Category Archives: Inequality

New at Cato Unbound: Charles Murray vs. the B.A.

Posted on by

Charles Murray argues that idea that everyone should get a four-year college degree is the bunk.

Here’s this month’s sales pitch:

Universal college education is often held up by politicians and pundits as a heady ideal of social progress. Economists insistently point out the “wage premium” for college graduates and infer that a main route to greater social and economic equality is an increase in college enrollment. Barack Obama, probably America’s next president, has put forth a plan for meaty tax credits  “for Americans who need a hand with tuition and fees,” because, as he says, “I do not accept an America where you can’t achieve your potential because you can’t afford it.” But does this really make sense? Do you really need a four-year college degree to “achieve your potential”? Is more college for more people really such a guaranteed ticket to greater opportunity and equality?

In this month’s Cato Unbound, the American Enterprise Institute’s Charles Murray, who knows something about ruffling feathers, argues that the BA degree isn’t all its cracked up to be, and urges us to adopt a system that stops pushing everyone to get a BA, whether they really need one or not, and starts offering a wide array of certification exams that signal competence without requiring years of college and thousands in debt. Lined up to reply are economist Pedro Carneiro of the University College, London, an expert in “human capital”; economist Bryan Caplan of George Mason University, who suspects that value of higher education is more about signaling than the cultivation of skill; and education policy expert Kevin Carey of Education Sector.

Carneiro is a frequent co-author of Nobelist James Heckman. His retort to Murray will be available in the morn. The idea that increasing rates of college enrollment is a key to reducing wage inequality is extremely widespread among labor and education economists. If Murray’s right, it would seem that lot of fancy economists aren’t.

The Trend in Real Inequality: More Evidence

Posted on by

Here’s the working paper [pdf] by Enrico Moretti at Berkeley:

Abstract. A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by diff erences in housing quality and is robust to a number of alternative specifications.

The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers’ standard of living is offset by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.

It’s great that we’re seeing more of this kind of conceptually sound work on inequality.

[HT: Bob Subrick]

The Benign Rule of Ben Bernanke and the Ideal of Democratic Equality

Posted on by

Tyler Cowen writes, “The economic fallout from these events [the crashes, the bailouts, the nationalizations] is dominating the headlines.  The intellectual and ideological fallout we are just beginning to contemplate.” Here’s what I’m beginning to contemplate.

If a high level of income inequality is a side-effect of voluntary exchange according to just rules, then what’s the problem? Market liberals tend to suspect there is no problem. What I’ll call “democratic liberals” think there’s a huge problem: the threat of economic inequality to democracy. Market liberals support democracy and democratic liberals support markets. The main disagreement, I am convinced, concerns views over the point of democratic institutions and their function in securing liberal values.

Some apparent democratic liberals are so fixated on the intrinsic value of deciding things collectively that any liberal commitments they may have turn out to be completely incidental. (Benjamin Barber is a good example. There’s a good bit of liberal rhetoric, but he is a Rousseauvian “forced to be free” democratic communitarian — a straightforwardly illiberal view in my book.)  I think of those people as “democracy fetishists” and I set them aside.

Non-fetishistic democratic liberals see a certain ideal democratic system as either instrumental to or constitutive of a society guided by authentically liberal values. In either case, sound democratic institutions are necessary to the security of our basic liberties. Democratic equality, according to which each citizen has an equal voice in determining the rules under which they must live, helps ensure that no group is able to dominate, oppress, and exploit other citizens. “One man, one vote” is a fundamental principle of democratic equality, but it’s usually seen as insufficient. Adult citizens may be on equal footing when it comes to votes, but we are very far from equal in “political resources” — all the means at our disposal for shaping the ultimate product of the democratic political process. Campaign finance rules are generally meant to secure relative democratic equality by limiting the inequality in certain political resources. One of the chief arguments for public financing of primary education is that citizens require some development of their intellectual capacities and a certain fund of knowledge in order to be able to effectively defend their interests in concert with others my means of the democratic process.

And then there is the idea that simply limiting economic inequality through redistribution will limit inequality in political resources, and thereby limit the ability of the rich to rig our institutions to their advantage. Paul Krugman, an archetypical democratic liberal (and one who understands markets very well, thank you), thinks this is already happening. For Krugman, it is so urgent to combat economic inequality because the liberties of most are threatened if the super-wealthy few are able to capture the institutions meant to secure the liberties of all.

But I don’t get it. First, there is often an assumption of class interest that is clearly false. The self-interested voter hypothesis does not do well generally. And the wealthy are very far from unified in their politics. As Gelman et al point out, the poor tend to vote pretty much alike (Demmocrat) but the rich are quite divided. Judging from their book, the best way to cut it I think is this: rich people who go to church are Republicans. Rich people who don’t are Democrats.  But isn’t this a distraction?

It seems to me that money is a relatively insignificant source of inequality in political resources. I’ve shared a house with two different guys who have clerked for the Chief Justice of the Supreme Court. Those guys probably had more influence in determining the effective policy of the U.S. government, just as a matter of doing their day-to-day work, than it is ever possible to buy with campaign ads. A JD from Yale, Harvard, Chicago, etc. is a ticket to professional networks that exert immensely disproportionate influence on the political process. Or consider Tyler’s other former debate partner, Randall Krozsner, now on the Fed Board of Governors. Could the wealthiest man in the world hope to influence American economic policy more than Krozsner? Unlikely. Indeed, Ben Bernanke’s Fed is basically unilaterally controlling the American and world economies without asking any of us for input. But the point is not the Bernanke is the most powerful man in the world. The point is that MIT and Harvard economics Ph.D.s have political resources that money cannot buy. Neither Marty Feldstein nor Paul Krugman need be in government to matter more to economic policy than a billionaire could dream. I don’t mind this. I like the technocratic elitism of the U.S. economics and legal bureaucracies. But then it’s hard to get exercised simply because some people are really really rich.

It strikes me as comical that our economy is now more or less ruled by a benign technocracy almost entirely outside democratic control, but most democratic liberals choose to complain that some billionaires are getting bailouts. If the problem with economic inequality is the threat to democracy due to large inequalities in political resources, shouldn’t democratic liberals be freaking out over the fact of the Federal Reserve, or about the immensely disproportionate influence on public opinion and policy by New York Times columnists and ulta-elite academic economists? It seems to me that if you’re not completely fliping out over these things, you can’t be genuinely interested in democratic equality. So if you insist on flipping out  over income inequality anyway, it can’t be a certain ideal of democracy that’s animating you. You’re going to need a different story to tell.

Here’s my story. Roughly meritocratic inequalities in political resources are OK. We want the democratic process, which cannot be counted on to yield high-quality policy, to be constrained and guided by legitimate experts. But then if wealthy people are better-educated, and better-educated people are more likely to make quality decisions about policy, than a democratic system more responsive to the wealthy than to the poor is more likely to deliver quality  policy (i.e., policy that does what it is intended to do). And if wealthy, better-educated people are more likely to be committed to liberal values overall, and there’s evidence that this is the case, then money-based inequalities in political resources may deliver liberal goods more reliably than a system under strict and comprehensive democratic equality.

War (on Poverty) is Over, If You Want It

Posted on by

Please listen to Christian Broda, from this profile in the American :

We are underestimating the gains from trade…The current statistical interpretation ignores the fact that a poor household today can access goods that, in the 1960s, they could not—microwaves, DVDs—and, more importantly, that the prices of the staples that lower-income households consume have also gone down dramatically.

[...]

In the ’60s, all the talk was about trying to win the war against poverty… The bottom line with our study is that we may have won the war against poverty without even noticing it. Here we have Congress debating why the poor in America haven’t been able to grasp the great economic growth we’ve seen in the last 30 years. ‘It’s been only concentrated in the top 1 percent,’ they say. And, absolutely, that segment has grown a lot. But that doesn’t mean that the poor haven’t been able to access part of that progress.

Will anyone listen? Stagnant real wages and skyrocketing inequality have a kind of  truthiness irresistible to the papers and the partisan wonks. If that story, the premise of a few too many badly argued op-eds and books, turns out to be based on a series of mistakes, I fear there will be no rush to admit to them.

Inequality and Politics

Posted on by

Commenting on Larry Bartels’ Unequal Democracy, Frank Pasquale writes:

We are frequently told that inequality–even the extreme growth in inequality witnessed over the past 30 years–is an inevitable concomitant of globalization, or is necessary for economic growth, or can’t be remedied by politics. Bartels’ work complements the growing consensus–led by people like David Cay Johnston, Jacob Hacker, Stephen Gosselin, Barbara Ehrenreich, among many others–that all these complacent contentions are not merely unsupported, but actually reverse the true causes and effects at work. Political change has accelerated US inequality–and only political change can address it.

I don’t know who Pasquale thinks he’s addressing. No one thinks we can’t use politics to redistribute our way to lower levels of income inequality. The question is: Why do this? What’s the problem to which this is the solution?

I feel like there is an unarticulated doing/allowing issue floating around in the background in this debate. Say the U.S. Congress cuts top tax rates. Is this politics causing higher inequality? Or is this evidence of relative indifference about allowing higher inequality? The left has the tendency to characterize every policy that might allow income inequality to rise as one intended specifically to have this result. This is a lot like the right’s characterizing, say, workplace safety regulation as a specific attempt to stymie the growth of small business. In each case, those opposed to a policy see its side-effects as more salient than the primary effects intended by those who favor it. Imputations of bad faith — “you’re really after the side-effect and your stated intention is garnish for malice” — are never far behind. Having read most of the recent left-leaning literature on the politics of rising inequality, it is disconcerting to see the argument from malicious bad faith as far and away the dominant narrative. It’s hard to find anyone who even tries to fairly understand the ideas behind the recent American right’s preference for policies that do in fact tend to allow greater income inequality. Am I wrong to find this pathetic?

Happiness Inequality

Posted on by

Read Justin Wolfers first in a trilogy of posts on U.S. happiness inequality at Freakonomics.

Also check out Eduardo Porter’s account of Stevenson and Wolfer’s paper:

It seems odd that happiness would become more egalitarian over a period in which the share of the nation’s income sucked in by the richest 1 percent of Americans rose from 7 percent to 17 percent. In fact, the report does find a growing happiness gap between Americans with higher levels of education and those with less, which is roughly in line with the widening pay gap between the skilled and unskilled.

The Argument for Preemptive Redistribution

Posted on by

The author of the Economics of Contempt has published a thoughtful and stimulating post about some of my views about inequality. He concludes this:

Wilkinson seems to be of the opinion that unless U.S. income inequality is benign unless it was produced by some inefficient or unfair mechanism. He also seems to think that absent evidence of an inefficient or unfair causal mechanism, no policies should dare attempt to reduce U.S. income inequality. This is also wrong, for the very same reason: if income inequality is high enough to permit government capture by the wealthy at the expense of the rest of society, the high level of income inequality is inefficient, regardless of the mechanism that produced the income inequality.

I’ve thought a lot about this. My conclusion so far is that questions about the justice of the mechanisms that lead to observed economic patterns really does exhaust the field of questions about distributive justice. There is no independent worry about patterns themselves having bad effects, because the bad effects Economics of Contempt and many others have in mind just are mechanisms or exploitation enabled by government capture. The argument on offer here is an argument for preemptive redistribution. We have to redistribute so that injustice doesn’t occur. But this kind of argument, like arguments for preemptive war, face a high bar. You need to be pretty convincing that in the absence of preemptive action, something bad will occur. I think egalitarians almost never get over that bar.

I emphatically agree that political predation is unjust. Indeed, it is a (perhaps the)  chief cause of inequality in many of the world’s most economically unequal countries. But, obviously, it doesn’t follow that because state capture and political predation generally cause high levels of income inequality that high levels of income inequality cause state capture and political predation. To make that inference requires a lot of supporting assumptions, most which strike me as false.

First of all, the level of income inequality in Denmark, which has the lowest Gini coefficient in the world, is high enough to permit government capture by the wealthy were the wealthy to effectively coordinate. The question is whether they want to. They don’t. Suppose Denmark cut taxes at the top, to unleash a little more entrepreneurial energy, and cut the generosity of some welfare benefits, in order to, say, keep some people from fraudulently collecting disability checks or staying in college forever, or whatever problem they may be facing in the design of their scheme of social benefits. And suppose these changes increase income inequality directly and also indirectly by increasing growth, the benefits of which disproportionately effect incomes at the top. Is the hypothesis that Denmark’s odds of government capture by the wealthy has just gone up?

Likewise, were we fiscally to lop off the heads of the tall poppies in the U.S., the Gini would drop, but it seems the effect of this on the odds of class-based government capture are basically nil. If all the now slightly less rich people wanted to band together and capture the government, they could still do it. The conspiracy would not be demoralized by a Gini of 30 instead of 40. What’s the evidence that preemptive redistribution would preempt anything? Why not suppose instead that when taxes on the wealthy rise, the wealthy become more interested in controlling the government?

None of this not to say that various individuals and corporate interests do not try their damndest to use the government to enrich themselves; they most certainly do. But rent-seeking is a largely a zero-sum game that puts some rich people at odds with other rich people (and the rest of us). The billionaires investing in green technology companies while lobbying madly for regulations to mandate their products are trying to put other billionaires out of business. Etc. The rich do not uniformly see their interests in terms of being rich, and the political preferences of the superrich are far from homogenous. Anyway, even if the rich do not act as a class, it’s true that rich individuals can do a lot more to rig government policy in their favor than can poor individuals. The straightforward implication is that the more power the government has to pick winners and losers, the more power rich people will have relative to poor people. The incentive to capture is a function of the value of the thing captured, not of the the means to do it.

EoC’s suggestion that the Bush tax cuts are evidence of government capture strikes me as silly. The tax cuts are evidence of the fact that Republicans like tax cuts — evidence of the fact that most Republican voters think tax cuts are morally required and are good for the economy, and that Republican politicians think tax cuts are good politics.

Of course, if the Bush tax cuts increased final income inequality, which they probably did, and income inequality gives the wealthy a firmer grip on government, then you’d expect this sort of thing to be a one-way ratchet. But Barack Obama is probably going to get elected and raise taxes considerably anyway. If it is possible for Obama and a Democratic Congress to become elected under historically high levels of income inequality, and to raise taxes and increase transfers, is this evidence for or against the imminence of a plutocracy that calls for preemptive redistributive action?

Oh, You Didn't Want to Decrease Inequality That Way?

Posted on by

Judging from the comments, Marketplace listeners do not seem all that receptive to the standard explanation of growing wage inequality, nor to the idea that limits on H1-B visas constitute a subsidy to domestic skilled workers that exacerbates the wage gap. Anyway, that’s what I argued today. Here’s my conclusion:

These days, almost everybody but their beneficiaries think agricultural subsidies are a lousy idea. They benefit a few already relatively wealthy American farmers and agribusiness firms to the detriment of poor farmers around the world. But H-1B visa restrictions are subsidies that benefit relatively rich domestic workers over their poorer foreign peers, and so it turns out many of us liberal-minded college grads are enjoying our own protectionist boost.

In this case, it seems the moral outrage is… well, we seem to be keeping it to ourselves.

And not only are we keeping the moral outrage to ourselves, it is apparently morally outrageous to address inequality by actually addressing the mechanisms that cause it — the relation between the supply and demand of skill — if that involves making some foreigners a lot wealthier.

By the way, I do not endorse the headline, “U.S. should import more skilled workers,” which of course I did not choose. If you dammed up a river, then found you had too little water downstream, and so released a bit of water from the dam, you could think of it as “importing more water.” Or you could think of it, more accurately, as removing the artificial barrier to supply.

J.R. Lucas on Equality and the Multidimensionality of Status

Posted on by

How Have I Never Read this Paper? J.R. Lucas, “Against Equality, Again,” Philosophy 52, 1977, pp.255-280:

We can object to strictly hierarchical societies on the grounds that those on the bottom of the hierarchy—the serfs, the villeins, or the prison-camp slaves—are accorded no respect at all. But we should remedy this by having more than one hierarchy, and, in so far as any one ranking system is dominant and generally accepted as constituting the social order, demanding that those who are deferred to should make manifest their respect and consideration for those who render them services.

The argument can, in part, be transposed to a lower key. Two inequalities are better than one. It is better to have a society in which there are a number of different pecking orders, so that a person who comes low according to one order can nevertheless rate highly according to another. One advantage that English society used to have over American was that whereas in America wealth was the only criterion, in England social standing was largely independent of wealth, and could, therefore, act as a corrective. More generally, it is good that there should be an athletic hierarchy besides the academic one, so that boys who are not blessed with brains may nevertheless be, and feel themselves to be, the stars of the football field. A man may not be a great success economically but still can be a big noise in the Boy Scout Association or the pigeon fanciers’ club. So long as we have plenty of different inequalities, nobody need be absolutely inferior. It is only if, in the name of equality, we set about eliminating them all, that we shall succeed in eliminating many of them and thereby make those that remain far more burdensome.

Egalitarians are angered when the argument from Universal Humanity is called in aid of inegalitarian conclusions, and produce vehement counter-arguments against it. They will not accept that the college servant is really better off than the prosperous proletarian, however much happier he may subjectively suppose himself to be, because the mere fact that the society recognises a difference in status between the college servant and, say, the fellows is itself an affront to human dignity. If we differentiate at all between one man and another on account of the social functions they fulfil, then we are no longer regarding them as men but merely as performers of certain roles. The bathroom attendant may think that he is valued for himself alone, but he is wrong; he is valued merely as a cleaner of baths and lavatories, merely as a pair of hands, merely as a useful automaton and not at all as a person, a child of God, a human being, an immortal soul, the bearer of an eternal destiny. This argument has powerful emotional appeal, but it is confused. It confuses the minimal and the maximal respect we may pay to a human being. Whatever a man does, whatever contribution he makes to our well-being, whatever his achievements, he is more than merely a doer, a contributor, an achiever, and I do not respect him properly, if I respect him merely as a doer, a contributor, or an achiever. If I am to respect him fully, I must respect him for himself, rather than merely as someone who satisfies certain specifications, just as a girl feels that she is not really loved unless she is loved for herself alone, and not her yellow hair. But only God can do that. In an imperfect world limited mortals have only limited respect for most other people. The respect which affords a basis for political argument is not a maximal respect we can aspire to but seldom achieve; rather, it is a minimal respect which we all ought to pay to everybody else. It does not exhaust the whole of political argument, but simply provides an incontrovertible starting point. I respect another man’s humanity by observing a certain set of minimum conditions towards him—by not killing him, by not torturing him, by not leaving him to starve by not depriving him of civil rights—and it is important to see these conditions as minimum conditions which must be fulfilled rather than as maximum conditions to which we should aim but which we cannot be blamed if we fail to achieve. If we set our sights too high, we shall secure nothing.

Yup. The multiplication of inequalities through the multiplication of status dimensions is perhaps the chief way in which liberal market societies achieve rough equality of status. It’s counterintuitive but true: more ways of being unequal in status increases the chance of enjoying high status and reduces the chance of being humiliated by inescapably low status. That many egalitarians are so eager to sniff at this is, to my mind, an indication that many of them aren’t so much concerned with the inequalities that matter most to most people. The motivated thinking seems to go something like this: If the best means of bringing everyone up to a minimum of status or a minimum sense of self-respect needn’t involve a lot economic leveling, then pride in being the president of the local PTA must be self-deluded crap. But where’s the respect in that?

Of course, most egalitarians see the minimum equality of respect implied by an equality of rights as too little. I guess I do too. I demand a somewhat more substantive equality in the sense that each has the necessary means to exercise her rights in a worthwhile way. We don’t respect others in this minimal sense if we don’t care whether it seems pointless to them to dream up some relatively long-term plans, because they doubt whether they will be able to act effectively to enact them. But we don’t give people that respect by politically “guaranteeing” them these means, either, because there is nothing in the nature or history of government to cause us to believe it is specially competent to make good on them. We give people their due portion of respect by attempting to maximize the probability that they will have these means. That’s likely to require both private and public assistance, but there’s no way to honestly guarantee that people need it will get it. We can say anything we want. What matters is what people get. The closest we can get to a guarantee is by cultivating a system of institutions that maximizes the production of wealth.

And it happens that this kind of system is one of mind-boggling task specialization and spatial distribution–a system that gives almost everyone a way to make things better for others, a system that implicates almost everyone in the process of wealth-creation that is as close as we come to a guarantee. In a market system, when we do our jobs, we help to provide for others–we help make available to others the means for building a life–in the way that respect requires, and this in turn gives us reason to respect people who do their jobs. Respecting someone as “a doer, a contributor, or an achiever” is no small thing.

In addition to supplying meaningful work that allows each of us to contribute in some real way to the welfare of others, successful market cultures create a climate for proliferating communities of affinity, much like the Great Barrier Reef creates a climate for a teeming proliferation of exotic sea life. On the job and in our “scenes” is where most of us get our quota of status. Our jobs and our standing in our multiple elective communities provide us grounds to respect ourselves and grounds for others to respect us. When we pretend not to see a beggar making an appeal, we do not treat her as an equal in even this small way, perhaps because we suspect she has done too little to merit even a quantum of respect. It is not really so hard to look someone squarely in the eyes, in the way a person acknowledges another’s personhood, but it is easier when we are all part of a joint enterprise of cooperation, improving life infinitesimally but actually for one another. And it is easier to confidently to hold another’s gaze, to feel an equal, when you are in your own small community, in your own small way, somebody. Because it doesn’t seem small to you.

But that’s all sort of beside the point. Because our government’s actual respect for its subject’s “merely formal” political rights is so sorry that it seems that Lucas’ “minimal respect” is fairly demanding after all, and there’s really nothing morally unambitious in aiming at this kind of liberal equality.

Class War!

Posted on by

Time interviews Barbara Ehrenreich:

Some argue that today’s basic standards of living surpass anything the nation has enjoyed historically. What’s your response to that?

Well, I certainly wouldn’t want to live in the 18th century myself, or the 19th either, for that matter. I am operating on a slightly smaller time frame here and thinking that there has been a real increase in inequality since the 1970s. In recent years we have seen stagnation in average people’s wages and salaries and a decline in the benefits they get from their employers. So in recent years I don’t think we have been fulfilling that kind of potential that historically we have always felt was America’s.

What do you think are the primary causes of that?

I think it’s class war coming from the wealthy, from the top really squeezing workers, trying to get more and more out of them.

Not from from international competition and globalization?

I think that’s been an easy excuse for a long time. Anything you don’t like about this economy — declining wages and speed-ups at work — it’s because we have to be competitive. Yet I look at the top and see that American CEOs, for example, are paid much more relative to the average worker than CEOs in other countries.

I fear she has no idea what she is talking about.

What does a real increase in inequality mean? A real increase in income inequality? Sure. An increase in real material inequality? Maybe not. The interesting question has to do with the composition of typical consumption baskets at the top and bottom of the distribution. And then the question is how gains in welfare from new products and the improvements in the quality of existing products have been distributed. It’s not clear at all that there is any increase in real consumption inequality.

Also, if there has been a stagnation in wages and a decline in benefits, then total compensation has declined. But surely Ehrenreich has Google:

So total compensation hasn’t been stagnating. But supposed it had been. Why?

CLASS WAR!!! That’s just crazy. What does she mean?

The reason compensation goes up at all is because productivity has gone up. Which is to say, because we are “squeezing more out of workers.” Here’s the relationship between average productivity and average real compensation:

Pretty close! There is a gap opening up between productivity and real compensation, though I suspect “class war” is not the correct explanation.

She’s right that CEO’s in the U.S. get paid more. And they may even get paid too much, for various reasons. (I am agnostic on this.) But say CEO pay is cut in half. Does she think that firms would allocate the savings to wages and benefits? If they did, would it be enough to even make a difference?

And for the purposes of this class war, who are the wealthy. The household income in the Howley-Wilkinson household puts us securely in the top 10 percent. Richer than 9 out of 10 households in a rich country–that’s wealthy, right? Where are my spoils from the class war!? I can tell you, we’re in no position to squeeze any workers. I guess Ehrenreich means the owners of capital who profit from labor. You know, like everyone with a mutual fund. Maybe some of these people should be ticked about the overpaid managers of the companies they own.

Special bonus (just substitute “class” for “race”):

Feedback Loops and the Matthew Effect

Posted on by

From the Boston Globe:

WHILE DIFFERENCES IN talent explain at least some of the gap between haves and have-nots, two economists at MIT and Harvard think another factor is also at work. They theorize that the ability to dedicate yourself to work – and not worry about problems at home – has an amplified effect on your productivity and, thus, your income. This can happen simply because a higher income allows you to more easily accommodate or outsource many of the hassles of home life, which then sets up a virtuous cycle of more dedication to work, more productivity, more income, easier home life, more dedication to work, etc. Conversely, to the extent that you cannot dedicate yourself completely to work, you may find yourself in a poverty trap. This explains some of the nation’s income disparity, the authors say, but it can also explain some of the gap between the developed and developing world.

Banerjee, A. and Mullainathan, S., “Limited Attention and Income Distribution,” American Economic Review (May 2008).

I think that there are many, many different interrelated virtuous and vicious circles that help explain increasing wage dispersion. Consider the fashionable  “Getting Things Done” personal productivity system. Highly educated people with complex schedules and multiple responsibilities not only find these kinds of systems helpful in getting things done, but also  for maintaining a sense of control and self-efficacy, which diminishes stress. If productivity goes up while anxiety goes down, more can be done in a period of time, more happily. Increased productivity tends to increase wages. Higher wages create an extra incentive to work more hours. But if productivity and workflow management technologies and practices increase a sense of control and self-efficacy, the wage incentive will be amplified, and even more labor will be supplied. Of course, practice makes you better, so people who work more also tend to work better, which eventually gets reflected in wages. And so on.

Americans Hate Redistribution

Posted on by

This is the sort of thing that makes the vein in Krugman’s forehead throb:

When given a choice about how government should address the numerous economic difficulties facing today’s consumer, Americans overwhelmingly — by 84% to 13% — prefer that the government focus on improving overall economic conditions and the jobs situation in the United States as opposed to taking steps to distribute wealth more evenly among Americans.

Here’s the breakdown by income:

This is consistent with other polling data I have seen that shows that even as the percentage of Americans who claim to be concerned about income inequality has risen (as income inequality has risen), support for redistributive programs has been more or less constant. What you see instead is increased support for educational reform, suggesting a widespread belief that the problem worth worrying about is the ability of people toward the bottom to gain the skills they need to be successful, not the fact that some small percentage of people are becoming really fantastically rich.

People often wonder why income inequality is so much higher in the U.S. than in other rich liberal democracies. In a nutshell, the preferences of American voters is why.

CEO Pay and the Mechanisms of Inequality

Posted on by

Like a broken record, I repeat myself: A high level of income inequality means nothing in itself. If you think there is some unfairness or injustice involved then show the mechanism that produced the pattern, and then let’s consider whether there is something unjust or unfair about it. Ian Dew-Becker and Robert Gordon’s new VoxEU op-ed is notable, and worthy of emulation, for pointing to a very possibly unjust mechanism behind the rapid rate of increase at the top of the top of the distribution.

While the demand and supply story of SBTC and Goldin and Katz can help explain the 90-10 ratio, increased skewness of incomes above the 90th percentile has been driven by a set of fundamentally different factors. To help understand the evolution of the highest incomes, we divide these workers into three categories. Superstars include the top members of any occupation that provides disproportionate rewards to the first-best as contrasted with the second-best. The superstar phenomenon has at its core the magnification of audiences, the fact that a single performance can be witnessed by an audience of one person or ten million people, depending on the perceived attraction and talent. The second category includes law partnerships, investment bankers, and hedge fund managers, where there is no obvious analogy to audience magnification but where there are steep wage premia for the very best in an occupational niche, and where it is apparent that incomes are highly market-driven.

The most contentious question regards the third category, top executives in public corporations. The core distinction is that CEO compensation is chosen by their peers in a system that gives CEOs and their hand-picked boards of directors, rather than the market, control over top incomes. The idea that managers, rather than stockholders, control directors goes back to Berle and Means (1932). This idea that the principal-agent control of stockholders should be reversed has been applied fruitfully by such authors as Bebchuk and Fried (2004). They argue that managerial power lies behind some of the outsized gains in CEO pay.

In general, we believe that better disclosure and better laws regarding corporate governance can help deal with high CEO pay. Precisely determining what counts as reasonable pay is beyond the government’s abilities. However, there is some evidence, reviewed by Dew-Becker (2008), showing that increases in mandatory disclosure lead to better corporate performance and better designed pay packages.

For some time now, I’ve seen overlapping directorates and reciprocal self-dealing by tightly socially connected corporate board members to be a plausible unjust mechanism behind the level of income inequality. Arnold Kling has a good post that outlines an alternative theory of CEO pay, but he also seems inclined to the view that there is some kind of malfeasance going on here.

Do notice, however, that the authors concede SBTC as a good explanation for much of the gap between the 10th and 90th percentiles. And, within the top 10 percent, superstar markets and the increasing value of talent in certain niches explains a lot of the gap between the 90th and 99th percentiles. It’s not clear just how much of the outsized income gains at the top of the top are due to CEO pay. So even were reforms put in place that would prevent collusive yachting buddies from making each other that much richer, the overall effect on income inequality might be small. Of those who benefit from pure market mechanisms, Dew-Becker and Gordon write,

Their earnings are an outcome of market forces, and the only policy measure available to achieve greater after-tax equality is an increase in tax rates at the top balanced by a decrease at the bottom.

That is to say, they identify nothing untoward about the institutional mechanisms that produce inequality in this way, so there is no reason to try to intervene with new policy to change them. But this of course raises the question of why, in this kind of case, greater after-tax equality is morally desirable at all, or why an equality-aiming increase in tax rates on those with justly-earned incomes would morally permissible.

Is Blog Traffic Inequality Evidence of Unfairness?

Posted on by

Tim Lee continues to preach it over at TPMCafe

For reasons that aren’t clear to me, a lot of people seem to have a very different intuition when we’re talking about the distribution of dollars rather than eyeballs or Wikipedia edits. The mere existence of growing income inequality is treated as a prima facie evidence of serious flaws in the American economic system. People seem to assume that such a distribution cannot arise absent systematic distortions redistributing income upwards. Therefore, even if we can’t identify the specific mechanism that’s robbing from the poor and giving to the rich, we can infer its operation from the skewed distribution of income.

But in fact, the processes that give rise to income inequality are roughly the same as the processes that give rise to inequality online. We should expect that even in a perfectly just economic system, some people would earn a lot more money than others, and that the gap would grow over time as technological progress increases the size of the market and the potential for division of labor.

It’s not obvious to me that the mechanism that drives inequality in Wikipedia edits is the same as the one driving blog traffic inequality, but Tim’s right that both these mechanisms are in work in the broader economy. In Wikipedia, I think you see a sort of regular 80/20 effect; a minority does most of the work. But what do they get for that? Blogs seem like a pretty typical superstar market. The small minority dominating traffic don’t necessarily have a large productivity advantage. The highest traffic blogs are all high-volume, but lots of high-volume, high-quality blogs get very little traffic. People want to read what other people are reading, so the blogs that win the competition to become a focal point for attention reap most of the traffic.

Inequality of Capability?

Posted on by

Lane Kenworthy kindly responds:

We should care about inequality of income not simply because it contributes to inequality of well-being, but also because it contributes to inequality of capability.

Even if consumption inequality has increased only a little, the rise in income inequality has produced a noteworthy increase in inequality of capability. The rich aren’t forced to purchase goods and services whose prices have increased more rapidly; they could switch to the same consumption bundle as the poor if they wished.

I feel like maybe we’re speaking a different language or something here. I’m not sure what Kenworthy means by “inequality of capability.” It sounds to me like he is using a currently popular term to repeat the not-contested because self-evident fact that people with a bigger budget have a bigger budget. And I’m not clear on the source of Kenworthy’s preference for thinking about what people can do with their money (capability) over what they do do with it (consumption), since it seems to me to come to pretty much the same thing, unless you think people really do systematically tend to act against their interests. No one disputes the fact that wealthier people have more options. That’s basically what it means to be wealthier. But isn’t the issue at hand the size of the difference in real quality of life once the wealthy and the poor have taken their best options? Anyway, that’s what I think the question is. If the best a poor person’s budget can buy improves faster than the best a rich person’s budget can buy, then that means the poor person’s quality of life has become more like the rich person’s even if the rich person’s budget expanded at a faster rate than the poor person’s. The analysis applies mutatis mutandis to capabilities. Isn’t this absolutely central to the question of economic inequality? Isn’t this in fact the central question of economic inequality — the gap in the quality of the lived experience of the rich and poor?

Kenworthy goes on:

In my view the Broda and Romalis analysis is important for our understanding of (absolute) poverty, rather than inequality. They find that the prices of goods poor Americans tend to purchase have risen less rapidly than the overall inflation rate. I can’t assess whether they’ve accurately analyzed the data and how much measurement error the data contain. But if the finding is correct, it suggests that the trend in living standards for America’s poor was more favorable (or less unfavorable) between 1994 and 2005 than income data imply.

I don’t get it. If living standards for the poor are better than we had thought, doesn’t that mean that the difference in living standards between the poor and the rich is smaller than we thought?