In his book and in this paper [pdf], Richard Layard points out that one’s perceived position in the income distribution is a better predictor of self-reported well-being than one’s absolute income level, given that a certain minimum income threshold has been reached. So, every time you move up in relative income, someone else moves down. This makes you happier, but makes everyone with a diminished relative position less happy, even though their absolute income has not changed, or may even have increased, but less than yours.
Layard interprets your gain in relative position as a straightforward negative externality — in the book he actually calls it “pollution” — and prescribes a straightforward Pigovian tax to minimize its harm. It is supposed that such a tax is not distorting, does not cause a loss of efficiency or create deadweight losses, because the externality was, in this case, caused by an oversupply of labor stimulated by the race for relative position. That is, the race for position causes an inefficiency, relative to the Benthamite standard, and the tax is merely corrective, bringing us to the amount of work that will create the greatest happiness. The loss of economic wealth is irrelevant, insofar as the excess wealth produced by the surplus in labor was not having a positive net hedonic effect.
Layard’s argument entirely turns on whether it is correct to conceive of the your decline in reported subjective well-being as solely the result of my perceived “polluting” act of upward income mobility — whether your feeling bad when I do better is a true, normatively relevant negative externality. This is how he blithely dismisses an imagined libertarian challenge to his understanding of the issue:
Libertarians object to this whole line of argument on the grounds that it panders to envy. They do not apparently mind pandering to greed. We should of course try to educate people away from both envy and greed, since neither is conducive to happiness. But at the same time we should set our other policy instruments at whatever level is optimal for the state of mind which currently prevails.
Layard’s argument here provides some evidence that Layard is not entirely ignorant of the revolution in thinking about externalities brought about by Ronald Coase’s paradigm shattering “The Problem of Social Cost.” [pdf] Let’s back into Coase by thinking about Layard’s flip rebuttal to his imagined libertarian critic.
Layard recognizes the possibility of preference change — that people could become less envious or greedy — and this points to some kind of understanding of the essentially relational nature of an external effect. If you cared less about where you stood with respect to other people, then how much money I make would have less of an effect on how you feel about how much you make. This is Coase’s central insight about externalities: it takes (at least) two to tango. My relative success has no “polluting” effect whatsoever if you don’t care about it. (You’re a good Buddhist, say.) The “pollution” is a joint product of my move up and your preference to not move down. The correct approach to the problem, if there is a problem at all, depends on what the lowest cost solution happens to be. If you changing your preference is cheaper than taxing me, then you ought to change your preference.
To which Layard replies, “. . .we should set our other policy instruments at whatever level is optimal for the state of mind which currently prevails.” This has to be incorrect, because the least cost solution to the putative externality problem may be a transition to a different prevailing state of mind. Furthermore, it seems clear that it may be morally obligatory to refuse to optimize relative the current state of mind, even if it expensive to move away from it.
Consider the Jim Crow American South, or apartheid South Africa. Suppose it was the case that any increase in income among blacks leads to a reduction in self-reported subjective well-being among whites, a reduction that totally swamps the utility gain to blacks. Suppose further that a reduction in income among blacks causes a increase in “happiness” among whites that totally swamps the utility loss to blacks. If “we should set our other policy instruments at whatever level is optimal for the state of mind which currently prevails,” then it is pretty obvious that an immiserating tax on blacks is optimal for the state of mind that prevails. Racist oppression is obligatory.
The Benthamite has two possible replies. (1) Yes, an immiserating racist tax is in fact optimal. This will produce the greatest amount of net happiness relative to the prevailing state of mind. (2) No, an immiserating racist tax is not optimal, because there is (a) an alternative (non-racist) set of preference profiles for members of the community which, if satisfied, would create a greater amount of net utility than the current set of (racist) profiles, (b) there is a feasible path from here to there, and (c) the utility gain of having arrived there will offset the utility loss of getting there.
If (1) is the reply, then we must reject Layard’s Benthamism. Racist opression is wrong, i.e., morally impermissible. If a candidate normative standard implies that racist oppression is morally obligatory, is it clearly disqualified.
If (2) is the reply, then it is false that “we should set our other policy instruments at whatever level is optimal for the state of mind which currently prevails.”
Clearly (2) is the better answer for the Benthamite, because it at least preserves the possibility of remaining a Benthamite. But then Layard will be forced to take the Coasian least cost avoider principle seriously. As it happens, one of Layard’s main points elsewhere is that preferences must not simply be treated as given, but must be understood as endogenously determined. Culture, media, the general structure of economic and social incentives, can shape our tastes or preferences, and these are subject to evaluation as well as our actions and policies. Layard argues that “good tastes are those which increase happiness, and vice versa,” and argues at length that many tastes, such as those that are induced by advertising, performance related pay, and general individualist cultural milieu, are not good tastes. So, clearly, Layard doesn’t really think that we should optimize relative to prevailing preferences, because we may have bad ones. And this more or less guts the rejoinder to the libertarian. Why cater to relative preferences about income?
In the case of the immiserating racist tax, I would argue that the other-regarding preference that blacks be made worse off is morally impermissible simply as matter of justice and independent of hedonic consequences. Not only should it not be given weight when tallying up what is or is not an efficient policy, we morally must not give it weight. I would argue the same thing about the other-regarding preference about one’s relative position in the income distribution. But, it turns out, it’s unecessary to argue this, for the happiness data itself suggests that Layard’s case for higher taxes might be pretty weak if he acknowledges Coase.
According to this fascinating paper by Alesina, Di Tella, and MacCulloch the negative effects of income inequality on happiness is far from written into the stars:
We find some intriguing results. First, Europeans and Americans report themselves less happy when inequality is high; however the effect of inequality on happiness is more precisely estimated for Europe. Second, aversion to inequality is concentrated amongst different ideological and income groups across the two regions. There is no clear ideological divide in the US concerning the effect of inequality on happiness. In contrast, those who define themselves leftist show a strong distaste for inequality in Europe, while those who define themselves rightists are unaffected by it. The breakdown of rich versus poor also shows some differences between Europe and the US. In Europe, the happiness of the poor is strongly negatively affected by inequality, while the effect on the rich is smaller in size and statistically insignificant. In the US one finds the opposite pattern, namely that the group whose happiness seems to be most adversely affected by inequality is the rich. A striking result is that the US poor seem totally unaffected by inequality. Any significance of the inequality coefficient in the US population is mainly driven by the rich.
Now, Alesina, et al. are measuring objective inequality (via state by state Gini coefficient) rather than perceived place in the distribution. But I think they at least establish that the relevant class of preference is highly contingent and likely quite malleable. For instance, they show that right-wingers care more about relative position than left-wingers. If more right-wingers became left-wingers, presumably the “pollution” of upward status moves would diminish. The authors conjecture that inequality has no significant negative effect on the American poor because they believe they can move up, while inequality has a significant negative effect on the rich because they believe they might move down. (So, when the NYT and WSJ and LAT are trying to convince us that there is less mobility than we think, they are contributing to the unhappiness of the poor, and the happiness of the rich.) Presumably, a change in belief about the importance of relative position would mitigate the effects of relative position (as well as mitigating the effects of inequality).
What the Benthamite need to know is whether on average one is more likely to be happier if one cares less about relative position. If so (and it seems plausible), then caring less about relative position may well be the least cost “solution” to the relative income externality “problem.” And that’s even if we treat preferences about relative position as having normative weight, which we shouldn’t. Also, insofar as the current rate and progressivity of taxation is politically driven by preferences about relative position, it may be that people who care too much about relative position are the ones imposing negative externalities — showering “pollution” — on people in the highest tax brackets. The rich therefore may be entitled to a preference shift that will result in tax cuts.
Richard Layard, meet Ronald Coase.
Will,
Do you think that all people can change their concern for their relative position?
If so, do you think it’s easy?
It appears to me to be a pretty fundamental thing to many people.
People may not be able to completely eliminate their quest for status, but they can certainly shift it to other margins, i.e. mastery at underwater basket weaving rather than income. At least I hope that’s true, else I wasted many years of my life.
You spent years of your life mastering underwater basket weaving?
No need to rub it in, Will.
Well, I’m pretty sure that it’s quite difficult. But, I don’t really buy the argument that these income redistributions are really a serious attempt to maximize happiness, anyway.
As Will points out, studies don’t seem to support that the happiness of the poor is greatly affected by changes in inequality.
The thing that’s driving this is the leftist distate for inequality. Not their own low status, personally, but inequality in general.
They seem to care about this much more than about the absolute welfare of the people they talk about helping. Even if they seem to understand that if everybody is getting better off, we should expect the spread between the top and bottom to increase; they keep coming back to describing this as a terrible problem, and are willing to make everyone worse off to “solve” it.
I don’t know if this is a fundmental moral precept that they picked up as small children, or if it runs even deeper than that; but many people I’ve tried to reason with just can’t get past the possibility of inequality of results.
I think it is more a question of fairness than a “distaste for inequality” Gil. Few of the people getting rich these days actually contribute anything of value to society…
Query to monkyboy: And those getting poor contribute more of value?
Some may be, Dilys.
I take it from Will’s latest posts that he has been moved off the looting SS portfolio and onto preserving the illusion that America is still a meritocaracy by his wealthy patrons. Fair enough.
What is the difference between politicians handing out lucractive contracts to their cronies, or a CEO voting himself a huge bonus and the poorest 80% of Americans voting for a huge transfer tax on the wealthiest 20% of Americans?
None that I can see…if their are no rules anymore, why shouldn’t the poor soak the rich?
Monkeyboy,
None that you can see?
You can’t see a fairness-related difference between spending money that people have voluntary paid or invested because they judged that they were getting a good deal, vs. people spending money that has been taken under threat force and without consent?
Call it “fairness” if you prefer that to “distaste for inequality”, but either way, your conception of these things is very different from mine. I think inequality of results is completely consistent with fairness; I’d be shocked if the fair outcome was otherwise. I think the concepts of fairness and equality of results have been confused by a large number of people (you included).
I think it’s “unfair” to people like me who are willing to leave people like you alone to the greatest extent feasible, that people like you aren’t willing to extend us the same courtesy.
You miss my point, Gil.
If you think CEOs today are doing what is in the best interest of their shareholders, I’ve got some Enron shares I can let you have cheap, hehe.
There is no such thing as fairness anymore. We live in a take what you can steal society now.
Whether or not you think taxes are theft..the poor would be suckers not to take the rich for all they can.
I think there’s as much a thing as fairness as there ever has been. Some people will always choose to ignore it.
It’s interesting that you first justified redistribution as serving fairness, and now you say there’s no such thing anymore. I suspect you realize that the initial excuse was BS.
Many CEOs today are doing what they think is in the best interest of their shareholders. Some aren’t, and some of these are getting fired, and others are going to jail.
Society has always been a place where some choose to take what they can steal while others choose not to.
If this society does become one where nobody chooses to be what you call a sucker, I think you’ll find that it will shortly become much less pleasant for just about everyone.
I guess I’d rather be a sucker than a clever rat on a sinking ship.
It’s nice you can take the high road, Gil, but people who have to feed their families don’t have that option.
It seems like a simple game theory problem:
If the system is fair, people should be fair.
If the system is corrupt, people should take what they can get.
Is the system fair?
Median income continues to fall under Bush, yet CEO pay is skyrocketing.
Little of the additional federal spending spent in the name post-9/11 security has gone to anything that actually makes us safer. Rather, it has gone to hundreds of companies run by Republican cronies that generate nice reports but nothing else…and our troops have to buy their own body armor.
What would Marx, the greatest philosopher in history, say to people in the lower income brackets in the U.S.?
Tax the bastards until they bleed…hehe.
I have to feed my family. Why do I still have the option of respecting other people’s property?
The system is pretty fair, although not perfect. The policies you advocate make it less so. Using imperfection as an excuse to go still further doesn’t seem…um…fair.
I’m not sure you’re right about median income falling, or what you think Bush has to do with it, or why you should care about CEO pay.
I agree that much government spending is wasted. That’s one reason why I’d like to reduce such spending rather than increase it as you seem to want to do.
I don’t think popularity contests are a good way to measure philosophical merit, and I would suggest that anyone who still thinks taking Marx’s advice is a good idea is tragically mistaken.
All kidding aside, it really seems like you have an interest in hurting people who are successful. Do you honestly think this will help the less successful in the long run, or do you see hurting the successful as something that’s valuable for its own sake?
Gil, govenrnment spending has been rising steadily under Bush and now accounts for fully one third of the U.S. economy. Through regulation, tax policy, import/export controls, research funding, etc., the government influences or controls the other two thirds of the U.S. economy.
What is the surest way to get rich in America these days? Spend some time working a government job, then cash in on your connections to become rich.
Bush’s choice for the supreme court is a perfect example of this. Judge Roberts has spent the 26 years since he got a law degree evenly split between government service and the “private” sector cashing in on his connections. In that time he has amassed a personal fortune in excess of $10 million.
I don’t advocate taxing the rich out of fairness, rather, to force them to change the rules of the game…
For the non-welfarist consequentialist, the effects of wealth inequality on how individuals evaluate their well-being need not be the whole inquiry. (Not that the evidence presented was conclusive.)
Wealth inequality translates into imbalances of power (of employers vis a vis employees and in myriad other ways). At least some of these power relationships may be bad consequences in and of themselves.
You may say: “We shouldn’t care about it unless it effects individual utilities? To do so would be arbitrary.”
But in practice judgments like this have to be made all of the time on the basis of presumed common sentiments or on whatever bases. Certain dogmas claim that information in “the price system” tells us all we could wish to know about individual well-beings, so much in fact that we ought to dispense with any other information about social states. But even among (possible) devotees to such an approach, there seems to be skepticism about whether “the market” does take into account certain interesting things, for example the costs of preference changes. And that difficulty is still located within welfarist analysis!
Moreover, as most people (including Will) believe, welfarism is not the end all be all of policy analysis. So most will continue to find discussing the axiology of power inequality and the role wealth inequality plays in bringing that about perfectly justifiable.
Of course, it may be that any efforts to reduce power inequality by reducing wealth inequality will do more harm than good. But one should not assume this. And assuming it is no good reason to not care about wealth inequality and the consequent power imbalances. Even if you could change your preferences regarding power their may be good reasons not to want to. The existence of all these libertarian blogs protesting otherwise might seem to indicate that these reasons to have some force.
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Will,
Do you think that all people can change their concern for their relative position?
If so, do you think it’s easy?
It appears to me to be a pretty fundamental thing to many people.
People may not be able to completely eliminate their quest for status, but they can certainly shift it to other margins, i.e. mastery at underwater basket weaving rather than income. At least I hope that’s true, else I wasted many years of my life.
You spent years of your life mastering underwater basket weaving?
No need to rub it in, Will.
Well, I’m pretty sure that it’s quite difficult. But, I don’t really buy the argument that these income redistributions are really a serious attempt to maximize happiness, anyway.
As Will points out, studies don’t seem to support that the happiness of the poor is greatly affected by changes in inequality.
The thing that’s driving this is the leftist distate for inequality. Not their own low status, personally, but inequality in general.
They seem to care about this much more than about the absolute welfare of the people they talk about helping. Even if they seem to understand that if everybody is getting better off, we should expect the spread between the top and bottom to increase; they keep coming back to describing this as a terrible problem, and are willing to make everyone worse off to “solve” it.
I don’t know if this is a fundmental moral precept that they picked up as small children, or if it runs even deeper than that; but many people I’ve tried to reason with just can’t get past the possibility of inequality of results.
I think it is more a question of fairness than a “distaste for inequality” Gil. Few of the people getting rich these days actually contribute anything of value to society…
Query to monkyboy: And those getting poor contribute more of value?
Some may be, Dilys.
I take it from Will’s latest posts that he has been moved off the looting SS portfolio and onto preserving the illusion that America is still a meritocaracy by his wealthy patrons. Fair enough.
What is the difference between politicians handing out lucractive contracts to their cronies, or a CEO voting himself a huge bonus and the poorest 80% of Americans voting for a huge transfer tax on the wealthiest 20% of Americans?
None that I can see…if their are no rules anymore, why shouldn’t the poor soak the rich?
Monkeyboy,
None that you can see?
You can’t see a fairness-related difference between spending money that people have voluntary paid or invested because they judged that they were getting a good deal, vs. people spending money that has been taken under threat force and without consent?
Call it “fairness” if you prefer that to “distaste for inequality”, but either way, your conception of these things is very different from mine. I think inequality of results is completely consistent with fairness; I’d be shocked if the fair outcome was otherwise. I think the concepts of fairness and equality of results have been confused by a large number of people (you included).
I think it’s “unfair” to people like me who are willing to leave people like you alone to the greatest extent feasible, that people like you aren’t willing to extend us the same courtesy.
You miss my point, Gil.
If you think CEOs today are doing what is in the best interest of their shareholders, I’ve got some Enron shares I can let you have cheap, hehe.
There is no such thing as fairness anymore. We live in a take what you can steal society now.
Whether or not you think taxes are theft..the poor would be suckers not to take the rich for all they can.
I think there’s as much a thing as fairness as there ever has been. Some people will always choose to ignore it.
It’s interesting that you first justified redistribution as serving fairness, and now you say there’s no such thing anymore. I suspect you realize that the initial excuse was BS.
Many CEOs today are doing what they think is in the best interest of their shareholders. Some aren’t, and some of these are getting fired, and others are going to jail.
Society has always been a place where some choose to take what they can steal while others choose not to.
If this society does become one where nobody chooses to be what you call a sucker, I think you’ll find that it will shortly become much less pleasant for just about everyone.
I guess I’d rather be a sucker than a clever rat on a sinking ship.
It’s nice you can take the high road, Gil, but people who have to feed their families don’t have that option.
It seems like a simple game theory problem:
If the system is fair, people should be fair.
If the system is corrupt, people should take what they can get.
Is the system fair?
Median income continues to fall under Bush, yet CEO pay is skyrocketing.
Little of the additional federal spending spent in the name post-9/11 security has gone to anything that actually makes us safer. Rather, it has gone to hundreds of companies run by Republican cronies that generate nice reports but nothing else…and our troops have to buy their own body armor.
What would Marx, the greatest philosopher in history, say to people in the lower income brackets in the U.S.?
Tax the bastards until they bleed…hehe.
I have to feed my family. Why do I still have the option of respecting other people’s property?
The system is pretty fair, although not perfect. The policies you advocate make it less so. Using imperfection as an excuse to go still further doesn’t seem…um…fair.
I’m not sure you’re right about median income falling, or what you think Bush has to do with it, or why you should care about CEO pay.
I agree that much government spending is wasted. That’s one reason why I’d like to reduce such spending rather than increase it as you seem to want to do.
I don’t think popularity contests are a good way to measure philosophical merit, and I would suggest that anyone who still thinks taking Marx’s advice is a good idea is tragically mistaken.
All kidding aside, it really seems like you have an interest in hurting people who are successful. Do you honestly think this will help the less successful in the long run, or do you see hurting the successful as something that’s valuable for its own sake?
Gil, govenrnment spending has been rising steadily under Bush and now accounts for fully one third of the U.S. economy. Through regulation, tax policy, import/export controls, research funding, etc., the government influences or controls the other two thirds of the U.S. economy.
What is the surest way to get rich in America these days? Spend some time working a government job, then cash in on your connections to become rich.
Bush’s choice for the supreme court is a perfect example of this. Judge Roberts has spent the 26 years since he got a law degree evenly split between government service and the “private” sector cashing in on his connections. In that time he has amassed a personal fortune in excess of $10 million.
I don’t advocate taxing the rich out of fairness, rather, to force them to change the rules of the game…
For the non-welfarist consequentialist, the effects of wealth inequality on how individuals evaluate their well-being need not be the whole inquiry. (Not that the evidence presented was conclusive.)
Wealth inequality translates into imbalances of power (of employers vis a vis employees and in myriad other ways). At least some of these power relationships may be bad consequences in and of themselves.
You may say: “We shouldn’t care about it unless it effects individual utilities? To do so would be arbitrary.”
But in practice judgments like this have to be made all of the time on the basis of presumed common sentiments or on whatever bases. Certain dogmas claim that information in “the price system” tells us all we could wish to know about individual well-beings, so much in fact that we ought to dispense with any other information about social states. But even among (possible) devotees to such an approach, there seems to be skepticism about whether “the market” does take into account certain interesting things, for example the costs of preference changes. And that difficulty is still located within welfarist analysis!
Moreover, as most people (including Will) believe, welfarism is not the end all be all of policy analysis. So most will continue to find discussing the axiology of power inequality and the role wealth inequality plays in bringing that about perfectly justifiable.
Of course, it may be that any efforts to reduce power inequality by reducing wealth inequality will do more harm than good. But one should not assume this. And assuming it is no good reason to not care about wealth inequality and the consequent power imbalances. Even if you could change your preferences regarding power their may be good reasons not to want to. The existence of all these libertarian blogs protesting otherwise might seem to indicate that these reasons to have some force.