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Risk and return redux

May 28th, 2003

It seems as if the BlogGeist has suddenly focused on the issues of risk and income distribution – admittedly they’re hard to avoid with news of near-infinite payouts for failed chief executives (including Governors-General) being announced daily. At the same time as Ken Parish and I were discussing risk and income distribution, a very similar debate was taking place in the Antipodes (relative to Oz, of course).

Kevin Drum started off with a post pointing out how much of the increase in income in the US over the past twenty years had gone to people in the top 5 per cent of the income distribution. It’s an excellent point, but I think the argument could have been strengthened if Kevin had used real rather than nominal income figures, and looked at the share going to the top 20 per cent of households. Except in the final years of the bubble, virtually all the increase in national income in the US over the last two or three decades went to this relatively well-off group. A rising tide has not lifted all boats.

David Adesnik at Oxblog (permalinks bloggered) tried a defence along the ‘reward for risk’ lines I had pre-emptively refuted in my post. Then Kieran Healy came back with links to me and Ken, as well as some pointed arguments of his own. And Matt Yglesias weighed in, attacking Adesnik’s line about “equality of opportunity versus equality of outcome”. As I pointed out here

Given highly unequal outcomes in one generation, the successful members of that generation will find ways to give their children a headstart. Hence, equality of opportunity can’t coexist with ‘too much” inequality of outcomes.

Adesnik also linked to Bill at Rational Explications whose post on income distribution repeats a number of errors that have been refuted more times that I can count, while adopting a condescending attitude more suited to a Nobel prizewinner than to an economic neophyte (at least, I hope he’s a neophyte), as in

Sadly, the level of incompetence or mendacity with regard to data displayed by Prof. Barker is no longer surprising among the academic left

. The most glaring errors in Bill’s post are:
(i) comparing tax burdens of the rich and poor by focusing only on income tax and ignoring Social Security taxes, sales taxes etc
(ii) ignoring the obvious explanation for the fact that the top 1 per cent are paying a bigger share income tax, namely that they have a bigger share of income (Kevin Drum’s original point) and
(iii) looking at real expenditure on health, education and welfare without taking account of population growth, growth in real cost of health services and so on

People in glass houses …

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  1. May 29th, 2003 at 03:01 | #1

    For what it’s worth….

    I used nominal instead of real because I was dealing in percentages and only cared about the final number ($687 billion). There didn’t seem to be much reason to use real numbers in this case since the end result would have been the same.

    I did a quick calculation for the top 20% as well, and it came out about the same. So if GDP growth is taken as a baseline, the top 5% have beaten it, the next 15% have matched it, and the rest have lost ground.

  2. The Merry Blogster
    June 1st, 2003 at 08:51 | #2

    Telling me that the rich are getting richer and the poor are getting poorer because “the government” does require enough transfers of its citizens is useless. If you want to make the assertion that wealthy are ripping off the poor then do it, show me the money, where it’s coming from and where it’s going, and I may find something meaningful in your comments, otherwise your normative assertions are silly.

    The risk-return tradeoff I agree may be inappropriate, but the point is meaningless if you instead assume that CEOs are tournament winners in the Lazear and Rosen sense. They are rent-seekers, like everyone else wishes they could be.

    The point about whether or not population growth is taken into account is meaningless unless you can show that there was change during the periods observed. I believe long run population growth in the US runs about 1 to 1.5%, implying there are overall increases on average; what are you bitchin’ about.

    Thank You,

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