarter, so he becomes undernourished, ill, and eventually dies as a resulting of getting less coconuts than he needs to survive.

Smarter believes that he could team up with Average, and perhaps overpower Stronger . . . but he doesn't want to take the risk. He also could share his extra coconuts with Average, but he likes the security of having a stash. So, Smarter does nothing to help Average. "After all", Smarter thinks, "it is all Stronger's fault, so why should I suffer."

IMO, this is basically what happens in human society, although the story is obviously a vast simplification.

My value system dictates that the coconuts should be shared equally so that all may survive, and the thing to do is force Stronger and Smarter to share by whatever means necessary. On the other hand, if there are excess coconuts, those may be taken by dint of harder work, intelligence or other individual factors. (I think communism is unworkable, and absolute equality is an illusion.)

I think we should strive to achieve a society in which all who contribute can secure Life, Liberty and the Pursuit of Happiness. The chance to pursue happiness requires some material basics, however, and I don't think our society is providing those now because the rich have taken more than their fair share of coconuts.

I would be interested to learn your moral stance, as I could not glean it from your post.

A few additional comments:

** I think moral problems are practical problems -- they only seem different outwardly.

** Although I haven't done the math, perhaps letting the top 5% have 30% of the wealth instead of 60% would be a solution from "a practical standpoint". No need to wait for a far-off future where all work is done by machines.

** I do not think that an Economic Bill of Rights is a "perversion of the concept". With the 13th Amendment are we not circumscribing the rights of slave-holders to own slaves? How is this different from circumscribing the right of big bosses to have wage slaves? . . . . it's only different in degree, not in intent. Hasn't Hudson referred to the road down which the wealthy elite are now taking us as Debt Serfdom?

I think the fundamental premise of your example makes it non-applicable to the real world. In reality, there is far more than enough resources to sustain the world's population. The question of what to do with the excess is a moral quagmire, where any notion of redistribution is, in essence, an advocacy for theft.

[c1ue]

Re: record inequality

You cannot help the poor by destroying the rich.

Untrue. A neutron bomb destroying all the rich would free up all their resouces for others including the poor.

You cannot strengthen the weak by weakening the strong.

Untrue. Removal of top predators in an ecosystem allows emergence of a new top predator class as well as growth of prey species

You cannot bring about prosperity by discouraging thrift.

True. But what does this have to do with wealth? Paris Hilton isn't thrifty. Bill Clinton isn't thrifty. For every Warren Buffet, there are dozens of Schwarzmans and what not

You cannot lift the wage earner up by pulling the wage payer down.

The assumption made is that the wage payer is personally paying the wage earner. That's a load of crap. A business which generates income is not the exclusive province of the owner - the workers, capital employed, and management are all in it together. None of the three can exist without the other two.

You cannot further the brotherhood of man by inciting class hatred.

Perhaps not.

But Liberte, Egalite, Fraternite and the guillotine seemed to coexist.

Then again it seems any criticism on the 'rich' is considered class hatred.

What then should the ongoing and pervasive attack on the middle class be? Class Love?

I feel there is a fundamental problem with the tendency of capital to accumulate and grow through no effort of its holder. My simple solution is to redistribute excess wealth upon the death of the holder (something like 0% redistribution up to $1,000,000, then 10% up to $2,000,000, then 20% up to $3,000,000 and increasing until you get to about $10,000,000 and you take all of it after that).

I completely agree with that. The thing that really ticks me off as much as the ongoing FIRE crap is seeing a giant pile of old money influence my destiny - see Kennedy, Rockefeller, etc.

Smaller but still large piles of money do the same - see Paris Hilton

[newnewthing]

Re: record inequality

some small business can probably function somewhat for the love of the business, but large corporations function at the highest profitability rate they can generate or else they do not get funding. the paramaters of how the world works here means its all about the love of the money, the bottom line is all that counts. adam smiths magic hand starts to not look magic when taken to the extreme, which he never wanted, company's need to externalise costs and find some passive money flows to remain competitive. it becomes hard to argue with idiots like charles chuck prince the third when he says you've got to dance, that's just the dynamics of the system. sorry you've got to regulate or change the system.

The officers and directors of a corporation have a fiduciary duty to the shareholders to maximize shareholder value. If they start running a corporation for other purposes (founder's hobbyshop or some notion of public good) they run the risk of violating their legal obligations. Even if the majority of shareholders approve. An exception is where all existing shareholders agree to pursue that goal. This most easily occurs when the corporation only has one shareholder. The fewer shareholders, the easier it is.

One of the biggest mistakes founders make is they consider "their" company something they can use as they wish. They also tend to whine when new investors want to see increased professionalism. The skills that make for a good entrepreneur often, but not always, aren't the same ones a business needs as it matures. Resolving this to everyone's satisfaction is one of the major obstacles - and milestones - in the growth of a corporation.

A good entrepreneur knows their own strengths and weaknesses and is able to hand over the reins when they reach their limits. More easily said than done though.

If you ever get a chance see the play "Other People's Money."

[jk]

Re: record inequality

The officers and directors of a corporation have a fiduciary duty to the shareholders to maximize shareholder value. If they start running a corporation for other purposes (founder's hobbyshop or some notion of public good) they run the risk of violating their legal obligations. Even if the majority of shareholders approve. An exception is where all existing shareholders agree to pursue that goal. This most easily occurs when the corporation only has one shareholder. The fewer shareholders, the easier it is.

One of the biggest mistakes founders make is they consider "their" company something they can use as they wish. They also tend to whine when new investors want to see increased professionalism. The skills that make for a good entrepreneur often, but not always, aren't the same ones a business needs as it matures. Resolving this to everyone's satisfaction is one of the major obstacles - and milestones - in the growth of a corporation.

A good entrepreneur knows their own strengths and weaknesses and is able to hand over the reins when they reach their limits. More easily said than done though.

If you ever get a chance see the play "Other People's Money."

there is room for interpretation about what constitutes "shareholder value."

see, for example, the piece about share buybacks at high prices:

http://jeffmatthewsisnotmakingthisup...king-like.html

key excerpt:

...a specialty chemical maker called Lubrizol that had purchased its own stock at $52.63 a share during the September 2008 quarter, but refused to touch the stock when it was being offered, in size, in the vicinity of $37 a share one month later, as we pointed out in a virtual column called “Companies Bought High, But Won’t Buy Low” (November 3, 2008).

At the time, Lubrizol’s Treasurer, Charlie Cooley, explained the strange logic behind the company’s “Buy High, Don’t Buy Low” repurchase strategy as follows:

Fair question….we have been asked this question during the course of the year, asking why our share repurchase program has been as kind of methodical and systematic as it has been.

We have never viewed the share repurchase program as primarily being a tool of making a call on our share price. Rather we see it as a way of balancing our use of cash and adjusting [our] capital structure….This is all about maintaining the strong financial help that we have enjoyed for years.

So it is suspended temporarily and we will look for an opportunity to get back into a share repurchase mode.

Far from being “methodical and systematic,” Lubrizol’s share repurchase program appears to have been more on the “mercurial and arbitrary” side, given the fact that a share repurchase was decidedly more attractive with the stock at its “suspended temporarily” conference call valuation of less than 6-times trailing EBITDA than at its “methodical and systematic” share repurchase valuation of nearly 8-times trailing EBITDA.

Now, if Lubrizol management had decided to “get back into a share repurchase mode” during the early March 2009 market panic, with its stock trading briefly at $25 a share, just below 4.5-times trailing EBITDA, we’d be nominating Lubrizol’s Treasurer for a spot in the Warren Buffett pantheon of Rational Investing.

But they did not.

btw,

In fact, the company actually increased its estimated shares outstanding, thanks no doubt to management option grants bloating the share count.

shareholder value, indeed.

[ASH]

Re: record inequality

I would be interested to learn your moral stance, as I could not glean it from your post.

Hi raja. Thanks for sharing your moral viewpoint. An invitation to share my moral stance can be a dangerous thing, because I find it difficult to summarize in few words. That's why I put off responding for a bit.

I prefer governance by the consent of the governed. This is a subjective statement of value.

Borrowing from Hobbes (I think -- I'm not schooled in philosophy), I believe that government by the consent of the governed implies a social contract between individuals. In reality, we are born into society and are ruled by governments which pre-date our existence. But ideally, citizens should consent to the rule of their government, and the laws imposed by that government should reflect the terms of the social contract by which individual citizens agree to be bound. It seems tautological to me that an individual's acceptance of the social contract should be governed by their self-interest, as judged by whatever metric they, as individuals, choose to apply.

In the parable of the coconuts which you told, I think that the individuals Stronger, Smarter, and Average have an opportunity to enter into a social contract that governs distribution of the coconuts and much else. In the simplified parable, Average literally lacks the ability to survive if in direct competition with Stronger and Smarter, and Stronger and Smarter each seem to believe their interests are best served by competing with Average. Were that actually the case, Stronger and Smarter have no reason to enter into a social contract with Average to regulate distribution of the coconuts, and life on the island will be "nasty, brutish, and short" as a result. Average will die, but Stronger and Smarter will have more coconuts. Apparently, Stronger and Smarter are not troubled by this -- they neither fear Average, nor feel compassion for him because of their personal values, nor require Average for any purpose... or at least these considerations are outweighed by the coconuts in the parable.

Is that a moral outcome? My answer is yes -- but only if Stronger and Smarter truly are better off without Average, living in a state of anarchy on the island. That might be the case in the simplified island parable, which is a one-variable problem (coconuts), but is usually not the case in real life. This conclusion should be offensive to most, because it appears to deny that Average's life has any value. In my view, describing the island as a one-variable coconut problem is what has stripped Average's life of value.

What value should attach to Average's life? Convention has it that all life is sacred. I think, for what I would characterize as anthropological reasons, that this common moral value is a generalization of purely practical considerations. I believe that morals -- and cultural values, generally -- are to society what genes are to individual organisms. In particular, the moral values which are common to most societies tend to promote the communal interests of society over the selfish interests of the individual. Moral values which say we should protect the weak, value the well-being of our neighbors, disapprove of greed, and so forth are all tied to furthering cooperation between individuals and strengthening society. Moral concepts derive their authority from their supposed universality, which is why they are expressed as absolute generalizations, such as "all human life is sacred". That is something useful you can teach to your children, and state with absolute authority. "Human life is sacred to the extent that it promotes the survival of the society which values it" is both less appealing and harder to teach. However, tacit recognition of the underlying calculation is why different races didn't used to be "people", and much else that remains objectionable about the world today.

So, getting back to the question of the redistribution of wealth, and the need to provide a decent material standard of living for the poorest among us, I earlier said that I didn't see an unequal distribution of wealth as a moral problem. That was a considerable abbreviation of this post, and perhaps could have been better stated as follows: I often use the world "moral" as shorthand to describe an idealized subjective value. The values which appeal to me include government by consent of the governed and that the material resources an individual is "entitled" to are exactly equal to those which they can produce themselves (which doesn't rule-out redistribution for a myriad practical reasons, such as from myself to my infant daughter). I do not believe that need is the same thing as entitlement, and I do believe that the common moral imperative to provide for the poor is actually a generalization of underlying practical considerations.

** I think moral problems are practical problems -- they only seem different outwardly.

I was searching for words by which to distinguish subjective value preferences and practical expedients. For instance, my subjective value that one is only entitled to the material wealth which one can directly produce is difficult for me to defend on practical grounds. I perceive this preference of mine to flow from an aesthetic sense that inputs balance outputs, although it is no doubt influenced by selective forces which favor more productive societies (and thereby incentivize individual labor).

** Although I haven't done the math, perhaps letting the top 5% have 30% of the wealth instead of 60% would be a solution from "a practical standpoint". No need to wait for a far-off future where all work is done by machines.

I don't have a number, either. My vote is whatever it takes to have a cohesive and open civil society in which as many citizens as possible feel they have a fair shake.

** I do not think that an Economic Bill of Rights is a "perversion of the concept". With the 13th Amendment are we not circumscribing the rights of slave-holders to own slaves? How is this different from circumscribing the right of big bosses to have wage slaves? . . . . it's only different in degree, not in intent. Hasn't Hudson referred to the road down which the wealthy elite are now taking us as Debt Serfdom?

Perhaps this is a semantic point, or one of emphasis, but I would look at the 13th Amendment as granting liberty to colored citizens rather than an infringement of rights. Specifically, I think it was more a declaration that humans could not be considered property, and less an infringement of property rights.

The difference between the case of slaves and low-income workers today is that for slaves the fundamental problem was liberty, whereas for low-income workers the fundamental problem is opportunity. Except for the rare case of being freed by an owner, a slave could not hope to gain his freedom either by skill, effort, or good fortune. A low-income worker today has the liberty to seek a better job, but often lacks the opportunity to compete successfully. However, even granted social mobility (which isn't working so well anymore), the structure of the labor market is such that there is a large mass of workers at the bottom whose labor isn't worth enough to support a decent standard of living. Even if there is some mobility, there is no real opportunity for all those low-income workers to take high-paying jobs. That is why I say I am driven to redistribution as a practical expedient, even though my moral preference is that workers are entitled to what their productivity is worth. I also favor measures to improve the opportunities for social mobility. However, I don't see this as a moral issue, or a matter of liberty, in the same way I view the freeing of the slaves.

[c1ue]

Re: record inequality

ASH,

You're also forgetting that when there are 95 Averages - they can hunt down and kill 2 Strongs pretty easily.

Under feudalism this was untrue - an armored knight could dominate almost any number of peasants, but with the advent of guns the equation is not nearly so unbalanced.

Thus at least a fairly generalized sense of equality is necessary to social stability.

[ASH]

Re: record inequality

ASH,

You're also forgetting that when there are 95 Averages - they can hunt down and kill 2 Strongs pretty easily.

Under feudalism this was untrue - an armored knight could dominate almost any number of peasants, but with the advent of guns the equation is not nearly so unbalanced.

Thus at least a fairly generalized sense of equality is necessary to social stability.

Yeah -- actually, that is among my practical reasons for thinking a more equal distribution of wealth is desireable. I didn't state it in this post because of the way raja set up his parable.

[newnewthing]

Re: record inequality

there is room for interpretation about what constitutes "shareholder value."

Indeed there is. It's called the business judgement rule. Courts are reluctant to overturn judgments of a board. But when they state a goal clearly in conflict.....

I recently was on a comp sub where the issue of renewing a golden parachute came up and felt the reasons for the intial parachute no longer largely applied. I strongly argued that it should not be renewed. It wasn't. This didn't win me brownie points with the CEO but that ain't my job. Ya gotto do what you believe is best for the shareholders. That's what boards are for. Otherwise they are just the parsley around the seafood*

*An infamous quote I got from Monk and Minow.

[marvenger]

Re: record inequality

are outrageous bonuses what's best for shareholders? you need to attract the best to make the most profit apparently. No one seems to think about attracting those with low moral fibre willing to increase long term risk for short term concentrated gain in their hands, that would be a problem with markets and we don't want to think about that.

[MarkL]

Re: record inequality

Oh and btw, Krugman is the living proof that a Nobel prize is not worth a bucket of warm spit.

Bucket of Warm Spit = $1.4M Dollars

[MarkL]

Re: record inequality

ASH,

You're also forgetting that when there are 95 Averages - they can hunt down and kill 2 Strongs pretty easily.

95 smallish countries like Iran and Iraq could probably take down the USA. I'm sure we'd put up a helluva fight but still.... scary thought.