6 ms·

Ask PG: Is growing income inequality in the US a sign of health?

27 points by jshen 16y ago

In 'Mind the Gap' you said, "I'd like to propose an alternative idea: that in a modern society, increasing variation in income is a sign of health. "

pchristensen 16y ago
It's probably too coarse of a measurement. In the same essay he says there are two ways to accumulate wealth: create it or steal it. Increasing numbers of wealthy people don't necessarily mean more wealth is being created.
- Peaker 16y ago
  That's a false dichotomy, unless you define every zero-sum game in economics to consist of theft.
  - jshen 16y ago
    Right, are the continually rising CEOs salaries theft or a sign of health?
    - deleted 16y ago
      [deleted]
ilium 16y ago
This might be true if health is defined as the total wealth that exists in a society. But I don't think that's a good thing to optimize for. If there is too much inequality, there will be social unrest, civil war, etc. We should be optimizing for something else. Average income increasing? The bottom quartile increasing? Longer lifespan? Happiness index? I'm don't think any of those have been increasing in the US as of late.
olegious 16y ago
Depends on what the inequality is caused by, if it is caused by a shrinking middle class, then no, it isn't a sign of health. If the middle class isn't shrinking but the rich are making more money, then I'd argue that it could be a sign of health.
pg 16y ago
For people who haven't read that essay, I should explain that one of the points in it is that there are two distinct ways to get economic inequality in a society: an ancient zero-sum game where a ruling class appropriates wealth generated by a large number of peasants, and a newer form that is not zero-sum, where some people become richer than others by generating wealth faster. For various reasons, people who write about economic inequality tend to conflate the two sources. But whereas the older sort of economic inequality is bad for societies, the second is, if not in itself good, a sign of a good thing: variation in productivity. (The reason variation in productivity is a good thing is that if you have no variation in productivity, it is very unlikely that the reason is because everyone is highly productive.) For more details, see http://paulgraham.com/gap.html http://paulgraham.com/gap.html and http://paulgraham.com/gh.html http://paulgraham.com/gh.html So your question becomes, do I think that the economic inequality we see today is increasingly of the old form rather than the new form? No, I don't see any evidence of that, not in the US.
- jshen 16y ago
  Thanks for taking the time to answer, and I completely agree with the framing of the two types. The reason I asked is that it's hard for me to believe that the rise in CEO pay is a result of a rise in productivity of said CEOs. Another example would be wall street, they are taking a larger and larger cut of the pie, but I can't see how they are adding to the pie commensurate with their increasing rewards. In short, this seems like the old form to me. The counter points are of course Jobs, Zuckerberg, The Waltons, etc. But it feels like these are not the majority case, but I admit I don't have any hard numbers on this.
  - pg 16y ago
    It's clearly possible for CEOs to be worth the sort of money they get paid. E.g. Steve Jobs. If I had started a company and wanted to retire, and was looking to hire someone to run it for me, I would have no problem paying the right person 5% of the total revenues, or even more. From what I've seen (and I am old enough to remember the old days), the main cause of the rise in CEO pay is that CEOs are now the equivalent of free agents in baseball. The hedge funds are an interesting case. I'm not absolutely sure about this, but I suspect they are irrelevant, because while they don't create wealth, they don't confiscate it either, at least not in the old way.
triviatise 16y ago
It may be a sign of a healthy market, that ultimately can become unhealthy to the society. So it depends on which aspect of the US you are looking at. As people get disproportionate amounts of money, they get disproportionate amounts of power that they can then use to distort the rules of the game. When there is a small but very wealthy class (say .1% of the population owns 80% of the net worth) then maybe the rest of the population can become oppressed. It is difficult to get good stats on this, but this site has data that suggests since 1983, the top 20% have improved their lot at the expense of the bottom 80%. Income isn't really a good way to measure the gap. If someone makes 500K/year and spends 100% of it on non-assets, they are just returning their money back into the system. It is actually a complex problem to determine if the changes are good or bad, if wealth vs. income is the right measure, and what percentile groups make up the "elite"

27 points by jshen 16y ago

In 'Mind the Gap' you said, "I'd like to propose an alternative idea: that in a modern society, increasing variation in income is a sign of health. "

pchristensen 16y ago

It's probably too coarse of a measurement. In the same essay he says there are two ways to accumulate wealth: create it or steal it. Increasing numbers of wealthy people don't necessarily mean more wealth is being created.

Peaker 16y ago
That's a false dichotomy, unless you define every zero-sum game in economics to consist of theft.
- jshen 16y ago
  Right, are the continually rising CEOs salaries theft or a sign of health?
  - deleted 16y ago
    [deleted]

ilium 16y ago

This might be true if health is defined as the total wealth that exists in a society. But I don't think that's a good thing to optimize for. If there is too much inequality, there will be social unrest, civil war, etc. We should be optimizing for something else. Average income increasing? The bottom quartile increasing? Longer lifespan? Happiness index? I'm don't think any of those have been increasing in the US as of late.

olegious 16y ago

Depends on what the inequality is caused by, if it is caused by a shrinking middle class, then no, it isn't a sign of health. If the middle class isn't shrinking but the rich are making more money, then I'd argue that it could be a sign of health.

pg 16y ago

For people who haven't read that essay, I should explain that one of the points in it is that there are two distinct ways to get economic inequality in a society: an ancient zero-sum game where a ruling class appropriates wealth generated by a large number of peasants, and a newer form that is not zero-sum, where some people become richer than others by generating wealth faster. For various reasons, people who write about economic inequality tend to conflate the two sources. But whereas the older sort of economic inequality is bad for societies, the second is, if not in itself good, a sign of a good thing: variation in productivity. (The reason variation in productivity is a good thing is that if you have no variation in productivity, it is very unlikely that the reason is because everyone is highly productive.) For more details, see http://paulgraham.com/gap.html http://paulgraham.com/gap.html and http://paulgraham.com/gh.html http://paulgraham.com/gh.html So your question becomes, do I think that the economic inequality we see today is increasingly of the old form rather than the new form? No, I don't see any evidence of that, not in the US.

jshen 16y ago
Thanks for taking the time to answer, and I completely agree with the framing of the two types. The reason I asked is that it's hard for me to believe that the rise in CEO pay is a result of a rise in productivity of said CEOs. Another example would be wall street, they are taking a larger and larger cut of the pie, but I can't see how they are adding to the pie commensurate with their increasing rewards. In short, this seems like the old form to me. The counter points are of course Jobs, Zuckerberg, The Waltons, etc. But it feels like these are not the majority case, but I admit I don't have any hard numbers on this.
- pg 16y ago
  It's clearly possible for CEOs to be worth the sort of money they get paid. E.g. Steve Jobs. If I had started a company and wanted to retire, and was looking to hire someone to run it for me, I would have no problem paying the right person 5% of the total revenues, or even more. From what I've seen (and I am old enough to remember the old days), the main cause of the rise in CEO pay is that CEOs are now the equivalent of free agents in baseball. The hedge funds are an interesting case. I'm not absolutely sure about this, but I suspect they are irrelevant, because while they don't create wealth, they don't confiscate it either, at least not in the old way.

triviatise 16y ago

It may be a sign of a healthy market, that ultimately can become unhealthy to the society. So it depends on which aspect of the US you are looking at. As people get disproportionate amounts of money, they get disproportionate amounts of power that they can then use to distort the rules of the game. When there is a small but very wealthy class (say .1% of the population owns 80% of the net worth) then maybe the rest of the population can become oppressed. It is difficult to get good stats on this, but this site has data that suggests since 1983, the top 20% have improved their lot at the expense of the bottom 80%. Income isn't really a good way to measure the gap. If someone makes 500K/year and spends 100% of it on non-assets, they are just returning their money back into the system. It is actually a complex problem to determine if the changes are good or bad, if wealth vs. income is the right measure, and what percentile groups make up the "elite"