Inequality on the Island
by Noni Mausa
Inequality on the Island
Your island has 1000 people. 500 are working age, 500 are children or elderly and can’t do much. That’s normal, and not a problem.
The 500, working together, easily produce enough food and stuff for 5000 people, while also supporting the 500 young, old and disabled. In fact, the working 500 are so productive that in good times they have plenty of time to create music and art, write books, do research, and explore the sea, the land and the heavens. And when members of the 500 grow old, there are youngsters ready and willing to take their place.
With 5000 livings floating around, no-one expects each person to have 5 livings. Some will always have a bit more, others a bit less. But this variability can go too far.
By 2007 on the island, 200 people control 4250 of the 5000 livings,and of that group ten people control 1730 livings. One of the 200 has 615 livings all to himself.
The other 800 people on the island have 750 livings to share, 0.94 each. Half of these people are not workers, and need to be supported by the remaining 400.
These 400, subsisting on less than a living each, produce 80%of the island’s economy of 5000 livings, or 10 livings each. In return they receive 1.88 livings with which to support themselves and one dependent.
There’s your inequality. How does it look to you?
Instead of abstractions, how about analyzing the actual economy?
It’s not that hard. We all have a rough idea of the numbers by just looking at our own life budgets.
Some major life expenses are hidden from us — health insurance costs especially (until we see a COBRA statement at least).
It was discovering Henry George’s argument (~10 years ago now) that really opened my eyes to how *exactly* our economy became screwed up.
The problem is simly rent-seeking, people getting something for nothing, or in Adam Smith’s words, reaping where they did not sow.
This is the fundamental injustice in the economy, rent-seeking in land. Median rent is $1100/mo now, and there are ~50 million renters, so total rent is at least $600B/yr, ~$20T over 30 years.
Then there’s our $8000/capita health care cost, 2x everyone else in the OECD. $1.2T/yr or more in rents there.
Government is probably wasting another $1.2T or more a year.
Then there’s the trade deficit, ripping $600B/yr+ out of the paycheck economy in a harmful way that few people apparently understand.
Now, rents are returns on capital, and retirees just can’t save a big ball of cash to live off of, they actually have to invest in things. But the problem with land is that its valuaton is nothing more than whatever we are willing to pay for it — as real wages go up, land values rise in lockstep. It is a real treadmill for everyone not fortunate enough to inherit their own land, and a major cause of the wealth disparity in this country.
well, i don’t know that i understand troy’s point, and i am not sure i agree with noni’s thought they are both almost certainly “more right” than the standard line from either the right or the left.
as far as i can tell most people want “more” at whatever level of “living” they find themselves. this will limit the degree of sanity you can hope to obtain.
while my sympathies are with the left… as at least being more decent than the hard line right…as well as more realistic, i cannot support an ideal (as in ideology?) based on “equity” or “equality.”
i think as a country we need to find ways to not “waste” human lives in meaningless or demeaning work… and no work is inherently demeaning, it’s the conditions imposed by “the boss” that determines whether it demeans the worker or not. .. or in wretched idleness.
i like my idleness but that is not wretched idleness which is involuntary because the economy does NOT offer opportunities for everyone in spite of what the free marketeers believe.
don’t know where i am going with this except to say that the old ones knew why “envy” was a sin… it makes you sick…. and an economy based on envy, or “equity” is not a good answer to an economy based on reckless greed, exploitation and destruction.
without knowing where noni got her numbers, i would suggest that the “average” worker in America can support about four of five “lives.” both children and the elderly can get by on about a quarter of the income of the average worker… so i would suggest that an average worker can support his own life, two children, and “himself when he is an old person” in reasonable comfort.
too lazy at the moment to work all of this out and see if it makes arithmetic sense, but i suggest it’s a better place to start than comparing yourself to the “one percent” or even the joneses up the street.
another big problem of course is whether your work or your neighborhood allow you to live a reasonable life at a reasonable cost.
As for my numbers, I did attach links, but apparently the cat got them before they could be printed. Here they are:
Wealth statistics from 2007, it’s worse now. Source: http://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States#Statistics, and a lot more detail here http://www2.ucsc.edu/whorulesamerica/power/wealth.html
The person with 615 livings is derived from here: http://g-mond.parisschoolofeconomics.eu/topincomes/#Database: searching United States, 2007, top .1% income share including capital gains.
I’ll briefly address Troy’s comment in another comment.
“ i don’t know that i understand troy’s point”
“It is difficult to get a man to understand something , when his income depends upon his not understanding it!” — Upton Sinclair (paraphrased slightly)
I wanted to make it as bare and simple as possible. Economics is like quicksand inhabited by squids — wading through the totality of its complexity just tires people out, thereby preventing some approaches to clarity. To deal with an intractably complex problem, it can help to set absolute, known limits. Too, you can get a hint of the utility or non-utility of elements of an economy or society by asking yourself, what would happen if these disappeared?
We know that many working Americans’ incomes are less than their whole-life cost of living. We also know that if only the “highly productive” (i.e. wealthiest) 1 or 10 or 20% occupied the US and the others vanished, the country would be so weak that its productivity would collapse, along with most of its businesses. If only the “productive” 500 stayed and the other 500 vanished, there would similarly be serious social problems.
Trying to tackle the whole of econ-plexity merely invites TL/DR.
Noni
well, then you have to add the rent-takers to your toy economy then I guess.
I agree we have a distribution problem, but the reason we’re not living in a Jetson’s economy now is all the messy details of how wealth creation is captured by rent-takers via the various economic rents they enjoy.
Troy
my income does not depend on not understanding your point. you could try to explain yourself more clearly.
i think “rent” has a special meaning in economics i am not familiar enough with to use with any sense that i know what i am talking about.
i have paid rent from time to time for housing, or to use equipment i could not afford to own. neither of these seem an unreasonable burden. i did notice that often rents for housing had more to do with “what the traffic will bear” than any reasonable relation to costs.
on the other hand, as a land owner i can tell you that renting to others is no picnic. it’s a relationship i would avoid if circumstances did not “force” me to do what i can with what i have in the world as it is.
noni, i hate links. usually they send me on a wild goose chase where all i find out is that the person who did the linking doesn’t read things the same way i do.
i assume your numbers have something to do with the distribution of money income. i am not sure that that translates to what i would call “living.”
not to sound too much like an apologist for the rich, i have some reason to believe that only about one person out of a hundred is actually capable of organizing a basis for ‘ivings.’ my feelings would not be hurt if the 99 hired that person to be their grownup and paid him a wage exactly equal to what they paid themselves.
but it doesn’t seem to work out that way. so i find it easier for me if i don’t envy the Lord his Manor and long as he attends to the welfare of the peasants and sees they do suffer deprivation or injustice.
obviously that is not the situation we have in America today. but the problem is not the inequity… or if it is, only because the very rich have the political power that comes with great wealth and they are not at all interested in attending to the welfare of the peasants and workers.
maybe the cure for injustice and deprivation can only come from addressing equity… but the reason is not so that WE can have as much as THEY have, or even that THEY should have no more than WE have.. but only that the current form of monetary non equality is harmful to the people in some other way than simple “i have less than you have.”
not to sound too much like an apologist for the rich, i have some reason to believe that only about one person out of a hundred is actually capable of organizing a basis for ‘livings.’ my feelings would not be hurt if the 99 hired that person to be their grownup and paid him a wage exactly equal to what they paid themselves.
but it doesn’t seem to work out that way. so i find it easier for me if i don’t envy the Lord his Manor and long as he attends to the welfare of the peasants and sees they do not suffer deprivation or injustice.
obviously that is not the situation we have in America today. but the problem is not the inequity… or if it is, only because the very rich have the political power that comes with great wealth and they are not at all interested in attending to the welfare of the peasants and workers.
maybe the cure for injustice and deprivation can only come from addressing equity… but the reason is not so that WE can have as much as THEY have, or even that THEY should have no more than WE have.. but only that the current form of monetary non equality is harmful to the people in some other way than simple “i have less than you have.”
my income does not depend on not understanding your point
my mistake, I thought you said you had a rental property earning for you…
i did notice that often rents for housing had more to do with “what the traffic will bear” than any reasonable relation to costs.
and that is the problem. It’s a treadmill for all renters. Get a tax cut — rents go up. Get a raise, rents go up. Invent an entire new industry that brings thousands of workers into the area, rents go up.
The theory of rent-capture here is not that opaque, and its contribution towards wealth-disparity is not hard to miss. Hundreds of billions of ground-rent per year is being transfered from labor to capital via ground rents, the value of the real estate location monopoly.
The only way to increase the supply of land is to improve area transportation. Housing can be increased via density, which can help the supply problem at the cost of the quality of life.
on the other hand, as a land owner i can tell you that renting to others is no picnic.
robbing banks is no picnic, either. Same line of work in the end, getting something for nothing.
my point in all of my above is to point out that today’s inequality is not some abstract moral discussion. It is being driven by real-world dynamics that are easy to see and easy to fix (tax the bleep out of economic rents). AFAICT, the nordic states take a sledgehammer to rent-seekers with their aggressive tax brackets, but IMO this is unnecessarily harmful to bona-fide wealth creators who do in fact “earn” their high incomes via their labor.
Today’s economy is a gauntlet against the skimmers for any middle-quintile person. Hundreds of billions in ground rents. A trillion or more in economic rents in medicine. Those are the major avenues of ongoing harm, everything else — cell phones, local cable monoply — is a combination of voluntarily consumption and small beer in the scheme of things.
But housing, that’s not voluntary and it’s not small beer. It’s every schmuck’s dominant life expense.
Troy
you will not endear me with this line of argument. the “rent” i extract for my land is barely enough to pay the taxes. and my renter’s income is at least ten times mine.
as for something for nothing. the money i put into buying the land is “something.” so is the care i put into maintaining it.
with actual houses the work and worry that comes from tenants who don’t care for what they don’t own is more than the “rent” is worth. the only reason i would even consider renting a dwelling is if i couldn’t use it myself, and couldn’t sell it with an expectation of being able to buy “similar” where and when i could use it, so wanted to hang on to it until i needed it, without losing all the money i put into taxes, and interest and upkeep.
i think your Rent equals theft model is a little simple minded.
again, it’s not mine. but maybe i am not a schmuck. i paid a reasonable amount for my house… in terms of what it would have cost me to build it. or, i suppose, to wrest the land away from the indians who “really” owned it.
if i had had to rent the same house, i would have paid a reasonable cost… compared to what it would have cost me to build, etc, only prorated on a monthly basis.
now if you object to “interest” … well, it’s hard to see how you justify “taxes” or how you expect an economy to “grow” considering that interest and taxes have both evolved quite naturally along with rents
i am not much of a “free markets justify everything” type of person. but then again i can’t get excited about every magic theory that is going to solve the injustice of the world and restore the garden of eden.
I object to what you described above:
“i did notice that often rents for housing had more to do with “what the traffic will bear” than any reasonable relation to costs. “
that’s the definition of “economic rent” — income above the amount necessary to keep a factor in production.
http://en.wikipedia.org/wiki/Economic_rent
The land is a monopoly — “the mother of all monopolies” as Winston Churchill said. Profiting from natural monopolies is what is getting something for nothing — landlords profit from “providing” land that is not the product its owners. It was here before all of us, and this rent flow is a fundamental economic injustice.
http://www.amazon.com/Progress-Poverty-Industrial-Depressions-Wealth/dp/0911312587
it struck me that noni’s “five livings” is not very different from my “four livings”…
let us say, for the sake of argument that “four livings” is correct. this seems to me it would pay for “the worker”, his wife and three children at “half a living” each in “cost”, and himself and his wife in retirement at half a living. don’t get confused by the “living” metric. think of how much it costs to feed and house and etc a “person” and recognize that a reasonable approximation is that kids cost about half as much as grownups (they are not buying cars and houses), and so do wives… again, the stay at home mom is not buyin house and car out of her “earnings.” and presumably by the time the couple retires, neither of them is buying a house any more, or sending the kids to college..
so what about noni’s “five” livings… well, that’s the source of the inequality… that 25% of what an average worker “produces” that he does not collect in “income.” this is the money that “the rich” get… either as a somewhat justifiable income based on their contribution to the ‘production’ of workers, or as interests and rents and unjustifiable “wages”. so how does only “one” living become “hundreds of livings per plutocrat: simply because there are considerably fewer of them than there are of workers, so by addiding up the one “excess” living per worker times how ever many workers the plutocrat “oversees”… justifiably or not… you get those hundreds of extra livings per plutocrat.
two things worth noting: the plutocrats may be stealing from each other more than they are stealing from each worker.
two… the envy the poorest have for those who have more than they do is not envy for Bill Gates, but envy for YOU. It hardly occurs to the poorest to envy the very rich. they may even assume that somehow Bill Gates “earned” his millions. but when they look across the street and see your bigger houses, and bigger cars, and new hundred dollar sneakers… they can envy that… perhaps even with some justice. i never could convince myself that my assistant boss did anything that was worth a paycheck, let alone one bigger than mine.
envy may not be your best guide to economic fair play… or even decency.
troy
but people have been fighting over the control of land for at least fifty thousand years. where do you want to start the “justice” tally?
or do you think land should just be available for whoever wants to use it… to hell with whoever got there first?
seems to me that “buying” it or renting the use of it are pretty civilized solutions to that problem.
that does not mean that i don’t agree that situations arise where one person or group of people has control of land or housing or some other resource in such a way that they are able to charge “rents” far beyond their reasonable “costs” to the hardship of the renters…
but that is a problem you will not solve by telling me i am robbing my tenant.
or proposing that agree to let the country tax me out of my land.
A couple of points. First, many people are unclear on the meaning of the term “rentier,” confusing it with ordinary landlord type rental situations. Rather, rentiers are people who derive some or all their income from tolls paid for things they control or possess, as opposed to people actually trying to make a living through producing stuff. Landlords are not a very good example of rentiers because their income depends on real property which needs care and which is at risk (earthquake, fire, frat parties) every day it exists.
The ideal rentier economy consists of a small number of people who control essentials, deriving steady payments while keeping others from benefiting from them, yet have little risk of loss and little responsibility to provide that essential. The banking system, for instance, is essential because not many people can buy a house or even a car outright without a loan, and most commerce is rooted firmly in a network of banking institutions. Bank profits above their cost of operation are the “rents” they charge for access to the service they control. Ditto for access to health care, access to patents, access to prescription drugs, access to the ears of government, etc. The rentier’s portion is the part paid above the natural cost of the essential being provided.
Envy is a red herring in this argument, coberly. The truth of it is that the 1000 on the island are necessary to do the work and create the society that the rentiers manipulate. The top 1% would be helpless without them, as a jockey would be helpless without his race horse.
The crime of the rentiers is that they have gotten better and better at it, finally having contrived a system which constructs a toll bridge in every person. It stands between each individual’s labour and the fruit of his labour — with a toll for most people well over 85%.
Is it envious to be angry when you see the great bulk of your productivity drawn away, and when you work harder, longer hours, more family members working, investing in higher education, and yet see no increase in what comes back to you? This has been the situation since 1980 for almost all Americans, and only strategic divisiveness and the complexity of the toll bridge system has kept people from seeing it clearly. We are not too angry, we are not angry enough.
noni
thank you for making your argument, and troy’s, clearer.
i am disposed to agree with you, but in the terms that you put the argument at least at first you were appealing to envy. and troy assured me that as a landlord i was stealing from my tenant. these arguments are not helpful toward the change you, and i, would like to see.
i would offer, again as an aid to thinking clearly, that it is at least in principle just as likely that the 1000 people on your island depend on the one guy at the top to organize their labor so that they are productive enough to produce those 5000 livings, of which the poorest 300, by my arithmetic get to keep about 2 1/2 each, while the next rank gets 7, and the second highest rank gets 11. Leaving only the guy at the top with the astounding 615.
I don’t know if the poorest either “earn” more than their 2 1/2 or are in actual need because they don’t have more. My guess, based on my own experience, is that they could live quite comfortably on that 2 1/2 if they had some sense… and if the landlords didn’t take it all from them.
i’m not saying that makes it fair or desirable. just that raw appeals to inequality do not seem to me to justify much in the way of social change.
i think the crime of the “rentiers” is not the toll bridge… though if you can show in real world examples where these toll bridges are, i would most likely join the action to eliminate them… but the actual criminal activity and government collusion by which they aquire and maintain them.
we don’t need to be more angry. we need to think more clearly.
btw
the race horse would win no races without the jockey, and get no oats.
i don’t like the metaphor, because in fact i don’t like horse racing. but instead of us horses moving into the manor and learning to eat steak, i think we need to kick down the fences and learn to eat grass.
note that you could take 2 livings from the folks with seven and raise the folks with 2 1/2 to about 4.
there doesn’t seem to be much to be gained from reducing the 11 livings held by each of the 10. but you could take away 500 of the livings held by the one with 615 and add one to the folks at the bottom raising them to 5 and 10 respectively. not sure this would satisfy your equity gene but you ought to think about whether the increases are worth it, justified by the actual contribution or actual need, of the folks at the bottom, and how much of your own “excess” you are willing to contribute to them.
if you give the guys at the top names… like tim geithner or peter orszag or andrew biggs… not to mention peter peterson… i would be more inclined to agree that they are not worth the harm they cause to the rest of us, though i don’t think its a question of their being rentiers, or even of their high salaries…
Another red herring is to begin to think of specific individuals, deserving or otherwise. An economy is the interaction of very large numbers of people over long periods of time. So you ask “I don’t know if the poorest either “earn” more than their 2 1/2 or are in actual need because they don’t have more.” In any demographic distribution there will be a number who are more or less productive, and over time they go from helpless to strong to helpless again.
So to simplify the question, ask yourself, “what happens if the “unworthy” are removed?” What sort of a country has a population of nothing but strong educated “worthy” workers? None, they would have to import them from elsewhere. What sort of country has no people who old, ill, disabled or unemployed? Does that even look like a country, as we understand the idea?
No, such a “country” would be both dependent upon and parasitic upon other, free-range countries. But in my island scenario there are no other countries.
noni
i wasn’t thinking of “removing the unworthy.”
but i was going to ask you this…. would you be willing to give up ten thousand a year so that those poorer than you could have an extra ten thousand?
alternatively, what would you do with an extra ten thousand that would be worth it to you take it from the hand of the richest man in town?
i would bet that the ten thousand you gave to the poorest would shortly end up in the hands of their landlords, or the local grocery chain, or car dealer, or payday lender…
so while we may look like mutual flashers of red herrings, i would continue to suggest you try to take a more mechanical picture of what is actually going on, and what you actually propose
and not to propose mindless equalization, or accuse me of proposing “removing the unworthy.”
as one of the unworthy, i can live on 2 1/2 “livings”. i can live on one. i don’t want the rich man’s money. and i suggest the problem with the poor is not that they have “less” but that sometimes they don’t have “enough” and quite often they are incapable of managing what they have. these are serious problems and they need serious thought, not vague ideas that just “sharing the wealth equally” will solve any problems, much less all of them.
oh, and yes, i think excessive wealth is part of the problem, but not because it is unequal. but because it is used to drive the politics that allows the criminality, and fails to address poverty in a more creative way than just throwing dimes out of the limousine to make yourself feel better.
just to try to be a little clearer. i wasn’t thinking of the 2 1/2 livings people as “unworthy” or “helpless.” I was thinking of them as possibly contributing “only” 2 1/2 livings to the 5000 livings on your island. if you have ever worked with people you ought to understand that “low productivity”
is a rather common condition among workers, not always due to the oppression of their bosses.
i wasn’t thinking of the “helpless” at all. i am a great believer in taxing all of us to provide welfare for those who are in temporary or permanent straits. but are you sure you want to provide them welfare up to middle class standards, or would you expect them to be able to get by on “one” living? and if it turned out they were not helpless but anxious to contribute their productive potential… would you consider putting some effort into enabling them to do this, or would you just give the a welfare check and let them figure it out themselves. the poor are, as we know, experts at finding their own niches, and dressing for success.
i don’t see where any of this is helped by asking them to look at the guy who has 615 livings.
but i’d watch that 615 guy pretty carefully to make sure he is not buying the government so he can set up sweat shops at home or abroad and poison the rivers the poor get their water out of.
“…would you be willing to give up ten thousand a year so that those poorer than you could have an extra ten thousand?”
I currently do exactly this. I generate my 5L in productivity (lifelong, not this instant in time) and receive in return about 2L, in the form of a small pension and my health and other services. Part of the 3L difference flows upward and some flows downward. Because I live in Canada, I am sure a good chunk of it goes to medical care, more of it goes to common goods like roads, schools etc. That’s absolutely right and I would be willing to pay more if I had more. And some of it goes to the black holes of wealth, which cannot be prevented.
“…alternatively, what would you do with an extra ten thousand that would be worth it to you take it from the hand of the richest man in town?”
That’s even easier. It would go into the economy so fast it’d make your head spin. New windows for my house, and cash in the carpenter’s and manufacturer’s pocket. Foundation repairs. A new garage to replace the 1940’s vintage ramshackle thing I currently have: more happy carpenters. Cataract surgery for a blind American relative. Donations to a homeless shelter. And a big lottery win would develop velocity even faster, breaking some of the laws of physics, in the form of a lifelong ambition to endow a meeting and exhibition hall.
Is the richest man in town doing these things? Some of them, surely. But he’s not stepping up for my blind US relative, I know that for sure, and though she’s on medicare by now she can’t afford the $2400 co-pay to have her eyes fixed. She sits and listens to the radio, can’t read or write or cook or even dial the phone, and needs help to do almost everything because she can’t see it. My elderly friend, by contrast, had her cataracts done a few years ago on my Canadian taxpayer dollar, and still reads and writes and cares for her own apartment till 18 months ago when, at 90, she finally had to go into assisted living.
One ill caused by high inequality is that it makes the economy smaller. For almost all people, it amounts to a drastic cut in income, resulting in increased poverty, even though they are still working (if they have work) just as hard. There appears to be 5000L in the economy if you do the numbers, but effectively they are living in an 850L economy, with the added insult that their 850L economy keeps the prices down so that the wealthiest can get far more milage out of their portion. Yet the extra cash exists and can be used to strategically distort the 850L economy as desired by those who control it.
I suspect that one marker of a severely unequal economy lies in the prices of things like art — $120M for a pastel version of an iconic modern painting has to come from somewhere, has to come from someone who would spend it as easily as you or I would choose to buy a new car. $120M can build you a pretty decent office building, yet someone could afford to spend it on a piece of cardboard about 2×3 feet in size.
Noni
noni
i am not altogether sure that about 615 of the livings in your 5000 living economy don’t come from what the rich man spends. he may not spend it directly on your friends cataracts, but he may well spend it indirectly.
i understand and appreciate your concern for the least among us, but i still don’t think envy is the right remedy.
i am, as you may have noticed, in a fight to preserve Social Security. I started trying to preserve it by pointing out the lies of those who want to kill it. I find myself completely sandbagged by the “social welfare” or “equality for all” faction who want to turn it into welfare and kill it that way. And I have to note that they use the same technique as the Big Liars… that is they lie about what they are doing.
I may be wrong… it may be that humans are hopelessly greedy and stupid.. but I really thought that a program that protects peoples ability to pay their own way …. and has been the most successful anti poverty program in American history… was a better way to help the poor than to teach them to demand favors from the rich.
If i understood that you “give” that ten thousand to the poor by paying taxes and buying things, then I have to conclude that I have no idea what your remedy for inequality is except that you want to tax the rich to pay for things you want, and you want more money to buy the things you want, and you tell yourself this is all a fine and noble way to make the world a better place. I just can’t follow the logic.
Puzzling over making the whole “livings” thing more comprehensible (to me, if no-one else.) Here’s one way to turn it around.
Suppose disaster hits the island, a tsunami probably, and renders disabled 307 of the workers in the lowest class, currently earning 1.88L each.
And assume Mr. 615, overcome by sorrow and pity, determines to expend his whole fortune to support these people plus their 307 dependents who are already assumed to need support.
Can he do it?
That is, can he himself expend the “livings” he controls to support 2/3 of the island’s population, of whom the greatest fraction (about 460) are now permanently disabled?
Well, no. No sensible person would think so. Can a single man care for 600 people, even if the resources like food and heating fuel are already laid up against such a disaster?
The new, post-tsunami island economy consists of (1000 – (500 + 307)) = or 193 fit, working age people, supporting 250 elderly and 250 children, plus 307 disabled, plus themselves. Given a 1:5 productivity ratio, they appear to be just barely able to support themselves and the helpless. But Mr. 615 alone? No way.
It becomes obvious that his huge wealth lies in the interweaving of the energy of all the others. Whether kindly or predatory, his power is proportional to the human energy available to be mustered and directed.
And in fact, the productivity ratio in the smaller working population would probably not be 1:5 anymore, nor anywhere near it.
Again, simple strokes with a broad brush, to approach clarity.