Friday, September 08, 2006

Beggar you than me

Jane Galt examines the argument that one of the principal reasons for becoming rich is to be able to look down on others and examines it's dual.

I recall once hearing Larry Summers ask students a provocative question to spark discussion: If there were some policy that would make the rich poorer without affecting the income of anyone else, would you want the government to flip this switch?

Traditional economic policy analysis assumes the answer is no. After all, the policy intervention Summers described is a Pareto-deterioration. But the answer is less obvious if, as Brad suggests, people derive utility from comparisons with others. In this case, making the rich poorer raises others' welfare, even if their material standard of living is unchanged.

In Brad's world, a rich person conveys a type of negative externality, like pollution. High taxes on the rich can be seen as Pigovian. Economists like me complain that high tax rates on high earners discourage their hard work and entrepreneurship. The Veblenesque Pigovian economist replies, "Precisely!"

Hey, sounds like a civilizational fault line to me.


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