Layard Bait and Switch
OK. I’m still tired. But thinking about things in a more contracualist mode made me realize that I was confused. But it’s not my fault. It’s Layard’s. His “pollution” tax argument turns on a deceptive change of subject.
Layard:
Every time [people] raise their relative income (which they like), they lower the relative income of other people (which those people dislike). This is an “external disbenefit” imposed on others, a form of physical pollution. [p. 152]
So Layard prescribes a tax on income to provide a disincentive to work:
Thus a tax on noxious emissions will reduce this emissions, and a tax on income from work will reduce work. [p. 153]
But, hey!, the analogy fails entirely. Work is not the “pollution.” Income is not the “pollution.” Moving up in relative income is the “pollution.” So, if the proposed Pigovian tax was going to be analogous to a tax on noxious emmissions, it would have to be a tax on upward income mobility, not on income from work, per se.
When Layard goes on to explain why these taxes are “corrective” rather than “distorting,” he claims that they are “performing a useful function that we were unaware of,” which is to “preserve our work-life balance.” [p. 153]
But hold on! Work-life balance is a totally different subject from the negative external effects of upward moves in relative income. This is easy to see. Imagine a world where everybody works 120 hours a week, never gaining ground in terms of relative income, but never losing it, either. This is a world with zero “pollution” from relative income gains, because there aren’t any, but a terrible work-life balance.
The “arms race” argument, that everybody would be better off if we mulilaterally agreed to work less and read more Proust, is about work-life balance. To argue that a tax on labor income would increase utility for arms race reasons is fine. But it has nothing to do with relative income gain “pollution.” In order for the negative externalites argument to go through, Layard has to show that a tax on income increases utility by decreasing income mobility, not by creating a better work-life balance. These are separate issues, but be illegitimately conflates them. He pulls a conceptual bait and switch. So, besides failing for all the more technical reasons about the reciprocal nature of externalites, Layard’s pollution argument fails at a more fundamental level, because he provides no evidence that his prescribed tax is even relevant to the “problem” it is supposed to solve.
And just consider that every time someone retires and begins to live primarily off savings, someone else’s relative income goes up. Here we have relative income gain (and attendant “pollution”) brought about by a choice to work less. Because change in relative income is largely a life-cycle thing, most people move up and move down through the distribution in a similar pattern. If people move up, creating supposed negative externalities, then they later move down, creating offsetting positive externalities.
So, it looks like the “arms race” argument really is the only one worth taking seriously. And it, unlike the pollution argument, it isn’t really an argument involving meddlesome preferences. It’s a regular old collective action problem. So the post below is confused, starting with a discussion of meddlesome preferences, and ending with a discussion of coordinating on utility maximizing general rules. But this just reflects the fact that Lord Layard is confused, too. Or trying to pull a fast one. Anyway, the “pollution” argument in Happiness is, as stated, not just wrong, but nonsensical.
And it annoys me that it took so long to see this. And that Layard argues that it is an argument that demands a “revolution in what is called ‘public economics’,” and “provides an important new element in the case for progressive politics as such.”
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Also, while I may prefer other’s income not increase relative to mine, I might also prefer (strongly and “meddlesomely”) that everyone else work really hard and produce lots of useful stuff.
So a tax on income, rather than helping fulfill my first preference, is likely to stymie my second because of the bait and switch you’ve identified.
Suppose I’d like to work less to achieve work/life balance, but that I would also hate to watch my relative income decline. If taxing everyone’s increased income will discourage us all from working so much, that WILL make it easier to reconcile these goals.
Of course the two goals hypothesized are distinct. Do you really think Layard cannot see this? He’s making the factual claim that both of these two goals are combined and that addressing the relative income “problem” will address the other. Maybe he’s right. Maybe he’s wrong. But he’s not stupid.
Now, I have absolutely no committment to defending Layard’s views. My position is that relative income explains little in itself, but is connected to things that explain lots. (Out of wack work/life balance may or may not be one thing that it partially explains.)
Bill, Yes. That’s why it’s a collective action problem. It needs to be a multilateral “decision” to change the work-life balance, or else the arms race won’t slow down.
I guess you could put it this way: If I unilaterally choose to work less, my relative income goes down. But if I have a meddlesome preference for higher position (really just a preference that other people have lower position), I will expose myself to the “pollution” of folks who do not opt out of the race. (But notice that the pollution isn’t caused by others doing anything to increase their position, just by my choice to reduce mine.) If the loss from the pollution swamps the gain of extra leisure, I won’t opt out. But if everybody opted out (because of the tax), we’d all be better off.
So these questions are clearly are not unrelated. We get into the arms race because of the our meddlesome preferences. It seems Layard is framing it as though mutual disarmament in the race is the evaluative baseline. If someone defects from the agreement, and starts working longer hours to move up in relative income, then that’s “pollution.”
But, first, Layard needs to show that disarmament would indeed be part of some kind of ideally rational agreement to fix it as the baseline, deviations from which need special justification. He doesn’t show that.
Second, the defection question and the pollution question are separate. My defection from a multi-party cooperative agreement may cause the entire cooperative endeavor to crumble, and the cooperative surplus with it. So you lose if I defect. But the defection is not a negative externality, unless one has an extremely un-orthodox notion of an externality. It can just show that the agreement is out of equilibrium.
Second, the pollution argument just isn’t set up as a collective action problem. It just says that upward moves cause a utility loss to other parties, simply in virtue of reducing their relative position, NOT in virtue having an effect on work/leisure balance. The pollution argument needs to address the utility loss from reduced position independent of the argument for utility loss do to the inability to enforce a collective agreement on work/leisure balance.
I think Layard may treat the problems separately in the lectures on which his book is based. I need to check. But in the book, Layard gets, in effect, halfway through the pollution/externalities argument, and then just switches to the related but logically distinct work-life collective action problem.
Work is not the “pollution.” Income is not the “pollution.” Moving up in relative income is the “pollution.”
I think that this is wrong. Income is the pollution. Every dollar that I make is good for me but bad for everyone else, since it makes my relative income higher than it would have been if I had not made that dollar.
That said, income taxes do not seem to be the solution to the pollution. This is easiest to see with a flat tax. In a world with a uniform 50% flat tax on all income, an extra hour of work helps me in terms of relative income just as much as it would if there was no tax at all. The whole income distribution is now just scaled down by 50%, so someone who had an income of x now has an income of .5x. Since your added gains are now scaled down by the same amount, they impact your relative position just as much as they would have.
Could another kind of tax do better? That depends on some of the details of Layard’s belief about how relative income disparities lead to unhappiness. In any plausible income distribution, income is going to vary from the first percentile to the 99th percentile. The question is if the unhappiness created by income disparities depends on the details of the distribution or not. If not, then no tax could change the total amount of “pollution”. If the distribution does matter (e.g. with a more equal distribution creating less disutility) then the tax could reduce pollution by improving the distribution. Since some units of income pollute more than others, the tax would need to be higher on the income that pollutes more. For instance, a progressive income tax might be a more efficient pollution tax, if additional income for richer people creates more pollution than additional income for poorer people (which would be the case if there is less total pollution in a more equal distribution).
The arms race argument, as you said, is a separate argument, and I think a clearer and better one.
I think Blar’s on the right track. The point is that not all dollars have the same marginal external effect. Dollars earned by those at the top of the income distribution have an external cost because they increase income inequality. Dollars earned by those at the bottom of the distribution, however, have an external benefit because they reduce income inequality. The natural Pigovian conclusion would be to impose a progressive tax on income, perhaps even with a negative tax on especially low incomes. (I concur, of course, with the Coasean response you made in an earlier post.)
Also, I think it’s incorrect to say the pollution is caused by income *mobility*. Some forms of mobility increase the income gap and others shrink it, as stated above.
Glen and Blar: Yes, of course, Layard should be for a progressive income tax. Note, however, that you can find people arguing that intra-class income competition is a big problem too. And they argue it with some justification, since that’s where the work-life balance mostly comes into play…not in the choice to develop vastly greater earning power.
The whole discussion of Layard is a red-herring though. Income-envy is so low on the list of reasons to favor “left-wing” things like CEO salary limits, decentralization of economic power, wealth transfers, minimum incomes, public spending favoring the less wealthy, etc. that its almost disingenous to discuss it exclusively. Even consumption-envy, for example, is a considerably more formidable reason. Livlihood/status security and status/power imbalances caused by wealth inequality are much bigger issues. Layard seems to have some inkling of how income inequality (he should discuss wealth inequality) threatens the status security of those with less (making them jealous, not envious). But he obviously does not get this across very well, since Will can convince people that the status-jealous impoverished should just “get over it”.
And why should we believe that the least [social, utility] cost avoider is the low income person with the “inferiority complex”?
(To his credit, Will just says that this is a possibility. Of course it is THAT.)
Possible reasons:
(1) Wealth inequalities are endemic in any highly productive economy. We could find no way to equalize wealth without ruining the economy, thus costing the low/middle income people so much consumption-possibility that it’s better for them just to deal with their wealth-inferiority complexes.
(2) High wealth people get so much benefit from being such that redistributing their wealth to the less wealthy would have overall costs to average utility.
(3) High wealth people have so much political power, that it would cost more to organize a way of redistributing their wealth than the benefit to the redistributees.
(4) Most everybody accept for the REAL LOSERS thrives on “the rat race” and a more egalitarian arrangement would plunge everyone into existential dread… a utility crusher.
Bill, The study I mentioned a while back showed that , in the US, income inequality had a negative effect on the happiness of the wealthy, but not the poor. It effects THEIR status security. Because they, like the poor, believe in the a high level of income mobility, they worry they’ll move down. The extent of inequality shows just how much they’ve got to lose.
Right. That study provides an explication of the benefit to the wealthy that I discuss in (2) in my last post. To me at least however, that study’s conclusion (even if correct) seems a pretty poor argument for asking the relatively poor to just get over it, as per your Coasian hypothesis. There’s a big difference between their jealously sensing that we value them less (placing such emphasis on wealth as we do culturally) and their envying the income of others.
If I were ranking those possible reasons, I would say that (1) and (3) are by far the most plausible and that its quitedifficult to decide between them. (4) also plays an important role. (2) is a piss poor justification of inequality.
Also, the study does cannot encompass all of the ways that wealth inequality negatively impacts the poor. Studies like that (few and number and incomplete as they are) make good intellectual ammunition and food for thought, but do little to justify world views.
And of couse, the study you cite could be taken to imply that we should do the American rich a favor be levelling incomes.
And finally, those authors are just interested in the effects of beliefs about income mobility (not whether it is a fact). Even if it is a fact (which in some sense it seems to be) that doesn’t mean income mobility is making us happier. We may even really like the income mobility game itself (consider my (4) from the last post) and yet it turn out to be immiserating us. Reported happiness is important, but not the end-all-be-all.
Wealth inequalities are endemic in any highly productive economy. We could find no way to equalize wealth without ruining the economy, thus costing the low/middle income people so much consumption-possibility that it’s better for them just to deal with their wealth-inferiority complexes.
There’s another possible reason against state efforts to reduce economic equality. It could be that the policies that the state would embark upon in order to reduce inequality are morally unacceptable on other grounds, aside from economic considerations.
For instance, one way to reduce inequality in American society is to crack down on immigration, as immigration is a sizable source of domestic economic inequality. But to do so seems counterproductive because the United States might successfully reduce domestic inequality, but global inequality would increase.
Similarly, conservatives frequently argue that welfare programs that redistribute income encourage dependency, crowd out civil society and social capital, or promote some other bad outcome. Thus, we might reject state efforts to reduce inequality because of harmful effects that specific redistributive policies generate and these effects might be harmful for the economy, as you suggest in (1), or harmful for other reasons.
We may even really like the income mobility game itself (consider my (4) from the last post) and yet it turn out to be immiserating us. Reported happiness is important, but not the end-all-be-all.
How could policy makers know that the rate race is actually immiserating us if social science is incapable of detecting the immiseration? Or do you define immiseration in terms distinct from subjective well-being?
Javier: If reducing wealth inequality is itself a goal, that certainly does not mean that any and all means of achieving it would be acceptable. Your immigration example reminds us that statistics on inequality are just a means of estimating the things we really are interested in. This is a point that I have often myself made in this blog’s recent discussion of happiness and inequality. I also gree with you that we must consider international inequality as well.
As you point out, I did not by any means provide an exhaustive list of “possible reasons” that the wealth-poor should “get over it” for Coasian reasons. But notice that many of your conservatives’ concerns have to do with effects on the economy.
It would probably be foolish for policy makers to set out uninformed to save us from a purportedly immiserating rat race. But social scientists could do relevant studies. So far happiness studies tend to just ask people roughly “How happy are you?” We could ask more nuanced questions. Also, the study Will cites just studies beliefs about income mobility. We could study a sample of people who actually have achieved inter-quintile mobility (or suffered downward movement). Was downward movement as bad as feared? Did income-position gains correlate with expected happiness gains? One of the first happiness studies, by Easterlin, found (to the contrary) that individuals predicted accurately that they would get wealthier but inaccurately that they would get more happy throughout their lives.
It is suggested that reducing immigration (suggested by Layard, in fact) might indeed reduce inequality and hence increase happiness; but that this should not be implemented because, while US citizens might become happier, non-US citizens could not have their happiness increased by immigrating to the US.
That could be true from a global point of view. However, US politicians, who are in charge of US immigration policy, have a social contract with those who elected them; not with the world.
If they want to import more immigrants in order to increase global happiness, then they should ask their consituents if that is what they want. I think we know the answer that they would get.