Why I need to read Piketty

I haven't read Thomas Piketty's Capital in the Twenty-First Century yet, but I need to.

From what I've read, his history of inequality is top-notch and makes the book a must-read, but his predictions for the future and his policy suggestions are not.

I'm of the opinion that inequality is an unimportant distraction from the real issue: The well being of the poor. That's what people should care about.

It's flawed to believe that inequality itself causes riots and social disorder (which is not the same as saying they are bad, but encourage bad behavior). Those uprisings occur when people can no longer afford food, and capitalism, globalization and technology have made food cheap and readily available in developed nations. Agricultural subsidies deserve no credit.

Despite what Robert Reich claims, real incomes and standards of living have been increasing in America. Reich cherry pick one way of calculating interest rates - the CPI inflation calculator - and underestimate wages by ignoring non-monetary forms of compensation like health care.

So in comes Piketty with the idea that at certain points in history, interest rates outpace growth. He's not just accidentally invoking the idea of of a negative sum game: he's pursing it head on. That's a terrible trend and if he's correct that it is happening now and here to stay, everything I believe would be suspect and ripe for revision.

So that's the big question for me, is Piketty correct in his future predictions, and what about the policy recommendations he makes? Surely his fans already supported them and are using his book to rationalize that view, and just as surely people who oppose those policies are going to ignore his book because it challenges their world view.

There's some troubling talk about Piketty having a soft spot for command and control policies and the USSR. I'd have to read it for myself to make that call, but if true it's a serious flaw.

The thing I find most interesting is that Tyler Cowen is a critic despite having recently written "Average is Over" which also predicts a future of structural inequality. Tyler is one of my favorite living economists and his response implies that Piketty doesn't have a slam dunk, but still wrote a book people need to read.
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Milton Friedman the skeptic

A few years ago I stumbled across an interesting exchange between Milton Friedman and a religious man who was concerned about Friedman's secular beliefs. Friedman nailed it, and since then I've noticed a variety of off-hand comments Friedman has made that would would excite the secular and skeptical communities if they heard them.

Today as I was listening to a lecture he gave on inequality and I saw another gem worth digging out. In his comparison between religion and concerns over inequality, Friedman said:

Like most religious beliefs - and the reason it is to be called a religious belief - this one is unexamined, and preached rather more than it is practiced.

Later in the same talk he summed it up again:

As I said at the outset, religious beliefs have the characteristic that they tend to be unexamined. 

There are many more statements like this made by Friedman. As a side project I will be transcribing them here under the tag "Milton Friedman the skeptic" so they can be compiled later.
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Income complexity and misleading inequality claims

Mike Konczal has a new piece in Ezra's Wonkblog about how there are multiple ways to determine what someone's income is and all are correct in some sense.

Income sources should include wages from a job, but there is a debate if one should count benefits like health insurance, taxes the employer must pay on behalf of the employee, money from investments, government welfare programs and tax credits like deductions for children and the earned income tax credit.

Konczal does a good job of summarizing a point I've made on at least four different occasions - that looking at monetary compensation as the sole form of income leaves out meaningful data. Which, of course, is why people do it - they want to make things look worse than they really are.

I choose to count all of those factors as important when comparing income because it gives a meaningful response. What good is it saying John Doe has to live on $14,000 a year when the government gives him thousands more? Why should we ignore the generous benefit packages when hearing the latest gripe about teacher compensation? All of these factors need to be taken into account if we want the government to intervene.

Because it's Ezra's blog, Konczal put a left-wing spin on this issue:

Politically, conservatives are in a double-bind when it comes to the policy solutions for inequality. Many conservatives use the all-inclusive definition of income — one that includes, and in fact heavily relies on, government benefits — to argue that income hasn’t stagnated. But many conservatives would also like to see government programs cut significantly.

He has a fair point, of course. I came to the same conclusion when I started factoring in progressive income taxes to inequality claims while observing my fellow right wingers continue to push for flat taxes.

But progressives do something even worse. Left-wing activists tell us the government should be doing more to "fix" income inequality, but they ignore everything the government is doing now towards that goal when they make their case. It's completely dishonest.

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Misleading left-wing viral video of the week

I've seen this video posted a few times over the weekend and I expect to see a lot more of it. A few minutes ago someone simply posted it as a reply in a discussion about corporate welfare. That didn't actually make sense, which is fitting because the premise of the video doesn't make sense.




The problem with these numbers is that they are the pre-tax income levels, as if America has a perfectly flat tax system and no welfare programs. The solution advocated by the narrator is to "fix" the current reality, but he fails to provide the reality. He never said he wanted to force board rooms and employers to pay different wages, he said he wants "redistribution."

So why does he act like we don't do that at all? Bruce Meyers argues that post-tax and post-welfare numbers do not show this rise in inequality. Don Boudreaux and Mark J. Perry show the flaws in the middle class stagnation canard, including the way non-monetary forms of compensation are left out.

In short, this video says we don't "redistribute" enough, but never tells us how much we "redistribute" already. If we followed every suggestion he makes, the numbers he shows to scare us would not change.

There is a brief mention of a poverty line in the video, but no actual claim that the poor have an unacceptable standard of living. Envy is not a virtue, and this video is not about carrying for the poor so much as hating the rich.
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Mr. University is out to corner the education market

Alex Tabarrok made a clever point that in hindsight, is blatantly obvious.

New online education models, such as Marginal Revolution University, will allow the best teachers to take a larger share of the students.




The mechanism we see here is our old friend, the rock star theory of rising inequality, where technology allows fewer and fewer musicians to rise to the top, reach a wider audience and take a bigger share of the profits.

It can work the same way with teachers, where microphones and videos let them reach more students and the most popular ones will attract large classes while lackluster teachers will get less and less.
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Doesn't anyone want to challenge this middle class view?

Mark Perry said it all with his recent headline:

Pew Research Calls It "Hollowing Out of the Middle Class," But 150 Americans Moved Up for Every 100 Who Moved Down Between 1971 and 2011

I've found myself hearing this same exchange again and again. Someone who considers income inequality to be a major issue will lament the "death of the middle class" and the response from free market fans will be to say it's not because people are getting poor, but because they are getting rich.

I've seen this same exchange a dozen times, but I can't say I've heard anyone on the left come back with a reply.

Don Boudreaux shared a classic post on the subject from Arnold Kling showing decreases in the number of both low and middle income households and a three-fold increase in upper income households. I believe the facts are on our side, but every time I try to find a rebuttal on Google I just come across more people agreeing with us.

Karl Marx predicted that capitalism would cause fewer and fewer people to be rich, and the former rich would join the hordes of the masses in a violent struggle against the small number of rich people. Add this to list of things he got wrong, which includes nearly everything he wrote.

Update: I managed to find one article on the HuffPo that could be said to qualify, but I don't find the argument compelling. For starters, the author wants us to ignore non-monetary forms of compensation like health care benefits, as if they aren't something the employer has to pay for. He also said he doesn't argue the middle class will disappear, as that is a contradiction of the concept of the middle.
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Maybe it's good the rich have more political power

Whenever the mournful dirges start about the supposed death of American democracy and how the rich have too much power, I've never stopped and asked if that's always a bad thing.

This morning a book review from Tyler Cowen stirred an idea that will bring me blank stares and quiet frowns from my friends, but it's still important to ask. Do we really want the poor to have more political power?

The argument that the rich have too much influence over legislation is usually constrained to the realm economic issues, and it props up the myth that richer Americans on average pay a smaller percentage of their income in in federal income taxes as a result of their political influence. What about other issues?

Cowen references his mood affiliation fallacy concept, which means mistakenly rejecting an idea because it criticizes something you think deserves a better reputation. He wrote:

I would be falling prey to the fallacy of mood affiliation if I simply assumed the author wanted policy to be more responsive to the wishes of the poor and middle class. Still I can ask whether this would be a desirable end. Aren’t they less educated and less well-informed on average? Don’t they also care about politics less and derive less of their status from political processes and outcomes? Do I want them to have a greater say over social issues, including gay marriage? No.

We know that education correlates with both higher incomes and higher support for gay marriage, so that issue could regress under power redistribution. Cowen also listed contradictory wishes from the uneducated, such as wanting tariffs and cheaper goods. These are impossible and more power from uneducated voters would hurt the poor.

Matthew Yglesias made a similar point:

Needless to say, the disproportionate influence of the rich on the political system is also troubling from an accountability perspective. It suggests that elected officials will be more responsive to the objective needs of the prosperous at the expense of those whose objective needs are more pressing. But pining for a world in which policy outputs precisely reflect the views of the public is neither here nor there in terms of obtaining a better political system.

No one wants a system where the poor have no political power. However, believing that giving more political power to the poor will produce benefits universally is flawed and reads like a chapter out of The Myth of the Rational Voter. The average American leftist would have a tougher time passing the social issues he or she cares about if the poor had a larger platform and voted more


This should be uncomfortable idea for anyone who believes in representative government.
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Langoliers author upset, liberals applaud

In his latest work of fiction, novelist Stephen King has penned an angsty insult-ladden screed asking that rich people like himself should pay higher taxes, such as an effective tax rate of 50 percent. Links to the piece are being passed around by lefties like herpes at a juggalo concert, but I find the piece fundamentally flawed.

Before launching on a protectionist tangent recommending businesses should choose to manufacture more cheap consumer goods in America out of blind nationalism, King tries to make the claim that rich people pay a lower percent of their taxes than anyone else, and criticizes people who suggest he shut up and write the IRS a bigger check.

Normally I disregard that suggestion. Clearly, the idea is to get all the rich people to pay more, not just him. It's like the bumper stickers that say "Don't like abortion? Don't have one!" in that it fails to address the larger issue.

However, since his premise is that the rich people pay a lower percentage than anyone else, and they should be forced to pay more, the facts reflect that his voluntary action to pay more would make a big difference.

Last November I showed that the group that pays the pays the highest tax rate in America is the fabled 1 percent the left is focusing on. They pay 33.8 percent when you include capital gains and dividends as income. King lists his own amount as roughly 28 percent, which is on par with the top quintile and above the CBO's estimate of 17.1 percent for the middle quintile.

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Africa is screwed (Jim Yong Kim edition)

I had the displeasure of learning today that Jim Yong Kim, president of Dartmouth and founder of a successful HIV/AIDS groups, will become the president of the World Bank this summer.

I was routing for Ngozi Okonjo-Iweala of Nigeria, who was nominated in a rebellious act. Traditionally, the World Bank president has been an American and Okonjo-Iweala's nomination bucked that trend.

Okonjo-Iweala has experience in both economics and the World Bank while Kim does not. His list of qualifications ends with a rim shot. Don't get me wrong, he's a smart guy, but the World Bank is completely outside his area of knowledge. He has no experience with development, banking, policy or economics.

Lant Pritchett, professor at Harvard’s Kennedy School of Government, was less kind when Kim was nominated. From Forbes:

“There is no way you can say with a straight face that this man is more qualified to head the World Bank than Ngozi,” insists Pritchett. Okonjo-Iweala has tackled corruption in Nigeria and because she has worked inside the Bank and as the Bank’s government counterpart in a developing country with complex problems, Pritchett insists she has precisely the kind of experience needed in a World Bank leader.

“At best, Kim has worked with ministers of health, but they are in one of many, many government agencies,” says Pritchett. “A minister of finance has to make hard choices across sectors. Having the experience of a minister of finance is the optimal experience for being president of the World Bank.” Adds Pritchett, nominating Kim “is like picking the short stop for the New York Yankees out of the scrub leagues.”

...

For Pritchett, there is an important distinction between the kind of work Kim has done, which he calls “charity work,” and the complex tasks engaged in by the World Bank. “Development is about countries becoming prosperous, democratic and capable, like being able to deliver the mail, having police forces that work and kids who get educated,” says Pritchett. “Charity work is helping people cope with the fact that they live in places where they don’t have those things.”

It's worse than Kim simply being clueless on what to do. Bill Easterly collected some quotations on growth from papers co-authored by Kim, and it's not pretty. Here's one:

Through a series of specific cases, we have demonstrated how growth – the market-led economic growth sought by governments, the growth in profits celebrated by businesses, and the growth in power and influence of transnational financial and corporate interests – often comes at the expense of the disenfranchised and vulnerable… As the imperatives of growth at any cost increasingly determine economic and social policy and the behavior of global corporations, more people join the ranks of the poor and greater numbers suffer and die.

Electing a World Bank president that believes growth is harmful to the poor is like putting a Jehovah's Witness in charge of the Red Cross. This negligent error will not harm the people capable of reading this blog, but it will rob the world's poor of a chance at a better like.
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Can we find a definition of rich and stick with it?

This morning on NPR, Fresh Air host Terry Gross brought on guest Tim Dickinson who recently wrote an opinion piece in Rolling Stone masquerading as a news article on how American tax policy drives inequality.

Dickinson omitted a few pesky facts that challenged his thesis. Here's part of the exchange:

Terry Gross: "Have taxes become less progressive in the past few decades? And by progressive, I mean the idea that the more money you make the higher level you're taxed?"

Tim Dickinson: "The most important place where that's true is with investment income. In the tax reform of 1986, Ronald Reagan brought the top marginal tax rate down to 28 percent, which is far below where it is today, but he also brought the capital gains tax up to match it."

You see what he did? She asked him if taxes are less progressive, and his answer was to say they are in one narrow aspect. This misleads the listener into believing that taxes are less progressive in all aspects.

Dickinson's answers use a common trick people make when they barrage you with economic data to prove a point: they keep changing the parameters of the concept they are talking about. In this case, it's what group is counted as rich. In my last post, I showed how even when you include capital gains and dividends as income and factor in loopholes, the top 1 percent pays the highest tax rate in the nation, projected at 33.8 percent this year.

The Occupy Wall Street crowd set the line at the top 1 percent, and the interview starts with that parameter, but then Dickinson moves the goalpost to the top 10 percent. Then when he wants to make the point that rich people pay a lower tax rate, he moves it again to the top 400 earners with their tax average rate of about 17 percent.

He's not alone. Sometimes the line is moved to the top 0.1 percent. Irregardless, while there are a few anecdotal examples of rich people that have found a way to pay a lower tax rate, you have to leave out a lot of multi-millionaires to concoct a definition of "rich" that pays a lower tax rate on average. It's no different than holding up a handful of welfare cheats as proof that all people on government assistance are scammers.

The rich have received tax reductions in recent years, but so has everyone else. Some lefties like to point out that the top federal marginal tax rate in 1963 was 91 percent, but what they don't realize is that the lowest tax bracket at that point - the poorest of the poor - had to pay 20 percent. Please don't take my word for it, scroll through the numbers for yourself. You can go back to 1954 and see those same extremes were the same for everyone.

For comparison, In 2001 the lowest tax bracket was 15 percent and the villainous Bush Tax Cuts brought it down to 10 percent.

In the interest of fairness, if you want a further historical perspective, 1913 had 1 percent tax for the lowest and a 7 percent tax for the highest and by 1918 the poor had a 6 percent tax while the highest marginal bracket was 77 percent. Taxes have been all over the place and while one can argue they're not as progressive as they were in 1918, they're certainly more progressive than they were in the last 60 years the spotlight is focused on.

Dickinson must have done a lot of digging through the data, so he knew how much more progressive taxes are today than in the last 60 years. The way he worded his answer shows that he deliberately altered his definition of rich to focus on the top 400 to a prove his point - a point that is completely reversed when the data set is expanded.
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Taxes are progressive enough

There is a lie being repeated that America has a regressive tax system, that the rich pay a lower percentage of their wealth than the middle class. Instead, we have a progressive tax system that has done a great job of keeping inequality in check.

As I've said before, there's nothing wrong with inequality. What we should focus on is the well-being of the poor, and the poor in America enjoy a high standard of living.

The recent Bruce Meyer episode of Econtalk made a compelling point that inequality is much lower than the pundits claim because they are merely looking at pre-tax income. Once you factor in taxes, consumer spending and government assistance programs like the earned income tax credit you see a much different picture observe.

Both the left and the right make the mistake of focusing on the top tax bracket in the past, which was higher than it is today, but affected few people. A much larger percentage of our federal taxes paid by the wealthy, and it's not just because they have more of the wealth. We are seeing lower taxes for the poor and middle class.

Enter Warren Buffet and the claim that he pays a lower tax rate than his secretary, whose income was never identified. He claimed he paid 17.4 percent while everyone else in his office pays 31 to 44 percent. Greg Mankiw said that isn't even true, but let's play along and say it is.

Is it fair for members of the left to use him as an example to "prove" that the rich pay a lower tax rate, like "Bob" did in an exchange we had in a comment section at For The Sake of Science last month? People rightly claim that taxpayers are able to use loopholes and write-offs to reduce their tax bill, and the rich have access to smart accountants who can exploit them, so could this stymie the progressiveness of the official tax rates?

The good news is that the hard data says otherwise. Using Warren Buffett as an anecdotal example is misleading, as we can see by looking at the effective federal tax rate that compares what people actually pay in taxes to their incomes. Here's what the Congressional Budget Office projected for this year:



It's plain to see that in reality, the five different quintiles fall neatly in line, with the top 1 percent that gets so much focus today paying the highest at 33.8 percent. It is a lie to say the rich pay less of a percentage of taxes than anyone else.

All is not lost for the left. They could simply abandon this bogus claim of a regressive tax system and instead focus on the gains that have come through lowering taxes for the poor and middle class and various "redistribution" programs like the earned income tax credit. That would allow them to sleep better at night instead of, in the words of Michael Munger, elevating the sin of envy to a virtue.
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Good news from Mark J. Perry

A lot of my lefty friends have been reciting the mantra that the rich don't pay enough in income taxes because some specific and atypical investment profits have low taxes.

I normally respond by saying the top 1 percent pays almost 40 percent of income taxes, and the bottom 50 percent pays zero. But leave it to Mark J. Perry to show that even while the top tax bracket has fallen, the percentage of income taxes paid by that same top group has risen steadily.


Of course, this is because of the "Harry Potter" effect of increased productivity and winner-takes-most market effects, but still, shouldn't my friends on the left see this graph as good news?
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The moral case for income inequality

This month Slate.com featured a massive 10-part series of articles on income inequality in the United States. The widely-linked articles by Timothy Noah make the case that it's wrong for some Americans to earn hundreds of times what others make.

People who say inequality is a problem often end up implying that salaries should be as close to equal as possible, that zero inequality should be our goal. I make the case that this is unfair and immoral.

Imagine three high school students; Tom, Dick and Harry. Tom studies hard in school and goes to a Ivy league school. Dick takes the vocational program and becomes a laborer. Harry does not study and never graduates. What do their lives look like after about ten years?

Tom becomes the vice president of his firm. He works at least 60 hours every week. He is forced to miss his wife's birthday at the last minute because he has to fly to the west coast to negotiate a contract in person. He gets to see his kids about seven hours every week.

Dick becomes a carpenter. He works about 40 hours a week. He loses the last joint on two of his fingers to a circular saw accident. He gets to see his kids about 20 hours every week.

Harry becomes a clerk at a chain store. He works 35 hours each week. He stops thinking about his job the moment he leaves work. He gets to see his kids about 30 hours each week.

It's clear that Tom, Dick and Harry have very unequal lives. Tom's marriage is strained by his job while Dick and Harry are free to have rich personal lives. Dick is at serious risk of injury at work, something Tom and Harry don't have to worry about. The amount of time they get to spend with their kids varies. Tom enjoys more prestige with his job than the other two.

It's clear that these three live very unequal lives, so why should their pay be the same? Tom would be sacrificing all the extra school he paid for, all the time he doesn't spend with his family and the difficult nature of his job for nothing. Why should Harry get five times as many hours to spend with his kids as Tom does? It's magical thinking to believe that the prestige and job security Tom enjoys perfectly balances the sacrifices he makes.

Imagine the trouble a central planner would have trying to put a dollar amount on all of these factors. How much is Dick's risk of injury worth an hour? How much should Tom get for taking his job home with him and on vacations? How often does he only work 60 hours, and how much should he get in case he has to work 70 hours one week? Should Harry lose some wages for never finishing high school? How much money is an hour with ones kids worth? What if someone doesn't have a family?

Any attempt to put a dollar amount on one of those values will be arbitrary. Different people will value things differently. The fairest solution I know of is to let different wages attract people to the jobs they are willing to do.

I hear people talk about wages as if they measure someones contribution to society, like when people lament that athletes make more money than teachers.

But the flaw is that wages are not simply something given to reward people for their role in society. Instead, wages are something an employer gives up to attract people to a position.

The metaphor I like is to ask why diamonds cost so much more than water. Water is clearly more important to our existences - we have to consume it daily to stay alive, while diamonds are mostly used for aesthetic purposes. Shouldn't water be worth more, as it's in higher demand?

Well "worth" and "price" are too different things. The supply of water is much higher, and as long as it's easier to find that next glass of water than that next diamond, water will be cheaper. But if water was rare enough, the price would exceed the diamond price.

Zero-sum game nonsense

I think one of the reasons there is so much focus on inequality is that people have a zero-sum game bias; the belief that inequality is the result of the rich taking money from the poor. This is true in some examples, like the rich mayor and part-time city councilors of Bell California, but not in a free market.

David Henderson writes:

Is inequality of wages and incomes bad? The question seems ludicrous. Of course inequality is bad, isn’t it? Actually, no. What matters crucially is how the inequality came about.

Inequality of wages and incomes is clearly bad if it results from government privileges. Many people would find such an outcome unjust, but even more important to many economists is that such inequality sets up perverse incentives. Instead of producing valuable products and services for their fellow citizens, as people tend to do in free economies, people in societies based on government-granted privileges devote much of their effort to pleasing, or outright bribing, government officials. In many African countries, for example, such as Côte d’Ivoire, Ghana, and Zaire, there are stark inequalities because the government has the power to take a high percentage of the wealth of the already poor and give a large amount of it to government officials or their cronies. And in many Latin American countries, for many decades a few families have had most of the wealth and have used government power to cement their privileges.

Companies create more wealth in the world by creating something of value. Some of that wealth ends up in the hand of the company, but certainly not all of it. Therefore, it's good for society to create more wealth.

The assumption most people make is that the rich are getting richer while the poor get poorer. Anyone who studies growth understands this is not true - everyone is in fact getting richer. Noah's piece on Slate.com seems to imply something in the middle - that the poor have stagnated while the rich have taken off.

This morning Tyler Cowen shared a link disproving the Marxist notion that CEO's make more money because they take wages away from their own workers. First Cowen quoted blogger Adam Ozimek:

If the top earners are screwing over their wage earners in the big companies, by pulling in excess wages, options, and perks, we should observe non-stagnant median pay for people who avoid working in firms with fat cat CEOs. Or we should observe talented lower-tier workers fleeing the big corporations, to keep their wages up. Yet no evidence for these predictions is given, nor are the predictions considered. It is likely that the predictions are false.

Then Cowen added:

And in fact isn't this precisely the opposite of what the evidence on the employer size wage-premium tells us? If large firms were better at keeping wages down, then the employer size wage-premium would be negative, since small firms would pay more for comparable workers.

Cowen proceeded to list studies going all the way back to 1911 that made the same conclusion, yet people - even those with a world view that prizes empirical evidence - continue to believe that inequality exists because CEO's cannibalize their employees.

Gauge the status of the poor, not the rich

Instead of focusing on how good the rich have it, the real measure of improvements to a society are in the living standards of the poor. Checking to see if the poor are suffering is more important than envying the rich.

A college astronomy class I took described the observation that all other stars appear to be moving away from us, as if the Earth were the still center of the universe. But all positions in space are relative, and my professor said our solar system and all the stars are moving away from the spot where the Big Bang took place. The reason some seem to be moving towards it and some away from it is differences in speed. The stars moving the fastest appear to be moving in one direction, while from our position the slow stars appear to move in the other way as we outrun them.

The same thing is true for standard of living. The rich are getting richer much faster than anyone else, while the poor are getting richer at a slow rate. But most of the wealth increases the poor have enjoyed have been in the form of quality of life improvements, and as Brad Delong revealed in his famous Cornucopia paper, it's impossible to gauge standard of living increases in a meaningful way.

The way the Bureau of Labor Statistics measures standard of living increases is to compare how much it would cost to purchase a collection of common items. A major flaw here is that it ignores improvements in technology. A car from 1940 is vastly inferior to a car from 2010 that has airbags, a CD player, cruise control, low gas mileage and an alarm, but they are cast as the same item in government statistics. A computer from 1990 had a fraction of the power of a modern one. Even an iPod from a 8 years ago is vastly inferior to one from today. As these better versions replace the old ones, the poor experience an invisible standard of living increase.

Increased inequality as a natural phenomena

The most concise explanation for rises in inequality was made by economist Alex Tabarrok in his post about the gulf between Harry Potter author J. K. Rowling and classic writers like Shakespeare.

J.K. Rowling is the first author in the history of the world to earn a billion dollars. I do not disparage Rowling when I say that talent is not the explanation for her monetary success. Homer, Shakespeare and Tolkien all earned much less. Why? Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening's entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn't have to be at the theater to earn. Shakespeare's words were leveraged.

Tolkien's words were leveraged further. By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year - more than have ever seen a Shakespeare play in 400 years. And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare (Shakespeare incidentally also owned shares in the Globe.)

Rowling has the leverage of the book but also the movie, the video game, and the toy. And globalization, both economic and cultural, means that Rowling's words, images, and products are translated, transmitted and transported everywhere - this is the real magic of Ha-li Bo-te.

Rowling's success brings with it inequality. Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component. Thus, greater leverage brings greater inequality. The average writer's income hasn't gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires. The top pulls away from the median.

The same forces that have generated greater inequality in writing - the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization - are at work throughout the economy. Thus, if you really want to understand inequality today you must first understand Harry Potter.

Clearly, J. K. Rowling did not steal wealth from Shakespeare, and most readers are happy to buy her books over other authors. Both libertarian Russ Roberts and progressive Matthew Yglesias chimed in with the same idea of larger consumer pools and smaller marginal costs as a main component of inequality. Yglesias captured the idea as a justification to redistribute wealth - probably the most compelling argument for that policy idea I've ever heard.

I'd like people to shift their focus from inequality and back to the standard of living. Natural inequality does not lower the standard of living, but forced equality will as top producers will innovate less if they are not rewarded. Thwarting high wages for rare skills is a recipe for poverty, not prosperity. As Milton Friedman said:

A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.

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