Monday, January 14, 2013

An open letter to both sides of the gun debate

After the tragic shootings in Newtown CT last month, and with Biden's proposals to be announced this week, there has been a ton of discussion about gun-violence and "gun control" (which I put in quotes because I think it is poorly defined and, as a result, people project their own meanings into the phrase).

I think both sides in the debate miss some key points, so I offer an open letter here to each.

To the folks who favor "gun control":

The 2nd amendment is not only a constitutional right, but the supreme court has determined that it is in fact an individual right.  You may not like this fact, but you can't change it in the short term; people have been trying for 30 years to overturn Roe v Wade without success; if your strategy involves getting around the 2nd amendment or getting a different supreme court decision around it, you have a long, long road ahead of you and you're not likely to succeed.

So forget about stopping law abiding people from having the guns they choose to have.  I don't personally agree with the NRA on much, but they're absolutely right when they say that law-abiding/responsible gun-owners are not the problem.  If your solution involves trampling their rights, then you need another solution.

There are many issues that lead to violent crime and gun-violence in particular.  We should try to address all of them, of course, but when it comes to gun-violence, I think the issue is not guns per-se.  The NRA is right on another count: guns don't kill people, bad people with guns kill people.  Not everyone who drinks alcohol is an alcoholic or a drunk driver; not everyone with a gun is a problem.

So the key thing to focus on in the gun-violence arena is stopping "baddies" from getting guns.  (I'll define a "baddie" here as anyone who should not have a gun: criminals, mentally unstable people, and unsupervised minors.)  And, to the degree that baddies are getting guns from leakage somewhere in the pipeline from gun-manufacturer-to-gun-owner, I'd suggest addressing the key leakage points, and focusing on ensuring that the NRA's lauded "law-abiding and responsible" owners are in fact both, and that the incentives and penalties around both are strong.

To the folks who are gun-rights advocates:

Nobody is coming to take your guns.  There are some people who advocate doing so, but they can't.  You have a constitutional protection, which is about as strong as it gets, and despite the crazy political rhetoric to the contrary, we are a nation of laws.  You just sound ridiculous when you go off about how the first thing that Stalin, Hitler, etc. did was to take the citizens' guns.  We're not anywhere close to that situation: we have a constitutional protection to the right to bear arms that was not present in any of those situations, and we don't live in a dictatorship. Our laws and our constitution actually do get enforced, and our politicians are not above the law.  I don't blame you for being vigilant about potential erosion of your rights, but you're not going to lose your guns.  Nobody takes you seriously (nor should they) when you react to everything as if it were the final step before confiscation.  Join the debate in a sincere manner already, please, and quit with the "they're coming to take our guns" whining.  They're not because they can't.

That said, the 2nd amendment is like every other constitutional right: it is not absolute.  In the same way that there are limits on the 1st amendment, there are legitimate limits on the 2nd amendment as well.  No rational argument has ever been made to the contrary.  One obvious example is that you don't have the right to bear nuclear weapons or surface-to-air missiles; another is that we all agree that felons and mentally unstable people should not have guns.

Wayne LaPierre said a few weeks ago that "the only thing that stops a bad guy with a gun is a good guy with a gun."  He may have been right about that, but he leaped over an important piece: how did the bad guy get the gun?  As I said to the "gun control" folks above, we have a problem of too many bad guys getting guns far too easily.  If we all agree that baddies shouldn't get guns, then we should agree that we can do more to make it harder for them to do so.  Nothing is foolproof, nothing will stop all baddies from getting guns all of the time, but I also don't buy for a minute the argument that nothing can be done that is effective, or that any non-zero imposition on "good guys with guns" is too much.  If you choose to exercise your right to bear arms, then you must choose the responsibility that goes with having guns to help keep them out of the hands of bad guys.  That will mean some level of imposition.  Perhaps more than you like, but if it actually works (the key question), and it lets you have your guns, then it's consistent with the 2nd amendment and worth doing.

Oh, and stop with the argument about bats and other weapons.  Baddies with guns are a distinct problem from baddies with bats, for two reasons: (a) when you have a gun, you can kill people much more quickly than with other weapons, and (b) with a gun, you can kill someone without having to get up close to your victim (thus putting yourself at risk), which lowers the threshold to shooting.  I think these two assertions are well borne out by the statistics about the rates of murder with guns vs. other weapons.

So to both sides of the debate, I'll offer this request: we all agree that bad guys with guns are a serious problem, don't we?  So why can't we find effective means for solving that problem?

Friday, September 07, 2012

My rules for this election season

Republicans had their convention last week, Democrats this week, and we have another 8 weeks of this nonsense.

It's incredibly frustrating to me listening to both sides.  Not because of the issues per se (although I obviously have opinions on those), but from the whole way the political "debate" is performed.

So forthwith, here are my "rules" for the political process.  I'm not so naive as to think any of these will be respected by any politician, but I think if more people followed them then our system as a whole would work better.  Anybody who violates a rule should have to put a sock in it until at least after the election.  And these apply to people of ANY political persuasion.

  • Don't define the parties by their crazies and extremists; it's easy to find examples of them in any party, and since they're the noisy ones they get lots of attention.  Watch where the decision makers and consensus of the party are.
  • The other being wrong does not make them bad people, nor does it mean they have ill motives.
  • Political truths that were once valid may no longer be true.
  • Political truths applied in one situation may not apply to another.
  • The other side being wrong doesn't make you right.
  • ALL policies have unintended consequences and tradeoffs.  It is the weight of these - not their existence - that argues against a policy
  • Even if the other side is wrong, their points about the downsides of your position are likely valid
  • 99% of conspiracies aren't.
  • Challenge yourself . If you're liberal, watch Fox news. If conservative, watch MSNBC.  If you respond to an issue and know your position immediately without thinking, stop and think about it.  Could you actually argue the other side's case convincingly in a mock debate?  If not, you probably don't really understand it.
  • If you need to make up, distort, or omit facts, your case is weak. 
  • People can look at the same facts and have different opinions about their implications.  (This is, IMO, the source of most political disputes)
  • Don't forward email or post on Facebook without first checking whether something is true.
  • Be skeptical of any data coming from a partisan source; it is selective at best, untrue or misleading at worst.
  • Keynes was exactly right 100% of the time, except when he wasn't.  Corollary: Hayek was exactly right 100% of the time, except when he wasn't.

Saturday, July 07, 2012

How big is appropriate for government?

The health care ruling a few weeks ago brought up the ages-old debate about what is the right size of government, and where the right balance is between individual liberty/freedom and government regulations/requirements are.  Many of the people arguing for the conservative/libertarian view of minimalist government also adhere to a fairly strict constitutional interpretation and think a lot about what the founders meant.

I don't wish to wade into the merits of the health care decision (much less the law) here, nor do I want to argue whether a constructionist approach is appropriate (especially since the latter is really a subjective call; a matter of one's perspective and political philosophy). 

Rather, I simply wanted to make an observation as to the nature of why government has grown in our daily lives so much more compared to in the days that the constitution was created.

In particular, I think that our society has changed in two key ways that must require at least some more government "intrusion" in our lives than in the colonial days.  (Whether these justify the level of increased intrusion is a question I will leave readers to determine for themselves).

The first key change is that 200+ years ago, the vast bulk of trade was local.  If you had a home, you probably built it yourself.  If you had furniture, you likely built that too.  You probably grew your own food.  Trade certainly existed - people were certainly not entirely self-sufficient - but they were significantly more so than they are today.  And most of what they did in trade they did locally and face to face. 

Libertarians often decry government consumer "protections" as being unnecessary because the market will adjust for charlatans and cheats.  200 years ago, that was likely true: if the general store owner was dishonest in his dealings with people, he'd quickly be out of business because he was very likely to personally know each of his customers. 

It's still true today that the market can self regulate to a degree, but much less so.  If you feel AT&T screwed you on your phone bill, that's generally just tough luck for you.  The sheer degree to which we each rely on trade and the impersonal nature of much of that trade makes establishing a trust relationship with each trading entity prohibitively inefficient.  As a result, having some degree of 3rd-party trust validation provides a grossly disproportionate amount of lubricant to the economy; without it, the economy would grind to a halt.  In today's environment, the government does some of this (FDA ensuring food standards, for example), the private sector/trade groups does other aspects of it (Better Business Bureau, or, as an example of doing this badly, the ratings agencies that failed so badly during the financial crisis). 

I believe that one can legitimately argue whether the balance of government/private 3rd-party trust providers should be tilted more towards government, is about right, or should be tilted towards more private sector.  And I suspect that the reasons much of it that is government done today are primarily financial (there may not be a good private sector model to fund it) and trust (self-policing can sometimes fail due to conflicts of interest).  But the notion of reducing this function to its colonial-era levels is a quaint reminiscing for a simpler time that ultimately leads to economic suicide.

The second key change from the days of the constitutional convention is simple scale.  When we were a few million people scattered across the colonies, the impact one could have on one another and upon the broader environment (economic as well as ecological) was limited.  Our resources, and space simply dwarfed our numbers and our ability to have negative impacts.  With over 300 million people and a vastly higher per-capita income, those days are long gone.  The tragedy of the commons is a very real problem, even if there is controversy about what are the best solutions to it. 

But again, as with having 3rd party trust agencies above, governments tend to step in where markets fail.  Thus it is perfectly reasonable to expect to see a larger role for government in a larger, more crowded, and more resource constrained society.

None of this is intended as an argument in favor of excessive government intrusion in our lives or limits on our freedoms; quite the contrary - I, for one, don't want government involved any more than necessary.   My point here is simply that as society grows in scale and in technological sophistication, the definition of "excessive" will move over time; we shouldn't pretend otherwise.

Friday, May 04, 2012

China and climate change

I was in China recently to learn more about the country's progress in the clean-tech arena.  "Clean-tech" is a vague term, but encompasses almost anything that reduces pollution and/or consumption of non-renewable resources.  China has enormous challenges in this space: energy insecurity from the facts that they (like us) import most of their oil, their air and water pollution are bad enough to be properly labeled "hellish", and extreme water scarcity, just to name a few.  And on top of this, they are now the world's largest emitter of greenhouse gases, which of course contributes to climate change.

The authoritarian government there is terrified of instability (and being thrown out of power, in particular), and their primary strategy to avoid this has been economic growth.  There has been an implicit (albeit coerced) bargain between the government and the people, in which the Chinese government will help the people to build better lives for themselves economically, and in exchange the people stay out of politics.  I think there is lots one could say about this relationship, and perhaps I'll comment on it another day, but for now I'll leave it at "I don't live there (thankfully), so it's not my decision."  The key thing for my point right now is that China views economic development as priorities number 1, 2, and 3.

Well, actually, number 1 and 2.  In its current 5-year plan, China has elevated sustainability to be one of its top 3 priorities.  There's a lot I can say about that (and will in another column), but I think it highlights a key distinction between how they approach problems like climate change and how we approach it.

In China, there is no debate about whether climate change is real or man-made.  But not because it's a suppressed/censored debate.  It's because people in the government are, by and large, well educated technocrats and they would look at you strangely for suggesting that it's some plot by left-wing scientists who are fudging their data in order to get government grants.  They look at the data, and draw what seems to be the obvious conclusion: it's real, and it's likely to be a huge problem.  There simply hasn't been any credible scientific alternative theories or model (of course, one could show up, but it hasn't) to the idea of man-made climate change.  (Certainly none that actually demonstrate that the models cannot be true).

Yet China is, at the moment, the world's biggest contributor to the problem.  One might ask how this can be if they actually believe that climate change is both real and bad.  The main reason is the bargain I referenced above: economic growth wins, and economic growth right now means carbon emissions.  Here in the US, we struggle with the same tension, of course, between emissions and the economic growth that causes them, yet somehow some of us allow the debate about policy to cloud our ideas about the underlying science.  But denial is a lousy strategy.  If the science is wrong and climate change is not real, then hooray - that's great news.  Unfortunately, there's more and more evidence that the science is wrong and climate change is actually going to be worse than modeled.  I hope that too is wrong, but alas hope is also not a strategy.

The Chinese seem to be able to accept the most likely scenario (climate change is real and bad) and address it within the limitations of their other constraints requiring economic growth.  But they are not ignoring it.  They have some aggressive goals about energy intensity per unit of GDP to build on some pretty impressive reductions in energy intensity over the previous 5-year plan, for example.  I personally don't think that's enough - after all, the climate doesn't care about energy intensity, it cares about absolute emissions level - but it is a necessary first step.  What's really required - and I think China understands this, they just aren't in a position technologically yet to make it happen - is a fundamental shift of the economy to low-carbon energy sources.  I believe that the classic tradeoff between "economic growth" and "clean energy" is ultimately a false choice, a failure to see opportunity in a challenge.  And I think China agrees with me.  They are investing heavily in alternative fuels, efficiency, and figuring out a low-carbon economy, and when they get the costs right, the transition will happen for economic reasons rather than environmental ones.  And China will do very nicely economically as a result.

We in the US, on the other hand, still compare people who think that maybe this climate change thing is real to terrorists and mass murders.  I wouldn't trade our political system for theirs, but I would very much like for us to adopt their dispassionate approaches to these sorts of issues.

Sunday, April 15, 2012

Scientific "controversy" and a misunderstanding of science

Tennessee has just passed a law that allows science teachers to teach both sides of scientific theories that are subject to "dispute" or "debate."  While it's obvious to me that this is aimed squarely at evolution and global warming, and thus that it's really motivated by politics rather than improving science education (after all, teachers have never gotten into trouble for teaching students legitimate scientific inquiry and skepticism), I think someone needs to step in and remind people (a) how science works, and (b) what actually constitutes scientific "dispute" or "debate."  I'll be that someone.

Let's start with how science works: anyone who suggests that science can prove anything is full of beans.  Scientific methods and science cannot prove anything.  Now that might sound like a controversial and ridiculous statement, but let me clarify it: science can only disprove things.  This is why they are called scientific theories and not scientific facts.  A theory is good as long as it is not disproved.

This sounds counter intuitive, but it actually makes sense.  We view data about the world around us and form a hypothesis for what is going on.  A hypothesis must be testable (you can design an experiment to see if it works); otherwise, it is faith.  Nothing wrong with faith, but faith is not useful for describing the "how" of the world around you.  A hypothesis must also be able to make predictions, or else it is not terribly useful.  When we design an experiment to test a hypothesis, we are actually looking not to see if we can prove the hypothesis, but rather if we can disprove it.  If the experiment is inconsistent with the hypothesis, then it cannot be true - it is disproved and thus should be discarded, since it obviously and demonstrably doesn't work.  If it is consistent with the hypothesis, though, that doesn't mean the hypothesis is right, it just means that it could be right.

The simple example here is the hypothesis "all swans are white." (Apologies to Taleb)  You can design an experiment to test this: gather all the swans you can find, look at their color, and see if they are all white.  If you gather a million swans and they are all white, then your hypothesis is certainly looking pretty good, but - and this is key - it is not proven.  All it takes is one black swan and you have to throw it out.

This distinction between "proven" and "not proven wrong" is a subtle one, and when an idea is repeatedly tested and not disproved, we become casual about the distinction.  Newton's laws of motion (for example, distance = speed x time) have worked so well for centuries that we can on an everyday basis treat them as fact, although a pesky upstart scientist named Einstein showed that around the edges (namely approaching the speed of light) Newton's models are demonstrably wrong.

But that's how science works: when a model is shown not to work (or shown not to work in a particular domain), it must be thrown out and replaced with another model that does work.  It is only "proven" until it is disproved.

So, in a sense, all science is subject to "dispute" and "debate".  But some dispute/debate is more legitimate than others.  Particularly in the politically sensitive areas of climate change and evolution, people tend to make four critical errors:
  • Confusing "not yet disproved" with "insufficiently proven."  In American criminal trials, we have the idea of proof "beyond a reasonable doubt," and we sometimes apply this threshold to scientific theories, especially ones (like climate change) where it is difficult or impossible to do controlled experiments.  But this is the wrong threshold - as described above, Newton's laws, on which our ability to fly airplanes and drive cars relies - could not meet this threshold.  It is not reasonable to expect any theory to meet this bar; the correct bar is "not contradicted by observable data."
  • Treating flaws or open questions in a theory as proof for an alternate theory.  In the case of "intelligent design" as an alternative theory to evolution (which it isn't because it is neither disprovable nor predictive), perceived holes in evolution are used as proof that a higher being must have been involved.  This is a basic flaw in logic.  If there is a hole in evolution, that doesn't make an alternative theory any better.  Only if the alternative theory fits the facts better - and is predictive and testable (disprovable) - should the alternative gain any traction.
  • Confusing debate over the details of how a theory works with the overall idea of the theory.  Both evolution and climate change have lots of unanswered questions about the mechanics of how they work.  Climate change cannot be tested with controlled experiments, so it relies on models and fitting to observed data, and the overall system is so complex and chaotic that there are always huge margins of error in any model.  Debate over these issues is healthy; models should be refined and reworked as more data comes in, and we need to always remember that a model is just that - a model.  But whether someone is correctly accounting for heat-island effect or cloud reflectivity (or whatever) has no bearing on whether the basic idea of pumping CO2 into the atmosphere traps heat.  Almost all of the debate in the scientific community about climate change is about the accuracy of the models, not over the basic principle of greenhouse gases trapping heat.
  • Confusing "some people disagree with this" with "there is debate about the validity of the theory."  There are still people who believe the world is flat.  That does not mean that there is any debate about the shape of the earth.  Just because someone who calls himself a scientist openly questions something does not mean that the questions are worthy of discussion.  It is worth noting that most significant scientific advances were radical ideas from people who could be considered "crackpots" in their day : Galileo, Newton, Darwin, Einstein.  (I've written on this very topic.) But it is also worth noting that for every "crackpot" who turns out to be a genius, there are 99 crackpots who are simply...crackpots.  I'm not asserting that people who question climate change are crackpots (although some certainly are); rather, I'm pointing out that to date they have pretty much all either focused on the details (as above), or their "smoking gun" evidence disproving the bulk of climate change theory has either not matched facts, or has not actually been a "smoking gun" at all.
Questioning scientific theories - including evolution and climate change - is healthy and necessary.  It is how our understanding of the world, umm, evolves.  I suspect (though I cannot prove!) that both of these theories will undoubtedly be ultimately disproved, but I also suspect that - like Newton's laws - the subsequent theories will not be wholesale replacements but rather incremental refinements (as Einstein's models were refinements on Newton's).  These theories, after all, have held up for so long precisely because they fit the observable data so well.

Unfortunately, Tennessee's new law is not aimed at this sort of productive questioning.  It is aimed at legitimizing pseudo-science under the guise of scientific discussion.  There is no meaningful scientific debate about whether evolution is real (although there are lots of questions to answer about how it works).  And there is no meaningful debate about whether the basic theory of climate change is valid - not because there is some liberal conspiracy to which most experts in the field somehow subscribe, but because the basics of the theory have failed so consistently and for so long to be disproved.  There is indeed plenty of debate about the accuracy of various models, whether it is man-made or natural, or whether we can (or should) do anything about it; some of that is scientific, some of that is policy, and all of it is healthy.  But when the number of Americans who doubt the basic ideas of evolution and climate change is large and growing, treating these debates as a debate over the larger idea is misleading and does not teach our students critical thinking on scientific issues.

Wednesday, April 11, 2012

Can tax cuts pay for themselves?

I think it's interesting the notion that people have that tax cuts either pay for themselves (via increased economic growth), or that they simply drive the country deeper into deficit.

It seems to me that neither is always the case; it all depends on the tax being cut, from what level, and to what level.  I'm not an economist, so forgive my naivete on this, but a simple thought experiment and math suggests that some tax cuts sometimes can more than pay for themselves, while others would not.  In particular, is there any reason that tax cuts wouldn't work like any other price-elasticity supply-demand curve?

As a thought experiment, let's think about how pricing would affect sales of, say, a Ford F150 truck.  Let's suppose that Ford prices the truck at $1M.  It's pretty safe to assume that this is such a high price that it will choke off all demand for the vehicle.  Now, suppose Ford lowers the price by 10% to $900K.  You're still so far out on the curve that this will not nudge demand - there will still be no sales.  Suppose, instead, that they lower the price to, say, $40,000.  I don't know if that's a good price or a bad price for an F150, but you can imagine that the demand will be a large multiple more than the demand was at near a million.  If that multiple is more than 25x, then Ford will make more revenue selling F150s at $40,000 than they made at $1,000,000. 

Now lets lower the price (we're ignoring cost and profit here!) from $40,000 to $30,000, then $20,000, then $10,000, and finally to just $1,000.  The first few price reductions will likely increase sales further as the truck becomes more affordable to more and more people.  But at some point, everyone who wants an F150 can afford one and the later price reductions have negligible (if any effect) on demand.  A price cut from $1,000 to $500 is unlikely to result in double the demand because $1,000 for a new truck was hardly any barrier at all.

What does this have to do with taxes?  Everything, really.  From 1944-1963, the highest marginal personal income tax rate was in the 91% range.  That is a hugely burdensome tax rate, and puts a huge damper on the resources people have to invest in economic activity.  That rate fell to about 70% in the 1960s.  Taxes on this income bracket dropped by about 23% (91% to 70%), so if economic activity caused taxable income in this bracket to increase by 30% (= 1 / 0.77), the tax cut would have paid for itself.  The economy did noticeably pick up in this time period, though proving a causal relationship to the tax cuts is obviously difficult to do.  But it certainly passes the sniff test that a 23% cut from 90% could yield 30% more growth.

Fast forward to now with a 35% top marginal tax rate.  Imagine the same amount of rate reduction - 21percentage points.  (This represents the same portion of income that the government in the 1960's stopped laying claim to.)  The top rate would go from 35% to a mere 14%.  The same 21 points that represented 23% of the 90+% tax rate now represents a 60% reduction, and that means that taxable income in that bracket would need to grow 250% (= 1 / 0.40) to pay for itself.  35% may be a "high" tax rate, but it isn't so high one can reasonably imagine that it is restraining a more than doubling of economic activity.  Even if one proposed a proportional tax cut - 23% off of 35% (to 27%), that 8-percentage-point reduction is unlikely to yield the required 30% growth to be self-funding.

Now, nobody is proposing cuts like this on our current tax rates.  My point here is that, in the same way that each dollar of price reduction on the truck affected demand for the truck differently depending on what the overall price of the truck was, each percentage point of tax reduction also has a different impact on both the tax burden and the threshold to be "self-funding" depending on what the overall tax burden is.  A 21-point reduction from 91% behaves very differently than a similar reduction from 35%.

My analysis above is greatly simplified, and I'm not responding to any particular proposal.  My only point is to say that "self funding tax cuts" bear the burden of proof: one must not assume that a proposed tax change is or is not self-funding.

Saturday, November 05, 2011

Income Disparity and the Occupy Wall St. Crowd.

I've posted before about the income gap in this country.  Alas, I have to acknowledge I made a prediction that ultimately turned out to be wrong that the economic downturn would shrink the gap.  Well, as they say, predicting is hard, especially about the future, but even if I can't predict the future well, I stand by my overall points of what we should make of the income gap itself.

Anyhow, income inequality is back in the news with the Occupy Wall Street (OWS) protesters making a big deal of it.  It's certainly a real issue (albeit, as I've said before, a symptom of underlying problems rather than a direct problem itself).  But I think the OWS folks both make the mistake of viewing it as the problem, but also making assumptions about the causes that imply fixes that would not be appropriate.

At a macro level, there are 3 ways that income inequality can arise.  For the sake of illustration (and easy math), let's assume we start with a nation of 100 people, each of whom makes $100/year.  The entire annual economy is thus $10,000, and there is (initially) no income inequality.

How can inequality arise?  I think there are three basic scenarios, and I think it's important to point out that they are not mutually exclusive.  Quite the contrary: I think they all happen, in varying degrees, over time, simultaneously with the others.

Scenario 1: "Malthus Model".  In this scenario, one or two people ("the 1%") enrich themselves at the expense of the rest, but the overall economic pie remains fixed (hence the name "Malthus Model", after the man who predicted starvation due to growth in population that outstripped production).

Bernie Madoff would certainly be an example here, as were the CDOs that sliced and diced mortgages and got rated AAA despite having lots of sub-prime crappy mortgages in it.  I think CEO pay (another OWS complaint) could also arguably be placed here, to the degree that any "excess" pay they get above and beyond the value the create for the company comes at the expense of shareholders and employees.  Whether any CEOs pay is excessive, of course, is a subjective call, but there is good evidence that it has gotten disconnected from CEO value, especially when more than half of company boards target their CEO pay to be above the 50th percentile.  That is, of course, mathematically impossible to achieve, but it results in CEO pay that increases much faster than the underlying fundamentals.

Lotteries, by the way, are also in this model: 100 people spend $1 on a lottery ticket, one person wins $100, so that person gets $99 richer at the expense of the others.

In any case, it seems to me that Malthus-model driven economic disparity is often (though not always, as the lottery example demonstrates) indicative of a problem.

Scenario 2: "Steve Jobs/MicroEconomic Success": suppose that one of the 100 people is Steve Jobs, and he invents Apple Inc.  This creates a huge amount of value, and since the company is Steve's he will keep a significant amount of that value.  Everybody else still makes $100 (or perhaps a they take home little less that year because they buy an iPhone), but Steve makes a lot more money.  So now there is huge inequality between the 1% (Steve) and everybody else.  Two things to note here: (a) the other 99% did not suffer due to Steve (to the degree that they spent money on iPhones, they did so because they felt the iPhone was more valuable to them than the money it cost), and, more importantly, (b) the overall pie grew significantly due to Steve's creation.

I would argue that income disparity from Scenario 2 is not a problem, and is in fact a "good thing."

Scenario 3: "MacroEconomic Changes".  This is arguably a variant on scenario 2, but in this case it isn't that the folks that get rich create disproportionate value and wealth for themselves, but rather that the entire economy grows by some percentage (sometimes negative).  So our economy may grow from $10,000 to $10,400 one year, and then drop to $10,200 the next year.  The inequalities arise here from the fact that the growth (positive or negative) is not spread evenly across the population.

There are many factors why this growth is uneven.  For example, not surprisingly, people with more education and/or more marketable skills tend to weather the downturns better and ride the economic growth more than their less educated or less market-ably skilled fellow citizens.  People who get hurt or sick have trouble even in good times, and may not be able to change jobs due to health insurance concerns.  Our aforementioned lottery winners do well regardless of the economy.  Workers with skills that match open jobs may not be able to take those jobs because it requires them to move and they can't sell their homes because their mortgages are under water (this is proving to be a huge stubborn issue in the current recession given its housing bubble origins).  Macroeconomic trends can change the value assigned to skilled labor, moving jobs to where it can be done more cheaply.  (I can address why I believe fighting this trend rather than adapting to it is generally a bad idea in another post).

There are many moving parts here, many reasons why economic ups and downs affect different populations or economic sectors in different ways.

For that reason, I think that income disparity from Scenario 3, unlike scenarios 1 and 2, does not easily lend itself to a "problem" or "good thing" label.

Furthermore, I think that this scenario is by far the dominant driver of inequality, followed by scenario 2.  I think the Malthus scenario covers too few cases to be a major cause.

And therein lies my issue with the OWS crowd's take on income disparity.  To hear the chanting and slogans and placards, one would think that our income disparity is almost exclusively due to Scenario 1.  If that were the case, then it would be a simple matter of shifting "ill gotten" wealth back to its rightful owners and all would be well again.  But alas, in a Scenario 2 world that sort of explicit wealth transfer truly would be punishing success (hold that thought) and in a Scenario 3 world that probably wouldn't solve anything anyhow.  So I think the OWS crowd is dangerously naive here.

Now before you think I'm totally dissing OWS and everything they believe in, let me put in a defense of the 99%: It is important that we have a strong and vibrant 99%.  If you are a member of the 1%, you need to realize three things.  First, if you think you got to be a 1-percenter in a vacuum, you are delusional.  You did it in a society with good transportation infrastructure, rule of law, low corruption, security, and so forth - all of which are government functions.  Secondly, stability is critical to your success, and places with high concentrations of wealth tend to be less stable than places where there is broad economic participation.  And finally, having a healthy 99% is critical to your continued membership in the 1% club.  Steve Jobs would not have made very much money, after all, if nobody could afford to buy Apple products.

I do not advocate any solution that has a direct aim to reduce wealth concentration.  Robin Hood is decidedly not the answer.  But there are reasonable steps to help ensure that the broad middle has a fighting chance to be economically significant participants in the economy.

Fortunately, America has long done well with this.  For example, we already have a progressive tax system.  Indeed this is (by definition) a higher burden on the wealthy than on the poor, but as long as it isn't punitive, it is a very reasonable way to ensure that healthy 99%.  A 35% top marginal tax bracket simply is not punitive, but then neither was 39.6% (which we had throughout the boom of the 90s) or even a little higher.  (I think when you start hitting 45% or more things start to get punitive).  There are good arguments that the overall size of government needs to shrink - and if so, the rates obviously could come down.  But unless and until that shrinking happens, the tax rates need to reflect actual costs.  "Starving the beast" has yet to actually work to tame government spending.

Another place where America has long shined is in making the Steve Jobs scenario above an attainable dream for anybody willing to put in the sweat and innovation necessary to achieve success.  There's a reason that Apple, Microsoft, Facebook, etc. are American companies.

But the fact is that there remains much more to "solving" income inequality than having a progressive tax system and a good environment for startups, but I think they revolve around addressing the Scenario 3 issues.  Our housing crisis is exacerbating things.  Health costs are devastating for many people.  Our educational system is a mess, and a huge percentage of people studying STEM (Science Technology Engineering and Math subject) are foreigners who twenty years ago would have stayed here with their skills but who are now going back to their newly-stable and newly-prosperous home countries, while more and more American students are studying far less marketable subjects like journalism.

These are not easy problems to solve, and simply transferring wealth does nothing to address them.  If the OWS crowd is serious about addressing inequality, they would do well to focus their energies on real solutions to the big macro-economic challenges that we face, not just getting angry about some perceived "unfairness" that (gasp) some people have more wealth than others do.  That's simply not productive.