Income Inequality and Poverty

Quote 1: “We have tentatively suggested that steep progressive taxation, by reducing the rate of wealth accumulation, has yet prevented the large fortunes to recover fully from these shock.” Income Inequality in the United States. Piketty and Saez.

  • In my reading of this article, Piketty seems to do a great job of demonstrating the fact that the Kuznets curve is not a great explanatory tool in economic development, although he politely fails to say so directly.
  • There is a difference between recovery and growth. If a growth rate is steady at 5% and a massive drop in capital occurs one day, yet the growth rate holds, it is not proper to call the growth rate before the drop growth and the growth rate after the drop recovery. We should expect to see supernormal growth in a recovery, which is comprised of both the natural growth and a recovery premium. Piketty seems to demonstrate that capital grows more quickly with less capital taxation, which is obvious, but he does not demonstrate either that any recovery premium exists, nor that progressive taxation slows this premium in any way other than the obvious effect which is not unique to the recovery premium.
  • My final problem is not with the paper per se, but with the Kuznets curve once again. It’s not clear that income inequality is undesirable or even that it is in any way related to inequality of well-being, except by assumption. I was pleased to see Prof. Cowen writing about this very point in the other article I will address shortly.

Quote 2: “First, the inequality of personal well-being is sharply down over the past hundred years and perhaps over the past twenty years as well. Bill Gates is much, much richer than I am, yet it is not obvious that he is much happier if, indeed, he is happier at all.” The Inequality that Matters. Tyler Cowen.

  • I strongly agree with this point and I am glad that Dr. Cowen made it. I think that inequality of well-being is far more important than income inequality, wealth inequality, health inequality, inequality of education, or any other sort of inequality.
  • It was interesting to read that inequality of well-being is sharply down in recent years. I think this is an important sign of progress.
  • It was interesting to read that the use of discount stores by the poor leads in conjuction with the fact that income equality is typically measured using the CPI leads to the conclusion that it is not clear whether significant inequality in real terms has been worsening or improving.
  • I was actually already familiar with the point that the top earners do experience obvious and growing income inequality, but it is largely meritocratic. I was glad to see it noted.
  • I was glad to read about threshold earners who value leisure over additional income. While I was unfamiliar with the term, this notion has been one of my major objections to the income inequality argument from the start. Some people voluntarily cease to earn more income and one good reason is that they may highly value leisure.

Quote 3: “There have, however, been a wide variety of criticisms of the poverty line, which suggests that it would be valuable to revisit its calculation.” Gruber, Jonathan (2012-12-01). Public Finance and Public Policy (Page 495). Worth Publishers. Kindle Edition.

  • I have long been a fan of the poverty line approach to measuring poverty and creating welfare policy, but I found many of these complications raised to be valid.
  • I think the consumption bundle approach is far superior than the traditional 3*food cost approach.
  • I think the differences in cost of living by geographic area is an important consideration which should be incorporated.
  • I agree that all forms of income, not only cash income, should be considered.
  • It also seems to me that a poverty line approach rather than a relative poverty approach is superior because elimination of poverty in any degree by a relative standard implies weakened production incentives, and elimination in the strict sense implies a total lack of productive incentive, but elimination by the absolute standard need not affect productivity at all in the long run.
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