Economist's View: Poverty and Redistribution

Mark Thoma:

Here are two links:

• We Should Strengthen the Safety Net as the Recession Swells the Ranks of the Poor - Brookings Institution
• All Time Record Level of Severe Poverty - Angry Bear

And an argument for redistribution:

Superstars & redistribution, by Chris Dillow: Alex Tabarrok explains how increasing inequality can be due to “winner take all” superstar effects. This raises an issue. Insofar as this is a reason for higher top incomes (and it is only part of the story), mightn’t it strengthen egalitarians’ arguments for redistribution?

I mean this in three senses.

1. It increases the force of Rawls’ claim that the distribution of talents is “arbitrary from a moral perspective” because “no-one deserves his place in the distribution of native endowments.” The essence of winner-take-all economics is that  small differences in skills can mean large differences in returns. Even if you think Rawls was wrong on this, and that there is a moral element in the distribution of skills - say, insofar as these arise from differences in effort - one must, surely, be inclined to think that small differences in skill are largely arbitrary.

This is especially true because not all superstar earnings arise from even slightly superior skills. As Alex says, people like to read the books that others read. But this can generate Adler superstars - people who become rich simply because they arbitrarily become the focus of attention. Is Dan Brown’s superstar income really the result of him leveraging his superior intellect? Or is he just a mediocre writer who got luckier than comparable writers?

2. It reduces the relevance of the self-ownership thesis. Even if we concede the Nozickian point, that people own their own talents, this does not suffice to justify leaving superstar salaries untaxed, because such salaries are a joint product. They arise from an interplay of talent (or luck) with socio-technical forces: globalization; a negligible marginal cost of production; copyright laws; and so on. No superstar can claim a right to these factors, which are an accident of history. And insofar as these are social factors, it might be reasonable for the incomes arising therefrom to be socialized.

3.  It undermines Laffer curve arguments. Imagine you’re the impoverished J.K.Rowling writing her first Harry Potter novel, and that taxes on high incomes are very high. Do you think: “I’ll not bother writing, but become a waitress instead?” It’s about as likely as Wayne Rooney preferring to work in McDonalds than play football.

Because only a tiny minority become superstars - and they do so at least in part through luck - hardly anyone with rational expectations would anticipate becoming a superstar. Superstar salaries, then, are not needed to induce people to become writers, musicians or sportsmen. Instead, they consist very heavily of rents. And rent is a reasonable subject for tax.

Against all this stands Nozick’s famous Wilt Chamberlain story. But is this really a compelling counter-argument?

I've always liked the principle of equal marginal sacrifice as a basis for progressive taxation, but it's not the only foundation for a progressive tax structure.

Update: The CBPP notes that even though poverty rates hit record levels in 2009, without automatic stabilizers it could have been even worse:

The headline story in today’s Census Bureau report is the large jump in the poverty rate in 2009. But an exclusive Center on Budget and Policy Priorities analysis of the new survey data shows that unemployment insurance benefits — which expanded substantially last year in response to the increased need — kept 3.3 million people out of poverty in 2009.

In other words, there were 43.6 million Americans whose families were below the poverty line in 2009, according to the official poverty statistics, which count jobless benefits as part of families’ income. But if you don’t count jobless benefits, 46.9 million Americans were poor.

Update: More on the poverty report from Economix:

...Race continues to play a huge factor in poverty and income inequality. Median per capita income for non-Hispanic whites was $30,941, down 0.8 percent from a year earlier. Among blacks, median per capita income was less than two-thirds of the white median income, at $18,135....

Age is also a factor. Households led by someone 65 or older actually saw their median income rise 5.8 percent to $31,354. That was largely because of Social Security payments. But households maintained by someone aged 15 to 24 saw their income drop 4.4 percent, and those led by someone 35 to 44 fell 2.6 percent.

One of the most striking statistics released Thursday was the number of people aged 25 to 34 who are living with their parents. That number rose 8.4 percent to 5.5 million from 5.1 million in the last two years. We knew that recent college graduates were moving back in with their parents, but the fact that even older adults are doing so because they can’t make it on their own is a sign of the difficult economic times.

Had those people not been living with their parents, their poverty rate, officially reported as 8.5 percent, would have been a 42.8 percent.