I have little problem with inequality. I do think there are some downsides, like the threat of violent revolution, but my point is that I'm not making some hobgoblin of wealth or income inequality. I don't really care whether 20% of U.S. wealth is controlled by the top 1% or the top 10%.

But it does strike me as a little troubling to see -4% gains for the bottom percentile over a period of 80% increased productivity (taking those stats at face value).

Now, of course, correlation does not mean causation and it's perhaps more interesting what the true underlying causes are. But if inequality is such a strong indicator, it is worth wondering whether inequality isn't a bad thing in itself.

Does that mean you are unfazed by growing inequality, and view it as an unavoidable byproduct of progress?

Or do you believe economic inequality is a negative externality (like pollution) that needs to be remedied?

At the high end of the scale it doesn't seem to be a problem. I've seen a lot of people go from middle class to rich when their startups succeeded. Most live pretty quietly.

I would guess most of the damage done by economic inequality is at the low end. I don't think there is much debate that societies should try to mitigate that.

The problem I see with growing income inequality is not the "inequality" part, it's the "growing" one.

From a purely mathematical point of view, in any economic climate there's some level of income inequality that's going to be economically optimal for whatever it is that we want to optimize about our economy (some combination of jobs, happiness, wealth, or whatever). This is trivially true, as zero income inequality is a really crappy situation by most realistic measures of economic health, as is ultimate income inequality (i.e. a small handful of people holding all the wealth). In between those extremes there's got to be some optimal distribution of wealth.

But when I see a march towards higher levels of inequality, I'm left to wonder whether there are actually any forces in play that will keep us anywhere near that optimum, or if we're just seeing a runaway "wealth begets wealth" situation, as folks like Mandelbrot have suggested. Sure, it could be the case that the changing technological climate means that the optimal level of inequality is going up, and we're actually keeping pace with that, but that's just a "could be", and I've never seen a particularly compelling argument that our economy should work more efficiently now at higher levels of income inequality than, say, twenty years ago. An argument that increasing income inequality is inevitable, or even that it's fair, is not an argument that it's economically helpful.

I completely agree with your thesis that technology is a perfectly valid reason for the growing gaps, FWIW, it's a pretty unassailable argument. But I don't agree that it's not cause for concern: we're sliding at an increasing pace down the slippery slope, and at the bottom is complete human level AI, where a vanishing percentage of humans have anything at all of value to offer to the economy. Are you really comfortable with the wealth distribution that's going to result from such a thing?

Personally (and this is quite controversial, I admit), I think that we have to start taking that inevitable outcome to heart, and realizing that the next 50 years should be a period where we move a lot closer to a full welfare state, with full acceptance of the fact that more and more of us will be at the unemployed and useless end of the spectrum as time goes on. Then again, an economy where humans are less useful than their machines, even as far as designing and running those machines, is a completely different world than we've ever considered before, so perhaps it's premature to even consider what that means...

Let's assume that the optimum is farther down the spectrum (somewhere around "sustainability" but not so giddy as to be in "bubble" or "artificially-crafted giddy delusion"). Then what are the forces at play to drive us there? From a political standpoint, it's electability; yet if we're too far into the inequality part of the spectrum, the fixes take more than an election cycle, and therefore require strong political leadership or near dictatorship (think FDR and no term limits as a model; think Japan and its many prime ministers over the last decade and stagnation as the counterexample). That's not promising since it may mean only the Senate, with its six-year terms and only 1/3 of the membership up for re-election has a long enough time-frame to do what's needed.

But what about from a business perspective--what incentives and forces are there today in business to try to close that income gap? Henry Ford allegedly paid well and understood that he needed to create a market for what he made, yet the auto industry today can't close that gap alone. If Apple's prominence in the economy is comparable to Ford's, what hope is there that the jobs they create in China will create a positive feedback loop of income equality? Perhaps with a global perspective it will.

Therefore, I come to the conclusion that the Ford Motor of the 21st century will be a company that is able to further its own market by empowering its customers (and the common, untrained person) to become value creators from an economic standpoint. You see Google and Apple and even eBay nibbling around the edges, but who is going to emerge that harnesses and transmutes that latent economic power?

[1] http://marketplace.publicradio.org/display/web/2011/09/07/pm...

Ford paid well because that was the only way he could attract workers to do the relatively boring assembly line work.

The idea of paying people to buy your products is simply not a viable business plan. Ford created the market by making the cars cheap so ordinary folks could afford them.

For example, in medieval times in Europe (and identically in sub-saharan africa), there was very low inequity.

The ruling class did not own anything except the shirts off their backs. Their jewels were "crown jewels" and couldn't be sold. They had control of the land, but usually couldn't sell it between themselves.

The few fungible valuables they had (salt, and other trade goods) barely elevated them above the common masses.

Today, the power of the ruling class is magnified a 1000 fold, but the working bottom 10% lives better than they ever have thanks to innovations in technology. Indeed, the bottom 10% lives even better than medieval kings despite living in a highly unequitable society.

If they didn't own anything then why do their ancestors still own great chunks of places like the UK - where many members of the upper classes can trace their ancestries, and the lands they own, back to the Norman conquest?

Life as a royal in medieval times was pretty tough, but largely because they were still expected to fight to maintain their position, compared to the lifestyles of most people in the countries they ruled they were well fed, well clothed and had much better accommodation than most.

Both land and other stores of value (eg gold & silver) were frequently traded between medieval landowners.

Even looking at Europe alone, the Kinghts Templers acted as bankers as early as 1000AD, which allowed the rich to transfer money over distance. By the 1300's the Medici's had created an institution that would be recognizable as a modern bank.

Rich people have higher savings ratios than poor people. As a larger amount of income goes to those who have more than enough money than enough already, the average savings ratio increases. This is a drag on aggregate demand that hurts the economy.

Supply side economists will tell you that savings are not a problem because investment will go up. But then why would somebody invest when the people who would be interested in your product don't have the money to buy it because they're poor? This is pretty much the situation we're in right now, where there is no shortage of capital, but rather a shortage of possibilities for profitable investments because consumers have become more careful with their spending.

(I realize that it may look different from where you are standing - I am not an insider in the tech startup scene - but that is the picture in the larger economy.)

Another question that I am less certain about is how inequality affects economies of scale. Basically, as society becomes more equal, the larger size of the potential customer base makes investments in efficient production techniques more viable. Of course, there is the other side of the coin, which is that rich people finance advanced technology out of boredom, e.g. space travel.

This is simply not true - personal consumption is at an all time high. It is even higher now than it was before our recently ended recession.

http://research.stlouisfed.org/fred2/series/PCEC96

http://research.stlouisfed.org/fred2/series/PCEC

[Edit: added graph of real expenditures, didn't notice my first graph was nominal.]

As is so often the case, it comes down to how you interpret it and put it into relation to other things going on in the economy.

So real consumption is slightly above the previous peak. Now if productivity has increased in the three years that consumption had this "U" shape, it means the same amount of consumption goods and services can now be produced using less labour. This means that even though GDP may have returned to its previous peak level, this level of GDP is now accompanied by higher unemployment - unless new jobs have been created by something else.

A typical candidate for such job creation would be investment. However, given that consumption has only barely increased over the previous peak, there is currently little need for companies to make investments to satisfy consumption demand.

So I admit to not looking up the latest numbers before making my post, then I would have rephrased my statement. What's clear is that consumption hasn't returned to the previous trend (and probably won't), and that's a problem for the recovery (especially compared to the recovery from the 2000 recession, for example, where consumption did not deviate from the trend as the graph you linked to shows).

Your parent comment claims that "consumers are spending less", then you provide data that refutes that (and I remember you've done that several times on other threads too). Does that further the discussion? No, nobody changes their mind. They just cherry pick other data that confirm their views, and question the neutrality of any data that doesn't.

I think most time people change their views on politics, it's by reading books, having life experience and thinking. Rarely by being convinced by someone on a forum.

Compare to discussions on other topics: in every HN thread about Javascript or systems security or nutrition or music theory, there's bound to be quite a few readers who actually learn something or even change their minds about some preconceived idea they had.

(now I'll stop rambling cause there's an earthquake here)

You haven't been reading HN then, and you haven't met the Tea Party. There are a lot of people here who believe that poor people deserve their lot and should wallow in it.

In my opinion society needs to use tax dollars to ensure a basic standard of living for all citizens. This idea (the welfare state) is deeply unpopular in contemporary America.

You've turned a political disagreement about the methods to accomplish some desirable goal do so into a moral argument. You've decided that if I think there is a better way to elevate the poor than your way, I must want them to stay poor and thus must be evil.

Why do you feel you need to frame the argument as such?

There are SOME free market ideologues who believe that unrestrained corporations will enrich the poor, however I believe they are in the minority. You may be one of them.

The majority of libertarians believe that individual property rights are sacrosanct and that it is wrong to forcibly redistribute wealth to prevent poverty, hunger, suffering. This is the argument of the Tea Party to my knowledge. Am I wrong?

Right now the excess wealth is in the hands of the rich, especially the top one-tenth-of-one-percent (0.1%). Society is presented with a choice: (a) we can take it from them and redistribute it to the bottom 80%, or (b) we can let them keep it and allow people to suffer.

(a) is a moral statement, that the poverty of the poor trumps the property rights of the rich.

(b) is a moral statement, that the property rights of the rich trump the poverty of the poor.

Almost all proposed actions in this situation amount to either (a) or (b). The wealth of society can increase over time, but at any single point in time it is a fixed quantity whose distribution is intimately related to whether poor people exist or not.

Assuming one does believe (a), and also believes that our current level of redistribution is lower than X, it still does not follow that we need to redistribute from the rich. We could also redistribute from politically connected insiders (e.g., teachers unions, the military, real estate speculators) to the poor.

Your dichotomy of helping the poor also excludes a third possibility:

(c) Some of the poor are deserving of assistance, and some are undeserving. It is morally right to redistribute to the deserving poor, and morally wrong to redistribute to the undeserving.

(I tend to favor policies which automatically make the deserving/undeserving distinction. E.g., eliminate welfare/unemployment and replace them with unpleasant, low skill government jobs that pay welfare-like wages. Poor people willing to work get the benefits and those unwilling to work do not.)

There are ALWAYS more assumptions available to be challenged. Plenty in your post for instance. Turtles (assumptions) all the way down.

For instance, if the goal is to reduce poverty, you assume that it is mathematically possibly to take money from teachers. But if teachers are already on the brink of poverty, that won't work to reduce poverty. You're creating new poverty cases as you solve old ones.

Politically connected insiders are less relevant than those who actually have the majority of the money. It's not teachers, and it's not unions. It's software entrepreneurs, MBAs, and oligopolists. They have the far majority.

That's not an assumption, it's a simple fact.

http://lmgtfy.com/?q=teacher+salary

Teacher wages are not even close to poverty, and they get lots of non-wage compensation which costs real money (not to mention they only work 9 months/year).

Politically connected insiders are less relevant than those who actually have the majority of the money.

On the contrary, the existence of politically connected insiders mooching off the system is evidence that we can provide more assistance to the poor without raising taxes.

http://lmgtfy.com/?q=income+inequality+in+america

That puts them well below the mark where they'd need to be to be to place in the top X% (10-30, depending on what study you use) that own 80% of American wealth. If you believe that shuffling around the remaining 20% will work, more power to you. But I'd have to disagree.

I will, however, agree that politically connected insiders mooching off the system is DEFINITELY an issue in the US. I would just point to Corporations and the Rich in place of Teachers on your list.

The fact that teachers may receive average pay for below average work does not put them at the "brink of poverty".

As for finding the insiders, follow the money. Teachers and old people are some of the biggest recipients of government money.

http://usgovernmentspending.com/piechart_2009_US_total

"we can let them keep it and allow people to suffer."

Using your feelings to guide your monetary policy decisions is no better than the creationists forcing ID to be taught in schools. If your hunch is that a Keynesian approach is ideal, cool. Many would agree. But choosing it because it's the obvious "moral" choice just dumbs down the whole debate, opens the door to all sorts of emotional reactionary ignorance, and doesn't get us any closer to the right answer.

Questions like "is better aggregate economic growth a justification for disproportionate tax increases for these people?" or "if the bottom percentile are hungry, should feeding them take precedence over growth objectives?" are inherently moral

If I may say so, that is a rather refreshingly humble statement for an economist to make.

Of course the government is not the only actor that can, or should, address moral problems.

As I understand libertarianism, they are not at all against solving issues of poverty or hunger. But they do believe that the government is not necessarily the best solution to every problem. Of course that statement should be obvious, as government tends to be less efficient and more watered down than other organizations. So the question is in the details.

When the government gives poor single moms peanut butter to make sure that her kids have protein to eat, that gets measured, and we can perform efficacy studies on it. When the government gives housing stipends to poor families so that they have a home to live in, we can measure that too.

If the enormous segment of the population that doesn't believe the government should be helping the poor is initiating some kind of private action that has broad, measurable effects on the plight of the poor, I would be delighted to hear about it. If not, then this claim that some other action should be taken kind of seems like a red herring in the discussion, because that means that the only practical options on the table are for the government to do something or for the government to not do something.

Today, helping the poor largely means lobbying for more spending for some program.

The reason that the government should provide this welfare service, however, is that it results in an incredibly desirable situation where any citizen of the United States would know that, no matter what the state of the (semi-)unregulated economy, it is guaranteed that they will be taken care of.

Were welfare left to the emergent logic of the market, somebody who, say, depends on medication to fight a chronic condition or somebody who cannot for some reason hold a job reliably (like my pan-handler friend who can't get a job because of his face tattoo and rotting teeth) would not be able to count on being able to survive should there be a severe economic depression or a war.

To live in a society where somebody who depends on an external institution to them to keep them alive cannot absolutely depend on that regardless of the economic climate is, in my opinion, uncivilized, and for such a person, downright hellish.

If you could convince me that the market is more reliable over time than the US government, then by all means, I might consider the dismantling of the welfare state a viable option.

I don't see it desirable to disconnect causes from consequences. Quite the opposite. Society functions best when people are very aware that their choices have consequences and when they choose to act in ways that produce good consequences. In fact, individual responsibility is essential to civilization. Society would just fall apart if more than a few percent of people began acting irresponsibly.

For example, America has a problem with education. There are a lot of children not learning despite a lot of money being spent. I think a root cause of the problem is students knowing that nothing bad will happen to them if they don't work hard in school. If all the unmotivated students would be put to work for a few weeks in picking crops, with the promise that this will be their lot in life if they don't learn, I suspect the education problem would solve itself quickly.

We live in a world where it is possible to be tremendously productive and wealthy. But it is still necessary to labor and be disciplined to achieve wealth.

Retirement, doing nothing productive knowing that you will still be able to eat tomorrow, should be the reward of years of diligent work, not the entitlement of the lazy who want to benefit from the toil of others without contributing.

Except this wouldn't work for the kids of rich parents who wouldn't have to worry about that actually being their lot in life. Also people can say "fuck that" & go to a life of crime. This also assumes that our agriculture sector would even want these legal workers who they'd have to provide at least minimum wage to.

While it might not be your view, the notion that the poor "deserve their lot" and even that their being poor is the Will of God (evangelical prosperity theology) is literally a mainstream conservative position.

If this doesn't ring a bell then you haven't actually been paying attention.

I have never met a conservative who believed that the poor "deserve their lot." And I can't think of one single conservative I know who wouldn't love to see the elimination of poverty. They just disagree with the liberal method.

If this were really the case why would conservatives donate money to charity? Why would conservative churches run food kitchens?

It's funny how people can skim through a 1200 page book and select just the parts they want to emphasize. I could go on, but I'm getting way off topic.

The second half I also disagree with, but it's just a failure of logic and a disconnect of values, not flat out idiotic.

However my impression was that the bulk of the Tea Party harbors a lot of hate for welfare recipients and social services in general.

They believe the poor should pull themselves up via bootstraps and should not receive direct help from the government.

Am I wrong about this?

As, perhaps, a kind of silly example, a couple of weeks ago, my car wasn't working, I was immobile. I didn't and don't believe that the government should've helped me get my car working. But I did believe that I should be helped. I called a couple of my friends and now my car is working again.

The problem is compounded by growing inequality of opportunity or decreasing social mobility (lower now than in many parts of supposedly "socialist" Europe, even!). Indeed, from my perspective -- as a European of East-Asian stock and traveling between the two regions -- the US looks more and more like a plutocracy, not unlike post-communist Russia, and not like a liberal democracy. The start-up system acts like a pressure valve in that system, but that just means there is pressure to begin with.

Which indicates another problem with high inequality: it seems to be self-reinforcing (ossification is the keyword here). You can see this on so many levels, starting with the fact that higher education in the US costs real money.

_____________________

* which I'm too lazy to locate and properly cite here and now

Yes, I would imagine so. At least, up until the point the rioting and looting starts, followed closely by the guillotines.

Another word for gross inequity is plutocracy.

a perceived threat to one's status activates similar brain networks to a threat to one's life. In the same way, a perceived increase in fairness activates the same reward circuitry as receiving a monetary reward.

http://www.edbatista.com/2010/03/scarf.html

One economic argument against inequality is that it results in people spending a lot of resources on guard labor. If I live in neighborhood with lots of inequality I have to spend lots of resources keeping the poor people from stealing my things. Therefore, reducing inequality via income distribution can create a public good in the form of less crime (and less resources wasted on protecting property). Thus, you can argue that redistributing income makes sense on the same grounds that having public police makes sense. That is an efficiency argument for reducing inequality.

I'm pretty sure that you're not measuring inequality in a reasonable fashion.

Larry Ellison has a lot more resources than I do, but the net worth ratio is far greater than the opportunities ratio.

Yes, he could afford his own space program, but we both can afford to go diving. He can't drive his (much more expensive) car on 101 any faster than I can. And so on.

I'm actually running into this problem. I'm trying to get someone to help with a project. One of the sticking points is that the potential reward, while "huge" by some measures, won't significantly change what he can do. Since your model predicts otherwise, it's clearly wrong.

How about you figure out how to measure the actual "problem" before proposing solutions?

HN people live in a bubble and seemingly have never met anyone who is in real poverty -- they think because in college they had to eat Ramen they were poor. They are clueless.

Real poverty is being illiterate, being malnourished in the womb, being raised in a crime-zone, growing up without dental care.

The increase in the "Real Poverty" is due to economic factors like giving all the jobs to China, dumbing down education, and civil rights/feminist revolutions which led to social destabilization and people falling through cracks.

Sweden and Norway and France and Holland are not having issues with "Real Poverty." And they all have big welfare states.

The welfare state concept is sound. It lifts segments of the population in Real Poverty out of poverty. The problem in the USA is that for every social program helping a family out of poverty, there are 10 programs putting them back in their place.

Yes, but the income inequality measures under discussion say the opposite, which is my point. (Do the arithmetic. $10k to $200k, which is way more than I make, is 20x. Larry is way more than 200x past me in wealth.)

1) He glosses together reduction of income inequality with elimination of it. The zero inequality thing has been tried and failed.

2) one of his arguments is that better education of the poor will increase wealth inequality, because it will increase the number of customers and the number of possible entrepreneurs.

While the premises are no doubt true, the conclusion isn't. There are other inequality-decreasing factors that might well have a stronger impact. At the very least, a better educated population might have the wherewithal to organize and vote for increased taxes on wealthy people. Less cynically, better educated people need less stuff to get by (e.g. their cars last longer), and they are savvier consumers. And empirically, if one excludes the U.S., the best educated countries tend to also have the lowest income inequality.

3) pg neglects the costs of U.S. monetary policy on risk taking. The past 20 years have seen low inflation. When inflation is low, there is less need for money to be invested in order to preserve wealth. With higher rates of inflation, investors have no choice but to try and extract greater value out of the wealth they have if they want to keep up.

4) A related point: pg's argument is that high taxes reduce the large rewards founders get, causing them to take smaller risks. Yet there is nothing intrinsic about taxation that necessitates the burden fall primarily on the recently wealthy. PG's argument doesn't easily apply to "old money" -- would the decrease in upside of a wealth tax outweigh the incentives to invest imposed by a wealth tax?

From a tech progress/startup perspective, wouldn't the elimination of capital gains in favor of a tax on wealth cause exactly the right kinds of incentives for starting companies?

That idea is dead on arrival in today's heavily lobbied climate, I'm afraid.

In France, the wealth tax is 0% under €800k, increasing to a maximum of 1.8% (once the person gets to ~€17 million). How could this lead to impoverishment when even relatively conservative asset management averages returns of >5%? Even in this case the party's wealth is still increasing (especially since the proposal is to offset the wealth tax by eliminating all capital gains taxes, which are already extremely difficult to calculate).

And it's hardly an abuse: property taxes (a kind of wealth tax) are already levied, and while many complain, few claim it is government overreach. Government policy that favors a small and already powerful minority would seem to be a much greater abuse.

The bigger question is: why do most governments tax people for creating value, instead of taxing people for failing to?

But the main article talks about 30 years where money has been taken from the poor and given to the rich - that is, everyone has not increased together, and the poorest have lost ground. This article doesn't really answer that.

Imagine that a group of people, a nomadic tribe perhaps, wanted the freedom to live in a non-hierarchical society. If someone imposed inequality--that the best hunter/gatherer in the group should receive a "fair" share of resources--that would be restricting the freedom of the people, would it not?

I'm not endorsing a particular solution here, and specifically not endorsing forcing factories to employ expensive people instead of cheap robots to 'create jobs'. But it's important to see the situation clearly.

And you still can, if you live like it's 1960. Cancel cable, Internet, and everyone's cell phones. Never fly. Don't buy organic food. No HDTV, iPod, iPad, or laptop. Have a modest wedding. Don't send your kids to college. Live in a one-story house with one bathroom and a small garage for your one car.

If people today have to work harder and smarter than their 1960s counterparts, it's because they choose to pursue a correspondingly higher quality of life.

Much of the "oil states" are like that.

> What about CPAs, lawyers, and their must be some sort of corporate hierarchy wherever these people are employed right?

(1) In other words, you don't actually know anything about these biz,so you're hoping that what you picked up watching "The Office" is reasonably close. It isn't.

(2) Not really. How many lawyers do you think an oil drilling company needs? They need more CPAs than lawyers, but a decent "roughneck" costs more and a decent foreman is gold, and gets it. The lawyers? Not so much.

It's hard and dangerous work, but it's very good money.

You folks really ought to look at what decent tradesmen get.

Those spoils paid high wages for the US middle class because it needed those workers for its factories and companies. After a few decades the advantages of the spoils of war evened out with other countries (catch ups in capital, education, strong legal systems) and technology for outsourcing and cheap shipping broke up the US middle classes prior monopoly on US factory/company jobs.

It was a selfless policy, perhaps unique in world history.

In countries like France, Germany and Australia, unemployment was constantly below 4% for many decades after WWII, even below 1% in many cases. What's more, rises in the unemployment rate due to recessions were quickly and successfully fought using fiscal policy. In fact, such policies where quite consciously implemented after WWII even in countries that did not see large scale destruction, because the consensus was that returning soldiers needed to be given employment to avoid social problems.

Unfortunately, low unemployment meant better bargaining positions for workers, and so getting rid of this "problem" was quite openly discussed for some time (this was documented in a PhD thesis, http://bilbo.economicoutlook.net/blog/?p=11941). Economic troubles in the 1970s helped convince people that something needed to change and made it easier for attitudes towards economic policy to be changed, i.e. the shock doctrine. Thatcher in the UK was probably the most memorable driver of this change with her very open fight against unions.

It seems to me that a nice test of which of the two explanations fits the bill better is to compare the development to countries in which those measures of inequality, unemployment, and decoupling of real wage from productivity increases did not change at the same time as in the US.

Was it because the large corporation developed differently, or was it because those political shifts happened at a different time?

Thatcher's shock doctrine may have had many flaws of its own but the abandonment of targeting unemployment via monetary policy was preceded by the previous administrations' failures to actually achieve their unemployment objectives.

God help me if any of my children want to become economists.

[1] http://www.bls.gov/webapps/legacy/cpsatab9.htm -- only stats on unincorporated single-owner businesses go back to the 1960s, but the stats on incorporated single-owner businesses don't show any significant change over the last 10 years, so it seems hard to argue that Americans are really more entrepreneurial now and those numbers just aren't catching it.

A few years ago, I had some contact contracting in a large corp., and it was quite a feat to adjust to the life 'inside', where to be quite honest, life was a good bit slower, with a largely out-of-sight board, and dictates coming from on-high.

The take-away for me, is that not everyone is a Paul Graham, or a Zed Shaw, or a fogus, and that if you support the overall welfare of the country, then we should also support the population at large with reasonable roles that can support them with a living wage.

If we don't do this, and we haven't been, then the consequences of a giant unruly, unhappy and active underclass await.

Or maybe why even today, other countries have reversed that tendency.

And the answer to that question is pretty simple, progressive taxation.

As one of the people whose opinion about working for a large company changed during the 1970s, I know I didn't consciously think about tax rates. (It's possible they affected me unconsciously though, via the examples of people who'd cleared more after tax due to lower rates.)

So if your parents had bought a lot of art, you could donate the art. Better yet you could donate a million dollars to a charitable foundation you had, have them use it to buy a piece of art from you, and then donate 4 other pieces of art which are now valued at $1 million each.

The result was a huge run-up in the value of things like art, and a simultaneous increase in public art for display. When you visit the Metropolitan Museum, you're basically seeing the benefits of a tax dodge.

Since taxable income is included in inequality statistics, but company cars are excluded, this caused a big spike in inequality in 1986.

http://www.scottwinship.com/1/post/2011/03/what-would-it-mea...

As to the economic woes of the seventies, how much did they depend on policy, and how much did they depend on the oil crises? Anyway, I don't argue that everything was perfect before Reagan. I just argue that wages stopped being tied to productivity after him.

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion."

--> http://www.nytimes.com/2011/03/25/business/economy/25tax.htm...

Also: "Back when taxes were so high, the rich were really good at tax avoidance."

I have yet to see any time-series on tax avoidance or loopholes. If you do have some data on this claim, please give a reference; otherwise, you know...

Also, capital gains tax is really. You'd have to make less than $8,500/yr to be in a lower income tax bracket. This hasn't always been the case. So, one easy, legal way to pay less in taxes is to get paid via capital gains.

Before that, there was no point in being paid more. The only thing that made sense was to take pleasure in the organization that you ran.

Wrong period, but wasn't Jay Miner financed by some dentists when designing the Amiga, initially? This is the sort of thing I am thinking of.

Then there was a period in people largely borrowed against their house/assets to start a company. That is now closed to many.

On the flip-side (looking through pg's eyes), the cost of starting many classes of companies has now essentially dropped to just the time required, as much of the infrastructure, process, software required is free or can be generated or outsourced cheaply.

What "scale" are we talking about, and why ever would it be "firmly anchored at zero?" It's perfectly possible to have a negative net worth, a negative cash flow, a negative effect on the wealth and well-being of the society in which you live, etc.

What technology does "the top end" have access to that others don't today? Cell phones? Web servers? Technology has always been influential in proportion to its cheapness. And it's all really cheap now.

If a vacation works and recharges your batteries, it's not, in the grand scheme, a zero-productivity interval, is it?

I think the key to the answer is the large corporation. The period of flattening coincides with the heyday of the large corporation.

Large corporations are still around and arguably more powerful than ever. Yet the difference in pay between the top executives and average workers in those corporations is one way the growing gap between the rich and the not-rich is illustrated and measured.

I remember the transition quite clearly. When I was a little kid, in the early 70s, the most impressive thing you could do was to work for a large corporation. It was the era of conglomerates in shiny office towers. By 1980 we were starting to see a glimpse of the world we now live in, where the ambitious people are all free agents.

I think this says a lot more about how children's view of the world around them evolves as they grow up than about actual changes in the American business landscape. America has been the land of entrepreneur-worship for a long time. John D. Rockefeller was working for himself from the start.

Large corporations tend to decrease economic inequality. "

I think this is off the mark. This time period corresponds directly to the rise of the financial industry which is mostly independent of firm size.

You can make the argument it's goosing the economy to concentrate more and more capital into a single point of failure, a deeply interconnected network of financial firms. And you gotta wonder what the economy would look like, if Wall Street hadn't been siphoning off so much of the brains and capital to play card tricks. It might otherwise have gone towards, say, innovations in healthcare, transportation, energy, even domestic manufacturing.

Higher top rates in the 60's era also meant some of that productivity gain in wealth went back to the average worker. The whole economy gained wealth from public investment in infrastructure, funding for education, healthcare research and so on. But around the late 70's, the tide started to turn towards lower taxes at the top. A few more trends got rolling at the same time: technology that made big productivity gains possible; entire manufacturing industries being sent overseas; the financial industry getting really interested in ways to move existing wealth from where it was, to their own pockets.

That makes it sound entirely bad, which it wasn't... those trends also led to a slew of innovative new companies, disruptions to established business practices, stock options as a way to share in the risk and reward, and lots of cool gadgets. It's more interesting now than in 1960. But there are a lot of workers getting the shaft, and don't necessarily need to be.

Someone mentioned the technological advances, but technology did not start in the 70s. We had the invention of energy before then, TV, radio, aeroplane, car, etc. So, I think that the period where the employees started sharing less of the gains seems to coincide with the dismantling of the unions, which, on a common sense approach also it makes sense as loosing your bargaining power you would expect would mean getting a worse deal.

The technologists and the entrenched oligopolists ate all of the surplus while the commoditized worker drones got nothing. Which is inline with free market theory. The wealth goes to the people who produce the wealth and the people who corner the market.

This is so true, and I also think the fabric of our society will be strained as the gap grows. Especially when the offspring of these highly productive people begin inheriting enormous sums. Maybe a larger estate tax is a good counterbalance.

In absolute terms real income for the bottom quintile has increased. In addition, technological progress has drastically reduced the cost of many luxury items and put them in reach of the poor. Today the "poor" in America not only have clean drinking water and electricity they also have cell phones, internet access, large screen tvs, dvrs, cars, refrigerators, dish and clothes washers, etc. In short they have the ability to live at a much higher quality of living than in any previous era.

Sure it sucks to be poor, believe me I know, but let's not kid ourselves into thinking that the developed world is devolving into some dickensian nightmare when nothing of the sort is happening.

Edit: a helpful graph: http://en.wikipedia.org/wiki/File:United_States_Income_Distr...

No, you really don't know. Because being poor for you was temporary. I'm technically "poor" right now, but having a wonderful time because to make that amount of money I only have to work a few hours per week. Whereas some families at my daughters' school have both parents working two jobs to make less than I do. I've visited their home and no dishwasher, no clothes washers. They aren't working on a fucking startup.

let's not kid ourselves into thinking that the developed world is devolving into some dickensian nightmare when nothing of the sort is happening

My brother works in poor communities in the UK. It is happening. If trotting out graphs showing a single metric is all you need to do to convince yourself and voters like you otherwise, then I predict its only going to get worse.

The other quintiles, even the 21-40% group, have made real gains, and that's good, and most of your arguments apply to the other 4/5. However, it looks like we are slowly creating an underclass.

Do these people really have clean drinking water? Safe streets, homes and schools? Clean, healthy, food? A decent public education? I'm not talking about cheap toys, I mean basics of life.

Final rant: this stuff is personal for me. My family and I are a single income family, near the top of the 4th quintile now (< $120 K may not sound like much in Sunnyvale, but it goes a little ways in Sacramento), but I spent most of my childhood fairly poor. I was about 16 when Reagan's reign of error started ("Reagan" being a figurehead to represent the era and all its players). I went to college in the mid 80s, and watched the door to inexpensive public education largely being pulled shut bit by bit during the 80s. My academic abilities were in about the top 2 to 5 percent, but how is a poor, but smart, kid supposed to go to college now without piling on many thousands of debt? Are we doomed to live in a world run by legacy dullards like W???

In light of flat income growth, that means families either work more or do without. The scary thing (for me) is that we're reaching the maximum of the "work more" strategy when both parents work 1+ jobs. Where do people go from here, considering that they've reached the maximum of their family's earning potential while prices are still rising? I suspect that we're seeing the beginning of the real decline these past few years - with not only stagnant real income growth, but a decline in the amount of things we can afford, and that means less college education, a less educated work force, and rapidly accelerating (if it wasn't already) income inequality.

When you're priced out of a good education (can't afford one) that's when we cease to be a merit-based society where able people work their way up. That's the end of the American Dream in not so many words.

That being said, I can't imagine raising kids on that wage.

Your graph shows no growth in family income between 1970 and 2007.

But in 1970, Dad worked a shift and maybe Mom, while in 2007, to make the same money, Dad works two jobs and so does Mom.

That was rather the whole point of the original article, but you seem to have missed it. People may have the same amount of money, but a) they work every waking hour of the day and b) they have other costs that offset the income, such as health care. But they could have state-paid butlers washing their clothes and cooking their meals and it wouldn't offset the lower quality of life that comes from working multiple jobs, never seeing their kids, and being homeless the moment they get sick.

So levers for me, not for thee has precisely the result we would expect. Fascinating.

I'm not sure how large corporation has influence to this because at least, in Eastern Europe, raise of inequality (tycoons and such) goes hand in hand with lack of democratic institutions (sometime outright corruption but in many cases everything is "legal") and lack of regulations.

Unfortunately, regardless of reason of increasing inequality, history showed us that inequality is often fixed by events which are not part of capitalism teaching (revolution, war, crazy people end up leading the country).

Many of the arguments about economic inequality in this thread seem to be predicated on the notion that we are talking about comparing salaries or car brands. Don't be jealous of your neighbor for having a higher salary or a better car, and why should he have to give up more of his money via taxes just to enhance your lifestyle... seems to be the gist.

But income inequality is rooted in the question not of does your neighbor have more goodies, but how do we divide the spoils of our shared enterprise. If you and your neighbor are partners in the same firm, and you are working your ass off so that he can ride around in a Benz, things are a little different.

It is interesting to observe that when this argument is couched in terms immediately relevant to most of the posters here, the response on HN is quite different. I.e. "I have a great business idea, I just need someone to code it for 1% of the business equity". There are markedly fewer posters defending this notion, or condemning the hacker who wants a bigger share as exhibiting some kind of perverse socialist urge toward income redistribution, than there are posters in this thread defending the same notion expanded to society as a whole.

Technology can create entirely new ways of delivering value and generating income, it can multiply income and it can eat existing income streams.

Inequality is not such a bad thing if technology is the vehicle of economic mobility. Technology can act as a enabler in both directions of income generation.

However, when wealth or power or technology prevent economic mobility at any level, that is a bad thing. Inequality is not the problem, its access to economic mobility, which presumably means access to empowering technology.

We measure inequality of income not in absolute dollars but as ratios. So the anchoring at zero doesn't make a difference.

Is this view at odds with mainstream economists?

I believe the mainstream view is that technological progress is a tide that should naturally lift all boats.

If every programmer and engineer got paid $500,000/yr, that would be great...for ever programmer or engineer, it wouldn't matter much for others.

I do tech support for a web hosting company and I've definitely seen people with low incomes who don't and don't want to use technology, they are falling behind.

Moreover the bottom end of the scale isn't anchored at zero even in the US.

Oh! Are you "pg" of that ludicrous "hackers and painters" essay, the one that actual painters tore to shreds because it's the same sort of bizarre nonsequitor drivel? I can see you're still at it. Nice "work".

If you did a survey of developer compensations in Silicon Valley, do you think (a) developers who work in corporations with over 500 or (b) developers who work in companies with under 50 would have more egalitarian compensations?

My intuition suggests the former, in line with pg. I'd love to see actual evidence of this, though.

My disagreement with PG would come with whether that's the primary driver of inequality. For that, I'd argue it's the increasing power of generic capital over generic labor, instead of competition between specific types or quality of labor.

Large corporations decrease inequality?

Yes. All (most) software developers in a large corporation are paid the same wage. Well, there are persons that can make millions not working in a company (ie. Indie game developer, iphone app developer...). But when you work for a large corporation, you might take 20% more than the average developer, but not 20X times more.

So large corporations increase equality among developers. Boss get paid 10 times more than a dev. gets? Well, a boss is not a developer, and you are doing the wrong comparison here. Compare the boss in this corporation to another boss in another large corporation. They are getting paid in the same range, no? That's equality.

When you are your own boss, and your friends is his own boss; you can become as unequal as you want. So, small businesses and startups promotes inequalities.

Edit: I'd like to point out that this wasn't some kind of appeal to authority to support pg's arguments, so kindly explain the down mods.

...was that "reaganomics" took over after that.