I'm not finding much in the way of Gini data based on the modified incomes (based on tax). However, you don't comment about the Gini based on consumption, which is a bit easier to measure, and in my opinion reflects real after-tax, after-benefits income the best. There is good data on that:
Originally Posted by Magic Poriferan
According to this paper, Denmark has an income Gini of 32 and a consumption Gini of 28. This paper doesn't have US data, but the hoover paper I linked has that, from BLS: US income Gini is 46.9 and the consumption Gini is ... wait for it ... 28.
There may be some issues with methods of measurement being different in these cases, but certainly none large enough to account for the income Gini being so disparate but the consumption Gini about the same.
Read the European data in full. It's also interesting how it compares age ranges by region, since simply things like age distribution can skew the Gini by a lot: lots of young and poor (possibly immigrants), very few old and rich.
I'm pretty damn sure it would be Denmark, due to high taxes and a large welfare system. What if it were the USA vs, say, Angola? I'm pretty damn sure it would be the USA. At least in the case of those three countries, the order would not be changed whatever by counting the gini post-tax. I suspect this is mostly true across the board, as the countries with the lowest gini index and highest GDP PCs are well known for welfare state policies and the ones in reverse are just as well known for their lack. And at any rate, this would still actually shed very little light on, or make much counterpoint against, the fact that there is a relationship between the GDP PC and pre-tax gini index.
So, the observations of the paper would wiggle the figures around a bit, maybe swap around a few country rankings here and there, but I doubt it would fundamentally change the boundaries. If the point of the article was to convince me that equality and wealth do not relate, it failed to do so.
Here is a quick summary. I'll list it as pairs, with the income Gini first, and then the consumption Gini.
33/24 Northern Europe
46/35 Central Europe
47/41 Southern Europe
Compare with the US 46.9/28.0 result.
Northern Europe is dominated by Sweden in this study, hence its expected very low Gini.
Indeed. There is such a thing as malinvestment. Keynesian theory mostly discounts the effect of malinvestments, that any investment, any spending, is necessarily good, because all of it is evidence of the economy working. Those who believe differently, such as I, believe that malinvestments are encouraged by the typical Keynesian remedies of lower interest rates and increased government spending.
Now, statistical stuff behind us, I notice two things about your rationalization of the process that strike me as wrong, and in a nutshell they are:
1: That you overestimate the value of investment.
2: You have too much faith in a business's incentive to do something good.
I'll elaborate on those.
I find the aim of managing risk dubious in the cases when the umpteen millionth investor chucks his money into a massive, established corporation. I'm not exactly sure how much that addition helps, how much risk is even left, and how much the corporation needs it anyway. It's not that the investment does nothing, but as long as we throw around the word optimization, I would call a great deal of investment behavior far from optimal for the economy.
That said, malinvestments occur even without Keynesian policies in place, but their failure is more immediately obvious, discouraging future investors from making the same mistakes.
Remember back when I said that the economy comprises both wealth creation and wealth destruction? Lots of simple things destroy wealth to some degree. For example, when we consume food, that food is gone, and we can only make more, later. If we build a house, that house is usually around for years, and its value typically (but not always) increases over time. With these examples, it should be clear that both wealth creation and wealth destruction are essential processes. There is no "optimal" arrangement to eliminate all wealth destruction. Also, wealth is sometimes destroyed because of wealth creation elsewhere. Kodak is out of business because nearly every cell phone in the world takes pictures. For several decades, investing in Kodak was a sound investment, but in the last decade or so, it was a malinvestment.
The trick is to keep the wealth creation rate higher than the wealth destruction rate. When wealth is destroyed faster than created (e.g., the housing bubble burst), GDP goes negative, jobs are lost, and those of the lowest income levels are hurt the most.
It is possible for too much of the economy to be tied up in malinvestments. Virtually all of the wealth of the economy is investments, of one sort or another.
Now, at some point, perhaps particularly the 80s, this kind of activity was so lionized that questioning has largely became counter-culture, so my following questions might seem strange, but I want to ask you: Do you believe in such a thing as excessive investment? We can break this down a couple ways.
Do you think it's possible for too much of the economy to be tied up in investments?
Yes, that is called a malinvestment.
Do you think it's possible for people to invest too much, or for a business to have too much invested in it?
Yes. Normal people doing their usual jobs is wealth creation. Your employer (or clients, if self-employed) need something of value from you, and pay you for your time and effort of doing it. It creates wealth, because it is impossible for everyone to know how to do everything, so when we need something done faster and cheaper than we can do it for ourselves, we pay someone else to do it. It's much easier to buy food from the grocery store than to farm/ranch it for yourself.
Do you think there are other processes of contributing to real wealth production which may be neglected?
Which also brings up this interesting fact, as mentioned in the hoover paper:
Finally, we note that consumption inequality may be even lower than reported by any of the studies cited above. This is because current methodologies measure only market consumption rather than total consumption, which is the sum of both market (purchased) and nonmarket (home-produced) goods. This is important because lower-income households consume a disproportionate amount of goods produced in the home (what economists call “home production”), including home-cooked meals, household-provided child care, and household home improvements and maintenance. Economists have estimated that home production is around one-third of gdp, yet this form of consumption is not counted in the total when measuring consumption inequality.
Every day, people make the choice between cooking their own meals, buying a frozen meal, or going out. Moms everywhere have to wrestle with the question of whether their time is better spent on a job and paying for day care, or staying home and taking care of the kids. If they do these things themselves, they create wealth. That wealth is shared with others via lower demand for the products in question: things like eating out and daycare aren't as pricey as they otherwise would be.
Here is where it gets kind of interesting: Adam Smith, author of the Wealth of Nations, who believed in the "invisible hand", really did not like businessmen. He knew the businessmen collude, try to cheat people, and in general get money for nothing. His main argument was that this "invisible hand" took all of that avarice and forced such people to do something real, anyway. There is much more money to be made by making your customer happy than otherwise, as long as there is some competition, because customers will go to those businesses that please them, rejecting the businesses that don't. So, in general, the "investing power" tends to end up in the hands of those who please their customers. Exceptions include the few oligarchic and monopolistic companies that exist. People like doing business with Walmart and Target, which have plenty of other competition and offer good prices on quality goods. People hate doing business with their local cable company.
Do you think too much investing power can wind up in the hands of one person?
Investment, in aggregate, manages risk. The actual investors, depending on their understanding of investments and investing, may very well be unaware that they are purchasing risk, and think of it just as a way of making money, as kind of a legal gambling. That doesn't change the fact that they're doing a service to the economy as a whole by assuming risk.
Do you think investment is often done with no intention of managing risk for a company that needs it?
It is also possible for an "investor" who is closely tied to a company to do very risky (and obviously bad) things and reap a reward from the investment. I know of one case personally where a person who was hired as CEO, and had the usual stock options, forced the company to overinvest in new projects and employees. It thus looked to investors as if the company was growing very quickly, but the company didn't actually have the resources to meet its contracts. The CEO skipped out after about 18 months, cashed in his stock options, and the company's stock crashed as the disaster the CEO intentionally created unfolded. This isn't typical, though. And in general while this might occasionally crater a company that would otherwise have been a world leader, usually there are other competitors who step up and do well instead. (And the CEO who does that sort of thing gets a reputation that makes it hard to get hired again.)
I'm familiar with that theory. I don't believe that it is true, in general. I believe that marketing has more influence in terms of getting a product out in front of the public faster, before the other guy. So the other guy's product might be "better" by some standard, but as long as the product that "wins" is good enough, the consumer is happy. And if the product that "wins" isn't good enough, no amount of marketing will sell it.
I just want to know if all of that even strikes you as being the realm of hypothetically plausible. Leaving that my questions, I really want to focus on the second criticism of mine because it strikes me as more important. Specifically, this statement;
That was a red flag to me.
Providing value to customers is at best a factor in how a company (and therefore those who manage it) make a profit. Just a factor.
I mean, even back in the 50s J.K. Galbraith was contemplating how a company could get greater returns out of investing in marketing to convince people that they made good products than by actually making good products, and to some extent this is demonstrably true. You can get people to spend onerous premiums on a pair of jeans with no remarkable quality as long as you brand it. This is large but subsidiary part of the fact that supply can and will manipulate demand.
I'm also familiar with this theory. I don't believe the oligopolies are as common as you do. Yes, they're big and obvious, so it's easy to point to them, but there are millions of other businesses out there, competing in terms of products that you probably haven't even heard of.
But then there's anticompetitive behavior, which is the real killer. Some
of the things you say might work in a world with ideal competition, but in the USA, the economy is almost entirely handled by collusive oligopolies and the occasional monopoly. These companies do not have to make a decent product to make a buck. In fact, a decent product (or service) becomes an unnecessary expensive. They also don't have to have reasonable working standards to attract labor. That too is an unnecessary expense. Once you don't have to worry about people "voting with their money" or feet, or whatever, it is strictly more profitable to exploit everyone. Garbage products for insane prices and long work shifts for an awful wage become the norm. The whole point to anticompetitive behavior is to remove alternatives from people so that have to accept these conditions.
Also note that the real power of oligopolies and monopolies is that they only last to the degree that the government helps keep other businesses from competing with them. For instance, while the FDA is necessary for letting consumers know that pharmaceuticals are safe and effective, the huge regulatory costs this imposes prevents smaller businesses from competing. It's a trade-off, though: the more economically efficient course imposes possible health risks. In the case of Cable TV, local municipalities ended up working deals with cable companies for monopolies in their area. The municipality thinks in terms of making sure they get the absolute best company, not realizing that they leave no competitive mechanism in place to keep that company the best. And of course the cable companies all insist on having their monopoly or near-monopoly. And no local businessman can say, "hey, I can do better," set up his own cable company and get it hooked up to the community: the municipality wouldn't allow it without jumping through a lot of hoops.
And that's why there is a market for other cell phone providers. If you really dislike what Apple does with its iPhone, an Android or Windows phone is an easy alternative. And if you don't care for a smart phone, but just need a simple cell phone, there are even more alternatives.
It's funny you should mention Apple, because they have some pretty well known practices that screw consumers. One is their love of planned obsolescence. What any reasonable person would call a patch or an update, Apple will market as a whole knew product, give short notice to discontinue support to the older version, and charge you an arm and a leg for the new one. This does not benefit the consumer at all. It is not a necessity for the company to thrive at all. It is just a racket for making extra profit.
Once upon a time, AT&T was a monopoly. If it were still a monopoly, then our phone service would be much like the cable companies. It'd work, but it'd be overpriced, and I sincerely doubt we'd have the hand-held supercomputers we call "smartphones": the monopoly would prevent other companies from introducing cell phones or smart phones, and would only have the benefit of its own researchers to develop anything like that.
These are indeed trade-offs. This isn't so much companies colluding to be anticompetitive, as it is the presence of a global marketplace. It's actually more competition, not less. And just as businesses would prefer to have less competition, so does the labor force.
And supposing circumstances really just couldn't be exploited as much as a company hoped, they can just go overseas. Wages too high in the USA? Walmart can get production from China. Food standards too strict in the USA? No sweat, Nestle sells to Africa and South America.
I'm unfamiliar with these "exactly the same" laptops. Every single laptop I have ever owned or had access to has been different. Only in the case of company laptops do I see "the same laptop", and that is because the company needs to standardize so that it is easier for IT to support.
These facts perhaps combine, appropriately, in the electronic factories littered about China. There you can find all the big, "competing" laptop models rolling down the same conveyor belt. They are exactly the same except for brand. They need no innovation, they exist to maintain status quo. They are non-innovative, identical products being produced in factory with low standards over seas. It is really the symbol of American business.
Most all companies would like to be as anticompetitive as you describe. Check my cable TV example to see how I view it: the environment in a particular municipality, city, state or country has laws that keep things anticompetitive to whatever degree. I suspect a lot of the ones that you view as anticompetitive (e.g., Apple) are actually in an extremely competitive environment, and have much less influence than you might think.
I've not really even touched on the extent of what a large and anticompetitive company can do, and I would think you at least know somewhat. The point is that between the marketing (not to mention the typical shares in or full fledge incorporation of the media companies), the collusion, and the boundless free trade opportunities around the world, practically nothing pressures business to do anything decent. If that is the case, your entire essentially meritocratic understanding of the flow of money is mistaken.
I don't believe I said it was impossible to redirect wealth. There is a trade off. The more you redirect, the lower the rate of wealth creation. At some level of redirection, wealth is destroyed faster than it is created. This hasn't happened to a significant degree in the US, but in various African countries (e.g. Uganda), where wealth was taken from "rich foreigners" and handed to local citizens, the wealth was quickly lost and all that remained was a very weak economy.
EDIT: I was going to write some things on how this impacts the nature of investment, but then I figured that if you got the point I was making, you wouldn't really need it spelled out.
However, unlike you suppose, it is possible to redirect wealth so that it doesn't just pile up in the hands a CEO or an investor. In fact, that is fundamentally what taxes can do if they are actually enforced, so it seemed like an odd assertion on your part.