The Bergeron Solution

Does anybody else remember  that Kurt Vonnegut story “Harrison Bergeron”? (It’s an early one; he reused the conceit, I think, in one of his novels — The Sirens of Titan maybe?) The idea is that in a future egalitarian dystopia, perfect fairness is achieved by subjecting everyone to penalties corresponding to their talents — the physically fit have to wear burdensome weights, smart people like you and me and Kurt have earphones subjecting us to distracting noises, and so on. 
As a story, it’s not much — sort of a Simple English version of The Fountainhead. But I thought of it when I read this post from Nick Rowe last month. Microeconomics isn’t normally my bag, but this was fun.

Suppose we have a group of similar people. One of them has to do some unpleasant or dangerous job, defending the border against the Blefuscudians, say. Has to be one person, they can’t rotate. So what is the welfare-maximizing way to allocate this bad job? Have a draft where someone is picked by lot and compelled to do it, or offer enough extra pay for it that someone volunteers? You’d think that standard micro would say the market solution is best. But — well, here’s Nick:

The volunteer army is fair ex post. The one who volunteers gets the same level of utility as the other nine. … The lottery is unfair ex post, because they all get the same consumption but one has a nastier job. That’s obvious. What is not obvious, until you think about it, is that … the lottery gives higher expected utility. That’s the result of Theodore Bergstrom’s minor classic “Soldiers of Fortune” paper.

The intuition is straightforward. Think about the problem from the Utilitarian perspective, of maximising the sum of the ten utilities. This requires equalising the marginal utility of consumption for all ten men. … The volunteer army gives the soldier higher consumption, and so lower marginal utility of consumption, so does not maximise total utility. ….

If we assume, as may be reasonable, that taking the job reduces the marginal utility of consumption, that strengthens the advantages of the lottery over the volunteer army. It also means they would actually prefer a lottery where the soldier has lower consumption than those who stays home. The loser pays the winners, as well as risking his life, in the most efficient lottery.

It’s a clever argument. You need to pay someone extra to do a crap job. (Never mind that those sorts of compensating differentials are a lot more common in theory than in the real world, where the crappiest jobs are also usually the worst paid. We’re thinking like economists here.) But each dollar of consumption contributes less to our happiness than the last one. So implementing the fair outcome leaves everyone with lower expected utility than just telling the draftee to suck it up.

Of course, this point has broader applications. I’d be shocked if some version of it hasn’t been deployed as part of an anti-Rawlsian case against social insurance. Nick uses it to talk about CEO pay. That’s the direction I want to go in, too.

We all know why Bill Gates and Warren Buffett and Carlos Slim Helu are so rich, right? It’s because they sit on top of a vast machine for transforming human lives into commodities market income is equal to marginal product, and Buffet and Gates and Slim and everybody named Walton are just so damn productive. We have to pay them what they’re worth or they won’t produce all this valuable stuff that no one else can. Right?

The problem is, even if the monstrously rich really were just as monstrously productive, that wouldn’t make them utility monsters. Even if you think that the distribution of income is determined by the distribution of ability, there’s no reason to think that people’s ability to produce and their ability to derive enjoyment from consumption coincide. Indeed, to the extent that being super productive means having less leisure, and means developing your capacity for engineering or order-giving rather than for plucking the hour and the day virtuously and well, they might well be distributed inversely. But even if Paul Allen really does get an ecstasy from taking one of his jets to his helicopter to his boat off the coast of Southern France that we plebes, with our puny so-called vacations [1], can’t even imagine, the declining marginal utility of consumption is still going to catch up with him eventually. Two private jets may be better than one, but surely they’re not twice as good.

And that, if you believe the marginal product story, is a problem. The most successful wealth-creators will eventually reach a point where they may be as productive as ever, but it’s no longer worth their while to keep working. Look at Bill Gates. Can you blame him for retiring? He couldn’t spend the money he’s got in ten lifetimes, he can’t even give it away. But if you believe his salary up til now has reflected his contribution to the social product, his retirement is a catastrophe for the rest of us. Atlas may not shrug, but he yawns.

Wealth blunts the effects of incentives. So we want the very productive to have lots of income, but very little wealth. They should want to work 12 hour days to earn more, but they shouldn’t be tempted to cut their hours back to spend what they already earned. It seems like an insoluble problem, closely related to Suresh’s superstar doctor problem, which liberalism has no good answer to. [2]

But that’s where we come to Harry Bergeron. It’s perfectly possible for superstar doctors to have both a very high income and very low wealth. All that’s required is that they start in a very deep hole.

If we really believed that the justification for income disparities is to maintain incentives for the productive, we’d adopt a version of the Bergeron plan. We’d have tests early in life to assess people’s innate abilities, and the better they scored, the bigger the bill we’d stick them with. If it’s important that “he who does not work, neither shall he eat,” [3] it’s most important for those who have the greatest capacity to work. Keep Bill Gates hungry, and he might have spent another 20 years extracting rents from network externalities creating value for Microsoft’s shareholders and customers.

There’s no shortage of people to tell you that it might seem unfair that Paul Allen has two private jets in a world where kids in Kinshasa eat only every two days, but that in the long run the tough love of proper incentives will make more pie for everyone. Many of those people would go on to say that the reason Paul Allen needs to be encouraged so strenuously is because of his innate cognitive abilities. But very few of those people, I think, would feel anything but moral outrage at the idea that if people with Allen’s cognitive capacities could be identified at an early age, they should be stuck with a very big bill and promised a visit from very big bailiffs if they ever missed a payment. And yet the logic is exactly the same.

Of course I’m not endorsing this idea; I don’t think the rich, by and large, have any special cognitive capacities so I’m happy just to expropriate them; we don’t have to work them until they drop. (People who do believe that income inequality is driven by marginal productivity don’t have such an easy out.)

But it’s funny, isn’t it: As a society we seem to be adopting something a bit like the Bergeron Solution. People who are very productive, at least as measured by their expected salaries, do begin their lives, or at least their careers, with a very big bill. Which ensures that they’ll be reliable creators of value for society, where value is measured, as always, in dollars. God forbid that someone who could be doctor or lawyer should decide to write novels or raise children or spend their days surfing. Of course one doesn’t want to buy into some naive functionalism, not to say conspiracy theory. I’m not saying that the increase in student debt happened in order that people who might otherwise have been tempted into projects of self-valorization would continue to devote their lives to the valorization of capital instead. But, well, I’m not not saying that.

[1] What, you think that “family” you’re always going on about could provide a hundredth the utility Paul Allen gets from his yacht?

[2] That post from Suresh is where I learned about utility monsters.

[3] I couldn’t be bothered to google it, but wasn’t it Newt’s line back in the day, before Michele Bachman picked it up?

Political Economy 101

When he’s right, he’s right:

everything we’re seeing makes sense if you think of the Right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff. Deflation is hell for workers and business owners, but it’s heaven for creditors. … thinking of what’s happening as the rule of rentiers, who are getting their interests served at the expense of the real economy, helps make sense of the situation.

Or, almost right. Because it isn’t just the Right…

EDIT: It’s interesting to note how reflexively DeLong shied away from this thought when it occurred to him a while back, with the ludicrous-on-its-face argument that only “coupon-clippers with their portfolios 100% in government bonds” could have an interest in deflation. The existence of rentiers as a distinct social class is an unthought in respectable circles. Which shows how impressively disrespectable Krugman is becoming.

How Many Rooms Does a Man Need?

I’m generally a big fan of Rick Bookstaber. His posts have a depth and originality that’s rare among economics blogs. But he goes seriously off the rails with this one, on commodity prices. In the long term, he argues, they are bound to fall, because a paradigm shift is underway:

with the increased focus on technology – where we spend more and more of our time on our cell phone, doing emails, watching DVDs and surfing the web – there is less of a difference between how the super rich and the reasonably well off spend their time hour by hour during their typical days. … in the not-so-distant future the main items we will demand, beyond food, clothing and shelter, are “game systems”…

Our demand for housing and transportation, two of the biggest commodity hogs, will be lower. McMansions will be totally passe. It should already be dawning on people that most all of our non-sleeping hours at home are spent in the kitchen and its adjacent family room. Living rooms and dining rooms are relics. 

This is a classic example of what we might call Dow 36,000 syndrome, after the perfectly timed punchline to the tech bubble, which argued that stocks were no riskier than bonds and should be priced accordingly, people just hadn’t realized it yet. The syndrome consists of coming up with a theory that implies people will behave quite differently than they do, and then, rather than concluding there must be something wrong with the theory, predicting that people will start behaving in accord with it any day now. There’s no explanation for why people haven’t followed the theory up til now, just the assurance that they’re about to, just wait. Tomorrow, tomorrow, people will realize stocks should be priced like bonds. And they’ll realize there’s no reason to have a bigger house than you need for your daily routine.

I don’t think so.

I happen to be sitting, as I type this, in a bedroom in John D. Rockefeller’s old 40-room mansion in Pocantico.I don’t know how much time he spent in most of those rooms … or in the enormous coachhouse down the hill … or in the “Orangerie, modeled after the original at Versailles” … or in the guesthouse, the consumption value of which presumablydidn’t much depend on the fact that it was initially exhibited at the Museum of Modern Art and then disassembled and shipped to the estate.

There may be a paradigm shift that leads to decreasing demand for commodities. I hope so; sooner or later, there needs to be. But Bookstaber, smart as he is, is being too much of an economist here. Anyone who thinks that the consumption of the rich (or of those in status competition with the rich) can be derived from some rational assessment of what a person needs, has not grokked what being rich is about.

Where do the rich get their money?

Well, from us, of course. All their dollars represent, is claims on our labor.

Still, it’s interesting to ask what forms those claims take. Especially since there is a widely-held belief that today, unlike in the bad old days, the incomes of even the super rich are, at least on paper, mainly compensation for their work — that they’re a return on “human capital” rather than the old-fashioned kind. Is there anything to that?

Here’s what the IRS Statistics of Income says:

Share of total income by source, filers reporting $1 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 31.0% 17.2% 28.4% 23.1%
2000 33.2% 10.3% 42.5% 13.1%
2005 26.9% 15.7% 38.1% 22.3%
2008 30.7% 19.8% 30.4% 23.2%

Share of total income by source, filers reporting $10 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
2000 25.0% 8.6% 58.2% 7.4%
2005 17.5% 17.4% 50.8% 17.8%
2008 18.8% 22.1% 45.4% 18.7%

Share of total income by source, all filers

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 76.4% 7.3% 4.0% 6.9%
2000 70.0% 6.5% 9.7% 6.6%
2005 69.5% 6.8% 8.9% 8.9%
2008 72.0% 8.1% 5.6% 7.5%

Source: IRS Statistics of income, author’s calculations
Notes: Income above $1 million not broken out before 2000. All nonwage income is net of losses. Business income includes business/professional income, S corporation and partnership income, and farm income.

So no, it’s no more true than it ever was that the rich earn their money, in even the most limited formal sense.

EDIT: In retrospect, I guess it would have been better to do the tables by year, with the rows by income class. Oh well.