The Heterogeneity of Preferences for Pecuniary vs. Nonpecuniary Goods

by Reihan Salam

Greg Mankiw, drawing on the work of Matt Weinzierl, says it better than I ever could:

[O]ne reason that people differ in their incomes is that some people care more about having a high income than others. To put it in geekspeak, preferences over pecuniary goods (say, consumption) and nonpecuniary goods (say, leisure) are heterogeneous. Bryan [Caplan] goes on to suggest that to the extent this is true, it weakens the case for income redistribution. 

He is absolutely right.  Most of the literature on optimal taxation and redistribution, following Mirrlees, assumes homogeneous preferences.  But Matthew Weinzierl has a recent paper on preference heterogeneity, which shows “ to the extent that variation in income is due to preference differences rather than productivity differences, the optimal extent of redistribution is lower, and the neglect of preference heterogeneity biases the results of conventional optimal tax analyses in favor of redistribution of income.” 

This is my entirely data-free version:

This is why an understanding of class based solely or even primarily on income is so flawed. Income fluctuates from year to year, particularly for the highest earners. What is more durable is the potential to earn income, which can be deployed or not deployed. A highly skilled person might choose to deploy said skills to earn a high income or to consume leisure. As female labor force participation has increased, for example, male labor force participation has decreased, both due to rising incarceration rates and other factors suppressing formal labor force participation among the less-skilled and as skilled and affluent men “consume” more leisure, more time with children, etc. This is a choice that involves trade-offs. And we are in a sense living through a cultural war in which some who’ve chosen, say, more leisure and prestige are waging a symbolic struggle against those who’ve chosen more income — the object is to devalue the accumulation of material possessions, to characterize it as “greedy,” etc. Indirectly, the proximate goals are to extract more tax revenue to finance public sector work that, in some but not all cases, offers relative stability if not very high cash incomes. Naturally, risk-averse people and people who are inclined to embrace the “greed” narrative are more inclined to sort into public sector work while risk-taking people who, say, like the idea of achieving some modicum of economic stability for their families by building their private wealth will be more inclined to sort into lucrative private sector work. But a risk-averse individual may nevertheless be a very privileged one in terms of cultural capital, while a risk-taking individual might be much less so. 

The sociologist Gabriel Rossman recently made a related point, which I hope I’m not botching: non-dischargeable student loan debt can be understood as a kind of “unimproved land tax” on human capital. That is, if you choose not to use your human capital to maximize your income, you will nevertheless be saddled with a non-trivial debt burden. This might incline you to gravitate towards more lucrative career options, regardless of your underlying preferences.

Means-tested student loan debt forgiveness, in contrast, can be understood as a subsidy for graduates who prefer nonpecuniary goods over pecuniary goods. Those who prefer pecuniary goods will have to bear the burden of the debt forgiveness, either directly through tuition repayment or through the channel of income taxes. A steeply graduated income tax is, suffice it to say, strongly biased towards those who prefer nonpecuniary goods.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.