Following in my illustrious footsteps as an Economist.com guest blogger, Brookings senior fellow Jason Furman writes thusly of rising income inequality:
According to the Congressional Budget Office’s income inequality data, the top 1 percent of households have seen their incomes go up by 7 percent and the bottom 80 percent have seen their income shares go down by 7 percent. In total that is a $664 billion increase in inequality, representing $7,000 for each household in the bottom 80 percent and nearly $600,000 for each household in the top 1 percent.
That number motivates a Hamilton Project tax strategy paper co-authored by Larry Summers, Jason Bordoff and myself that is being released today.
It is far from obvious what has caused the change; in just the last month alone the National Bureau of Economic Research has released three working papers with divergent explanations: a reduction in the bargaining power of workers, an increased reward for skills and worker productivity, and the destruction of good jobs by trade.
Regardless of the cause of rising inequality, lefties, utilitarians, Rawlsians and anyone with a deep-seated reverence for markets and the capitalist system should all be concerned. As Alan Greenspan memorably stated, “income inequality is where the capitalist system is most vulnerable. You can’t have the capitalist system if an increasing number of people think it is unjust.”
Well, I consider myself a sort of Rawlsian (a Rawlsekian!) with a deep-seated reverence for markets and the capitalist system. Should I be concerned? I agree with the sainted Greenspan that capitalism cannot survive a widespread conviction that it is unjust. And I agree that income inequality is one of those things that some thinkers like wheel out to try to convince us that capitalism is unjust, at least around the edges, in order to build popular support for such things as more steeply “progressive taxes combined with expanded benefits like health insurance,” like Furman wants. But I’m not so worried by rising income inequality as I am by Furman’s facile slide from income inequality numbers, which are meaningless by themselves, to the possibility of a crisis of legitimacy.
It is worth repeatedly and forcefully emphasizing that income inequality may or may not be symptomatic of injustice. The three hypotheses for rising inequality Furman mentions are perfectly consistent with advances in justice. And if they are generating income inequality, then it may vindicate capitalism. For example, the loss of jobs, a decrease in wages, or a decrease in bargaining power for some workers may be a consequence of lifting coercive restrictions on voluntary exchange across borders — restrictions that are themselves a form of injustice. Furman himself notes that protectionist policies could decrease inequality, though he advises against them, and rightly so, since they are unjust. But if protectionist policies are lifted, and inequality increases, that uptick in inequality is a side-effect of justice, not a symptom of injustice.
Inequality may reflect real injustice in our culture and institutions, and some portion of it probably does. But then our focus ought to be on rooting out those injustices, not papering them over with confiscatory redistribution which, in the absence of a reason to do it other than arbitrarily reducing measured inequality, is straightforwardly immoral.
Let’s set aside the matter of the intelligibility of “shares” of “national income” as a subject of justice for another time.
[Cross-posted from Cato@Liberty.]
In my philosophical meanderings, I’ve come to the conclusion that money is a socially-defined form of physical energy. It can be exchanged for goods and services, or in physics terms, for matter and energy. I’ve been calling it “econodynamics”, but it turns out someone already came up with that term.
How does this apply here? Well, I’ve determined that the Greeks had it backward: in the physical realm, it is not stasis and permanence that are good, but rather change, difference, and temporariness. Without differing energy levels, work cannot be done. Energy is only usable if it can flow, and it always ends up flowing “downhill”.
This means that inequality of incomes is theoretically an economic engine… and conversely, when all incomes are equal, nobody works!
Let me put it this way: there are Mexican citizens working illegally in America, without the benefits of Minimum Wage, Unemployment Insurance, and Social Security. Why? Because there are jobs here that are unavailable in Mexico, which are economically not feasible for most Americans. The inequality between America and Mexico results in money for Mexico and work done in America.
Thanks for the post! It got me thinking.
In my philosophical meanderings, I’ve come to the conclusion that money is a socially-defined form of physical energy. It can be exchanged for goods and services, or in physics terms, for matter and energy. I’ve been calling it “econodynamics”, but it turns out someone already came up with that term.
How does this apply here? Well, I’ve determined that the Greeks had it backward: in the physical realm, it is not stasis and permanence that are good, but rather change, difference, and temporariness. Without differing energy levels, work cannot be done. Energy is only usable if it can flow, and it always ends up flowing “downhill”.
This means that inequality of incomes is theoretically an economic engine… and conversely, when all incomes are equal, nobody works!
Let me put it this way: there are Mexican citizens working illegally in America, without the benefits of Minimum Wage, Unemployment Insurance, and Social Security. Why? Because there are jobs here that are unavailable in Mexico, which are economically not feasible for most Americans. The inequality between America and Mexico results in money for Mexico and work done in America.
Thanks for the post! It got me thinking.
“It is worth repeatedly and forcefully emphasizing that income inequality may or may not be symptomatic of injustice.”
For a large number of people, (maybe just those who yell it at me) non-trivial inequality is by definition injustice, at least in a system as complex as the market.
That’s why so many editorials/articles/papers just finish after the first paragraph you quote. Inequality is injustice is therefore Something We Must Do Something About.
“It is worth repeatedly and forcefully emphasizing that income inequality may or may not be symptomatic of injustice.”
For a large number of people, (maybe just those who yell it at me) non-trivial inequality is by definition injustice, at least in a system as complex as the market.
That’s why so many editorials/articles/papers just finish after the first paragraph you quote. Inequality is injustice is therefore Something We Must Do Something About.
Here are some reasons why people think inequality should be remedied with redistribution:
1) Inequality per se simply is unjust
2) We should maximize aggregate utility; poor people’s marginal utility of money is higher
3) We should maximize aggregate utility; lots of people care about poor people; thus we should redistribute because it helps poor people and makes rich people feel better due to empathy effects
4) Inequality in money causes inequality of future opportunity (education, safe neighborhood, nutrition, etc.). Thus we must alleviate the first to alleviate the second.
There are responses to all of these. (1) depends on your notion of justice. (2) I think has some truth to it; I think maximum aggregate utility is a reasonable goal to shoot for. (3) is interesting — it may not strongly argue for coercive taxation over voluntary donations; also, it may be difficult to measure the empathy effect in terms of money; finally, it is not clear that mere preference is a reasonable pretext for public policy. (4) is another reason why I support redistribution. You seem to argue that we should focus more specifically on the mechanisms (schooling, nutrition, etc.) by which having less money hurts your chances for economic achievement. That’s fair enough. Note that this is a hard thing to do, however. I am not convinced as you are that it is harmful to use money as a reasonable, temporary proxy, so long as we are committed to doing the research it takes to find out the real (i.e. more specific) causes. [Plus, as I mentioned, I can go for some redistribution because of (2)]
Here are some reasons why people think inequality should be remedied with redistribution:
1) Inequality per se simply is unjust
2) We should maximize aggregate utility; poor people’s marginal utility of money is higher
3) We should maximize aggregate utility; lots of people care about poor people; thus we should redistribute because it helps poor people and makes rich people feel better due to empathy effects
4) Inequality in money causes inequality of future opportunity (education, safe neighborhood, nutrition, etc.). Thus we must alleviate the first to alleviate the second.
There are responses to all of these. (1) depends on your notion of justice. (2) I think has some truth to it; I think maximum aggregate utility is a reasonable goal to shoot for. (3) is interesting — it may not strongly argue for coercive taxation over voluntary donations; also, it may be difficult to measure the empathy effect in terms of money; finally, it is not clear that mere preference is a reasonable pretext for public policy. (4) is another reason why I support redistribution. You seem to argue that we should focus more specifically on the mechanisms (schooling, nutrition, etc.) by which having less money hurts your chances for economic achievement. That’s fair enough. Note that this is a hard thing to do, however. I am not convinced as you are that it is harmful to use money as a reasonable, temporary proxy, so long as we are committed to doing the research it takes to find out the real (i.e. more specific) causes. [Plus, as I mentioned, I can go for some redistribution because of (2)]
Great post! Very clearly put.
Great post! Very clearly put.
What do Rawlsekians say against the argument that money is the freedom to do certain things? (freedom to buy a snazzy car, get great health care, etc.) In that case, Rawls’ minimax criterion would appear to be promoting whatever redistribution policy is empirically monetarily best for the least well-off [money isn't the only freedom, of course, so this formulation is too strong]. Clearly equality of outcome doesn’t fit the bill (it results in much less growth over time). But this seems to argue for some level of redistribution, not “arbitrarily chosen” but chosen according to the empirically applied minimax criterion.
I know you must reduce the liberty of rich people to do this, but I am not sure if this is really inconsistent with what Rawls says. (I am no expert, and you probably are, so you can take this as a request for clarification).
What do Rawlsekians say against the argument that money is the freedom to do certain things? (freedom to buy a snazzy car, get great health care, etc.) In that case, Rawls’ minimax criterion would appear to be promoting whatever redistribution policy is empirically monetarily best for the least well-off [money isn't the only freedom, of course, so this formulation is too strong]. Clearly equality of outcome doesn’t fit the bill (it results in much less growth over time). But this seems to argue for some level of redistribution, not “arbitrarily chosen” but chosen according to the empirically applied minimax criterion.
I know you must reduce the liberty of rich people to do this, but I am not sure if this is really inconsistent with what Rawls says. (I am no expert, and you probably are, so you can take this as a request for clarification).
Maybe it’s a typo or something, but a comparison like “the top 1 percent of households have seen their incomes go up by 7 percent and the bottom 80 percent have seen their income shares go down by 7 percent” immediately sets off my “dishonest advocate”/”lying with statistics” alarms. Why slightly-deniably contrast one “income” number on one hand to one “income shares” number on the other hand? Assuming both statistics are interesting, wouldn’t ordinary practice be to compare two “income” numbers (one for each bracket) in one sentence, and then to compare two “income share” numbers in another sentence?
I find it significant that it’s in the direction that, given economic growth over the period, would tend to make the implied comparison sound more dramatic than the underlying numbers actually are. The rich number gets puffed up by the economic growth over the period (because it increases income) while the poor number is chosen not to reflect growth (because growth doesn’t necessarily affect share)? That seems pretty good evidence that if Furman is a dishonest advocate, he’s a leftist. (And I hope that in this context I may be forgiven for crafting the sort of prose which misleads careless readers into a logical fallacy which says something which technically isn’t what I wrote.)
Maybe it’s a typo or something, but a comparison like “the top 1 percent of households have seen their incomes go up by 7 percent and the bottom 80 percent have seen their income shares go down by 7 percent” immediately sets off my “dishonest advocate”/”lying with statistics” alarms. Why slightly-deniably contrast one “income” number on one hand to one “income shares” number on the other hand? Assuming both statistics are interesting, wouldn’t ordinary practice be to compare two “income” numbers (one for each bracket) in one sentence, and then to compare two “income share” numbers in another sentence?
I find it significant that it’s in the direction that, given economic growth over the period, would tend to make the implied comparison sound more dramatic than the underlying numbers actually are. The rich number gets puffed up by the economic growth over the period (because it increases income) while the poor number is chosen not to reflect growth (because growth doesn’t necessarily affect share)? That seems pretty good evidence that if Furman is a dishonest advocate, he’s a leftist. (And I hope that in this context I may be forgiven for crafting the sort of prose which misleads careless readers into a logical fallacy which says something which technically isn’t what I wrote.)
Wiliam, I assumed that was just a mistake, and that he was talking about “shares” in both cases.
Wiliam, I assumed that was just a mistake, and that he was talking about “shares” in both cases.