Early Retirement Extreme Forums

Since I sadly killed the thread where we started discussing income equality with MMT (I'll shut up about it here), I thought I'd put this in a new thread:
Income inequality in the US:

http://www.youtube.com/watch?v=QPKKQnij ... r_embedded
Wilkinson: How economic inequality harms societies:

http://www.youtube.com/watch?feature=pl ... Z7LzE3u7Bw

How's the income defined?
In dollars?

In dollars per hour?

In dollars per risk of losing the dollars?

In dollars per age?

In dollars per experience?

In dollars per tenure?
Which of these measurements should be made equal at the expense of the other ones?

I assume income is defined how it's defined by the IRS. No matter how you measure it, the gap is pretty clear.

Here's something I presume: Nobody remains a sucker forever.
So if absolute income is equalized, the rational strategy is to minimize absolute dollars while maximizing the other measures.
Example: If absolute income is taxed more progressively (compared to now), there's pressure to work less hours and/or seek higher payouts in terms of effort, risk, tenure, etc.
In other words, society and individual behaviors eventually settle into a new structure.
In finance, there's the concept of a "fair price". That's the price where neither party is losing on the transaction. In practice you calculate the fair price and you buy if the quoted price is below the fair and vice versa. This behavior brings market prices into alignment with fair prices.
If laws are enacted to change the fair price, the market (aggregate personal behavior) will respond with a different behavior. What you really need to be asking. Is this new behavior better or worse for society than the previous behavior?
Personal example: I could have kept my $30/hour editing freelance gig. But take 15% in payroll, 5% in state, 15% in marginal and that leaves me $20. Is my time (presently) worth more than $20? Yes. Hence, the work doesn't get done by me. Did my rational response to stop editing leave society better or worse off?

"Here's something I presume: Nobody remains a sucker forever."
Here's where you and I fundamentally disagree. There are so many things that are used to manipulate people into being suckers: God, guns, arbitrary status symbols, the promise of future wealth. Haven't we seen the lower middle class vote against their economic best interest for decades--doesn't that suggest that, in fact, people can remain suckers for a long, long time?
There are plenty of ways people are made into suckers: advertising is one (this is worth reading: http://www.forbes.com/sites/shenegotiat ... g-america/). I think churches and schools do a good job as well.

@secretwealth - Yet the very reason that some people get rich/wealthy is that THEY aren't suckers. That is, they know the "fair price" and will behave accordingly in response to what society throws at them.
I'm speaking statistically.
So if you change the system, those very same people will very likely float to the top again.
We're back at the problem that "people have equal rights" but people are [obviously] not capable of carrying an equal responsibility" and similarly "people want equal wealth" but people are [obviously?[ not equally capable of generating it.
So what to do?
(If I knew the answer, I would be able to finish that investment book I'm working on. The ethics book too. I only have a local answer (mathematically local, that is, how to respond to the current situation). And that answer was given in the ERE book.)

"So if you change the system, those very same people will very likely float to the top again."
Yes, I fully agree--those who get rich aren't suckers. But how many of the decamillionaires and centamillionaires GOT rich and didn't START rich? It's an honest question--I don't know the answer. I know most millionaires are self-made, but as we all know that's a pretty low bar.
I do think there's a substantial mismatch in terms of value created per person and compensation. multimillion bonuses to CEOs who lower profit margins (or turn them into losses) notwithstanding, the compensation of your average banker is by no means as accurate a representation of absolute value created when compared to a teacher. Good teachers will inspire and create wealth creators who would otherwise not become the societal assets they grow up to be. Yet we aren't giving teachers huge bonuses for producing the Sergey Brins and Kurt Cobains of the world.
Bankers get huge bonuses because their added value is measurable, not because it's greater than others.
Which brings me to another important issue: a lot of people choose a calling over money. They want to make the world a better place, by studying English literature or physics. Are they suckers too?

It's the difference between providing equal opportunity v. equal outcome. If the goal is equal opportunity, some will rise to the top. If the goal is equal outcome, those people will just figure out a way to change the game and come out ahead anyway.
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Ha, sorry for repeating what Jacob said. We must have been posting at the same time.

@secretwealth - The solution would be to improve the signal process rather than redistribute the outcome. I totally agree that people closer to the money stream makes more simply because their input is more directly measurable. However, that's not the only factor.
I think society (the people in it!) has a problem in that we worship money. All the people in this country has all the money they need (lest they mismanage it). It's like oxygen or running water. So money translates into a status symbol. If being a teacher gave status (an improved signal process), things would change. Obviously, though, I'm a minority opinion in this society though.
And yes, doing academic physics research for $25k/year spells sucker compared to doing industry physics for $75k/year. But academic physicists are _in principle_ paid in freedom to research what they want which the industry physicist is not, so ...
This issue was if not resolved then at least explained by economists more than a century ago. Prices (and wages!) are NOT set by their inherent worth but by their value to other people AT THE MARGIN. If teachers and physicists are paid poor wages it most be because society on the whole don't value them as much as they'd like to think it should be. (People are way more interested in Lady Gaga than the ground state of Zirconium. Therefore Lady Gaga is paid way more for wearing provocative outfits on stage than the physicist who spends 100 hours per week in the lab. Blame people!)
In particular the margin issue trips people. The 1st physicist or teacher is VERY valuable. But the 10000th teacher makes no difference. Hence, teacher wages are low. Conversely, the first CEO is very valuable ... and because there are only 10 CEOs total, say, the 10th CEO is still very valuable.

Any number of people have worn outrageous costumes (on or off stage), but only a few get paid handsome sums for doing so. Is it their talent that makes them a financial success or their salesmanship? Why does society bother to heap money upon a select few?
Similarly, I suspect there are a few teachers who make a very substantial income. You don't hear about them because they're not in the public schools. They're probably not even in private schools. Maybe they are working for a television network?

I agree with everything you said, but I don't think it suggests that our system is a-ok. So I guess the question is whether those people who work for a "greater good" instead of money are suckers or not--and if they'll remain suckers forever. Or if we should nudge society to value different things--and use government to nudge. And if so, how they should nudge.
These are unanswered (and unanswerable) questions. But I think we also need to address something else: we don't have equal opportunities, and being born into money in the U.S. is making it easier to keep money. A very unamerican trend, and not a trend that can be reversed without government intervention somehow.

BTW, since this is similar to the economic fallacy thread, I'll offer the following bit of "wisdom", which took me about a decade to learn.
Only pursue this/these lines of thinking if

1) You're a politician who can actually change society.

2) You have an academic interest in the problem.

3) You like arguing.
If neither applies, I think time can be spent much better working out solutions for what individuals can do about to overcome the problem.
Example: This is why I started the ERE project instead of going on writing about resource depletion.
So you think incomes are unfair? Then don't give me aggregate statistics or tell me how society should be. Tell me what I can do to change my position so I don't get hit by the inherent unfairness? What can I do? Then tell others what they can do. Like, if you could have told a young-physicist-me that industry research was challenging and not just about brash commercialism or that finance wasn't for people who was too dumb for science ... you could have changed my life. Giving me wage statistics? No that wouldn't have done it.

FWIW, I think the estate tax should be 100%.
This is to avoid having to wait 3 generations for the children and grand children to demonstrate that wealth management is not genetic in nature.

You also have the technology issue.
E.g. the ERE book can be pirated. Does it increase the public good if the ERE book is freely (albeit legally illegal) available?
Yes it does.
Does this decrease my income and thus reduce my desire to write another book?
Yes it does. (This is why intellectual property laws exist. To avoid getting writers, inventors and other works suckered.)
http://earlyretirementextreme.com/gresh ... model.html
So a short-term benefit turns into a long-term cost.
Which leads me back to my original point... nobody takes the sucker position forever. The smart people float to the top. The question is: Is society smarter than individuals?
There's a nature/ecology issue too...

It all about da power laws again.
Something I read today that pertains to this:
"INVERSE POWER LAWS
RUDY RUCKER Mathematician, computer scientist; cyberpunk pioneer; novelist; author, Surfing the Gnarl
I’m intrigued by the empirical fact that most aspects of our world and our society are distributed according to so-called inverse power laws. That is, many distribution curves take on the form of a curve that swoops down from a central peak to have a long tail that asymptotically hugs the horizontal axis.
Inverse power laws are elegantly simple and deeply mysterious, but more galling than beautiful. Inverse power laws are self-organizing and self-maintaining. For reasons that aren’t entirely understood, they emerge spontaneously in a wide range of parallel computations, both social and natural.
One of the first social scientists to notice an inverse power law was the philologist George Kingsley Zipf, who formulated an observation now known as Zipf’s Law. This is the statistical fact that in most documents the frequency with which a given word is used is roughly proportional to the reciprocal of the word’s popularity rank. Thus, the second most popular word is used half as much as the most popular word, the tenth most popular word is used a tenth as much as the most popular word, and so on.
In society, similar kinds of inverse power laws govern society’s rewards. Speaking as an author, I’ve noticed, for instance, that the hundredth most popular author sells a hundredfold fewer books than the author at the top. If the top writer sells a million copies, somone like me might sell 10,000.
Disgruntled scribes sometimes fantasize about a utopian marketplace in which the naturally arising inverse-power-law distribution would be forcibly replaced by a linear distribution— that is, a sales schedule that lies along a smoothly sloping line instead of taking the form of the present bent curve that starts at an impudently high peak and swoops down to dawdle along the horizontal axis. But there’s no obvious way that the authors’ sales curve could be changed.
Certainly there’s no hope of having some governing group try to force a different distribution. After all, people make their own choices as to what books to read. Society is a parallel computation, and some aspects of it are beyond control.
The inverse-power-law aspects of income distribution are particularly disturbing. Thus the second wealthiest person in a society might own half as much as the richest, with the tenth richest person possessing only a tenth as much, and— out in the ’burbs— the thousandth richest person is making only one-thousandth as much as the person on the top. Putting the same phenomenon a little more starkly, while a company’s chief executive officer might earn $ 100,000,000 a year, a software engineer at the same company might earn only $ 100,000 a year, and a worker in one of the company’s overseas assembly plants might earn only $ 10,000 a year— a ten-thousandth as much as the top exec.
Power-law distributions can also be found in the opening weekend grosses of movies, in the number of hits that Web pages get, and in the audience shares for TV shows. Is there some reason the top ranks do so overly well and the bottom ranks seem so unfairly penalized? The short answer is no, there’s no real reason.
There need be no conspiracy to skew the rewards. Galling as it seems, inverse-power-law distributions are a fundamental natural law about the behavior of systems. They’re ubiquitous.
Inverse power laws aren’t limited to societies— they also dominate the statistics of the natural world. The tenth smallest lake is likely to be a tenth as large as the biggest one, the hundredth largest tree in a forest may be a hundredth as big as the largest tree, the thousandth largest stone on a beach is a thousandth the size of the largest one.
Whether or not we like them, inverse power laws are as inevitable as turbulence, entropy, or the law of gravity. This said, we can somewhat moderate them in our social context, and it would be too despairing to say we have no control whatsoever over the disparities between our rich and our poor. But the basic structures of inverse-power-law curves will never go away. We can rail at an inverse power law if we like— or we can accept it, perhaps hoping to bend the harsh law toward not so steep a swoop."
Brockman, John (2013-01-22). This Explains Everything: 150 Deep, Beautiful, and Elegant Theories of How the World Works (pp. 367-369). Harper Perennial. Kindle Edition.

But people are motivated by things other than money and there are cases of people trying to make information freely available for the betterment of society. Jimmy Wales and Larry Sanger come to mind.

I think the problem may be that "income inequality" is just a symptom or observation and not a disease itself. Thus, there are reasons for it that one would say are "good", like you invented something cool and sold it, or "bad", like you got your wealth through a life of crime.
Thus, railing about income inequality in a vacuum doesn't seem very useful to me. On the other hand, a topic like this gets more to a real (and timeless) point: "I think society (the people in it!) has a problem in that we worship money. All the people in this country has all the money they need (lest they mismanage it). It's like oxygen or running water. So money translates into a status symbol."
I agree -- although I have no idea what to do about it short of making money worthless, which would cause other problems.
As for teachers that make the most money, besides a few inventors, they are the ones who appear as expert witnesses in big-dollar court cases and arbitrations. Some as much as $1000 per hour or more.

We've climbed the ladder, you are a sucker if you are a top bracket employee for 2013.
I don't like being the sucker, we read that signal loud and clear. So we've been working on how to reduce AGI with as much intelligence and intensity as we previously used to raise it before we empirically realized it was bullshit.
Is it better for society if an engineer studies tax law to get his next raise or studies to be a more expert engineer?
"Wealth distribution" is a whole different ballgame than high income, but it is somewhat smoothed by these tax laws, which keep more of the upper middle from stepping over to the rich side. It does make those that do get to the other side, much fitter at avoiding politicians, taxmen and angry voters.
I think this is a ridiculous waste, but I do prefer to live in a society with a middle. I think a better solution than confiscation to hold people back would be to improve signals to low performers and give them better options.
I don't have all the answers, but I think the biggest distortion in market signals is the government itself.

"Only pursue this/these lines of thinking if

1) You're a politician who can actually change society.

2) You have an academic interest in the problem.

3) You like arguing.

If neither applies, I think time can be spent much better working out solutions for what individuals can do about to overcome the problem."
This is so true. Rarely will a rational discussion change someone's mind on a political topic. This is a fool's errand, so your time is better spent improving your personal life.
Along the same lines, I am with Seneca. It is a shame that so much effort and energy is devoted to minimize paying taxes into an obscure tax code designed to take a bigger cut than you feel is warranted. People just respond to incentives. It seems reasonable to think that society would be better off if the engineer was enticed to solve society's problems rather than figure out how to reduce his/her own excessive tax rate.

I hoped this thread would die... I guess I thought 2.5+ threads of pure political shitstorm were enough(?).
Perhaps focusing on the practical details of a happy and fulfilling life would be more productive than worrying about the theoretical money of third parties(?).
Personally, I don't care if billionaire xyz5000 has a trillion... We'll see how much his wealth is worth during the next market crash.
Meanwhile, I am perfectly content in all ways. And unlike million,billion,trillionaire -no one can take it away from me (self sufficiency).