Arnold Kling on the Sergey Brin effect and inequality:

Income inequality in the United States consists of two gaps. The first gap is an upper-lower gap, between those with a college education and those without. The second is an upper-upper gap, between those with high incomes and those with extraordinarily high incomes. The upper-lower gap reflects changes in the structure of the economy. New technologies place a premium on cognitive ability. Harvard University economists Claudia Goldin and Lawrence Katz have dubbed this “skill-biased technological change.” In today’s economy, more value added comes from knowledge work, and relatively less comes from unskilled labor.

Kling goes on to discuss policy options that might address inequality, such as tax and immigration reform options.

Inequality is one of the most fundamental and divisive political issues around, the root of considerable discontent. It offends many persons’ sense of fairness. Much inequality of fortune stems from luck–where one is born, for example. Growing inequality might be heralded as a forerunner of an H.G. Wells Time Machine world where humanity is divided into two classes that eventually become two species. It might come about as a result of exploitation, in which one group becomes wealthy at the expense of another. This clearly happens in the case of slavery; according to Marxist theory, of course, exploitation is the rule rather than the exception.

The free-market answer to these points is simple enough. Inequality in a market economy should not matter. In a market in which everyone has equal rights, trade makes everyone better off (Marx being wrong on his theory of value). Some have a larger piece of the pie than others, but the pie keeps growing, and there is more for everyone. Inequality might grow, but as the rich grow richer, the poor also grow richer. This argument is nicely made by Cox and Alm in Myths of Rich and Poor. Earlier, Hayek notes that yes, markets reward results, not merit, but from the standpoint of a population, it is results that matter–we want houses that don’t fall down in a strong wind, even if the architect who designs them is lucky rather than good. Furthermore, luck is not entirely beyond one’s control.

Building on this set of argument, it is common for libertarians to set aside concerns about income inequality as a result of “envy.” Whatever it is, it seems to be nearly universal; I recall (and am too lazy to hunt down and link to) a study a few years back showing that populations report higher levels of happiness in countries with less inequality. (There must be a limit to this at some point, one would expect, surely a population comprised almost entirely of people some of whom are starving, where others are merely malnourished, would not be particularly jolly).

Game theorist Axelrod seems to have tracked down the root of the problem. In his various tournaments, he sometimes set up games in which he asked participants not to be envious, that is, not to think of themselves as doing badly even when their opponent in a given game was doing better. He found that people would do it anyway. He hypothesizes that people want to know how well they are doing as compared to some standard, and in the absence of any other standard, are irresistably drawn to compare their results to those of others.

So are we stuck with dealing with inequality as a “problem,” making policy choices that move pieces of pie from the rich to the poor, even though this might mean that overall the pie grows more slowly–or not at all–or even that it shrinks? Hopefully not the latter. Must we adopt a religious outlook, in which wanting is set aside in pursuit of enlightenment, that is, zen, or perhaps a dose of Calvinism, in which all is predestined, or all serves some grand being’s larger plan? I find this stretches my own credulity too far. So teach economic history, and hope for the best.

Along these lines, maybe it was better for capitalism when there were more grim socialist examples around.

http://penny-arcade.com/comic/2008/9/26/

Speaking of snakes, I am just returned from a camping trip along the Appalachian trail in the Michaux Forest, quite out of wireless reception range. Several days’ heavy rain had washed the forest clean, left the moss glowing green and the mushrooms, salamanders, crayfish, and frogs quite content. There one combats the same problems confronted by earlier settlers–mice (and the snakes they attract), staying dry and tolerably warm, the production of decent meals, and keeping small children from wandering off into the woods. Why do some people enjoy briefly returning to this world? Despite being one of those people, I can’t say. Now I am back and my day is easy and comfortable (comparatively), with time to spare contemplating the meta-structures of finance, property, and capital. Let’s all hope these structures are not nearly as fragile as our confidence in them, which, judging from the tone of remarks at last week’s ITIF conference on innovation, has fallen quite low.

In particular, the dominant concern seemed to be involve U.S. competitiveness in the face of developments in India and China, low growth in jobs and real wages, and so on. One commentator described the last ten years of liberalized trade as an experiment in moving jobs overseas in the hope that consumers would reap considerable benefits, which he seemed to think had not come about. While every event needs a little pessimism, this particular low mood seemed to have spread to nearly everyone. (Intellectuals seem to be as susceptible to mass psychology effects as anyone else, if anything perhaps more so, because they live in their heads). I would not have been surprised if the attendees had spontaneously all broken into tears (oh, all right, I would have been).

ITIF’s policy proposals for the next administration suffered somewhat from being embedded in this glum context. Nonetheless, there are some good ideas there. In order of merit, the best ideas include:

1. Letting foreign grad students in the sciences and tech fields get green cards.

2. Let companies expense IT investments in the first year.

3. Significantly expand the R&D tax credit (overall tax reform and reductions would be preferable, but that isn’t happening, so this is a third best).

4. Establish a federal office of Information CIO. Not, I hope, to inform what goes on in the private sector, but to follow it, on the off chance that systems and records might be kept so that we might begin to understand how leviathan actually works (or doesn’t work), or even do something about improving it.

Next come ideas that I would count as worth pondering further, with the caveat that one might do more than good:

5. Reform the Patent System. What a can of worms that is…

6. Implement an Innovation-based National Trade Policy. ITIF seems to be supporting more aggressive WTO actions against nations that do not do such a good job of IP enforcement, for example. I think attention to this policy issue makes sense, but until the U.S. winds down agricultural subsidies and pressures Europe to do the same, we had better be wary of starting a more punitive trend. Better to focus on coming up with blueprints for better low-cost enforcement, carrots rather than sticks. Our own enforcement methods are rather archaic, at that.

And a few ideas that are not so good. However much I have benefited from Rob Atkinson’s sense over the years, I am skeptical that we should:

7. Create a national innovation foundation.

OR

8. Implement a national broadband policy by a) adding broadband to universal service coverage (even if reverse auctions are established) b) funding joint federal-state initiatives or c) initiate educational programs on how to use broadband. The idea of making more spectrum available, though, is good sense. (See, for example, a recent paper of mine at http://www.ipi.org/, “Should the U.S. Favor a Free Nationwide Wireless Network Provider.”

Overall, one ought not denigrate the contribution that innovation has made to the economy. But micro-tinkering with federal policy in support of innvation in the technical sense is less likely to yield real growth than a) figuring out how to address problems with the federal budget without increases in taxes b) looking to innovate public institutions so that they do not cause more problems than they solve c) avoiding disastrous commitments to entitlements and d) seeing the opportunity and promise in the growth of India and China (as speaker Kathleen Wallman alone pointed out). Otherwise we go the way of Europe, which has all the national plans, policies, and foundation conceivable, and where they are holding conferences at which speakers ponder why their own innovation is lagging behind that of the United States. Yes, tax rates do matter. And it is not, and never will be, a good thing for the United States to try to return to policies that leave more hungry children in Calcutta.