Thursday, February 01, 2007

DeLong on inequality

Brad DeLong, a Berkeley economist, has summarized his thinking on inequality. He distinguishes between international and national inequality, and sets his personal views aside...
Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: What Kinds of Inequality Should We Worry About?

... on the level of individual societies, on the level of nations, I believe that inequality does loom as a serious political-economic problem...

... Odds are that a greater effort to raise the average level of education in America would have both made the country richer and produced a much more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find and thus worth more on the market.
.. corporate CEOs and their peers and near-peers make ten times as much today relative to the patterns of a generation ago. They do not do this because a CEO's work effort level and negotiation and management skills are in relative terms ten times as valuable to a corporation today as they were to a corporation of a generation ago. They have risen because of a reduction in the ability of other corporate stakeholders to constrain the freedom of top managers and high financiers to direct the value added in their direction.

Similar patterns are found in other countries across the globe... For the most part, it looks like these changes in economy and society have not resulted in more wealth but in an upward redistribution of wealth: a successful right-wing class war. The easiest counterfactuals to imagine are those in which greater public investments in education and greater moral, legal, and cultural constraints on the freedom of action of those at the top produce an equal or greater amount of total wealth and income with a lower degree of inequality.

This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer, and the other hundred-millionaires of Microsoft are brilliant, hard-working, entrepreneurial, and justly wealthy. But only the first 5% of their wealth can have any justification as part of an economic reward system to enourage entrepreneurship and enterprise. And the last 95% of their wealth? It would create much more happiness and opportunity if divided evenly among the citizens of the United States or the world than if they were to consume any portion of it.

Moreover, an unequal society cannot help but be an unjust society. The very first thing that any society's wealthy try to buy with their wealth is a head start for their children. And the wealthier they are, the bigger the head start. Any society that justifies itself on a hope of equality of opportunity cannot help but be undermined by too great a degree of inequality of result.

In the United States, the problem of inequality has two dimensions: insufficient effort to educate, and insufficient control by other stakeholders' of the ability of the top 50,000 or so earners' discretion. In other countries the problem of inequality has these two but also other dimensions as well. In all it is something we should worry about, because we can see in our minds' eyes alternatives that would make for better, healthier, happier, and equally well-off societies.
I can't prove it, but I suspect that the C-suite value-redirection has a significant negative effect on corporate morale and thus productivity. Humans are hard-wired to punish cheaters, and employees see these wins as unfair.

So the CEO cut is probably contrary to the interest of shareholders as well as stakeholders ...

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