Paul Graham’s “Inequality and Risk”

In reading Ed’s blog today, I ran across a post that raised some issues that I can’t help but respond to.

So let’s think about Graham’s essay. The gist of it seems to be that high taxes on the rich makes start-ups not worth the risk for venture capitalists because they just don’t pay off well enough. Thus we shouldn’t overtax but we should make the use of wealth transparent so that wealth doesn’t result in great power.

I’ll take the second assumption first and make a couple comments. First, the idea of logging all transactions sounds pretty good. It allows a person to see what wealth affects and it’s already in practice in the form of being able to check who gave what donation to which politician. So presumably we’d take this a little further. I’m curious as to how far though, and, who does the watching. The government? Private firms? Also, what’s transparent? Is every ATM transaction open to everyone’s inspection? Is it limited to people with wealth or am I included?

In all honesty, I don’t really think it’d be possible to monitor financial transactions to the point that everything’s transparent. Even if we could, I’m not convinced that living in a society where everything’s transparent is automatically desirable (I’m open to it though).

Even if we could monitor transactions to the point that wealth’s effect could be monitored, I don’t think that we could monitor the connections between wealthy people. As in “Bob” went to college/is related to “Joe” who’s sister is married to a senator or something. That’s the sort of connection that can get people favors. Monitoring that sort of thing would be hard or impossible.

That being said, let’s get back to the first issue then… I think Graham’s right in that if you tax too much, you do discourage investment and you probably do discourage innovation.

However…

What I’m not sure about is what sort of policies he’s imagining when he talks about shifting money from the poor to the rich, or for that matter, what he means by poor. Is it using exorbitant taxation to move all the poor into a better economic bracket? Or is he against paying to move people off the streets and into homeless shelters? Or is it simply any policy that causes taxation of the wealthy to go past some magic number of return on investment?

Just for the record, I tend to think that exhorbitant taxation seems more likely to result from war and natural disasters for the near future. Even if Bush refuses to raise taxes, we’re going to either have to either pay more or spend less to get rid of the debt. Either way, social spending is likely to be less of a priority for a while.

As such, I’d like to balance the thought that exhorbitant taxation on the rich reduces innovation against another thought: Unmet physical needs also reduce innovation.

Maslow’s hierarchy of needs posits that people need to met certain minimum physical needs before they can concentrate on education and creative, risky ideas. I think the theory’s likely to be right in its general assumptions even though I might want to quibble with what Maslow regarded to be the highest of human needs.

To my mind what matters is the kind of inequality. Inequality isn’t so bad if it means that Bill Gates is exceptionally wealthy but a large group of “poor” people exist that have enough to eat, have air conditioned apartments and can pay their bills. Inequality is very bad thing if it means that there is a large group of poor people living on the streets, having only emergency room healthcare, or digging through dumpsters for food.

The good news is that our proportion of the former sort of poor people is larger than the latter. The bad news is that the latter sort of poor people still exist.

We lose the potential innovation of all those people scrambling for basic survival as long as their basic needs aren’t met. When they don’t have food on the table, they aren’t coming up with the next innovation in online commerce.

What I wish I knew was how long people typically stay in poverty in the US. Also, what effects does growing up in poverty have on a person’s future ability to think and create?

What I’m saying is that taxes vs. profit is a very narrow window to consider the topic of economic inequality under. It may well be that once a person brings the damage of poverty on a person’s potential into the equation, you might find that higher taxes would be a better choice.

I’m not saying I know the answer, I’m just pointing out that there’s more to be considered than taxes and their effect on venture capitalists.

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