Trading economic efficiency for compassion.

Great Debates
1

The “Living Wage” thread has made me ponder the question, of to what extent a prosperous society (such as the modern U.S.) benefits, as a whole, from trading economic efficiency for compassion for the least fortunate. Being kind of a numbers nerd, I’d like to present the question as a mathematical abstraction, so please bear with me.

I’ll start with the assumption (unproven, of course, and most certainly an overgeneralization) that every regulation or law that results in a redistribution of wealth also causes the market to work inefficiently, and reduces the overall wealth of the society. (In a nutshell, it’s the argument that at some point, increasingly-progressive tax rates disincentivize the top earners from starting businesses, hiring workers, etc., and as a result the whole economy suffers.)

To model this, I’m going to assign “prosperity units” to countries, which are NOT a zero-sum game. If the United States currently has 100 prosperity units, then Somalia might have 8. Think of them as representing, in a very general way, the (mostly material) quality of life in a country.

Those prosperity units are then divided amongst the quintiles of the population. A country like Saudi Arabia (one with a super-rich ruling class and a huge mass of poor people) might have 60 total prosperity units, divided 48, 3, 3, 3, 3 among the quintiles of their people.

Now imagine a fictional U.S.-like country with a distribution of 50, 30, 12, 5, 3. That is, the top 20% of the people (in terms of wealth) have a “prosperity” of 50, the next 20% have 30, etc. Using this example and the previous one, 80% of the people in this country live better than all but the top 20% of those in the Saudi Arabia-like one.

If the country were to implement economic and tax policies that distributed wealth evenly among all quintiles, I think you would certainly NOT end up with 20-20-20-20-20. The market distortions and disincentives would, I think, badly effect the markets and economy of the country, and you’d end up instead reaching an equilibrium more like 10-10-10-10-10. Communism has largely failed for a reason, after all.

But, let’s say that, looking at the specific numbers, if you’re over a 45, you live like a current-day multi-millionaire. 31-40 is upper class, but you still have to go to work. 21-30 is ‘normal’ upper middle class. A 10-20 is the range of middle class. 5 or lower is poverty-level; you’re not starving, but you barely live paycheck to paycheck, and if not for social programs, you’d be living out of your car.

Sorry for all the preamble! The debate is: take our vaguely U.S.-ish country of 50, 30, 12, 5, 3. Imagine a proposal of economic and tax reforms that would raise the lowest out of poverty, but shave off 10% of the nation’s total prosperity. (That is, the resulting wave of business-owners moving out of the country, some poor people working less hard because the safety-net is bolstered, etc. has been baked into the numbers, and the new equilibrium has removed a whopping 10% of the country’s wealth and productivity.) The resulting 90 prosperity units end up being 38, 24, 12, 10, 6. 40% of your population is now raised from poverty, their economic well-being in some sense doubled. 40% of the population has taken (on average) quite a hit. The 20% in the middle are still mostly lower-middle class.

Would that change be for the overall betterment of the country? Would you press the magic button that would effect this change?

A more abstract way of thinking about this: I think most Dopers would agree that a 500-2-2-2-2 country is not as desirable as an 50-40-30-20-10 one, even though the overall productivity and wealth is much lower. I think most Dopers would also agree that a 50-40-30-20-10 country is more desirable than a 15-15-15-15-15 country, even though the latter is more equitable, and the poorest are better off.

Where do we draw the line, when deciding as a country how much to trade away wealth/productivity/efficiency for compassion?

And before you say it: yes, I realize that was all needlessly complicated. :slight_smile:

2

The only way to make everyone’s live better is economic growth, that’s the reason the bottom 15% on income earners in the U.S. have a better life then a majority of people in a very poor country. The more money that is given to the government by businesses the less those businesses have to invest which in turn means less economic growth. (of course this is not absolute)

That’s not to say there shouldn’t be anything to help those in need but you can’t manually control the economy. There needs to be something to help people who can’t provide for themselves, but you can’t pay everyone and still expect the same economic growth as if you didn’t. There is limited amount of wealth and it can’t just be created in one day, it has to be worked for and that takes time. Economic rules need to be followed and when they are not bad things happen.

It needs to be balanced. Wealth should not be spread out equally, that just doesn’t work, but it also should not be controlled by only a few people. (Basically what you said in your third to last line)

And it’s not really the country’s choice to choose compassion or not. Economics works in a specific way, you can’t give everyone everything they want even if you want to.

I don’t know if what I wrote really relates to the topic of this thread but I hope it does…

3

I think the best way to think about it as ratios. 60 years ago, the top managers of companies were making on average about 40 times as much as their lowest paid worker. Now, it’s somewhere near 200 times.

I have heard that Japan has a law that sets the maximum pay of anyone in a company at 100 times the pay of the minimum. That may not be true, but it’s still a good system, because if the boss wants a raise, he has to raise the pay of the janitors, too. We can quibble about the number, but tying the pay of the company leadership to the pay of the workers is a great idea in theory, as it means prosperity of profitable companies will be shared throughout.

I think at the very least a policy like this would be a band-aid on our inequality problems. Plus it doesn’t have to go through this “taxation is an economic drain” (red herring) discussion at all.

4

Clearly the nation would be poorer. 90 prosperity units are less than 100. But yes I would press the button. The median citizen would maintain their standard of living and those at the lower end would see an improvement. The best judge of a society IMO is to see how bad off the worse off are.

Of course the ends might not justify the means. The method of magically producing the result could very well be unpalatable to me.

5

I recently started a thread on socialised medicine with a similar premise. My (eventual) question was that healthcare to individuals should be shown to have positive externalities for society as a whole to justify socialising it’s costs, and the opinion of most of the posters there was that efficiency aside, socialising medicine was the moral thing to do, and that they could not be dissuaded from that viewpoint. So, that’s a (somewhat idealistic) viewpoint you should factor in.
Me, I’d trade efficiency for compassion any day. IMO compassion, especially compassion writ large, wreaks far more havoc over the long run.

ETA: Mind you, I’m not on board with your assumption that every redistribution of wealth introduces a distortion that makes markets inefficient. How the redistribution is put in place makes a huge difference

6

There is no reason to think that capping the boss’s pay is going to raise anyone else’s pay. More likely, the bosses will figure out some way to get compensation off the books, or to monkey with the policy so that their particular industry is exempt. Or, just say fuck it and move the whole operation overseas.

7

FYI, this is not only unproven, something like the opposite actually has been proven (in a mathematical model, for what that’s worth to you). One time transfers are, overall, economically neutral. If we were operating efficiently before the transfer, we’ll be operating efficiently after the transfer, too.

8

Mathematically this is true, but in the real world transfers are not one time and even if they are they only work if everyone believes they are one time. Since Once you have established that someone’s wealth can be taken then people start to plan for that to happen again and would not start investing efficiently until they believed that it would not happen again. This would limit economic growth probably severely at first and then less as more and more people regained the trust that they would be able to keep their money.
If this led to our economy growing for the next fifty years at 2% instead of 3% then at the end of the fifty years our economy would be at 269 prosperity units instead of 438 prosperity units. This transfer has cost not the 10% taken but hundreds of prosperity units. These prosperity units could have been spent on great advances in science, medicine and technology that would have improved the lives of everyone in society. However, in the name of “compassion”, there are diseases that are not cured, technology that never exists, and scientific breakthroughs that never happen.

9

I suppose I’m thinking more of regular and repeating transfers, that create a permanent new equilibrium. To use an extreme example, if we decided that any income in excess of $1 million would be taxed at a 99% rate, I’d think that businesses with more than $1 million annual profit would never open another branch, thus pinching off potential job growth and hurting the overall economy. I confess my understanding of such things is not vast.

10

If you have to keep transferring, it’s probably not much of an equilibrium. But anyway, it was just an aside, I didn’t mean to stir up anything.

11

This is a really important point.

Government interference in the economy tends to breed inefficiency when it involves interfering in price control. The market economy works not because it “Satisfies greed” or that sort of nonsense; it works because it sets prices correctly. When the government really screws things up is not in thinks like social programs, but when it interferes in pricing. Where the government can interfere in a way that actually make the market work better is a market failure - that is, a situation where the market can’t price things. One of the underlying truisms of welfare economics is that a perfect market and a perfect, omniscient socialist planner would price things the same way. Markets generally work much better than socialist planning because they’re way better at pricing things.

A program of transferring wealth is usually a MUCH better idea than interfering in pricing. Rent control is an outstanding example; there is example after example of rent control being a socially disastrous policy that leads to a raft of unintended, and horrible, consequences.

Or to use my home province of Ontario, the government last year decided, as an election ploy, to unilaterally lower all electricity prices by 10%. We’re already paying less for electricity than it costs to produce, I should point out. This is quite possibly the single dumbest thing ever done in the history of Canada, but what’s fascinating is people will defend this on the basis of the fact that if you let electricity cost what the market will bear, poor people will suffer. But even assuming that’s true, forcing the price artificially lower is quite literally the worst way you could possibly deal with it. By altering the price:

  • Rich and middle class people save the lion’s share of the money, not poor people, so it’s a regressive program
  • Electricity use increases, since the lower price raises demand
  • Since the deficit must be made up in taxes, people who did not use the electricity must ultimately pay for it
  • Since the province is already in debt, the electricity will cost many times more (due to interest) what it would cost if we just paid for it now

Logically, a better - and cheaper - approach would be to let electricty cost what it should, and transfer money to poor people. If at current usage rates a poor family will be out $200 a year in increased power bills, just send a check for $200 to the poorest households and let them decide if they want to spend it on electricity or lower their usage and spend it on something else. Let everyone else pay what it costs, and of course now that the market is being allowed to work, power usage will go down, the overall cost to Ontario of producing electricty and building infrastructure will go down, and the people using the power are the ones paying for it, which means that energy-saving activities have a greater return and are more motivating. The transfer would could minimal economic distortion; the current price policy is catastrophically distorting, costing us billions in debt and environmental damage.

12

Actually, CEO pay has had a meteoric rise of late, and most company managers care primarily about their own pay. Because the cap is fluid, in order to raise their own pay (which they desperately want to do), they would have to raise everyone else’s. To be clear, a four sentence concept isn’t a complete policy proposal. Obviously more work would have to be done to sort out details.

I think I hear implied in your response, though, is a fatalist view that “those people are too smart, influential, and greedy to follow any restrictions placed on them, so why bother trying?” That’s quitter talk.

13

Look, this is a radical idea you’re pushing, and I don’t want to be the country to experiment with it. Show me that it’s worked somewhere and then we can talk. It’s a global market we live in, and any restriction you place on US companies that their competitors overseas don’t have to deal with should be assumed to be bad unless we have data showing it will be otherwise. I was just outlining a few of the reasons why it might not be a good idea. We probably don’t, and can’t, know all of them until we try.

14

Just so I understand, you are saying that commodity price supports lead to inefficient markets, but other kinds of corporate subsidies do not?

15

Do these proofs assume a free market? If so, do they hold when there is a restricted market (like just a few major players)?

16

I think the premise of this and similar threads is that wealth is a finite item that can be re-distributed. It’s not. There is nothing stopping the poorest person in a reasonably free market from generating large amounts of money independent from anybody else’s efforts. It is why someone would immigrate from a country like India. The different market forces at work in the United States makes individual wealth easier to accumulate. I believe it was 60 minutes that talked about the bureaucracy involved in starting a business in India. It was substantial and very limiting.

Wages in a free market represent a number of things but most notably they represent a skillset. Where we get screwed in a free market is the intervention of government in countries where the market is held artificially. And I’m looking at you China. Take an industry like solar cells. We have companies that make a superior product but the cost of production on a world market competes against China which will: financially back an industry to undercut other countries, ignore environmental laws and completely disregard anything that remotely qualifies as labor laws including hourly wages.

Taking the example of solar cells it doesn’t matter if we make a superior product in the United States because China will simply offer a solar cell for a fraction of the cost per watt. So even if the US version is better per square foot, the total cost to the consumer is much much less using Chinese products made in sweat shops that ignore environmental concerns.

This is what we are competing against. This is why wages are falling in the United States. We no longer possess the monopoly on heavy industry that was briefly but so spectacularly experienced after WW-II.

17

The premise is so fantastic that you might just as well ask “What if the Earth was flat” or “What if the Sun revolved around the Earth”.

18

I was wondering how many posts there would be before this one. 17. I should have bet the under. :wink:

But why is the premise – that we could achieve somewhat greater equality at the expense of overall efficiency – so bizarre? It seems that right here on the Dope, I read plenty of small-government, anti-redistribution arguments of the form: “If you enact redistributive policy X, you’ll give disincentive to job creators, resulting in fewer jobs, less business, and less overall prosperity.” Or, in more coarse terms, “If you try to help the poor by messing with tax rates or markets, you’ll just make the whole country suffer.”

Whether or not I believe that, I’m taking it as a given for my question, in order to sidestep arguments that redistributing wealth hurts the overall economy. I’m assuming that it does – thus, taken to its extreme, the failure of communism.

To put my question is less numeric, and more squishy terms: “Should a country be willing to lower its overall prosperity, relative to both other countries and its current state, in order to lift its poorest members out of poverty, if that’s what it took?”

It sounds like your answer is “It’s impossible for that to happen.” That’s a fine answer, though of course I’d be interested in hearing why.

19

I believe in general when the focus of the economy is to redistribute wealth rather than grow the economy, it results in the rest of society being dragged down to a poor level rather than the poor being uplifted economically. Just look at Zimbabwe for example.

20

The problem I am having is that your hypothetical basically saying “if a wizard did it, would you let the wizard do it”. It doesn’t explain any of the details of how this could be achieved in the real world. And those details are vital in making any sort of decision about whether to allow it to happen.

To give you a counterexample: I come up with a proposal of economic and tax reforms that would ensure that the lowest, those with a rating of 4, were reduced to a rating of 3.99999. The very poorest become marginally worse off. Those with a rating of 50 were magically promoted to 80, and everyone else was immediately and magically promoted to a rating of 55.

Would you push the button? Well of course you would. Almost nobody at all is worse off, and everybody else is much better off. But that doesn’t demonstrate that we should we should trade compassion for economic efficiency. It just demonstrates that you can produce entirely hypothetical figures that will force people to accept any conclusion if you present them in the total absence of any possible mechanism by which they could be achieved.

I have two obvious questions:

  1. What is an economic and tax reforms that would raise the lowest out of poverty? People in the western world have been trying to raise the lowest out of poverty for at least 50 years using every conceivable economic program, and it just does not work. You can implement a program of welfare handouts that alleviates the worst effects of poverty, but if someone has no interest in working and no interest in using birth control, no interest in obtaining and education, no interest in not committing crimes etc. you can’t raise them out of poverty. Or, at least, no nation in the history of the world has managed to do so. The most socialist nations of Europe still have large underclasses of impoverished people. Sure, they have free housing, free social security money to buy clothing and food, free transport, free medical care and so forth. But they remain just as impoverished as the same classes in the US. And just as large if not larger. Handouts have not raised people out of poverty. It alleviates the worst effects of poverty, with some serious social consequences for the people so “helped”, but it has never raised a group of people out of poverty. So how do you propose to achieve what nobody else in the history of the world has achieved. This isn’t a trivial detail in your hypothetical. It’s the very crux of it. Without this information all you have is a ‘wizard did it’ hypothetical. And as I have already demonstrated we can readily come up with equally valid hypotheticals demonstrating exactly the opposite.

  2. You claim that this will shave 10% off productivity, but what is that based on? Just looking at your figures, it seems it should be much, much higher. The inherent inefficiencies of enforced wealth tranfer are usually estimated at ~5%. IOW just the costs of paying tax collectors to get the money and social workers to hand it out to the poor and the inefficiencies inherent in doing so will burn away fully 5% of all the money collected. That means that you are assuming only 5% efficiency loss to loss of incentive.

So lets look at disincentive.

Your figures have gone from 50, 30, 12, 5, 3 to 38, 24, 12, 10, 6. These figures represent groups, but they are made up of individuals. There will inevitably be overlap between these groups. And you have brought the middle income and lower income levels to near parity. If we assume that the very lowest levels are people on welfare who basically do not work, then the next lowest levels must be the working poor. People doing menial jobs that require no education or skill. But you have brought them to near parity with the middle income earners: the tradesmen and lower lever professionals. IOW a painter or college graduate will be earning just 2% more than a MCDonald’s employee. What this means is that there are large numbers of middle income earners who, by having both partners obtain 4 years of college education and working full time and no children, are going to be earning just marginally more than a family of 3 children where one partner works at a menial job. That’s the take home message form your figures. We’re not talking here about poor people working less hard, we are talking about middle class people not bothering to get an education. And because wealth for the middle income earners increases dramatically with age, the recent graduates will almost certainly be earning less than someone working at MCDonald’s, and have to cop 4 years of study where they couldn’t earn any money on top of that. This is what you are saying when you suggest that the working poor should be brought to within 2% of the middle income bracket. If you don’t do this, then the 4th quintile simply won’t be at 10 when the median is at 12.

To me this is the biggest flaw in your figures. There needs to be a substantial wealth gap between unskilled and skilled workers to make it worthwhile to obtain skills. You can’t just close that gap and say that it will only reduce productivity by 5% above inherent loses. That median quintile represents college graduates under the age of 35. It represents tradespeople under the age of 45. It’s the core of economic productivity. The quintile immediately below it represents the working poor. People with no skills who work at menial jobs at or near minimum wage. There needs to be a substantial gap in between those quintiles to make it worthwhile to obtain skills and training. Yet you propose to narrow that gap to almost nothing. That will inevitably means that college graduates and tradesmen will be earning the same as or less than high school dropouts.

As your figures stand, then yes, of course the changes would be for the overall betterment of the country. The figures are deliberately written that way. I just dont; see any practical way to produce such figures. And that, of course, is the problem. The ideal always sounds great, but nobody has actually come up with a mechanism for reaching such an ideal.

I’m not sure most dopers would agree with that if they stopped to think about it. Those things aren’t bad by themselves, they are bad because they prove that there are severe restrictions on freedom within those economies. If the economies were freer, then inevitably people would work to get their hands on the wealth and the distributions would wok back closer to what we have in the US.

But if those economies are assumed to be perfectly free and democratic, can you explain what you see as being so wrong with a system where the vast majority of people clearly not even vaguely interested in obtaining wealth, as in your first example, or where people have obviously chosen to stay in their allotted social classes, as in the second? Since such situations can’t occur naturally as the result of market forces, such anomalous situations must be the result of choice. So why do you believe they are bad?

Compassion isn’t the problem. Sentimentality is. Compassion is feeling for other people. Sentimentality is professed feeling without any reference to the consequences. If a democracy or an individual citizen wants to trade away 100% of their wealth in the name of compassion, that’s great. The problem starts when people who are unconcerned with the cost, whether because they don’t care or because they are unaffected, start enforcing that cost n other in the name of compassion.

If people are willing to bear the cost, that’s great. The problem is that the people who aren’t going to bear the cost are usually the ones who want to redraw the line.

If you *are *going to be inflicting costs on other, the benefits had damn well better outweigh those costs. That’s the simple guiding principle. There is no point redistributing wealth and taking 20% off the upper income earners if the only people who benefit are those who have no interest in working. If your redistribution benefits those who are not working because they can’t find a job, that’s great, but it’s never happened yet that such a benefit can be achieved more effectively by interfering with wealth distribution. It’s really that simple: do the benefits outweigh the costs.