I used to work with this young engineer. I remember him primarily because he was an annoying conservative who listened to Michael Savage every day. But he was an okay engineer, nothing special but competent. Since that time, he stopped working as an engineer and went into sales. Why? Because he could make a lot of money. In his case, that’s probably fine. But it does speak to a very big problem in our economy: people are given incentives to leave socially important but relatively low paying jobs like teaching and engineering. And they are incentivized to go into less socially useful fields like law or sales.
A good example of the problem comes to me via the great book, The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us. Imagine that we enacted a law that said that no one with an IQ over 70 could be a lawyer. The society would be no different. That’s because lawyers battle other lawyers. It is a zero sum game. On the other hand, if we made such a law concerning engineers, our society would be destroyed: our cars wouldn’t run, our computers would malfunction, our clocks would be right only two times a day.
So we really ought to construct a society in which great computer programers create great things that make our lives better. It is a major market malfunction that software engineers are taken away from productive work to create high frequency trading systems, which cannot by definition help society. Even if you think that high frequency trading helps the markets, the people in the markets don’t need to be our best and brightest. Again: if there was a 70 IQ point maximum for traders, nothing would change.
What can we do about this? Matt Yglesias offered up an excellent idea, Tax Hikes Could Grow the Economy. It is based upon an economic paper “Taxation and the Allocation of Talent,” by Benjamin Lockwood, Charles Nathanson, and Glen Weyl. Without getting into details, the thesis is very simple. By taxing high incomes aggressively, we provide incentives for people to go into socially useful but relatively low paying jobs. The authors suggest that a top marginal tax rate of 70% to 90% would be optimal for a better distribution of talent.
Yglesias cautioned about reading too much into the results, however. First he noted that the finance industry does important work in the economy. Second, he observed that just because someone is a great hedge fund manager doesn’t mean he will be a great school teacher. I don’t buy either of these complaints. We are only talking about disincentivizing these highly paid positions. They would still pay a lot of money and attract a lot of talent. On the second point specifically, I think it proves the need for high taxes. Great hedge fund managers almost certainly would not be great school teachers or engineers. So we are paying them a great deal of money to do something of (at best) limited social value. And if financial speculation is all they are really good at, then they’ll go into that field regardless because no one will hire them for anything else.
I am constantly amazed that we have a political economy set up a certain way. There is absolutely nothing natural about it. We got it almost randomly. Yet the power elite have convinced themselves (and mostly everyone else too) that this is some God given system and if we changed it there would be catastrophe. But the truth is that we aren’t doing as well as many other countries that at least have somewhat different systems. Just look at taxes. Based upon the following graph via David Atkins at Hullabaloo, the OECD countries pay 42% (10 percentage points) more in taxes than the United States does:
Matt Yglesias wrote another great article today, No, Inequality Doesn’t Help the Economy Grow. It pushes back against this widely held belief that “there are tradeoffs between equality and efficiency.” As he notes, there are grains of truth to this and in the kind of perfect economies that fresh water economists like to model, this is true. But the real world is such that: (1) much wealth is inherited; (2) what people earn is not correlated with their effort; and (3) people are not paid according to their social value. Given this, there is little reason to believe that we need inequality for good economic growth.
Yglesias goes further to argue that inequality is bad for growth:
Unfortunately, we come back to the same reality: the United States really isn’t a democracy. The system we have is not only bad for the vast majority of our citizens, it is bad for the country as a whole. But it is great for the oligarchs. So we change nothing.