5/8/2023 Inequality & Business Things to know Ethics of inequality: equality as a distorting ideal, sufficientarism, diminishing marginal utility Facts about inequality: U-shaped curve, Kuznets curve, global versus national inequality, progressive's dilemma Things to know • Causes of inequality: r versus g - Mid 20th c. equality: destruction of capital, high taxes, fast growth, strong unions - Today: supersalaries due to technology, lower taxes, financial deregulation, changing norms - Race between technology and education - Return of patrimonial capitalism? - Assortive mating Things to know • Case for and against business: distrust, corruption, overpaid CEOs, monopolistic, BS jobs, why unpopular • Influence of business on politics: privileged position, lobbying as quid pro quo, lobbying as information, lobbying as legislative subsidy, contributions as consumption 1 5/8/2023 Debate: Do rich control politics? Discussion questions Ethics of equality ■ Is economic inequality really such a big problem? Isn't the bigger problem that some people don't have enough (the question of sufficiency)? If we could eliminate poverty would it then be okay to ignore inequality? Global inequality • Isn't the big story about inequality in our world, the decline in inequality across countries? Isn't the catch-up of countries that had been left behind much more important than the rise in inequality in countries that are already rich? Reducing inequality What should we do about rising inequality in the developed world? Are any of the solutions that Piketty identifies during the middle of the 20th c. still available -very high taxes, unions, high growth? What is available? Is inequality reduction a viable political program or is it just a slogan? What would it look like? Assortive mating Should we worry about assortive mating? Isn't the pairing up of very smart, successful, and hard-working with others who are similar a contributor to rising inequality? Aren't these power couples going to raise children with even more advantages? Don't online dating apps make these matches even easier? Is there anything we can or should do about it? 2 5/8/2023 Business: good or bad? What are your views of big business? Do you tend to trust big business or not? Why? How does it compare to other institutions like the military, small business, police, church, medical system, public schools, media, unions, politics? What are your main worries about big business? Can you imagine a better replacement? Inequality & Business Today Ethics of inequality Facts of inequality Causes of inequality The case for and against business Ethics of inequality Obama on inequality "The defining challenge of our time" Evidence that inequality in the US and other countries has increased considerably over last several decades Why care about inequality? Do we want to eliminate inequality? Does everyone agree that many situations where we should depart from complete equality? - Rawls's difference principle - Inequalities as incentives Is inequality a problem in itself or is the problem that too many people are poor? 3 5/8/2023 Doctrine of sufficiency Is it important that everyone have the same? Or that everyone has enough? Pursuing equality may help instrumentally, but not a compelling end in itself Problem of gluttony • Is there something morally wrong with excessive consumption? • Should we do something about it? - A consumption tax? Which items? Equality as a distorting ideal? • If I am concerned with equality then I won't be guided by own personal interests and ambitions - I measure my satisfaction according to my position relative to others • But amount of money available to others shouldn't affect what I need • However comparisons sometimes helpful: what is typical, new ideas Case for equality • Creates more fraternal society - more peaceful and harmonious? - Or more envy? • Economic inequality leads to other undesirable inequalities: social status or political influence - Is this a case for reducing economic inequality or for reducing other inequalities? Diminishing marginal utility • Each additional dollar brings you less pleasure than the previous one • People's utility functions more or less the same in terms of utility • Thus, to maximize utility of society we should distribute money more equally Objections • Is it true that marginal utility of money always decreasing? - Sometimes the more you do something, the more you enjoy it - warming up, acquiring a taste • Do we all have same ability to use money effectively? 4 5/8/2023 Giving people opportunity to live effectively • Ensuring that people have enough for their daily needs • Tolerate many inequalities provided there is protection on the downside and opportunities for economically ambitious Inequality and mobility Figure 7: "The Great Gatsby Curve 9 — Other inequalities Happiness Health and life expectancy Mobility Social status - being seen & respected - BLM How are these evolving? Inequality & Business Today Ethics of inequality Facts of inequality Causes of inequality The case for and against business Facts of inequality 5 5/8/2023 Economics & inequality Traditionally economics focuses on production - how to maximize efficiency & growth Assumption that growth ultimately benefits everyone in the long-run - Recall great divergence But not necessarily in short-run New work focuses more on distribution Inequality trends Figure 9.S. Income inequality: Europe vs. the United States. 1900-2010 =1 1 X ■="—' \ \ < K--1 S 1900 1910 1920 1930 1940 1950 I960 1970 1990 2000 201[ U-shaped curve • Piketty studies income distribution from 19' c. to present - Uses tax returns to identify the one-percent • Inequality rises up until World War I • Falls from WWI to 1970s • Rising again since 1970s Hg Share of Total Income going to the Top 1% since 1900 The evolution of inequality in English The evolution of inequality in continental Europe speaking eoiinLrius followed a U-sliape and Japan followed an L-shape 1820 1940 1SS0 1980 2000 2014 1900 1920 1940 1960 1990 2000 2014 Pre versus post tax & redistribution • Many industrial countries produce high levels of inequality • But most reduce through progressive taxes + social benefits • US an outlier on posttax, not pretax Inequality of incomes before and after redistribution 6 5/8/2023 National inequality versus global inequality • Inequality rising within countries • But falling across countries - Recall Great Divergence - Today: high growth in China, India and stagnation in many rich countries • Which is more important? 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Inequality high/rising when rate of return on capital is greater than growth rate, r>g - Owners of capital (rentiers, aristocracy, landlords) Inequality low/falling when growth rate of economy greater than rate of return on capital Growth and return on capital _j_1 *--' :_:_[_ * * \ -*- Pure rate "1" return H'lipili] r (Jin 1ji jnJ kjfiiiA ImvO -Q- Qmmm <>l .i . ! i ;j . 0~ IOOO- lltJO- lJOd- iSlO- Lflll- 1-540- AD II- lOJO- IMO I\t/0 tTOO itlO I pi) IftO »II iCyO 11m Three eras of capitalism • Belle epoque - High correlation between ownership of capital and high incomes • Convergence capitalism - High growth, rising education, low return on capital • Globalization capitalism - Like belle epoque but high labor incomes play larger role Why long period of equality • Destruction of physical capital during two world wars • Nationalizations of wealth and high tax rates • Very high economic growth: 30 glorious years • Strong labor unions Rise of supersalaries • Technology creates winner-take-all markets • Erosion of norms of CEO compensation - they set their own salaries - Lower tax rates at top encourage higher salaries - When marginal taxes at 90% why flout these norms • Financial deregulation 8 5/8/2023 Race between technology and education • Improvements in technology raise the gains for those with skills to handle complex jobs • But higher education not producing enough qualified workers • Employers bidding for stagnant pool of qualified Patrimonial capitalism • Inheritance-based capitalism • Are we heading back to a period when family dynasties control great fortunes? • Who are the super wealthy today? - Self-made people with high incomes: Gates - Inherited fortunes: Waltons - Financiers and bankers: Buffett Rank mm NM worth (USD) A0t 1 Jtff Bum S131 ■! t.iion 54 Anwon com 2 MO** e? 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LA Cappm 15 StaWon Adetw* $35 1 baton 85 La* Wgu Suds C«p Rastignac dilemma • Does it pay to work hard when one can inherit much more by marrying well? - Do any characters in Jane Austen's novels think that education and hard work are the answer? • Marrying well beats a brilliant career many times over "Importance of working hard" and noun income inequality & Income inequality rneasuretl tvj Ginr coe!li cierflversus importance wl emphaaang 'working i raising children across OECQcOtrnlrEes and China w, I h ■ fmw*6*"1 ins* I r £ E6 M 3& « 4$ Gim Index What do people think? ought lo indues income diHeianm ■:encs 'Gift. . " nl In Washington ought tc I: 9 5/8/2023 A change in types of marriages • In past, coupling driven by economic necessity - Need one member to take care of economics of household - Marry someone who complements your production skills • Today matches driven by shared interests - Marry someone who has some consumption interests as you Assortive mating • Is inequality being driven by changes in mating? - Creation of power couples - Choose mate with same education, income - Genetics, child-rearing, inheritance • Increase in marriage ages: you don't marry HS sweetheart • Expansion of university education Inequality & Business Today Ethics of inequality Facts of inequality Causes of inequality The case for and against business The case for & against business 10 5/8/2023 Distrust of business I Institution Trust Military 41% Small business 30% Police 25% Church or religion 20% Public Schools 14% Big business 6% Congress 0% Are businesses more corrupt? • Major scandals, but is it more widespread than in society • Business has incentives to limit - Reputation & social media - Monitoring by government • Businesses successful when employees believe in mission • Cases: Pharma industry, profits v. non-profits Are CEOs paid too much? • Many talents necessary: finance, PR, politics, global, technology & enormous work load • Technology increases returns to skills • Equity stakes should incentivize; pay connected with stock market price • But large decline in marginal tax rates • Less shame about large salaries CEO-to-worker Compensation Ratio While 2016 CEO pay is projected to fall slightly from 2015, the average CEO of a large U.S. company makes 271 times the wages of the average worker. ■HC 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 This uses the "options realized" compensation series which induces salary, bonus, restricted stock grants, options realized, end long-term incentive payouts for CEOs at the top 350 companies ranked by sales. SOURCE: Economic Policy Institute FORTUNE Are businesses exploitive monopolies? • How many monopolistic firms and how long do they last? Is everyone vulnerable? - Do they continue to innovate? - Do some give away free or cheap products? • Many monopolies caused by regulations - Healthcare: does it work either way? • NIMBYism creates monopolies • What about higher education? Does business create BS jobs? • Graeber: Flunkies, goons, duct tapers, box tickers, and taskmasters • Why low wage growth - low productivity growth or power of employers? • Harassment in workplace - is it worse in corporations or elsewhere • Is work supposed to be fun? Is it sometimes a haven? 11 5/8/2023 THE 5 TYPfS (W BULLSHIT JOBS Why is big business so unpopular? • We judge them by same standards as people (and they encourage this) - Not our friends but serve purposes • We ask them to pursue social goals - Health insurance, minimum wage, speech regulation • Is business more polarized or more tolerant than government? Influence of business on politics Privileged position of business Public officials responsible for state of economy Business is main influence on economy -They decide on investment and production Politicians must listen to business in order to carry out their public functions -When government threatens business => recession or stagnation Why not workers? • Economy depends on them too, no? • But they don't have a choice about where and when and how much to work • Business can choose not to produce Objections • Does business really have so much choice? • Can it withhold production and blackmail government? - What about my competitors if I withhold investment? • Can business solve its collective action problem? 12 5/8/2023 Stylized facts about lobbying Many contributions from lobbies go to members who already support the industry - If you were a tobacco lobbyist, who would you give money to? How to understand access of think tanks without many resources? Why would lobbyists trust legislators to do their bidding? Explanations for lobbying/contributions Quid pro quo Information Legislative subsidy Consumption Lobbying as information • Parties/MPs uncertain how policies will affect probability of reelection • Lobbies provide private information about effect of policies • But why should MPs believe them? Lobbying as legislative subsidy • Time and resources of politicians are limited • Contributions provide politicians with capacity to devote more attention to particular policy areas • But they are policy areas which MPs already support - Very little lobbying of uncommitted or opposition Contributions as consumption? • Contributions may be due to ideological motivations (ie, not quid pro quo) • People who contribute to politics also participate in other ways (eg, attend meetings, write letters, etc.) • Firms give more to charity than to politics 13