Chapter 16 Distribution

1. Chapter 16Distribution Geog 3890: ecological economics A fat, rich, man who just ate a 16 ounce steak & a baked potato creates more demand for food when he orders an after dinner mint than a destitute child who has not eaten anything in two days. In the market, hunger is not demand for food, money is. In fact, it would not be ‘efficient’ or ‘pareto optimal’ to feed that child.

2. Outline of Chapter • Pareto Optimality • Efficiency, Scale, and Distribution • Economics as a “Positive Science”? • Distrribution of Income and Wealth • Functional and Personal Income Distribution • Measuring Distribution • Distribution and Taxation • Consequences of Distribution for community health • Intertemporal distribution of Wealth • Normative approach of Ecological Economics • “Positive” approach of Neoclassical Economics • Discounting, Psychology, and Economics

3. Global Distribution of Wealth

4. Distribution of Wealth: American Perception & Reality http://urizen-geography.nsm.du.edu/~psutton/Sutton_Courses/Geog_3890_Ecological_Economics/Miscellany/WealthDistributionArticle.pdf

5. Pareto Optimality & Pecan Pie 7 minute Video: Pareto Optimality and Pecan Pie http://www.youtube.com/watch?v=wCuI-2LI6-M • Efficiency maximized at Pareto Optimal allocation of resources by the marketplace. • This allocation is fundamentally dependent on the initial distribution of wealth • Re-distribute wealth equally & there will be no market for Lamborghinis • Efficient does not mean or imply Fair. • Economist’s typical solution to unfairness is simply to grow the economy.

6. Question: Does Pareto Optimal allocation assume a given Scale as well as a given Distribution? • Linear, areal, or volumetric scaling? (They can’t all be the same) • The size of the economy Relative to the size of the of World’s ecosystems is constrained. • Optimal Allocation assumes a given scale just as it assumes a given distribution.

7. “Positivism” and Economics • Economics prides itself on being a “positive science”. Allocative efficiency is thought to be a positive, or empirically measurable, issue, even though, as we just saw, it presupposes a given distribution. Whether or not the scale of the economy is sustainable is also considered to be a positive issue involving biophysical constraints, although normative questions of conservation for the future and other species are not far below the surface. Distributive equity, on the other hand, is a normative issue. This is the main question addressed to distribution: “Is it Fair?” Not, “Is it Efficient?” or, “Is it Ecologically Sustainable?” The question: “Is it Fair” is directly and unavoidably normative, and for that reason alone it is given minimal attention by the positivist tradition of economics. - We’ll give it some attention now 

8. Can redistribution increase total utility while being ‘inefficient’? • The Pareto Optimal criteria forbids interpersonal comparisons and summations of total utility. • The extreme individualism of economics insists that people are so qualitatively different their hermetical isolation from one another that it makes no sense to say that a leg amputation hurts Smith more than a pin prick hurts Jones. • If we abandon the Pareto Optimal ‘forbidding’ of making interpersonal comparisons we could improve the human condition by redistributing wealth.

9. Which Cat do you thinkyou are?

10. Distribution of Income & Wealth

11. Winners Take All….. • http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

12. How rich are the super-rich? A huge share of the nation's economic growth over the past 30 years has gone to the top one-hundredth of one percent, who now make an average of $27 million per house- hold. The average income for the bottom 90 percent of us? $31,244. http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

13. Capitol Gain: Do our congresspersons live on Wall Street or Main Street?

14. Functional Income Distribution • Functional Income (above) • How do Histograms on left differ in meaning?

15. Measuring Distribution: GINI coefficient I Australia: .305 China: .415 Denmark: .290 Guatemala: .551 U.S.: .450 India: .368 • The GINI coefficient is used to measure the inequality of the distribution of wealth or income across a population. A GINI coefficient of 1 implies perfect inequality (one person owns everything), and a coefficient of zero indicates a perfectly equal distribution

16. Measuring Distribution: GINI coefficient IIhttp://www.sustainablemiddleclass.com/Gini-Coefficient.html • The GINI Coefficient for the United States has risen steadily since 1967. If the current trend continues, the United States will reach a GINI Coefficient of 0.546 in about 37-years, or 2043. This coefficient is equal to the one Mexico had in year 2000. Mexico is not known for having a large prosperous middle class.

17. When is enough enough?OrWhen is the CEO making way toomuch more than the Mail Clerk? • Plato – 4x • Ben & Jerry – 5x • U.S. Today - 500x • Back to Slide #4… • Americans think it • Should be about 3x

18. Distribution & Taxation Can you find Krugman’s “Gilded Age”, “Middle-Class America” and “Great Divergence” in the figure above?

19. Consequences of Distribution for Community and Health • Do societies with lower GINI coefficients have better Health outcomes? • The answer is – YES , according to: • Richard G. Wilkinson (Richard Gerald Wilkinson; born 1943) is a British researcher in social inequalities in health and the social determinants of health. He is Professor Emeritus of social epidemiology at the University of Nottingham, having retired in 2008. He is also Honorary Professor at University College London. • He is best known for his 2009 book (with Kate Pickett) The Spirit Level, in which he argues that societies with more a equal distribution of incomes have better health outcomes than ones in which the gap between richest and poorest parts of society is greater. His 1996 book Unhealthy Societies: The Affliction of Inequality had made the same argument a decade earlier. 4 minute video on “The Spirit Level: http://www.youtube.com/watch?v=jsEZr3s1aBA

20. Inter-temporal Distribution of Wealth • Seven generation sustainability is an ecological concept that urges the current generation of humans to live sustainably and work for the benefit of the seventh generation into the future.It originated with the Iroquois - Great Law of the Iroquois - which holds that it is appropriate to think seven generations ahead (a couple hundred years into the future) and decide whether the decisions they make today would benefit their children seven generations into the future. • Ecological Economics – (Intergenerational Justice) • Mainstream Economics – (Intergenerational Allocation) • Evolution of the ethical question from: • How much should we sacrifice to make the future better off? To • How much whould we sacrifice to keep the future from being worse off than the present?

21. Ecological Economics take…. • The generation into which someone is born is based entirely on chance. There is therefore no moral justification for claiming that one generation has any more right to natural resources than any other. At the very least, future generations have an inalienable right to sufficient resources to provide a satisfactory quality of life. The current generation has a corresponding duty to preserve an adequate amount of resources. • Limit Fossil Fuel use to at least the waste absorption capacity of the biosphere. • Minimize generation and dispersal of garbo-junk • Develop substitutes for consumed non-renewable resources • Harvest biotic stock flow resources at less than MSY

22. The “Positive” approach of NCE • Objective decision rule for intergenerational allocation: Intertemporal Discounting • People Prefer Things NOW. Why? • Impatience • Uncertainty and of course – Death (PRTP) • Opportunity Cost – Could at least have made interest on it • Richer Future argument – diminishing marginal utility • Pure Time Rate of Preference (PRTP) • The primacy of the Discount Rate and Net Present Value (NPV) calculations.

23. Intertemporal Discounting and Global Climate Change • High Discount Rate (~6%) – No Justification for reduction in greenhouse gas emissions • Low Discount Rate (~2%) – We should make substantial investments to reduce impacts of global warming • High discount rates favor projects with costs put off to the future with benefits now. • Is choosing a discount rate an art or a science, a normative or an objective question?

24. Discounting Reconsidered • People Die. • Societys don’t (societal existence continues indefinitely) • This is a serious difference. • Consequently social discount rates should be lower than individual discount rates. • The complementarity of Natural and manmade capital coupled with the law of diminishing marginal utility suggests we should apply a negative discount rate to Natural Capital.

25. Hyperbolic Discounting This web site provides best explanation http://www.paulchefurka.ca/Hyperbolic%20Discount%20Functions.html Why is it so difficult to generate concern for events that are seen as belonging to the future even though their consequences may be dire?  Why is it so easy to generate concern for much smaller events that are happening right now?  Consider the outpouring of generosity that happens when a local family without insurance is burned out of their home.  In a single day the community will respond more than they would to a year's worth haranguing by Peak Oil activists.  A recent article on the web site "The Oil Drum" sheds some light on why this happens, and it's as simple as it is surprising.

26. Distribution is fundamentally different from allocation, and, consequently, justice replaces efficiency as the relevant criterion for policy when time periods become intergenerational.