Ask PG: Is growing income inequality in the US a sign of health? | Hacker News Reader

Ask PG: Is growing income inequality in the US a sign of health?

27 pointsjshen27 comments

In 'Mind the Gap' you said, "I'd like to propose an alternative idea: that in a modern society, increasing variation in income is a sign of health. "

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For people who haven't read that essay, I should explain that one of the points in it is that there are two distinct ways to get economic inequality in a society: an ancient zero-sum game where a ruling class appropriates wealth generated by a large number of peasants, and a newer form that is not zero-sum, where some people become richer than others by generating wealth faster. For various reasons, people who write about economic inequality tend to conflate the two sources. But whereas the older sort of economic inequality is bad for societies, the second is, if not in itself good, a sign of a good thing: variation in productivity. (The reason variation in productivity is a good thing is that if you have no variation in productivity, it is very unlikely that the reason is because everyone is highly productive.)

For more details, see http://paulgraham.com/gap.html and http://paulgraham.com/gh.html

So your question becomes, do I think that the economic inequality we see today is increasingly of the old form rather than the new form? No, I don't see any evidence of that, not in the US.

Thanks for taking the time to answer, and I completely agree with the framing of the two types. The reason I asked is that it's hard for me to believe that the rise in CEO pay is a result of a rise in productivity of said CEOs. Another example would be wall street, they are taking a larger and larger cut of the pie, but I can't see how they are adding to the pie commensurate with their increasing rewards.

In short, this seems like the old form to me.

The counter points are of course Jobs, Zuckerberg, The Waltons, etc. But it feels like these are not the majority case, but I admit I don't have any hard numbers on this.

It's clearly possible for CEOs to be worth the sort of money they get paid. E.g. Steve Jobs. If I had started a company and wanted to retire, and was looking to hire someone to run it for me, I would have no problem paying the right person 5% of the total revenues, or even more.

From what I've seen (and I am old enough to remember the old days), the main cause of the rise in CEO pay is that CEOs are now the equivalent of free agents in baseball.

The hedge funds are an interesting case. I'm not absolutely sure about this, but I suspect they are irrelevant, because while they don't create wealth, they don't confiscate it either, at least not in the old way.

Is insider trading a form of wealth confiscation? The only way banks and hedge funds can be as successful as they are is via insider trading - not in the legal sense, but in the sense that they have info that the public does not. I don't know the answer, but to me it seems more likely to fall in the confiscation category. Not an easy call.

Yes, pure insider trading seems a lot like theft. But it doesn't seem likely that most hedge funds depend on it. It would be a remarkably well executed subterfuge if all those quants were just window-dressing.

Why don't hedge funds create wealth? How do they do it less than, say, DST or any other investor?

I'm not 100% sure where investors fit in, but my current hypothesis is that "pure" investors (i.e. people who supply only money) are like armed forces: they do not themselves create wealth, though they can sometimes create an environment in which it's easier for other people to.

CEO pay is getting larger because the companies are getting larger.

Just run a simple thought experiment: you have two CEO's Alex and Bob. Bob will increase the companies growth 1% more than Alex.

If the company is $100 billion, Bob will create $1 billion more a year than Alex. Over time with compounding it's a much greater effect. $10-$50 million a year doesn't really seem like a lot when you actually figure out the added benefit.

People attack Wall Street, specifically Hedge Funds but they make the system efficient (look up arbitrage). The problem with Hedge Funds is a ridiculous loop hole that lets them only pay their income at the capital gains rate. Another problem is that the government through legislation has taken away the risk while leaving the reward. With minimal regulations Wall Street profits are balanced by the risk they incur.

Does Bob create $1b of wealth or do the workers of the company create that wealth?

The CEO is one of the employees of the company, so the two are not exclusive. The answer is that all the employees contribute, but in varying degrees. The contribution of a good CEO is usually the largest of all the employees, which is one of the reasons even clearly non-captive boards are willing to pay them so much.

I'm not arguing that they don't have a great deal of power and control over the direction and focus of the company. However, it does seem, especially these days, that their pay is not actually connected to their actions, as we see CEO after CEO destroy value while collected big rewards.

This seems like a completely different point from your previous comment.

The answer is that CEOs can be good or bad just like other types of employees, but (just like other employees) you have to pay market rate to hire one, even if they turn out to be bad.

That's like saying Scipio Africanus, Charles Martel, or Alexander the Great were nothing because their soldiers did the fighting. The leader manages and leads the troops, they follow his vision.

Take a modern example, Steve Jobs, the man is the creative visionary behind most products. He envisioned the wealth and then set the workers upon creating it. Without him it wouldn't have existed.

And yet, it's the workers/soldiers who often are the ones on the line. We see CEOs walk away with big payouts, even when their strategies have been disastrous (for the company, for the workers, for the stockholders).

That's not the CEO that's the board selecting the wrong person and creating the wrong compensation package. Just like a basketball player getting hurt after signing a huge contract.

EDIT: Look at PG's response above. same thing.

"CEO pay is getting larger because the companies are getting larger"

Like Borders? The increase in pay doesn't appear to be based on anything sane.

I'm not necessarily on the "CEO salaries are sane" side but..

Failure does not mean that salaries should necessarily be low. If you take the argument(s) above (1% profit increase is worth $100m to a $10b company), it applies equally to negative salaries. When you have such big companies, the best possible CEO is worth a lot (in dollar terms) more than the next best one.

I think correct question is are CEOs being selected for these sorts of reasons or are they being selected for other reasons. Is the system corrupt?

You also have corporate governance problems where the CEO gets to pick far too many of his friends that leads to some distortion. Are movie stars salaries sane? Basketball players? The market pays what it sees fit, I'd say a $20 million/yr CEO creates far more than a $20 million/yr athlete or movie star.

"The market pays what it sees fit"

There is no such thing as "The Market", there are markets, all of which are composed of arbitrary rules created by people. They are all corruptible, and the question here is if ours is being corrupted and is in need of some systemic changes.

A question for the people voting me down, do you believe there is some singular market that is a law of nature? If not, then why do you disagree with my comment?

Yes it is corrupted by government regulations and interference that have distorted the pricing effect that makes markets work. These are basic economic principles. The problem is people don't understand the pricing effect. When you do it's obvious why problems such as health care exist or why increasing tax rate doesn't increase revenue (Hauser's Law, tax revenue is 18% of GDP no matter what tax rates are).

"tax revenue is 18% of GDP no matter what tax rates are"

Not really. http://www.angrybearblog.com/2010/11/hausers-law-is-extremel...

"it is corrupted by government regulation"

It is corrupted by people. If we had no government it would still be corruptible.

"These are basic economic principles."

Like if I have a bigger gun than you, I get the rewards? Oh, you mean principles that we agree to in the form of government? Principles which are arbitrary and chosen by humans and vary from market to market! Yes, those "principles".

Depends on what the inequality is caused by, if it is caused by a shrinking middle class, then no, it isn't a sign of health. If the middle class isn't shrinking but the rich are making more money, then I'd argue that it could be a sign of health.

It may be a sign of a healthy market, that ultimately can become unhealthy to the society. So it depends on which aspect of the US you are looking at.

As people get disproportionate amounts of money, they get disproportionate amounts of power that they can then use to distort the rules of the game. When there is a small but very wealthy class (say .1% of the population owns 80% of the net worth) then maybe the rest of the population can become oppressed.

It is difficult to get good stats on this, but this site has data that suggests since 1983, the top 20% have improved their lot at the expense of the bottom 80%.

Income isn't really a good way to measure the gap. If someone makes 500K/year and spends 100% of it on non-assets, they are just returning their money back into the system.

It is actually a complex problem to determine if the changes are good or bad, if wealth vs. income is the right measure, and what percentile groups make up the "elite"

It's probably too coarse of a measurement. In the same essay he says there are two ways to accumulate wealth: create it or steal it. Increasing numbers of wealthy people don't necessarily mean more wealth is being created.

That's a false dichotomy, unless you define every zero-sum game in economics to consist of theft.

Right, are the continually rising CEOs salaries theft or a sign of health?

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