I agree that looking at the top 10% can cause jealousy, higher expectations and sometimes unhappiness. But those same 10% are equally visible (sometimes more so) in India & China & Egypt etc. We live in an internationalised world now… so unless we raise the incomes of all people in a country they will still end up jealous of their (international) neighbours.

America is not the richest country on earth. That is Luxemburg… with Qatar fast catching up. America is the richest *big* country on earth. Even then, they often share that title (or swap that title) with Norway. But close enough. America is a huge country with a lot of diversity. It’s a difficult place to generalise about.

I like your second paragraph. It’s an interesting point that I am instinctively sympathetic towards and will think about more. You seem to be saying that it’s important to have a vibrant middle class between the upper and lower “clases”. I think that a free-market achieves that quite well… and better than most alternative approaches. Indeed, I think the free-market effectively created the middle class in the first place.

I wouldn’t call that issue “income inequality”.

You repeat the concept of income inequality getting “out of hand”, but that presupposes both a correct level of diversity, and that you know what it is. I don’t think you’ve established either points. Even if we had that super-computer you mention, I have no idea what equations you would put into it.

I also think you over-estimate the virtues of democracy. I agree people will change a govt if they are unhappy with them. But I don’t think the popular position is necessarily the correct one.

I agree with most of your analysis re: workchoices. Many people saw it as an unfair attack on low-income workers. But… I think their concern was with low-income workers, not the gini coefficient. I also think they were wrong in thinking the reforms were going to do much. The ALP & Liberal positions were actually quite similar.

Your ideas are underpinned by the assumption that relative poverty causes pain. I say it does but it is irrelevant, and even useful. Aspiration is a good thing for society to have. When someone drives off in a 4WD towing a boat, you can either say “you bastard” or “I’ll work to have those or one better one day”. Or you can not care. I say what matters is absolute income. Strangely you don’t know what level of pain is correct but nevertheless you are concerned about it and wish it would go away.

You are implying that we need to adjust income inequality, with an adjustment range between 0% to just less than 100% equality. At the same time you are advocating free enterprise and pure Marxism.

What happens when an entrepreneur finds a new production method which benefits mankind - their wealth rises to 5% of global GDP from nothing. What should we do? How will the new policy affect their firm and future generations directly and indirectly in terms of innovation? You have to answer these questions from a policy perspective because economics constantly asks us about unintended consequences.

“It seems a big part of the problem is a large section the population living beyond their means because they perceive the standard of living enjoyed by the top 10%, and assume they should be able to achieve that too - after all, we’re constantly told “America is the richest country in the world”.”

Some very bad Clinton era policies have lead to this and partially to the sub prime crisis. Lenders were legally barred from calculating risk based on income and denying people loans on the basis of insufficient income as it was deemed “racist”.

This is the kind of policy folly we have when we worry about relative poverty. But now living beyond your means is your concern, not inequality?

‘Ah, but the poor only spend so much because the rich are so wealthy. Reduce the rich to middle class and there is no problem’

That would be a very condescending response. People of all wealth levels spend beyond their means or can exhibit miserly behaviours. People spend beyond their means because they can and are not financially educated. If banks are allowed to deny people credit, they will (No, banks don’t make money by lending to people who cannot payoff loans, an actual bank levered 15 plus times risks severe financial distress itself if a small proportion of customers don’t pay up. What can make banks lend too much? Moral hazard creating policies we don’t have here but exist in the US like deposit insurances).

“it’s more an issue of ensuring that every income-bracket is well-populated”

Why is this an issue at all? Because there is a discontinuity in raw data doesn’t mean there is injustice. You don’t remove said imaginary injustice by making the graph looking more appealing. How well off is everyone now? In ten years time?

“But importantly, there’s no one group that has the ability to excercise so much power and influence that the majority basically gets pretty little say in how things are done.”

Andrew Forrest also has very little say. It appears he doesn’t care enough to meddle.

“And if this process has arguably failed in the U.S., I don’t have an easy answer as to why, although U.S. voting patterns seem to be frequently driven by phenonema that appear anything but rational.”

You still want poll driven policy, by assuming Australian voters are rational. This is just America bashing which ignores the problem of median voters.

“Perhaps one day computers will be powerful enough and human behaviour well enough understood for us to be able to model the outcomes of various levels of inequality more accurately, and we will be able to calculate a level that results in maximum prosperity for all.”

That will never happen. Maximising prosperity is quite different to choosing an “optimal”, yet undefined mix of income inequalities. I’ve mentioned the empirical and theoretical failures of policies based on income equalisation. You want the computer to come up with a solid answer for you. How are you going to programme it when you rquire it to violate the laws of mathematics?

You should note to that central planning is impossible, due to the constraint of virtually boundless information which the price system has. You want to use central planning to blur prices even more. How will society organise it’s economy with prices that don’t reflect scarcity? I doubt you could even calculate such prices in the first place. Hayek’s address to the American Economics Association as President is noteworthy on this topic.

http://www.econlib.org/Library/Essays/hykKnw1.html

Hayek, F. A., 1899-1992.
“The Use of Knowledge in Society”
American Economic Review, XXXV, No. 4; September, 1945, pp. 519-30.

I would also note that it’s not necessarily measures like “wealth of the top 10% compared to those at the bottom 10%” that matter - it’s more an issue of ensuring that every income-bracket is well-populated. Indeed, if I had a choice between a society where the lowest 90% of the population earned between $9,000 and $11,000 each, and the top 10% earned on average $500,000 each, and one where the bottom 10% earned on average $10,000 each, the top 10% $1,000,000 each, but every decile in between earned amounts ranging from $20,000 up to say, $500,000, I’d choose the latter, even though by some formulas, the latter has greater inequality. But importantly, there’s no one group that has the ability to excercise so much power and influence that the majority basically gets pretty little say in how things are done.

I don’t think democracy is a method of “calculating” what the ideal measure of inequality is - I’m just suggesting that democracy is probably the best bet we have in ensuring that economic inequality doesn’t get out of hand: if it really does reach a point that the majority are obviously unhappy about it, the a government promising to address it is more likely to be elected. In a way, I think there was an aspect of seeing this action wrt WorkChoices: a majority perceived (correctly or otherwise) that WorkChoices gave more power to employers and was likely to result in great economic inequality, and consequently voted against it. And if this process has arguably failed in the U.S., I don’t have an easy answer as to why, although U.S. voting patterns seem to be frequently driven by phenonema that appear anything but rational.

Perhaps one day computers will be powerful enough and human behaviour well enough understood for us to be able to model the outcomes of various levels of inequality more accurately, and we will be able to calculate a level that results in maximum prosperity for all. But I can’t see that happening in our lifetime, so we have to work with, essentially, a form of trial and error in the mean-time.

And do you agree that real problems that objectively exist in the real world are more important than faith-based vibes about correct levels of diversity? Because ultimately I have a lot of sympathy regarding how difficult it would be for you to re-assess these issues (my family is also burdened with a strong faith-based belief set and I see how hard it is for them to question it)… but if you agree that real-world problems are more important, then we should be able to work broadly towards the same goals.

Democracy is not an answer to any question of objective reality. Democracy is simply a tool to allow peaceful action despite disagreement. It doesn’t create truth.

This confusion about democracy is quite common, and quite unfortunate in my opinion. It is circular, because if democracy creates truth then how are we supposed to vote in the first election on an issue? And once that first election has taken place, on what rationale could we ever change? Once we’ve voted that drugs are bad, they are bad… because that’s what we voted!

You have given no reason for believing a correct amount of diversity even exists. Nor reason for believing the current level is higher than the correct level. It seems scarily like you’re running on a vibe. I don’t believe religion should be involved in politics.

I’m quite sure that every “trendy progressive” has to believe that American inequality is too high. I’m just as sure they have little base this on except for knee-jerk skepticism of all things American. I wish they had the same skepticism for all things said/done by all governments… but based on what they mostly complain about, the Chinese govt (questionable justice, Tibet, Taiwan, Falun Gong, censorship, supporting Zimbabwe & Sudan, more inequality than america etc) isn’t so bad.

But that aside — surely we should at least agree that government policy can only be based on objective assessment of reality, and not on vibes and religious opinion? If politics is about faith, then rational discussion is irrelevant. While that is true for many people, I didn’t think that would be your position.

What’s happenin to the middle class? Are they becoming richer or poorer in absolute terms?

And John, I don’t really think there is an objective way of determining the “ideal” inequality. Some people are happy with more (or don’t care), some people want less. I think Australia’s current level is a little on the high side, but it’s the trend towards greater inequality that concerns me more than the absolute level currently. I’m quite sure that America’s level is unhealthily high, from my own first-hand observations and papers I’ve read about the impact it has on society (e.g. those by Elizabeth Warren, who looks at the “vanishing middle class” phenomenon).

If there was a rational, objective way of calculating the ideal level of everything, we wouldn’t need democracy.

Can it ever be useful? How do we attract children to study to become doctors or to save their capital and become entrepreneurs?

I think income inequality may seem mean spirited but look at it in a more general way. It gives us a signal as to what forms of activity are highly useful to society.

Don’t you think it is useful that the more highly valued work in society is valued properly and there is an incentive to train for, invest in and engage in these behaviours?

I’m not saying that group based entrepreenurship or innovation in State socialism doesn’t occur. I am saying that income inequality is a useful signal to tell people what behaviour is and is more and isn’t welfare enhancing for society. At the moment we could conclude that surgeons are more useful than lawyers and accountants with programming and security analysis and maths skills are more useful than telemarketers. This is not a value judegemnt, but an observation of aggregate preferences.

There are also implicit behavioural signs that can relate to generational poverty.

Any possible benefits from income inequality are actually underlied by the assumption about inequality being a problem. Inequality will only be a problem, and price signals won’t work, if there are barriers to upward and downward mobility. (I’m not arguing against a safety net).

If income inequality may be useful, in itself is not destructive and you don’t know what the “right” level of it is, then why would you be concerned at all then? It is like being worried about dams having “too much” capacity.

But when you say “adequate services”, I hope you mean the quality of the service… and not the quality of the government-offered service. I think the quality/quantity of health & education could go up easily with tax cuts — by making the systems more private.

Health/education are only seen in contrast with tax rates when there is an assumption that the government has to do it.

The problem with cutting spending is that everybody agrees with the idea, except for (and then they name their preferred projects). When you bundle people together in a democracy and try not to offend anybody, you end up with ever-growing government. I don’t know how to get around this problem. Except perhaps through education, insh’allah.

Once again you dodge the vital question of how you get your magical perfect amount of inequality. This isn’t a rhetorical question.

To say that a certain level of inequality is wrong, you must have an idea of what is right. Personally, I don’t think there is a “correct” level of diversity, and I certainly don’t think the government can, will or should work it out. But if you know the current amount (or the free-market, or 30/30 amount) is wrong, tell us how you worked out the correct amount.

I have a strong suspicion that you’re hidden assumption is that any move towards greater inequality is wrong. But what if the supposed “perfect” level of inequality is higher than today’s level? What makes you think the current level is right? What makes you think people will never change their lifestyle choices?

Democracy is a totally impossible way of working out the correct answer to this question. It gives you an answer, but the answer has nothing to do with logically working out the truth. If the “correct” amount is worked out democratically — then what should you vote for? You can’t know what is correct until *after* the vote! If there is a correct amount of diversity, then there must be an objective way to work out the “correct” amount of diversity.

What is this objective way? Is it “the vibe”? I’m not a big fan of faith-based politics. Or faith in general. It’s dangerous to trust the fate of yourself (let along other people) in the hands of sky-fairies and gut-feelings. I much prefer rational analysis… especially if you’re going to consequently impose your views involuntarily on other people.

Surely it’s infinitely more important to address real problems that can be identified. Like poverty. War. Lack of civil liberties. Overcrowded jails. Mental health issues. These things aren’t just faith-based vibes concerning the “correct” level of human diversity. They are much more real.

“You assume it is bad for society and the economy. This is wrong. The truth is, without other preconditions, it doesn’t actually matter.”

Nonetheless you say:

“If anything, your constant attempts to “prove” that income inequality is a good thing has quite put me off the idea of libertarianism, despite aspects of it that attract me significantly.”

Well you should come back to the ideas of libertarianism. Because I never tried to show that income inequality was good or bad. I even showed you that economic growth has progressed for 200 years, independent of rising or falling inequality. I’ve said repeatedly that it simply doesn’t matter. More or less, it is inconsequential. I’ve said it quite a few times.

However attempting to deal with an imagnary problem has real, deleterious consequences.

“Well, you’ll excuse me if I question your confidence that human behaviour can be so easily modelled by a few simple formulas.”

Strangely, you predict social calamity and economic stangation if the ratio between high earnings and low earnings gets “too large”.

What you should note is that Keynes has been refuted empirically for the last 30 or so years with no new support and that the Marxian assumptions you had have been shown to be mathematically impossible. It is one thing to claim human nature can’t be modelled but it is another to make predictions based on mathematically impossible foundations. Doing both is rather odd.

“I do not believe I have a “strange focus on income inequality”. I just happen to believe than excessive income inequality is not healthy for a society, and my own real-world observations, biased and blurred as they may be, tend to bear this out.”

I don’t know why you say this, plenty of others have observed the opposite or provided alternative explanations and you can’t actually name an occurence of your predictions occuring.

PS

Income equality is neither good or bad. That is my point. You assume it is wrong. The truth is, without other preconditions, it doesn’t actually matter.

I do not believe I have a “strange focus on income inequality”. I just happen to believe than excessive income inequality is not healthy for a society, and my own real-world observations, biased and blurred as they may be, tend to bear this out.

Anyway, I will say it again - you are about as likely to convince progressives that restraining inequality not is a worthwhile goal as progressive are likely to convince libertarians that restraining the size of government is not a worthwhile goal. If anything, your constant attempts to “prove” that income inequality is a good thing has quite put me off the idea of libertarianism, despite aspects of it that attract me significantly.

(No, they have far more important institutional issues. They don’t have adeuqete law and order systems. They don’t have well defined property rights. Often the Government is kleptocratic. The British Isles had very strongly entrenched inequality 400 years ago. The inequality may be even greater now, but the average Brit or Irish is better off in any comparable way. Furthermore, the motivations for political violence are more to do with tribal history and recent oppression by ex Marxists such as Mugabe. General economic problems these developing countries face include agricultural tariffs from developed nations, which are meant to be tackled by the Doha round.)

However, you actually point out the precise difference between the West and much of Africa. Income inequalities are entrenched there in Africa. Income inequalities do not cause further economic problems or entrench themselves (as I’ve shown you before with a mathematical proof and the several failures of Keynesian economics).

Since the industrial evolution, capital investment has boomed. In the 1800s, real wages in the UK quadrupled. Now in absilute terms the bulk of society is better off. Let’s say we’ve never seen time series data for Gini coefficients. 200+ years of economic growth either shows that: a) inequality is decreasing due to economic growth or b) increasing or stable inequality is irrelevant and non-causitive to economic growth. 200 years should be long enough to detect a trend and what your predicting doesn’t happen. Either a) or b) have to be true.

The degree of upward and downward mobility is more important. Let’s discuss two logical extremes of your African examples.

If there was even more income inequality but the lower classes had gotten out of poverty, these places would obviously be better places to live in with less chance of political turoil. However, you seem to dispute this point even to the stage where if Africa got to our levels of income but with an even wealthier upper class, they would be just as or more vulnerable to turmoil. Americans and the British may find this difficult to believe. You back up this assertion with your own fears, (contrary to the history of the West) which is reliant upon your misconceptions rooted in the thoroughly debunked Keynes (though empirical evidence) and Marx (through rigourous mathematical proofs).

However, your strange focus on income inequality implies these nations would be better off and would see fantastic levels of economic growth if the upper classes would merely destroy many of their possessions, investments and productive capital they owned. The poor cannot benefit from this and may be even worse off in absolute and ultimately relative terms as capital is destroyed, their productivity (demand for their labour) would fall.

Income inequality in Western nations is not entrenched. We have upward and downward mobility. These countries openly punish attempts to be upwardly mobile. Ethiopia used to have 85% income taxes on incomes over 4000 USD p.a. How do you go from poverty to the ruling class even in four or five generations with these constraints? When there is a three year wait to register the title on your farm you have recently bought?

You keep on implying that income inequalities cause economic stagnation. I’ve shown you that this is incorrect. You should abandon this idea because it is completely false and not even possible to argue in the affirmative.

Zimbabwe rolled on for long enough not to blame the level of income inequality then for a crisis during the 1980s or even the 1990s.

The crisis now is not caused by income inequality. Income inequality is a result of the hare brained kleptocracy.

Can you actually name an example of what you asserts happens actually occuring without any of the preconditions I think are necessary?

No they don’t. Not without several other preconditions that effectively make inequality a result, not a causitive factor.

Income inequality is not a valid concern of policy nor a good reason to punish high income earners.

As far as “calamities arising from income inequalities” - they happen all the time in other parts of the world. But we should be able to better than just calamity-avoidance in a country like Australia.

You’ve spent an awful lot of time on something that is not going to happen. I take it calamities arising from income inequalities are never going to happen as well?

BTW, I worked out how to get to comment n. Type this in the address bar:

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