Got Optimal?
It seems to me that one of the most underrated notions in the world is that of the “optimal” arrangement. You hear a lot of folks talking about things like ”exploitation”, “growth”, “fairness”, “maximizing profits”, etc, etc, but it seems to me we don’t talk nearly enough about how to structure the world in the way that best benefits the most people, ie to seek the optimal arrangement given the needs and contributions of all the players involved.
Nearsighted conservatives will sometimes mistake that kind of discussion as “socialist” because they see it as veering away from the competitive, individual forces that very effectively drive highly productive economies, but they forget that in the game of economics we should generally be looking at metrics such production divided by number of people (GDP), and this number will be bigger if we optimize correctly.
The left in this sense is usually too “far sighted”, looking to distribute the wealth that may vanish if we eliminate those individual and corporate competitive structures that are the hallmark of industrialization and the spectacular rise in the average standard of living in the industrialized world over the past century.
So, how to optimize things? Economist Vilfredo Pareto (OMG he’s Italian?! economic credibility challenge alert!) had some neat ideas with respect to optimizing systems where we’d examine them to find ways to increase the well being of some participants without decreasing that of others. http://en.wikipedia.org/wiki/Pareto_efficiency
I think this simple basic idea should factor in a lot more, especially for those who fret a lot about the inequitable distribution of production towards the rich. Those folks generally, and very wrongly, assume that redistribution won’t have negative effects on production. It will, although that certainly does not mean we should not redistribute anything. It just means we need to redistribute with *great caution* to avoid the catastrophic kinds of problems faced by basket case economies like North Korea.
I think the single greatest challenge of optimizing is the degree to which you factor in the needs of other nations. Optimizing with the rural Pakistan peasantry in mind is different than if we draw our lines at the US border and say to heck with the needs of everybody else. Although I believe we have a moral imperative to take the needs of the world into much better account than we do now, I also recognize that it’s not practical or even possible for those of us who enjoy the many benefits of industrialized capitalism to successfully integrate our economies with those of countries like North Korea or China or even very friendly “economic allies” like India. Fortunately for those guys – and probably for us too – industrial globalization and the communications and technology revolution are handling much of this task, often via the invisible hand of Adam Smith style free marketeering.
The future … is better optimized !
Those poor folks in the 99% who only have 8 million to their name.
After some time looking I finally found the number I’ve been after, which is the cutoff point in terms of the wealth of those elusive and mysterious ”1% people” everybody is talking about. Here’s the excellent research document:
http://www.levyinstitute.org/pubs/wp_589.pdf
We learn that the cutoff for moving from the impoverished 99% to those nasty ONE PERCENTERS is …. wait for it …. a Net worth of $8,232,000 or more..
WoW.
So here’s the problem if you are an anti occupation person – those one percenters SURE have a LOT of money! In fact as you go into the category of the super duper rich – the top tenth of a percent, you get wealth so great it’s hard for most of us to even imagine – hundreds of millions of dollars.
HOWEVER if you are a “pro occupation” person I think you have even a bigger problem, and that’s the thing most would not even call a “problem” at all, it’s the fact that we are SO prosperous here in America that millions and millions of people who are well below the “one percent” mark are incredibly well off . Somebody with 7 million in the bank won’t make the 1% cut, but clearly they are very rich.
How moved should we be by a movement that considers millionaires to be among the disadvantaged in America?
Of course the 99% folks don’t mean it literally, rather they are concerned that a small number of elite rich folks control the whole show. It’s an important topic, yet it seems to me the concept of exploitation of the poor by the rich weakens as you examine closely the actual data as well as the procedures and power structures as well as how things work in the country’s business and political circles. Lots of redistribution is already taking place, though tax critics will reasonably note that taxes go mostly to entitlements for the middle class and the defense department. Higher taxes are not necessarily a path to “greater fairness”.
Certainly we want more even distribution of America’s massive wealth, but it’s also important to keep the production levels high so we have something to redistribute. This balance is not easy. Not easy at all.
To Prosper or NOT to Prosper.com ?
Eat those mofo CEOs! Or maybe not.
For me the ”Eat the Mofo CEOs!” argument, aka “CEO pay is an outrageous inequitable violation of human rights”, etc, etc. isn’t necessarily wrong, it’s just very incomplete.
What we DO KNOW is that most folks are a lot better off here in USA than in most of the alternative economies. This is particularly true for those of us making more than a modest amount per year, but I think it’s hard to make a case that even welfare folks here are not better off than in, say, any of the other top 10 populated countries with perhaps Japan as an exception.
What has generated that prosperity for so many? Certainly “high CEO pay” is at best only a small factor in this, but I’m not clear how you can start modifying things like “maximum CEO benefits” without running into some complications with innovation and productivity.
One can reasonably note that there’s not a correlation between CEO pay and corporate productivity (at least I think this is indicated by several studies). However a better question is really “is there a correlation between the lack of intervention in economies and productivity?”. This has been tested now for many centuries across many countries, and we generally find that lack of intervention seems to create more total wealth and massive intervention as in old school communist crazy stuff tends to bring a sh**storm of economic trouble.
However US style ALSO seems to push the distribution more to the rich. Of course it would be better to have more equal distribution IF you could keep all that productivity, but how do you arrange that?
It’s the biggest question of our lives. I don’t have the answer, but when I look around the USA (where distribution is NOT equitable even after heavily progressive taxing of the rich) I see a LOT better standard for pretty much everybody than when I look around places that don’t have vibrant capitalistic economies (or have only had them a short time).
One can offer up Scandinavia as the “alternative model” and I’d agree that if we could duplicate Scandanavian standards of living at US scale we should do so. but I don’t think you could apply that model effectively to a country the size of the USA. These countries have some major advantages that have to do with oil wealth and demographics and history. They are smaller than many US states and thus not really comparable if you are talking about global economic architecture, as you must do when trying to “fix” the many problems the world is facing after the boom and recent mini-bust of the post WWII era.
It seems to me that the *first* line of discussion with respect to any economy needs to be “how do we create wealth?” rather than “how do we distribute he wealth we have created?”
This point is completely obvious to pretty much anybody I talk to from the right or in business, and seems to be completely opaque to many on the left side of the political equation, especially the wall street occupation forces. Many of those folks seem out of touch with basic business economics and hell bent on the destruction of capitalism – naively assuming that massive productivity will continue under all scenarios, so the only thing we should focus on is making sure the rich don’t get … richer, because then we’ll see all that prosperity flow more equitably to … usually… their causes or even to them.
But be careful what you wish for because when taking a global perspective on things redistribution will not necessarily flow in your direction! Folks in China and India are living at much lower levels than almost anybody here in the states, so as we work for equitable distribution (as we should), we’ll need to work to get THEM more involved in the economy so they can raise their standards to a fraction of ours! Globalization is taking care of this right now in the sloppy form capitalism usually takes, but it’s ironic to me that occupiers seem to think the wealth of the super rich should be heading back to mainstreet USA rather than to the truly needy. Rich or poor, pretty much everybody seems to think they are the underpaid and overworked folks. Take out a map folks and put your finger on your location. If it’s in USA then equitable distribution is likely to flow AWAY from you.
I’m all for more equitable distribution IF you can do it without hurting productivity, though I also would like to see that prosperity flow to those who really need it rather than simply bloating the bureaucracy as we tend to do when taxes go up.
Ray Dalio of Bridgewater Capital – the world’s largest Hedge Fund – both makes a ton of money and pays a ton of taxes. Like most of the rich he pays both a greater total amount and a greater percentage of his income to federal taxes. His point on Charlie Rose the other night was direct and simple. Like Gates, Buffett, and legions of other super-wealthy folks Dalio is going to be giving most of his billion dollar fortune away to the poor. He’d be happy to give it to the government IF they’d spend it wisely, but he knows that they will NOT.
Robert Reich’s interesting 2 minute explanation of the economy. Dude, surely you jest!
In the interest of putting up good arguments *against* my general point of view (which I posted in “Shut up or Cut”, here’s the always-sharp-but- often-wrong Robert Reich. As with most tribal viewpoints, Reich makes several correct points and connects them in ways that are fairly rational. HOWEVER, what you miss with this type of analysis is the full and bigger picture that emerges when the many other factors in an economy are included. It’s a game super smart folks like Reich play super well, but for me it undermines their long term credibility since he’s more advocate and politico here than economist. Reich is a left wing economist and therefore focuses too narrowly on distribution issues as in this video. Compare with the CATO boys – the “right wing” economists who focus too narrowly on the *production* side of the equation. They largely ignore income distribution issues and mostly whine about how tax and government inhibit economic development (good points, but too narrow). On balance I line up more with the CATO views because I think they are far more representative of the forces and ideas that created our massive, vibrant, and mostly successfully economic powerhouse, but I’d like to see more from the right about the desirability of a more level income distribution. NOT so much because it would seem to be “fairer”, but simply because it is likely to create more stability both economically and culturally. So I’d agree with Reich about that part at least.
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