Income Inequality

A NY Times article quotes a Harvard economist who makes an almost entirely reasonable argument:

"I think incredibly high incomes can have a pernicious effect on the polity and the economy,"... Much of the growth of high-end incomes stemmed from market forces, like technological innovation... But a significant amount also stemmed from the wealthy’s newfound ability to win favorable government contracts, low tax rates and weak financial regulation, he added.

It is certainly true that income disparity creates serious issues in our society. In particular -- as he notes -- the wealthy have a greater ability to bend government policy towards their economic interests. His latter two examples of such bending, however, are foolish.

The charts included in the article demonstrate that increases in the highest incomes do not lead to tax cuts. (Perhaps one of his students can explain him how to run a regression... )

Secondly, he repeats the oft-heard, but couldn't-be-farther-from-the-truth, cant that Wall Street excess was enabled by "weak" financial regulation. In the context of his argument it is more thoughtless than usual. If the wealthy are able to bend government policy to their interest, why would they modestly settle for weak regulation, when they could get regulation that more affirmatively served their interest? (Do they really call it Government Sachs for nothing?) And as he understands that the wealthy strongly influence government policy, how can he take for granted that strong regulation would, in any way, work against their interest?

On a related topic, one Ronald Dworkin (no, not that one) argues in the journal that the upper middle class today is more responsive to marginal disincentives to work then it was in the past, as work is less considered itself a virtue and professionals are increasingly swayed by quality of life concerns.

His argument strengthened another argument that has been bubbling in the back of my head: Progressive taxation increases income disparity. To construct a crude model -- a company with $100 revenue and two employees, one highly silled ("A") making $66 and one not ("B") making $34. If both are taxed at 33%, A takes home $44. If taxes are changed such that A pays 50%, her take home would initially be reduced to $33. A's natural response would be to ask for a $22 raise to restore her take home value. Any raise for her comes out of B's pocket. If A recieves half her request, she is now making $77 and B $23. The increased tax progressiveness producing an increase in income disparity.

This is a rough model by any stretch, but its core contention is strengthened by the argument that A will meaningfully reduce her hours in response to a meaningful reduction in her after-tax wage. In theory, the company could hire an additional person to share A's role. In practice, it will often be more cost effective to pay A more.