Bruce Bartlett and Tyler Cowen on Inequality

Bruce Bartlett writes about income inequality:

Is Income Inequality Really a Problem? by Bruce Bartlett, Commentary, NY Times: With Democrats back in charge of Congress, it is not surprising that we are seeing a revival of interest in the issue of income inequality. In his response to President Bush’s State of the Union address on Tuesday, Senator James Webb, Democrat of Virginia, complained that corporate C.E.O. compensation has risen from 20 times that of the average worker 40 years ago to 400 times today. Such obscenely large payouts may result from nothing more than the operation of Adam’s Smith’s invisible hand, but even many conservatives are wary of defending it that way.

One free marketer who is not afraid to do so is Alan Reynolds of the Cato Institute, whose new book, “Income and Wealth,” is a thoroughgoing attack on those who would redress income inequality through higher taxes. The cure, he says, would be far worse than the disease.

This is not new territory for Reynolds, one of the original “supply-side” economists who convinced Ronald Reagan and the Republican Party to support large tax rate reductions in the 1970s. ...

While Reynolds covers the waterfront of issues related to income distribution, he has lately been enmeshed in a debate about whether income inequality has or has not risen as much as most people believe it has. ...

Reynolds has been criticized for making too much of inherent limitations in the data that have been known for many years and for ignoring evidence that conflicts with his thesis. Most economists would probably agree with Gary Burtless of the Brookings Institution... Even accounting for the factors Reynolds cites, there are too many different sources all showing a rise in income inequality, from Census Bureau and Federal Reserve data based on surveys to Securities and Exchange Commission figures on executive compensation, which come straight from corporate filings. No matter how you slice it, the distribution of income has become more unequal over the last 20 years or so...

Personally, I am willing to concede the point, but I would prefer to come at the income distribution question in a different way. I have long sought a study showing exactly what the cost of inequality is. If my real income does not fall, how am I hurt when Bill Gates makes another billion dollars? After all, the economic pie is not fixed. What he gets doesn’t come at my expense, so why should I or anyone else care? ...

In every debate on the subject I have ever engaged in, those advocating redistribution were not concerned about inequality per se. They were bothered by poverty and an infinite list of unmet social needs that they believe could be cured if we just spent more money on them. Since people like Gates clearly don’t need all their wealth in any meaningful sense — he would be just as well off materially with only 10 percent of what he has — redistribution appears to be a costless way of making many people better off while not really hurting anyone. In other words, the argument for redistribution is, at its core, not moral but purely utilitarian — the greatest good for the greatest number.

If it were costless to play Robin Hood and take from the rich and give to the poor, it would be hard to oppose. But there are costs. We really don’t want the Gateses of the world sitting around clipping coupons. We want them out there thinking of new products and businesses to make themselves richer, because in the process they will improve the quality and lower the prices of goods and services we use, employ workers ..., and so on. Nor do we want the poor sitting around waiting for handouts. We want a balance in which incentives are preserved both at the top and the bottom of the income distribution. ...

Perhaps ... redistribution measures would be justified if there were evidence of income stratification. But all the evidence we have tells us that there is considerable movement up and down the income scale... Karl Marx’s 1865 observation remains valid: “The position of a wages laborer is for a very large part of the American people but a probational state, which they are sure to leave within a longer or shorter term.”

Perhaps a better way of addressing the issue might be to ridicule the excesses of those with great wealth the way gossip columns and Web sites make fun of “celebrities” like Paris Hilton. It could be a better way of encouraging the wealthy to engage in socially beneficial activities, such as donating funds to poverty relief, instead of buying yachts and jewels.

The topic of inequality has been discussed here in some depth, so just a couple of things. Many of the statements presume that compensation at all income levels is determined in competitive markets. If it isn't, and I don't think it's hard to make the case that many of these markets (e.g. CEOs) are not competitive, then compensation at the margin is greater than it would be under an efficient outcome.

As for the claim about stratification and income mobility, that's been covered before as well:

The American Dream gains a harder edge, By David R. Francis, CSMonitor.com: The American dream, at least on the economic side, is fading. … Today … the odds of a son or daughter rising above their parents in such a financial predicament have shrunk. "Income mobility has declined in the last 20 years," says Bhashkar Mazumder, an economist at the Federal Reserve Bank of Chicago. What that means is that the US is becoming less of a meritocracy, where skill and intelligence determine success, and becoming more of a class-bound society, where economic background, including the better education money can provide, matters more. … Most Americans don't believe that to be true, surveys show. But academic studies suggest that income mobility in the US is no better than that in France or Britain. It's actually lower than in Canada and is approaching the rigidity of Brazil. That marks a change from the past… From 1950 to 1980, Americans were more and more likely to see their offspring move up - or down - the income ladder. … Today, it could take five or six generations to close the gap between poverty and middle-class status, calculates Mr. Mazumder. … [Income Mobility Papers by Bhashkar Mazumder.]

Next, Tyler Cowen also takes up the topic of inequality:

Economic Scene Incomes and Inequality: What the Numbers Don’t Tell Us, by Tyler Cowen, Economic Scene, NY Times: The growing inequality in wealth and income has led many people to question whether the contemporary American economy is rigged in favor of the rich. While there is little doubt that the gap between the wealthy and everybody else has widened in recent years, the situation is not as unfair as some of the numbers seem to imply.

Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.

Furthermore, more-educated groups show greater income inequality than less-educated groups. Uneducated people are more likely to be clustered in a tight range of relatively low incomes. But the educated will include a greater range of highly motivated breadwinners and relaxed bohemians, and a greater range of winning and losing investors. A result is a greater variety of incomes. Since the United States is growing older and also more educated, income inequality will naturally rise.

Thomas Lemieux, professor of economics at the University of British Columbia, estimates that these demographic effects account for about three-quarters of the observed rise in income inequality for men and 69 to 95 percent of the observed rise in income inequality for women (The American Economic Review, June 2006). ...

Alan Reynolds ... goes further... Mr. Reynolds ... describes the observed rise in income inequality as a statistical illusion. The consensus of professional economists is that Mr. Reynolds goes too far. The long-term trend of rising income inequality is evident in many different studies, including those of executive compensation, even if some estimates are exaggerated.

In any case..., income is not the only — or even the most — important measure of inequality. For instance, inequality of consumption ... does not show a significant upward trend (Dirk Krueger and Fabrizio Perri, “Does Income Inequality Lead to Consumption Inequality?” January 2006). Consumption, of course, is not an ideal indicator of well-being; a high or steady level of purchases may reflect growing debt, and the ease of buying a big-screen TV does not reflect a comparable ease in buying good health care.

Happiness, possibly the most relevant variable for a study of inequality, is also the hardest to measure. Nonetheless, inequality of happiness is usually less marked than inequality of income, at least in wealthy societies. ... Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness.

Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations. (See the symposium in Journal of Happiness Studies, December 2005.) ...

If we look at leisure, from 1965 to 2003, less-educated groups experienced a bigger boost in free time than more-educated groups (Mark Aguiar and Erik Hurst, Federal Reserve Bank of Boston Working Paper). In other words, the high earners are working hard for their money and perhaps they are having less fun.

So matters are not as bad as the critics have suggested. ... Income and wealth inequality measures, taken alone, provide a misleadingly pessimistic picture.

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people.

What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.

I don't see why "Happiness [is] possibly the most relevant variable for a study of inequality." As Tyler notes, "Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness." So, we shouldn't expect that making the wealthy even wealthier will affect the distribution of happiness.

That is, if we start with one wealth distribution that is unequal, and then give even more wealth to the people at the very top (as has happened), they won't get any happier and happiness inequality will be unchanged.

But if the same wealth were given to the lower end of the distribution, would the happiness gap still remain unchanged? I don't see how a static happiness gap when wealth is flowing to the top of the distribution implies that inequality has not increased. It only means that those receiving the additional wealth don't appreciate it since it makes little material difference in their lives.

Update: Steve Kyle at Angry Bear also comments on Tyler's article.
Update: Felix at economonitor follows-up, and adds more from Robert Shiller and others on the topic.

Comments

[bullbust]

"If my real income does not fall, how am I hurt when Bill Gates makes another billion dollars?"

"it remains the case that most American wealth today is produced rather than taken from other people."

Taken together, we see the ridiculous nature of the arguments propounded.

-Without the patent and IP rents, Bill Gates wont be earning as much.

-Which means we all end up paying Gates more than we should. The wealth is taken from those who produce it.

Wealth has increased - the question is how was the increased share divvied up? Bill Gates get more than he should, because of the patent and IP rents.

Personal wealth in the US today is more a product of sycophancy - rig the system to collect tolls and be the toll collector - rather than competitive or creative ability.

The second thing that these bull articles omit is the fleecing of owners by the management. Again we see a sycophantic system where the 'managers' who manage the money for investors and the 'managers' of the corporations where the money is invested, look out for each other, leaving the investors a pittance. Hedge funds, mutual funds, pension funds,.. you name it - the story is the same.

These two reasons put together can explain most of the concentration of personal wealth in this country, rather than all the reasons mentioned in these bull articles

[Isabel]

"Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.

Furthermore, more-educated groups show greater income inequality than less-educated groups."

????? What about Scandinavia?

[dale]

And no mention of the effects of inequality on health, longevity, etc. It's literally a matter of life and death. See the British social epidemiologists- Wilkinson and Marmot.

[Isabel]

I've linked to this article before, that I find fascinating:

THE HEIGHT GAP - Why Europeans are getting taller and taller—and Americans aren’t

http://www.newyorker.com/fact/content/articles/040405fa_fact?040405fa_fact

Its rationale is the following:

"Over the past thirty years, a new breed of “anthropometric historians” has tracked how populations around the world have changed in stature. Height, they’ve concluded, is a kind of biological shorthand: a composite code for all the factors that make up a society’s well-being."

Here is an excerpt that seems to indicate that inequality per se might indeed have costs:

"As America’s rich and poor drift further apart, its [height] growth curve may be headed in the opposite direction, Komlos and others say. The eight million Americans without a job, the forty million without health insurance, the thirty-five million who live below the poverty line are surely having trouble measuring up. And they’re not alone. As more and more Americans turn to a fast-food diet, its effects may be creeping up the social ladder, so that even the wealthy are growing wider rather than taller. “I’ve seen a similar thing in Guatemala,” Bogin says. “The rich kids are taken care of by poor maids, so they catch the same diseases. When they go out on the street, they eat the same street food. They may get antibiotics, but they’re still going to get exposed.”"

[john c. halasz]

Er, "wealth" is commanded resources and resources have variable uses. And the among the generalized purposes of the uses of resources, aside from seeing to their "efficient" use, which is no small matter, is to see to it that they are deployed in taking care of the world, including human beings and nature. What is it that says that not attending to the distribution of resources is the best way to insure their optimal uses? How does that serve to transmit some or all of the relevant information?

[reason]

john c. halasz,
has it right. Some people seem to have forgotten what the economic is for. GNP is a proxy, not the real goal of the system.
Besides which we need these incentive effects measured. Lets not forget there is a negative income effect and a negative substitution effect which partly (or wholly) cancell each other out for higher earners. It always amazes me that "Free-marketers" emphasize the income effect for the poor, but ignore it totally for the rich. I'm all for removing poverty traps and building sensible tax/social security systems that don't ignore incentive effects, but that has little to say about incentive effects for the rich.

[BiJian Feng]

And how much should Bill Gates get? How will that be determined and by whom? Will some government employee sit there and calculate how much each and every person should make? Those are problems socialism never solved.

As for patents, we can argue the number of years they should be in force before expiring, but clearly they are needed. Inventors and artists who create need some way to monetize their works. The more useful their creation, the more people who will demand it, and the more money they should make in compensation. The guy who invents the tractor in a primitive farming society, saving EVERY farmer 2 hours a day in labor FOREVER, should never have to work again thanks to what he's already done for the society. A patent does just that. The patent will expire, but he'll have made a deserving fortune before then and there's nothing wrong with that.

Now I do have a problem with the way patents are handed out currently, especially for the internet and technology. "The process and idea to sell X over the internet" should NOT be patentable. Patents are handed out too easily in my opinion, but patents are important. Drug companies definately need patents so that they can recoup the costs of R&D, including all the drugs that failed before, PLUS a profit, or else investors would never put up the capital needed for drug creation in the first place. I'm not going to invest in a drug company if I can't get a return on my investment that compensates me for the risk I'm taking. Capitalism works!

[anne]

Thank you for the New Yorker reference, Isabel. There is an idiocy to the discussion that should be self-evident by evidently isn't evident at all:

"If we look at leisure, from 1965 to 2003, less-educated groups experienced a bigger boost in free time than more-educated groups (Mark Aguiar and Erik Hurst, Federal Reserve Bank of Boston Working Paper). In other words, the high earners are working hard for their money and perhaps they are having less fun.

"So matters are not as bad as the critics have suggested."

From the wit and wisdom of Tyler Cowen.

[a]

"Will some government employee sit there and calculate how much each and every person should make?"

No, we the people will elect Congresspeople and Senators, who will raise taxes on the wealthy.

[Isabel]

Well said, a!

[anne]

Oh, by the way, about drug companies recovering this and that and the other. The most profitable sector of the American stock market since 1980 has been our international drug companies, so too the most profitable investment sector. In 1980, drug companies gained the right to patent drugs developed in the public domain or with public funding. Recovering costs, which are vastly overstated, is a breeze.

The Vanguard health care fund has returned 19.2% a year since inception in 1984, while returns from 1980 to 1984 for the historically low turnover fund would have been comparable.

[anne]

"What matters most is how well people are doing in absolute terms."

This in a country in which 47 million people, most adults and most working, have no health insurance in the course of a year. And, why even bother to point to the cost of college education. And in western Europe, well, why compare. But, absolutely, all is well and better than well.

[Remember, my health care insurance is gold-plated and I am am thinking of switching gall bladders just to say I did. Wow.]

[callahan]

I can't believe this needs to be debated. Let one of the "geniuses" who denounce the inequality issue try living at what is called the "poverty" level. Even poverty level to the power of 2.

In the old days unions would have taken care of the problem. Today unions are useless. What's the answer? We start with an armed march to DC.

[gng]

"The broader philosophical question is why we should worry about inequality — of any kind — much at all."

We should worry about inequality of wealth because it's symptomatic of inequality of opportunity. It's difficult to be happy when your potential is limited more by your class and by chance then by your innate talents and abilities.

says...

GNG:

"The broader philosophical question is why we should worry about inequality — of any kind — much at all."

We should worry about inequality of wealth because it's symptomatic of inequality of opportunity.

[Precisely; and there is no real debate only the same radical conservatives suddenly finding truth beyond the biblical in the delivered tablets of Alan Reynolds. I went to Confession, and I can think such things again.]

[anne]

Sorry; I am bullying my computer to Confession now, but that was me.

Maria understood at once just how Alan Reynolds was being prepared for never-think-tank sainthood. These folks simply go about using each other for authority on any topic from global warming on....

[maria]

The lengths of convulted argument that the mouthpieces for the obscenely rich in the USA will go is beyond amazing. This segment of US society, or much of it, seems to have lost all social morality and decency. It might be best illustrated by the spectacle of a obese glutton wolfing down Beluga caviar surrounded by starving women and children while telling them how perfectly okay it is for him to do so.

[ken melvin]

Worried about wealth distribution? Not this lot. Oh, not at all. Absolutely not at all. Hardly a need to mention, let alone defend.

[callahan]

All is well in Wally World (Walmart). Forbes 400 list has at least 4 Waltons at $15 billion each. How are wages at Walmart? Maybe $10 bucks an hour.

[maria]

US drug companies have "rigged" the situation here with lavish ad campaigns and funds funneled to Congress so that most drug profits are made in the USA. Where the public has to pay more than, say, in Europe or Canada, so that these companies can return 20% or often much more on equity. Cutting drug prices Canadian style would be more than reasonable and it would not stop the companies from developing new drugs. That is simply a scare tactic to defend their extreme profits. PS I might add that even so, mismanagement and wasted resources has blunted the performance of several of these companies. Most of big pharma waste billions on "research" whereas most new drugs now come from boutique biotechs.

[save_the_rustbelt]

While it is not the duty of the government to end inequality, neither should it be the task of the government to increase inequality.

Both Rubinomics and Bush-o-nomics have rigged the game, the government represents the rich. Perhaps the Rubin version was a little more worker friendly, but not much.

News for Cowen - the game is rigged.

[anne]

Maria makes an important point, for drugs are increasingly being developed in small biotechnology companies, often university related. Some of the evidently promising small companies are partly financed by the internationals. As drugs show promise the international companies negotiate for ownership or take distribution rights.

Still, over 65% of drugs gaining approval are "me-too" designs, which are slight variations on established drugs and meant to further hold patent rights.

Also, international drug companies regularly pay generic drug makers to keep generics from the market. Yes; they really do, and the practice is currently being defended and successfully defended in court.

[anne]

How the game is played:

http://www.nytimes.com/2007/01/24/opinion/24wed3.html?ex=1327294800&en=fbddc80d593946f8&ei=5090&partner=rssuserland&emc=rss

January 24, 2007

Return of the Drug Company Payoffs

Two excessively lenient court decisions have allowed the manufacturers of brand-name drugs to resume the underhanded practice of paying generic competitors to keep their drugs off the market. It is a costly legal loophole that needs to be plugged by Congressional legislation.

The problem arises when a generic manufacturer tries to take its drug to market before the patent on a brand-name drug has expired by arguing that its product does not infringe upon the patent or that the patent is invalid. Huge sums of money are at stake, especially with blockbuster drugs whose annual sales can exceed a billion dollars.

Rather than risk it all, a brand-name manufacturer may choose to pay its generic competitor substantial compensation to drop its challenge and delay marketing its drug. Both companies make out handsomely. The big losers are consumers and the public and private insurers that must continue to pay monopoly prices for the brand-name drugs....

[anne]

So, then, there are drugs well beyond patent and highly expensive that generic companies will not manufacture. There is remarkably little competition among generic drug makers, though profits are ample, while questions are seldom asked after the lack of competition. Drugs needed for limited numbers of patients can be and are a special problem.

[anne]

Also, there is a little game of deception that is always played by Republicans when they are losing political power. The game is, well, there may be problems now but the problems were and will be worse with Democrats. But, middle class households fared far better under Bill Clinton, for all the fierce Republican opposition, than they have under George Bush.

[Keith]

"Even poverty level to the power of 2."

Since $15,000 squared = $225,000,000, I'd be thrilled to take you up on that.

[reason]

IP and scientific research (as against product development - two different things) seems to me an area open to debate. Does IP promote science in a socially desireable way. Do market incentives increase the effectiveness of science, or do they tend to undermine the ethics of science (more than say the promise of fame does)? Has someone researched whether the promise of financial reward motivates scientists to better scientific acchievement?

My contention is, that it has a positive impact on the financing of science, but a potentially negative impact on the direction and even the pace of scientific development (because it emphasizes narrow and secretive research).

I think we need another paradigm for financing science.

[callahan]

Keith: point taken, I misspoke on power of 2, meant twice the poverty income.

Now if $15,000 is poverty, then make that a power of 4, whoops make that a multiplier of 4.

Two incomes at the multiplier of 2 or $60,000 ain't that much in Michigan anymore.

I'm thinking the poverty ceiling needs to be re-thunk.

More like $50,000.

[anne]

Yes; intellectual property rights and availability is a critical topic to be studied internationally. I have long argued, that central to the explosive development of China has been technology transfer. And, as far as I can tell and am told, Chinese technical development is becoming rapidly more impressive.

[reason]

Keith/Callahan,
squaring currency amounts is meaningless!

[yartrebo]

"The guy who invents the tractor in a primitive farming society, saving EVERY farmer 2 hours a day in labor FOREVER, should never have to work again thanks to what he's already done for the society. A patent does just that. The patent will expire, but he'll have made a deserving fortune before then and there's nothing wrong with that."
- BiJian Feng

Society could achieve that end (rewarding the inventor with no more work) for much, much less by directly paying him a pension and not having a patent. Even better, society could pay a salary to the most inventive minds to spend all their time developing new inventions, which will dramatically increase the rate of new inventions.

Patents mean that the rest of society can't use the invention freely, which means some do without, others have to pay distortionary patent fees, and resources are wasted on lawyers, courts, accountants, and so on. It also means that inventors have to be very careful that their inventions don't use patented parts, so that means less innovation overall and yet more lawyers.

[callahan]

Reason: Meaningless? So is a CEO, but he's paid well aint he?

[reason]

The sqare of currency is in units of currency squared?

[callahan]

Reason: Don't be a square, I'm talking raise the ceiling on what is called poverty income.

Or why do you suppose congress voted themselves a raise eight times over the last ten years?

says...

"After all, the economic pie is not fixed. What he gets doesn’t come at my expense, so why should I or anyone else care? ...

This all depends on how the pie grows and Barlett restates this argument from "Supply Side" economics in action. the 83 book.

gains in productivity are a great tool to hedge inflation however, they can also create profits that are not Plowback. This will channel gains in the pie up to investors. This recovery has been leveredged debt driven. Home price increases. Few Gains from Wages. At the end of the business cycle, a purely supply side model becomes inefficient as a demand creator. inventories rise, markets cant clear etc etc etc.

[fiskhus jim]

Rising income inequality would be acceptable if it could be made to be merit-based in some way.

However, most of the increase in income inequality is not due to hard work or even smart investment - it is due, primarily, to family connections, undue political/economic/social influence and the ability of the already wealthy to purchase additional income. And, that is NOT the hallmark of a market that is free.

[callahan]

Ok, forget poverty income. Let the geniuses who say don't worry about inequality try living on the "MEDIAN" income. Even the MEDIAN times 2, will not a rich man make. Maybe comfortable middle class, but far from rich.

Does this mean that the figure defing poverty needs to be raised? Yup. Does that mean that we many, many more families living in poverty than we thought? Yup.

[callahan]

Now what about the "working poor"? Poverty or no?

Bump it up a notch, how about the "working eeking out an existance from one paycheck to another"? Poverty or no?

[Alex]

The issue about economic inequality has to be dealt with in a number of ways. There is first the economic sense, then the moral sense. In order to give society cohesion, there should not be a great stratisfication of income and wealth. For the economics, there must be enough incentives to spur economic growth. Fortunately, it would appear that an economy with some inequality in distribution, but also with saftey nets, is the way to go. Now one could argue about changing pre-tax outcomes, post-tax outcomes, or both at the sametime. It would seem to me that either changing pre-tax incomes or post-tax incomes would be a good idea, depending on what one cares about. As far as I'm concerned, we should let the economcy rip, do its thing, and then redistribute income and wealth via taxes, transfers and a saftey net. I also admit the caveat that I am not dealing with regulations, structures of relatively efficient markets and dealing with market failure, although these to have impacts on such redisribution ideas.

Additionally, there is the question of the post war period (1947-1973) which was great for Americans. Why was that? I mean, were there differences between then and now, disregarding taxes, unions, government policy in general, that led to these beneficial outcomes. I would argue that there might have been some differences, particularly the post war boom and lack of a globalized economy, which led to gains for middle Americans. Could the 1947-1973 period be replicated today?

[callahan]

The early 1900's had some rough times, people were killed while trying to organize labor unions to get a fair wage and fair working conditions. Those days may be coming back.

Should a lawyer or a doctor or a dentist or a economist be able to have two middle class homes while a great portion of the working population struggles to hang on to one home? No. Inequality grows deeper every G.D. day.

[billy]

"The guy who invents the tractor in a primitive farming society, saving EVERY farmer 2 hours a day in labor FOREVER, should never have to work again thanks to what he's already done for the society. A patent does just that. The patent will expire, but he'll have made a deserving fortune before then and there's nothing wrong with that."
- BiJian Feng

Society could achieve that end (rewarding the inventor with no more work) for much, much less by directly paying him a pension and not having a patent

This whole "innovation will stop without patents" is bogus. If inventors dont want inventions to be copied, then dont make it public. Keep the tractor under the bed.

The guy who invents the tractor has no natural right to stop others from copying his invention; todays patents rights are artificially created by government and laws. The aim of those laws should not be to make inventions a jackpot so that the inventor has to 'never work again'.

The sky is not going to fall if patent rights are curtailed - the inventor will still earn a living, but what they wont be able to do is to make a killing.

I would rather the inventors work constantly to improve their invention, if they wants to continue a living. This one-shot invention/jackpot/retirement is a rigged system, engineered to transfer wealth to the few.

There's no difference between earning a living and hitting the jackpot. At least that is not debatable given that these articles are saying inequality does not exist. So I say, why give the inventor more these laws that curtail other people's right?

The far right should agree with this - there is a good body of libertarian argument to back this up.

[Keith]

On the height issue, I think has nothing to do with wage inequality, since the height problems seem to affect our rich. I hypothesize that our height problem has more to do with our lower driving age. Kids turn 16, drive, and eat crap out of the home instead of better food in the home just when they should be eating right for their final growth spurt.

To test my theory, I suggest we check heights among the Amish. We may also look for heights among kids who didn't get licenses for some exogenous reason.

The problem with making a big deal out of wage inequality is that it distracts you from the real causes of actual problems. This is the primary problem with the left.

[Keith]

As I've pointed out at Angry Bear, it looks like people are (somewhat deliberately, perhaps) missing Ty;er's point.

As we've sent more kids to college, we've ended up with more wage inequality. Tyler cites recent research by Lemieux that was published in the AER to show something very important: The increases in inequality are driven by inequality WITHIN the college-educated cohort, not inquality BETWEEN the college-educated and high-school educated cohorts.

In other words, when more kids go to college, you later get more inquality within that group of kids, because wage variation among the college educated is much higher then wage variation among the high-school educated.

In other words, our increase in inequality is largely caused by INCREASES in opportunity.

[Keith]

"However, most of the increase in income inequality is not due to hard work or even smart investment"

Actually, as other work by Lemieux has shown, a large part of the increase in inequality (25%) is driven by moves towards performance based pay in the American economy over the last 30 years. The other main causes are demographic. We have more college-educated workers, and inequality WITHIN college-educated workers is higher compared to inequality within other groups (and has been for 30 years). And we have more older workers. Inequality within older workers is higher too relative to inequality within younger workers (and it was that way in the early 1970s, too; we just have a larger fraction of older workers).

In short, we have more inequality because we've sent more people to college (arguable an increase in opportunity), we've had fewer babies, and we've moved to more performance-based pay. The American economy is no less fair than it was in the early 1970s, and, given the fact that much of our inequality is caused by the increase in opportunities to attend college, is almost certainly fairer.

Opportunity does not necessarily beget equality.

[James Killus]

One point that is seldom mentioned is that wealth itself depends strongly on government intervention in society. Wealth, especially vast wealth requires enormous maintenance, in the form of legal and police protection. Sans government, a wealthy individual would need to spend great sums on a private police force simply to keep people from walking off with chattel or moving onto unprotected real estate.

On the other side, it's rare to find a great fortune whose wealth never passed through government coffers, or whose income doesn't depend upon some regulatory "favor". Would physicians become wealthy without the vast sums spent by Medicare or the tight regulations on who can practice medicine (or even be educated in the practice)? Would the U.S. computer industry even exist in its present form without the initial government markets for its products and without peculiar (and dubious) kinds if intellectual property?

It's also worth asking how much of the U.S. military expenditures are for the purpose of maintaining a particular global order that benefits wealth more than it benefits ordinary folk.

Put this all together, and it suggests strongly that the real issue for current policy is that the highest income Americans are simply not paying their fair share of the cost of government. They receive enormous benefits from the functioning of government, yet pay a much smaller share of taxes than their position in society exercises in the way of power and privilege.

[Keith]

"Sans government, a wealthy individual would need to spend great sums on a private police force simply to keep people from walking off with chattel or moving onto unprotected real estate."

Us ordinary folk types kinda like police protection too.

"It's also worth asking how much of the U.S. military expenditures are for the purpose of maintaining a particular global order that benefits wealth more than it benefits ordinary folk."

It ain't the wealthy who would be the most screwed if this particular global order fell. It would be the ordinary folk, who always suffer the most when disorder comes along.

"Would physicians become wealthy without the vast sums spent by Medicare or the tight regulations on who can practice medicine (or even be educated in the practice)? "

So you favor ending Medicare and regulations who can practice medicine? Milton Friedman would be proud.

"Would the U.S. computer industry even exist in its present form without the initial government markets for its products and without peculiar (and dubiou(and dubious) kinds if intellectual property?"

Yes, thanks to intellectual property rights, the wealthy make money and the orinary people get a ton of great products. So ruin the efficacy of our intellectual property rights laws by taxing away all the benefits?

That's the strange part about people on the left. They actually resent the benefits that government creates for society, and thinks government should take it all back. They also don't seem to understand how the market makes government more effective. We built an interstate highway system, but we didn't centrally plan all the fueling of all the cars, we let the market handle that.

"They receive enormous benefits from the functioning of government, yet pay a much smaller share of taxes than their position in society exercises in the way of power and privilege."

We all receive enormous benefits from the functioning of government. That's the point. After all, when I go buy bread from the store, I don't pay more just because I get a lot more satisfaction from bread.

And I'm curious: How exactly do you calculate the share of taxes based on power and privilige? Do you believe that power and privilige are a concave, linear, or convex function of income and wealth?

Oh, and Tyler's still right. A lot of our inequality growth came about because we increased opportunity by sending more kids to college, and wage inequality is relatively higher among college-educated people.

[James Killus]

"So you favor ending Medicare and regulations who can practice medicine? Milton Friedman would be proud."

Keith, when you engage in this sort of straw man chicanery, it makes it hard to credit anything else you might say.

Indded, just about everything else in your reply is a straw man. My words "fair share" carries with them the notion that, yes, indeed, many others receive benefits from laws and the enforcement thereof. That does not alter the fact that large concentrations of wealth enjoy greater protection than small amounts, or do you really believe that it is safer to steal from a rich man than from a poor one? Is it really your opinion that the police, fire, and emergency services respond just as quickly to a call from the poor section of town than to one from a gated community? Do you truly believe that it is as easy for a poor man to get into a university than a rich one, or that, once educated, the poor man has just as good a chance at wealth as one with family connections and inherited wealth?

Or are you simply trying to pretend that the world is just, when anyone with a smidgeon of experience, and a lick of sense knows that it is not?

[anonymous]

"As America’s rich and poor drift further apart, its [height] growth curve may be headed in the opposite direction, Komlos and others say."

This one's easy: America takes in more Asians, and noone is going to argue that the influx of the yellow men is the wealth-buster in itself, now is it?

[Morgan]

James:

"Sans government, a wealthy individual would need to spend great sums on a private police force simply to keep people from walking off with chattel or moving onto unprotected real estate."

If anything, that argument seems to imply that the wealthy should be taxed less!

Does it take 10,0000 times as many people to protect $1 million as it does to protect $100 dollars?

What is the ratio of the perimeter of a 10,000 square foot plot of land to the perimeter of a 1,000,000 square foot plot of land?

[Doctor G.]

One reason that there might be more inequality of income among the college-educated is that there is so much corruption in professional and management occupations. So those of us who refuse to lie, cheat, bully, and steal do worse economically than those who do.

[Keith]

"Or are you simply trying to pretend that the world is just, when anyone with a smidgeon of experience, and a lick of sense knows that it is not?"

True justice is proably something nobody wants, deep down, or even knows what it would look like.

But the point is that the world became more just in a particular dimension, the ability of kids from more backgrounds to go to college, and that generated more inequality later on, because there's more inequality within college-educated cohorts. As a result, increases in justic doesn't necessarily increase equality. As I've said before, opportunity does not necessarily beget equality.

And it does look to me like you haven't really thought about what fair taxation would look like or why. You had no answer for my question as to whether you think power and prestige is a concave, linear, or convex function of income. If you can't answer that, then it's clear that you actually had no basis for your statements. You vaguely believe that taxes should be more progressive than they are now for some reason, but you can't say why or how progressive taxes should be.

And Morgan makes an interesting point. One major point about public goods is that they are nonrivalrous in consumption. That means they have strong economies of scale. That means (and this depends on demand curves for these services) that two-part tariffs could be an optimal pricing mechanism for these goods. In the case of zero marginal cost, that would equate to head taxes.

[billy]

"Would the U.S. computer industry even exist in its present form without the initial government markets for its products and without peculiar (and dubiou(and dubious) kinds if intellectual property?"

Yes, thanks to intellectual property rights, the wealthy make money and the orinary people get a ton of great products. So ruin the efficacy of our intellectual property rights laws by taxing away all the benefits?

At least this is easily disproved - Viable Open source software businesses have proven how "the intellectual property rights" meme is plain transfer of wealth, rather than anything else.

[fiskhus jim]

I was talking about the ridiculous and absurd pay packages - like Jack Welch's $900 Million, the recent Home Depot payout and the package what-his-name got from the NYSE.

All three of the Compensation Committees had one member in common - and with that kind of social connection implicated in all 3 instances, it's got to be more than mere coincidence.

Plus, I bet, those 3 alone would account for close to a basis point in the study!

[Morgan]

billy:

Please point me to viable software businesses without IP protection. I'd like to start selling copies of their software and undercutting their prices right away!

[anne]

Actually, there have been quite a few successful software businesses without intellectual property protection and a few have been wildly successful. Also, software businesses that tried to be too exclusive were regularly passed by as more open software was offered. The issue is complex.

[anne]

Also, as has been pointed out in the cases of China and Brazil there are reasons to allow intellectual property restrictions to be set aside to establish markets where markets either would not have formed or been formed in a way that would subsequently damage the prospects of a company that wanted entry. Brazil has repeatedly clashed with international drug and record companies on pricing, driving tough bargains but leaving the the companies better off than otherwise. Mexico and Nigeria have long needed to learn from Brazil. Microsoft has understood the trades that need to be made to establish the company in China.

[maria]

An obscene manifestation of income inequality:

http://today.reuters.com/news/articlenews.aspx?type=
domesticNews&storyid=
2007-01-25T211639Z_01_N25460726_RTRUKOC
_0_US-LIFE-HOME.xml&src=rss&rpc=22

[js paine]

anne you are the avenger 'round here
when it comes to big pharma
bravo
i can keep the hands folded
and let you rip away

[js paine]

am i wrong here mark
or have we a new repug hit song

more and more
inequality won't make you less happy after all ???
nice to see the denial phase has ended
so reynolds can go back to making foil wrap

the cigarette boys should have done the same

shifted ground and said
stuff like

study shows
dying prematurely
of lung cancer
won't make you less happy
and cite
a recent study
by
death institute
shows no matter
which way
or why
you die early
you 'll feel the same about it

[anne]

http://www.calvorn.com/gallery/photo.php?photo=3316&u=3878|4|...

American Robins Feeding Their Young in a Nest Perched on Juliet's Chest
New York City--Central Park, Great Lawn.

Nice, Slink. Running this morning, I passed a bush and more than 30 robins lifted out to a near tree. I counted. This in the middle of January.

[billy]

billy:

Please point me to viable software businesses without IP protection. I'd like to start selling copies of their software and undercutting their prices right away!

Product - Apache

Quote from ASF licence

2. Grant of Copyright License. Subject to the terms and conditions of this License, each Contributor hereby grants to You a perpetual, worldwide, non-exclusive, no-charge, royalty-free, irrevocable copyright license to reproduce, prepare Derivative Works of, publicly display, publicly perform, sublicense, and distribute the Work and such Derivative Works in Source or Object form.
3. Grant of Patent License
....

It goes on. You cannot make money selling it, it's free. You can only make money by installing/supporting/ maintaining/customizing/enhancing it for some user or client. In short, no jackpots. You have to work, to get money, and the amount you can get by that work is limited by competition. (It has 70% of it's market.)

IBM definitely makes money doing just that, and the Apache developers/support engineers also get paid.
Money can be made, but competition and the open nature prevents rents.

[Doctor G.]

Oracle makes good money reselling Apache, and so does Apple.

[James Killus]

Morgan is being silly. It only takes one person to protect the $100 or the quarter acre plot--the owner. It is when the amount of wealth that is being protected becomes large that large organizations must become involved.

As for a "just tax policy," I'll start by suggesting that the marginal tax rate of someone collecting a million dollars in capital gains should not be less than that of a self-employed contract worker making less than $30,000 per year.

Put another way, I want the Social Security surplus to be a surplus, and for the federal deficit to be reduced by increased marginal rates on high incomes, i.e. an elimination of the "Bush tax cuts" for the top 10% of incomes and an elimination of the favoritism given to capital gains.

Feel free to scream "class warfare!" and gibber about how it would be economically disasterous, just like the seers did when taxes were raised in the 1990s, you know, prior to the Great Depression that occurred during the Clinton years.

[Keith]

"At least this is easily disproved - Viable Open source software businesses have proven how "the intellectual property rights" meme is plain transfer of wealth, rather than anything else."

Actually, it shows why it's good to have strong intellectual property rights. You can always forgo them if there's a better business plan.

[kthomas]

somewhat unrelated, but the last paragraph of the article is rather sad.

[kthomas]

sorry: http://news.yahoo.com/s/ap/20070125/ap_on_sp_au_ra_ne/car_nascar_industry_woes

[billy]

"Oracle makes good money reselling Apache, and so does Apple."

You are confusing the product with support service. The product can be downloaded, copied, distributed by anyone. That limits the price it can command, you are competing against free downloads. Since the product is open, anyone can learn the code and support it. Difficult to create a monopoly in product support too.

Actually, it shows why it's good to have strong intellectual property rights.

Yup. Because you said so.

[Morgan]

billy:

As I suspected - they're not a software company. Your argument seems to be that I don't need IP rights because I can just make the product so difficult to use that you have to hire me to help.

So when farmer Brown invents a great new tractor, he can just give the invention away, but he'll be fairly compensated when people call him to get the damn thing to work.

[save_the_rustbelt]

U.S. home to set world price record at $155 mln
Thu Jan 25, 4:16 PM ET

NEW YORK, Jan 25 (Reuters Life!) - If you're looking for a new home and have $155 million to spare, you could be the proud owner of the world's most expensive abodes.

Forbes.com, the online site of Forbes magazine, on Thursday said timber and real estate baron Tim Blixseth has just upped the ante in the price of the world's most expensive home, planning to build and sell a home for $155 million.
The 53,000-square-foot stone and wood mansion will be built at the Yellowstone Club, a members-only, residential ski and golf resort near Bozeman, Montana developed by Blixseth.

That tops the $139 million asking price for Updown Court in Windlesham, England, which was listed No. 1 in the Forbes.com list of the world's most expensive homes in 2006.

[dale]

Keith,
I think you're using "opportunity" in a way that makes for a circular argument.

[billy]

billy:

As I suspected - they're not a software company. Your argument seems to be that I don't need IP rights because I can just make the product so difficult to use that you have to hire me to help.

Does not matter - the question was about whether the inventors can earn a living, without IP and patent protection.

And, you seem to have no understanding about this. FYI, Apache is much easier to use, cheaper to get support, and more secure to run, than the product of your epitome of the software industry - Microsoft's ISS server. You think Apache has 70% of the market because "the product so difficult to use that you have to hire me to help" to run it? Especially when -unlike Microsoft ISS- , the entire code is open and available for any copycat company to learn and make a competing product?

So when farmer Brown invents a great new tractor, he can just give the invention away, but he'll be fairly compensated when people call him to get the damn thing to work.

Nothing to do with giving it away. The question is whether someone else can produce a competing tractor? If yes, then that limits what Farmer brown can get. Farmer Brown gets the benefit of being first to market. If Farmer Brown keeps on innovating, he will stay ahead.

This is a real headline
Ford Motor Co. claims patent infringement over General Motors Corp.s third door on pickup trucks

[Arne (not anne)]

"when more kids go to college, you later get more inquality within that group of kids"
I actually think Keith is right to highlight this. My brother has a PhD and teaches music at U of O. I have no PhD, but make considerably more as an engineer. Once you have enough to live comfortably, it leaves room for lots of choices. My brother enjoys what he does, but he will be one of those who makes less than the previous generation.

[Arne (not anne)]

"As for patents, we can argue the number of years they should be in force before expiring, but clearly they are needed." "Capitalism works!"
On the other hand, these two quotes from a single posting are ludicrous when taken together. Patents are there to address one of the market failures of capitalism.

[Arne (not anne)]

Before 1985 software was generally protected by copyright. Patents were not considered applicable.

[cm]

Morgan: As a partial rephrase of billy's points, there is also an "S-curve" effect involved -- during the growth/evolution phase(s) of the product you the originator (and presumably visionary) can maintain an edge over copycats who can only sell past versions (or when they sell present versions they will quickly depreciate in relative value or even become obsolescent). Part of that edge is this mere "propagation delay", another is that your copycats can well figure out the "what" and "how" of your product, but not necessarily the "why", because they have the product of your vision/smarts, but not the whole smarts themselves.

Once the growth curve flattens out, the product has become "commodity", and there is no more edge potential (in that product), but you can create a new edge by moving on to new great products.

At all parts of the curve, you the originator are presumably in a better position to deliver services too, subject to capacity and logistical constraints.

And most tech products don't deliberately have to be made difficult to use, they are often complex by nature, or else making carefree products is a tall enough order, esp. when you have to constantly trade off between "edge" features and perfection/ease of use.

But invariably without "IP" protection, there has to be more emphasis on services.

[save_the_rustbelt]

FADING FORTUNES
Overseas competition is claiming more manufacturing jobs, and Ohio is among the biggest losers
Friday, January 26, 2007
Paul Wilson
THE COLUMBUS DISPATCH
Today's coverage
Fading Fortunes

Overseas competition is claiming more manufacturing jobs, and Ohio is among the biggest losers
Graphic: Increase in displaced workers

International competition caused more Ohio manufacturing workers to lose jobs in 2006 than any year in the past decade, a study has found.

More than 13,000 manufacturing employees became eligible to apply last year for retraining under the federal Trade Adjustment Assistance program, according to Policy Matters Ohio, a Cleveland-based nonprofit research group, which used data from the U.S. Department of Labor.

[Nathan]

I believe the US produces 90+% of all new drugs, largely because of our strict patent laws. If we were to give generics the power they have in many other countries expect to see a stop in new research. You cant have you cake and eat it too.

[fiskhus jim]

I think James Killus makes many valid and valuable points in his rather short post.

Certain it is that the only people screaming "Class Warfare" these days are the ones who are benefitting from the exploitation of the American working class - especially when they manage to pit the American worker against folks in other countries with vastly lower satandard of living. That really generates cash for the rich.

[Real Person from the Real World]

The problem with inequity is that it raises the bar for everything! One Example: Why has Walmart been so successful? It's cheap. The wealthy can buy anywhere, including Walmart, but the poor are pretty much limited to Walmart. And, as in Chaos theory, everything gets bigger as it moves on.... Employers lower salaries because you can live on all those cheap and shoddy goods sold at Walmart, while companies look at average prices that people will spend (skewed toward the wealthy) and keep prices high, while poorer people make up what differences where they can, by using credit cards and getting screwed even more.

As for patents and copyrights, hardly anyone looks at the blog for the Copy Free businesses. So many of you support the right of someone like Bill Gates to copyright everything. Ever wonder about the prices? Those are based on marketing, NOT the actual costs underlying the development. Anyone remember the Noka Chocolate blog? That is just one example of marketing based price nuttiness in this country. And this certainly pertains to medical services and products as well. A cancer cure is socailly useless, if the only ones with access to it, are those making a million dollars a year.

About music files: people bought high quality CDs for sound, but MP3s that lose some of the quality and depend on how they are ripped, are portable. Now that so many people want portability, the companies want you to pay the same price as for a CD. They claim that MP3 files are killing CDs, but what about all the overpriced CDs with one good song and 16 others you couldn't care less abotu. As for MP3s, the quality is lower, the file needs software to run it, and ultimately is vulnerable to damage and compter problems and viruses, and all the copy protection software interfers with the original desire to make the music portable.

Another issue: Look at this article in the NY Times:
Someone (Other Than You) May Own Your Genes
By DENISE CARUSO
Published: January 28, 2007
Medical companies collect information from people then patent them, without regards for the problems the new limitations cause. Your doctor may not be able to discuss a problem you have because the information is patented, and it may have been based on YOUR DNA.

All I can say is that the lengths people are going to, in the new selfish society to defend their accumulation of wealth at everyone else's expense is OBSCENE.