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What is the Ideal Economic Pie?

Reframing the Inequality Debate

Imagine having the power to rearrange society’s wealth at a moment’s notice. With the mere flick of a finger, billionaires could turn to millionaires; the poor could become the middle class. Poverty could be eradicated for good. Imagine this came with no drawbacks—no repercussions. People would transition seamlessly into their new roles without complaint, difficulty or even a twinkle of knowledge about their transformation.

Now assume you were forced to use this almighty power, despite your protests over free will and the rights of others to define their own destinies. You are presented below with four options for rearranging society’s wealth. Which one would you choose to divide the economic pie? Which one seems the most fair, ethical and practical?

Assume income and total individual wealth are synonymous for this thought experiment

Assuming you chose an option, you may have several questions. For one, why only these four choices? And second, why these particular choices?

Though it might not appear so at first, there are people who would support each of these options. In fact, these four represent a rough spectrum of possibilities surrounding our views on fair income distributions. For instance:

Option A, income exaggerations aside, is closest to what America has today. Inequality is high but so is country-wide wealth with respect to total income. For classical utilitarians who value “the greatest amount of good for the greatest number,” Option A is the perfect choice because the country is at its wealthiest (see footnote 3 for reference). Since the economic pie is larger, more people can enjoy its scrumptious riches. Income inequality is therefore not immoral. In fact, some may justify this imbalance with logic akin to trickle-down economics where wealth and employment opportunities trickle down to the lower classes through the business and financial investments of high-income earners. Option B embodies the leftist ideal of perfect economic equality. Unlike the others, the bottom quintile of the population has a decent, livable income. This is the ideal choice for any prioritarian who values “well-being across all individuals with extra weight given to worse-off individuals.” Although prioritarians similarly do not find inequality inherently immoral, unlike more hardliner socialists, this is often the preferred option for both parties. As for why the total country-wide wealth is lower than in other options, this is my way of affirming the economic consensus that complete economic equality is inefficient. For reference, see the works of Arthur Okun, N. Gregory Mankiw and Paul Bloom. Option C presents a unique case where the overwhelming majority of the population is very well-off (even though the economic pie is smaller than Option A’s). This choice’s inclusion is meant to highlight a maverick approach to distribution: sufficientarianism. Despite the long-winded name, the intuition here is actually quite simple. According to philosopher Harry Frankfurt, sufficientarians only find inequality unacceptable up to a point. In other words, there is an income threshold that society should strive to help its citizens reach, beyond which inequality no longer becomes a moral and societal concern. The choice of threshold is arbitrary, capable of encompassing anything from subsistence to the compassion felt by an impartial spectator. For example, assume the minimum threshold is $100,000. Option C therefore becomes the best choice since the greatest proportion of the population (≈80%) is above this limit. By extension, this makes options A and D equally good as second choices because they both cover around 60% of the population, and because inequality differences have no bearing here. Option D is a subtle tweaking of Option A. Although total wealth based on country-wide income is comparatively lower, the economic well-being of the bottom 40% is nearly twice as high. This presents a more equitable distribution despite the existence of sharp inequalities. Moreover, the economic pie is substantially larger than the more uniform Option B, making this a compromise option for anyone seeking a balance between economic productivity and income fairness.

So what is the point of this thought experiment?

If you have ever read an op-ed or social media post on economic equality, you might have noticed that authors rarely talk about what an equal society actually looks like. Sure, they may preach about “fairness,” “equality,” and “greater opportunity,” yet they rarely venture beyond these generalities.

In fact, it is odd how quick we lambaste income inequality, yet when we talk about solutions, we rarely address whether marginal or perfect equality is the best path to follow. At best, we may argue over niche topics like progressive and regressive taxes, and the fairness of fiscal policy; but even these debates are misleading. For most of us, our principles of fairness are incomplete. Progressive taxes may seem more just and logical than flat taxes, yet when we push ourselves to address equality for society at large, we are often stumped on what the ideal economic pie should look like.

In experimental settings, Democrats and Republicans alike are reported to ”want a far more equal society than they actually live in or believe that they live in.” In fact, one study by The Atlantic finds that “the vast majority of Americans prefer a distribution of wealth more equal than what exists in Sweden.” But how accurate are these findings? After all, most Americans have likely never been asked about “the perfect economic pie.”

So how can we argue over ideals when we have no clear picture of what we want in the first place? Sure there are ideologues on both sides who we can give exception to, but for the majority of us, these questions are likely novel ones.

For instance, does economic fairness come from everyone owning mansions or is it simply the capacity of each citizen to afford a comfortable living? If every American could pay for housing and food with money left over for savings, vacations and entertainment, why should we concern ourselves with the wealth of the top 1%? If institutional barriers to growth and opportunity are removed, while everyone enjoys a comfortable income, why worry over inequality, especially if we assume the wealthy earned their income ethically? How do we square off inequality with the biological differences in strength and talents that define us? What about the differences between slackers and hard workers? In light of these questions, can we still say that economic inequality is always immoral?

Note that these questions purposely avoid mentioning the role of government, a beast of a question in its own right. Instead, they simply evaluate our ideal notions of the perfect economic pie.

Which is why I recommend Option D as the model that equality advocates should strive for. Borrowing the sufficientarian explanation above, we should only revile inequality up to a certain point. However, unlike sufficientarians who would be indifferent between Options B and D at a low income baseline, we should prioritize the choice with the larger economic pie. This way we boost economic growth and innovation while keeping the system sustainable, allowing for even greater opportunities for wealth and prosperity. Thus when building the ideal economy, the needs of productivity and the poor must be balanced.

There are several useful ways of applying this philosophy to the United States.

An American Sufficientarian Approach

For starters, by having a concrete idea of the economic pie we want, it becomes much easier to answer questions like “how much assistance do people need” and “what is the socially acceptable minimum for family incomes?” By having a rigidly defined baseline, we can prioritize when and how assistance should be given. The only problem is defining this threshold.

Relying on national Census-based poverty ratings, which are inflation-adjusted by the Consumer Price Index (CPI), is an imperfect metric to rely on. Unlike, say, livable income measurements from sources like MIT’s Living Wage Calculator, poverty rates do not effectively account for childcare, transportation and healthcare costs. More importantly, national poverty rates fail to capture the concentrated nature of poverty in America.

Source: James B Holt (2007), “The Topography of Poverty in the United States: A Spatial Analysis Using County-Level Data From the Community Health Status Indicators Project”

Since poverty is largely scattered along the Southern and Rustbelt States, the national average becomes insensitive to these differences; and while the obvious remedy would be to construct individual thresholds per state, it is nevertheless possible to build a semi-accurate national baseline that can guide federal policy.

For example, we can extrapolate a baseline from the 6 states (including D.C) with the highest poverty rates using MIT’s Living Wage Calculator, those states being Kentucky, Georgia, Arkansas, Louisiana, New Mexico and Mississippi.¹ The findings, presented in the graph below, suggest that every American family should possess at least $35,524 in post-taxes income.² Any inequality above that is negligible for purposes of guaranteeing a livable income for all citizens. Of course, in light of inflation and other future price fluctuations, this benchmark can and should be updated and properly indexed.

The poverty threshold is the averaged national poverty incomes for 1 person and 4 person households

A second recommended approach would be to set a threshold based on comfortable incomes. These incomes factor in savings and discretionary spending on top of the basic necessities covered by living income measurements. GOBankingRates provides a useful list of incomes we need to live comfortably in the 50 biggest U.S. cities. Taking the average of these 50 income values, we can create a convenient threshold of $56,573. Alternatively, if we want a more nationally representative benchmark, we could simply add a 20–30% buffer to the previous living wage threshold to account for savings and other discretionary purchases, leaving us with a new baseline of $42,629 (20%) — $46,181 (30%). There are many other ways of finding the ideal threshold. It all depends on our values and what we consider to be essential for a good and meaningful life.

The poverty threshold is the averaged national poverty incomes for 1 person and 4 person households

And if the previously mentioned Atlantic study is to be believed, then this is a great sign for all of us. For amidst the partisan bickering that plagues our society, we can take comfort in the fact that we share aspirations for a more equal future. We may disagree on the methods, the role of government, on how to get there; some may even consider this impossible, a waste of time. But even still, this is a source for common ground—one that defies partisanship. At a time when unity and compromise are in short-supply, this presents an incredible opportunity for collaboration, one where Americans of all stripes can work together to get the policies and representatives they need to promote their economic visions.

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¹ This basic computation is done by averaging the “required annual income after taxes” entries for “1 adult” and “2 Adults 2 Children” per state. These household sizes were chosen to best represent the national demographic given a national 2017 total fertility rate of 2.06 and a 52% married population. While I acknowledge the risks of extrapolating state from national data, my objective here is not statistical accuracy, but the opportunity to introduce new ideas.

² Information for the quintile incomes of both charts comes from 2014 Tax Policy Center data. I rely on older data here because more modern alternatives either fail to present their findings in terms of quintiles, or they present quintile data in terms other than income.

³ Total Pie Sizes in Thought Experiment (Since population is evenly split along quintiles, the exact population value does not matter for determining relative wealth sizes).

Note that quantitative differences here are arbitrary and do not perfectly reflect the differences that each distribution would have on societal wealth.

EDIT: Given recent feedback, I wish to clarify that I am not suggesting that greater inequality guarantees more societal wealth. The academic consensus has regularly held that the largest economic pies come from optimal inequality distributions. While I do not dispute this conclusion, for purposes of my article, having an obviously superior option in both equality and total societal wealth would make it harder to present a more nuanced (and fair) thought experiment — at least one that would allow me to properly present each unique philosophical approach to distribution.

Lastly, my interpretation of classical utilitarians here borrows from Amartya Sen and Bernard Williams’s Utilitarianism and Beyond (page 3ff). This interpretation takes the assumption that decreasing marginal utility of wealth is not factored into the utilitarian calculus. Utilitarian approaches that do, which I do not address, are called “accidental egalitarianism” in the literature. For more information, see page 3 of an article by Edward Page.