Re: Wealth Inequality

Paul Graham’s wealth inequality essay is generating considerable discussion. Seth Bannon rebuts, How Paul Graham gets it wrong in “Economic Inequality, arguing that Graham is attacking a straw man; however, Seth Bannon fails to actually make a substantive case that wealth inequality is bad for the economy.

In the essay, his overarching point seems to be that an ever-increasing level of economic inequality is a necessary function of living in a healthy society where wealth is created for the benefit of all and innovation flourishes. Further, he argues that attempts to limit such inequality would mean “ending startups.” Neither argument stands up to scrutiny.

There are many studies that demonstrate negative effects of economic inequality[1]. Bill Gates gave an excellent summary of the argument against unchecked levels of economic inequality[2]:

High levels of inequality are a problem — messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

Capitalism does not self-correct toward greater equality — that is, excess wealth concentration can have a snowball effect if left unchecked.
Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

His source for #1 is an article from the NYT about how wealth inequality can be bad for your health, but this is not really an economics argument. By ‘negative effects’ I was expecting an article about how wealth inequality is bad for the economy. It’s almost misleading.

Source #2 is link to a review by of Bill Gates of Piketty’s Capital in the Twenty-First Century, which is also unconvincing. In the review, there aren’t any substantive economics arguments or studies about how wealth inequality is bad, and I think Seth Bannon demonstrates the argumentative fallacy of the ‘appeal to authority’ by mentioning Bill Gates as if the presence of his name alone is sufficient as an argument. If would have been helpful if Bannon had cited a passage or from from the long essay, pertaining, specifically, about how wealth inequality is bad for the economy, but I can’t really fault him because such evidence is actually hard to come by. There is no consensus by economists that rising wealth inequality bodes poorly for the US economy as measured by actual data such GDP.

High levels of inequality are a problem — messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

Capitalism does not self-correct toward greater equality — that is, excess wealth concentration can have a snowball effect if left unchecked.

Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

These are all hypotheticals about how wealth inequality could be bad – not actual data that shows wealth inequality is stunting growth.

Furthermore, a lot of the arguments posed by Piketty and the rest of the left (that wealth inequality leads to crisis, that wealth inequality stunts economic growth – or – that dynastic wealth is permanent) are easy to refute or are at least unconvincing, and it doesn’t help the left that some of the data in Piketty’s book may have been fabricated. The credibility blow due to the revelations of this potential fraud seem to have undercut the hype, and no one talks about his book anymore.

In 2014, the IMF released a report about how “inequality is damaging to economic growth”.

“We find that higher inequality seems to lower growth. Redistribution, in contrast, has a tiny and statistically insignificant (slightly negative) effect.”

However, correlation is not causation. Often countries that are in turmoil or transitioning will also have high income inequality. So while wealth inequality and crisis can coexist, wealth inequality does not cause the crisis. America had high wealth inequality in 2007 leading up too the recession, but wealth inequality did not cause the banking problem and recession – reckless lending standards and other factors did.

At the very least, there may be insufficient data to conclude high wealth inequality is bad for the economy.

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