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What kind of society would you desire if you had to enter it cold, sight unseen? The classic example: What would have been the opinion of antebellum slaveholders if there were an equal chance they would enter society as a slave owner or a slave? The “veil of ignorance” is a common philosophical thought experiment for helping determine the ethics of social arrangements or of an optimal social contract. More to the point today, what sort of modern welfare state would you want if you had an equal chance of possessing the sort of innate skills likely to gain you a high income in a particular society as of not having those skills? You might, perhaps, want a social contract that includes income transfers from high skill to low skill. A social contract with social insurance. But an interesting new paper out of the Minnesota Fed by V. V. Chari and Christopher Phelan wonders about incentive effects:
For instance, policy mechanisms that transfer income from highly skilled people to those with low innate skills frequently require progressive income taxes. Such policies affect incentives regarding the acquisition of skills through effort and education. If high incomes are highly taxed, high-innate-skills individuals may have less incentive to get, say, a medical degree. Economic arrangements seen as best using the behind-the-veil criterion typically trade off such output losses against the “insurance” or welfare gains associated with transfers. … A rich-country policy to tax high incomes will redistribute income (within that country) from those with high innate abilities (and, by assumption, with the ability to become highly skilled) to those with lower innate abilities. In so doing, that policy will reduce inequality within the rich country, but it will also create disincentives there to becoming highly skilled and thereby reduce the global supply of skilled workers. This reduced supply of skilled workers from the developed country then reduces opportunities for young workers in the poor country to become skilled. … We conclude that using the behind-the-veil-of-ignorance criterion to advocate for redistributive policies within developed countries while ignoring the effect of these policies on people in poor countries violates the criterion itself and is therefore fundamentally misguided.
Take the issue of trade. Many free trade opponents in advanced economies point out the economic impact on low-skill workers from having to compete with counterparts in emerging economies. But maybe this should count, too, as Chari and Phelan explain: “According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent. This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.”
Likewise, what are the ethics of a certain set of policies that could make it less likely the US would generate innovative, risk-taking people and companies that (a) provide opportunity to low-income overseas workers and (b) technologies that can be spread to lower-income nations and boost economic growth? As the Financial Times recently noted, one study suggests that corporations only keep about 4% of the social value of their innovations.