Sunday, October 12, 2008

The Futility of Equality

In Russ Roberts' conversation with William Bernstein about inequality last week, Bernstein argued that largely different salaries harm the less wealthy people. In the pursuit of status, the 2nd, 3rd, 4th, placers stress out about their lives. This stress harms their health and shortens their life span. Thus we should engage in redistribution.

It's a clever argument, but I challenge its conclusions (again...see my previous challenge here). I assume Bernstein searches for something less than full equality (where everyone makes the exact same amount) since that would be prohibitively expensive. The alternative is partial distribution, where a few are poorer and several are wealthier.

Redistributing from the wealthy to the poor still creates that ranking system, only with a smaller variance. Instead of being much wealthier, those "on top" of the status ladder are only slightly wealthier. But according to the status theory, that shouldn't matter. A runner up is still a runner up, whether by a little or a lot. They will be just as stressed out, just as prone to an early death. But society will be less opulent because of the incentive distortions. Bernstein's world is strictly worse.


Ryan said...

Wait, how's that work? Why isn't an externality tax in principle welfare-improving? You seem to be assuming that in order to believe in status goods, or signal theory, one cannot simultaneously believe there are also non-status/signal goods. And even if that were the case, then it's unclear how there can be incentive distortions. In fact, one might think it would unwind distortions: given that we already have a distortionary tax system, budget-neutral taxes on negative externalities should be doubly good for efficiency.

This is not to say that I like the Bernstein/Frank sort of argument. To the contrary. I'm just wondering what the underlying model is here.

Ryan said...

Btw, in case you haven't seen it, Robert Frank has an article in the most recent JPubE entitled "Should public policy respond to positional externalities?" I'll give you three guesses as to his conclusion, and the first two don't count.