Sunday, December 25, 2011

The economic pie

Andy Xie, says inequality is a price worth paying if it motivates people to make the economic pie bigger... but I would add "only if the pie gets to be shared by all".

The Occupy Wall Street movement drew attention to what organizers said was a huge gap between the 99 percent of the nation's citizens whose lives are out of synch with the 1 percent wealthiest Americans.

The top 1 percent control about one-fifth of the nation's income and two-fifths of the wealth. The top 10 percent take in about half of all income and have accumulated 80 percent of the wealth. Meanwhile, about 80 percent of Americans merely get by and have very little wealth available as a cushion for when personal finances turn down.

The gap between the rich and the rest, which has roughly doubled over the past two decades in the United States, is an inevitable result of competition. Of course, competition motivates people, and inequality is often a price worth paying if it motivates people to make the pie bigger. All could be better off with a bigger pie, even if inequality worsened. Limiting competition improves equality but decreases incentives for people to work. A society needs to make a tradeoff between the two.

Inequality worsens in an environment of limited competition, as inefficiency and social friction rise. Examples of this phenomenon include the Philippines, where few families rule through monopolistic practices. The country has become poorer relative to others over the past two decades, while inefficiencies are supported by Filipinos who work abroad and send money home.

Many Latin American countries fall into this category, too, and the United States is heading that way.

1 comment:

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