More on Declining Marginal Utility: Reply to Yglesias and Clarke

Matt Yglesias and Conor Clarke seem to see the same upshot as Chait in the idea that rich people spend way more than poor people for stuff that isn't that much better. Here's Yglesias:

[T]he point here is that the marginal utility of money income declines as it grows. This is also a strong argument for believing that redistributing money from wealthy or high-income individuals to the poor or to public services will be welfare-enhancing. The difference, in welfare terms, between a Sub-Zero refrigerator and an Ikea refrigerator is much smaller than the difference in welfare terms between having health insurance and not having health insurance. So a surtax on high earners that goes to finance expansion of health coverage to the working poor is making people better off. In that case, when we look at statistics indicating skyrocketing income inequality we’re seeing evidence of inefficiency that can be rectified through the policy process.

Here's Clarke:

If rich families are spending an additional $10,650 for fridges that will offer little in the way of “lived difference,” this does not suggest to me that all is peachy in the U.S. of A. It suggests that those rich families have $10,650 lying around that could be redistributed at little “lived” cost!

So, if Will's argument is that income differences in the United States increasingly fail to translate into commensurate differences in consumption, why isn't this just a brilliant argument in favor ofredistributing more income than we already do? Perhaps Will Wilkinson of the Cato Institute should be a hero to liberals everywhere!

I think Conor's right that I should be a hero to liberals everywhere, because I'm an awesome liberal! But seriously. First of all, there's all the stuff I said in my reply to Chait. Everybody go and read David Schmidtz on DMU. If you think DMU is a utilitarian argument for progressive redistribution, you might really be logically committed to a utilitarian argument for higher levels of wealth inequality! The problem might be that the rich consume too much and save too little. It might turn out to be inefficient for the rich to spend ten thousand bucks on a fridge. But a much smaller fridge and several thousand in an index fund might do more for utility overall than a transfer. DMU might be the basis for an argument about tax incidence, not tax levels.

Don't forget about the way luxuries typically become democratized. That rich people were willing to buy plasma TVs for thousands of dollars several years ago has a lot to do with the fact that I was able to buy an even better plasma TV for $600 in June. Goods that can be mass manufactured are by definition non-positional. But the timing of the consumption of newly introduced goods can be positional. Eager early adopters subsidize the rest of us.

Also, Keynesians should be careful not to suddenly forget their beliefs about the downstream demand-side effects of consumption. Progressive redistribution targeted at low hedon-per-dollar luxury consumption should be expected to reduce aggregate demand. The rich will shift away from consumption toward savings. And some portion of the tax collected will be lost in the journey of the leaky bucket.

Most importantly, utilitarianism is false. I don't know about Conor, but I know Matt and I disagree about this. Like Rawls, I think the fact that utilitarianism is completely indifferent to the question of whether an individual's income and wealth is or is not a result of exchange according to fair procedures is one of the main reasons it is false. How we came to have what we have matters. Utilitarianism says it doesn't matter. So utilitarianism is false. As far as I'm concerned, the main reason you can't just take my TV or take the money out of my wallet and give it to somebody who would get more out of it is that it's my TV, it's my money. It's not yours to redistribute.

Of course, both property rights and the power to coercively redistribute property require justification. Suppose we've justified both. It remains that when gains are not ill-gotten, the state's exercise of a legitimate power to redistribute requires justification; it must not be an undue infringement or limitation of property rights. If one among several revenue-equivalent tax schemes harms the taxed less than other schemes, but helps the recepients of transfers just as much, that's a good reason to prefer it. I suspect that a consumption tax, which discourages luxury consumption and encourages productive investment, may be preferable to a revenue-equivalent income tax for DMU reasons. But DMU doesn't deliver the gotcha argument Chait, Yglesias, and Clarke seem to think it does.

Anyway, you've got to love the heads I win, tails I win attitude that seems to be at work here. If I'm wrong, and real consumption inequality has increased a great deal, tax-loving liberals will take that as a reason to tax high-income individuals at a higher rate. Justice demands we close the gap! If I'm right, and real consumption inequality has not increased much, because the effective rate of inflation for the rich has been so much higher than the effective rate for the poor, tax-loving liberals say that just goes to show why we should tax high-income individuals at a higher rate and redistribute more. The principle of utility demands progressive redistribution!

One more point. I know Matt thinks the U.S. spends too much on defense. So why argue for a new tax on the rich to finance health coverage when the program could just as well be financed by changing our budgeting priorities? This would obviously be far superior in terms of both utility and justice.