Thursday, September 07, 2006

The X% (or 1%) Question -- My Response

Tony V. has outlined his response to the question he and I both posted about last week:

Given the opportunity of accepting an additional million dollars of salary for as long as you work or anonymously increasing the income of every person in country Z (we settled on China for the purposes of our discussion) by X%, how large does X need to be in order for you to consider giving up the millions of dollars?
For him, X is greater than 10. That is, incomes in China would have to increase by more than 10% for him to forgo the million dollars/year.

For me, X is less than 1.

First, I believe many people would notice and value a 1% increase in their income. While I think it is possible that some people – particularly those, like me, whose monthly income far exceeds monthly expenses – would not notice a 1% change in income, most people’s basic consumption keeps them close enough to their budget constraint that I cannot believe that they would fail to notice and appreciate an expansion of their budget set. People who live close to their means tend to be acutely aware of how much money they have at all times, and, even in our very rich country, many people expend a great deal of effort to increase their incomes by 1% -- clipping coupons, recycling bottles and cans, shopping at second hand stores, and engaging in a host of other “penny pinching” behaviors – because their current incomes are inadequate to provide enough food, clothes, medicine, or Christmas presents for their children. I cannot imagine that the hundreds of millions of poor Chinese are any different.

Tony V. is correct to point out that framing will affect precisely what the transfer gets spent on and how happy it makes people (e.g., there are differences between giving people this transfer as a lump sum versus slightly changing their weekly salary, the prices they pay, or their tax rates), but regardless of how it arrives, in the end, it will be translated into 1% more goods and services (including more saving or less debt). (Maybe some of my readers with Chinese backgrounds might be able to help make this more concrete by describing what they think a 1% increase in Chinese incomes might get spent on for people at various points in the income distribution.)

Second, unlike Tony V., I do have an additive component in my social welfare function. That a billion people live in China matters. Even if each individual Chinese person is only slightly better off, a small amount multiplied by a billion quickly becomes a very large amount. I just can’t ignore this.

One person at dinner argued that, even if I didn’t think that my marginal utility of an additional million dollars was that high, the world would be better off if I took the million and divided it among the N poorest people in China (or bought 50,000 mosquito nets for Africans or something). I am unconvinced by this approach. I just don’t think a million dollars can buy me or even people much poorer than me a great deal of happiness relative to the $70-90 BILLION dollars being giving up. I just simply don’t believe that the world is better off adopting a scheme that essentially levies a 1% tax on all income in China, takes $69,999,000,000 of the money raised and sets it on fire, and then takes the remaining million and gives it to the poorest people we can find. (Technically, there is a slight difference between taking 1% away from Chinese and preventing them from earning an additional 1%, but hopefully you get the idea.)

I guess this all means that, at least when the magnitudes are this large, I prefer something closer to a utilitarian social welfare function (sum up utility) over a Rawlsian one (maximize the welfare of the lowest member of society). I know that I am not consistent in this preference. There are certainly situations where I would be willing to “burn money” in order to make unfortunate people better off, but the “waste” in this scenario is much too large.

So, at least when China (or India) are involved, my X is less than 1 percent. Where precisely, I am not sure, but it is probably pretty well under 1 percent. I have no reservations about my choice.

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