Matt: October 2008 Archives

On Income Inequality

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There is a scene in drama The West Wing in which one of the characters, Josh Lyman, says:

Imagine before you are born you don't know anything about who you'll be, your abilities or your position. Now design a tax system.

John Rawls's philosophical original position posited this idea.

I'd like to write a longer piece about how the economics of this are only a smart part of the philosophy, but in summary the important part here is that this is the ultimate justification for unequal taxation. If we had to agree to a social contract before we knew our own mortal capabilities, or our birth parents and their socioeconomic situation, the world would look a great deal different than it does now. It was, more than anything, this argument which swayed me from a purely Libertarian view of economics. We are, in a great part, the sum of our circumstances. There is no doubt that many intangibles, such as determination, perserverence, grit, courage, play roles in success, beyond the strength and wits we are born to. But both nature and nurture are properties of circumstances.

I believe in incentives. The marxist motto of "from each according to his ability, to each according to his need" is a complete abrogation of incentives. The problem with marxism in terms of utility is that great strength, intelligence, and determination mean nothing when you have no motivation to use them. When one man has a knife and the other a gun, there is no inequality if neither has the will to wield the weapon.

On the other hand, the laissez-faire capitalism espoused in the Ayn Rand-ian heroic dramas, which has great appeal to me, ignores the veil of ignorance completely. It rightfully celebrates the best of man - and the concept of man as a heroic being. It has appeal as such, especially to those who believe they do or can rise to such heroics. And yet all such emotions are generated from an ex post facto look at circumstances. But one thing rings true: when people believe it is easier to come by what they need via social extortion than work, they will extort rather than work.

It is in the fertile middle ground where we must work. We must balance considerations so the impetus to achieve is still high, but recognize that when we look at the least capable and the least fortunate, we have to realize: there, but for the Grace of God, go I.

There is a philosophical disingenousness on both the left and right, to my perception. The left uses terms like 'economic justice', without quantifying justice; they give rise to the perception that "fair" means all having the same thing, and Americans (rightfully) recoil. The right talks about "redistribution of wealth", as if everyone who was hurting and economically in need was more interested in stealing their money than working.

Some side facts:

In 2006 In 2006, the top 1 percent of tax returns paid 39.9 percent of all federal individual income taxes and earned 22.1 percent of adjusted gross income. I often see half of this statistic quoted - that the top 1% pay 40% of all taxes. To be clear, to be in that 1%, the lower bound of your income must be well over $250,000 per year.

There has been dispute over what this poll means, but Brookings Institute wrote:

An October 2000 Time-CNN news poll showed that 19 percent of Americans thought that they were in the high income group that would benefit from proposed tax cuts - defined as roughly the top 1 percent of the distribution.

Chaos

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The world is in financial chaos. The TED spread has hit 4.14%, an all time record. Suck it, Black Monday.

If this weren't so horrific, I'd say it's fun. I've never had so much fun following economics, which is incongruous with the general state of fear that is permeating the country.

The world is full of good news.

From Calculated Risk, note that we're coming back from the brink of madness on a huge number of indicators. Energy prices are plummeting. Heck, the dollar is even stronger.

Note that the government was all set to bail out Wachovia, a bank drunk on the wine of Subprime, by backing their debt in a sale to Citibank. But Wells Fargo stepped in to actually make a competitive bid without the guarantee, and Citibank has acquiesced. So there was real value in Wachoiva.

Will it get worse before it gets better? Maybe. It feels like this is panic time, and this is very much unlike a stock market crash, and unwinding the tech bubble in 2001 wasn't exactly smooth sailing. This is clearly a lot worse.

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This page is a archive of recent entries written by Matt in October 2008.

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