Category Archives: income distribution-wealth-poverty

My Thoughts on Inequality

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I have an essay, mostly inspired by Cosmides and Tooby at a Cato panel a while back. I begin by saying that

my goal is to make each side’s arguments intelligible to the other. I want Ayn Rand’s partisans to understand Karl Marx’s partisans, and vice-versa.

I conclude [link fixed],

I think that it is beyond debate that capitalism is imperfect. However, the more interesting question concerns how to try to improve it. There, a lot hinges on how one interprets the frequent failures of socialism as well as the failures of less-drastic forms of government intervention. To opponents of capitalism, these failures suggest a need to try harder to implement reform correctly. To proponents of capitalism, these failures suggest a need for reformers to back off. In that regard, I admit to being on the side of the proponents.

Read the whole essay before commenting.

Tyler Cowen on Inequality

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He writes (link is to enormous PDF file)

if American productivity growth had not slowed after 1973, today the median household would earn $30,000 more each year. Alternatively, if income inequality had not accelerated after 1973, today the median household would earn an extra $9,000 more. That is less than one-third of the loss from the productivity slowdown.

His point is that we should pay more attention to productivity. Of course, many policies that ostensibly reduce inequality serve to harm productivity. And there are some ideas, included in Tyler’s essay, that could help with both. Reducing occupational licensing, for example.

My guess is that on policy issues, Tyler is not terribly far from his “opponent” in the volume, Melissa S. Kearney. If anything, her proposals for reducing inequality would take longer to work than his.

Probably the most contentious debate in the volume concerns the employment-reducing effects of government tax and transfer programs. Robert Moffit says that the effect is small, while Casey Mulligan says that it is large. It would be nice to see if they could pin down the reason for their difference of opinion–is it that Mulligan looks at more programs in more detail, or do they take a different view of the shape of the labor supply curve?

Libertarianism and the Middle Class

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From a commenter.

The most important reason libertarianism is unpopular is that it has no credible agenda to benefit the middle class. Smart conservative writers have realized this, hence “Reform Conservatism”.

Many intellectuals on the right and the center-left share a perverse way of thinking about policy: they think that the poor are the legitimate recipients of government assistance, the middle class is not, and all the various middle-class-benefitting tax subsidies, entitlements, and other programs are unjustifiable bugs, rather than features, of our policy landscape. They fail to realize that a large, stable, prosperous middle class is not an inevitable or natural product of a market economy. . .

I think of the government currently as using the taxes on the rich to help pay for things like defense and non-defense purchases, while using taxes on the middle class to pay for the rest of that stuff plus transfers to the poor and to others within the middle class.

Given that perspective, what should be the balance of within-middle-class transfers vs. transfers from the middle class to the poor?

Thinking as an economist, I view the within-middle-class transfer system as imposing large deadweight losses. Primarily this is due to the need to have high taxes on work (payroll taxes), which drives down employment. There are also some deadweight losses due to rent-seeking, such as the costs imposed on the rest of us by the housing lobby, net of the gains to suppliers of services to the housing market.

If you got rid of the deadweight losses, and gave nothing additional to the poor, you would make the middle class better off. But that gain will not be politically salient.

My point is that I might agree with the commenter on the politics, but on the economics I would have to disagree. The middle class collectively would be better off without the programs that appear to benefit particular factions within it.

Explaining Preferences for Redistribution

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The paper is called Crowding Out Culture: Scandinavians and Americans Agree on Social Welfare in the Face of Deservingness Cues, by Danish researchers Lene Aaroe and Michael Bang Petersen.

Suppose that you survey people’s opinions about redistribution without saying anything about whether welfare recipients are not working because they are unwilling or because they are unable. Then Danes are more favorable to redistribution than Americans. However, if the people surveyed are given information that indicates whether or not the welfare recipients are unwilling to work or unable to work, average opinion among Americans and Danes is indistinguishable. This suggests that Americans do not have (relative to Danes) a cultural aversion to redistribution. Instead, they are more likely to believe that welfare recipients are unwilling to work rather than unable to work.

Pointer from Leda Cosmides in her presentation at this panel, which I again strongly recommend–the video is now up at the link.

What I’m Reading

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1. Philosopher John R. Searle’s The Making of the Social World, published in 2010. One excerpt:

How do governments, so to speak, get away with it? That is, how does the government manage to be accepted as a system of status functions superior to other status functions?. . .governmental power is a system of status functions and thus rests on collective recognition or acceptance, but the collective recognition or acceptance, though typically not itself based on violence, can continue to function only if there is a permanent threat of violence

…All political power is a matter of status functions, and for that reason all political power is deontic power.

For some reason, my brain keeps wanting to read “deontic” as “demonic.”

Anyway, I think of a status function as a social convention that assigns people or objects certain properties. I think of a deontic power as a right or obligation.

So, imagine a busy intersection. We could put up a traffic light and by general consent give it a status function to regulate traffic flow. Or we could let an individual direct traffic. For the status function to work, we need to be willing to follow the social convention of obeying the signals, either from the stoplight or from the individual.

Next, suppose that we recognize that the individual wears a uniform and a badge, and we recognize that the individual is permitted to impose fines on people who do not obey. These are stronger deontic powers, and they will deter drivers from trying to cheat the system. We can think of that move as a metaphor for government by consent (although the consent may not be explicit or universal).

As of this writing, I have yet to finish the book. By the time this post goes up, I may have finished a first read, but the book will require some re-reading. It seems to me that Searle is likely to turn out to be on my side of a disagreement with Michael Huemer.

2. Ryan Avent’s new book (not yet out) The Wealth of Humans. I attended a discussion of the book the other night. As the conversation jumped around, I found myself frequently thinking, “Show me the model.” That is out of character for me, because I have spent a lot of the last few years criticizing economists’ use of formal models. But as people tried to speculate about capital accumulation, wealth distribution, and productivity differentials, I found that I could not follow what was being said. I needed to think in terms of supply and demand curves crossing, income adding up to output, and output equal to labor input times output-per-worker. It was hard to get that in a purely verbal discussion, particularly when people were speaking extemporaneously.

Asking Different Questions

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Tyler Cowen writes,

note that essentially none of those income gains went to rural areas. That meant a 7.4% wage gain for larger cities — does the raise the import of the case for deregulating building?

I think that he took his figures from the Census report, but I cannot be sure. I think that “wage gain” should be “income gain,” but again I cannot be sure.

I would ask different questions:

1. Does it raise the import of the case for looking carefully at making cost of living adjustments that differ by location? If the cost of living fell in rural areas, then they had some real income gains. If the cost of living soared in larger cities, then they had less real income gains than are reported if one uses an aggregate price index as the denominator in a real income estimate.

2. In which location–rural areas or large cities–are government transfer payments a larger share of household income? My guess is that transfers make up a larger share in rural areas. In that case, in spite of (1), the report may under-estimate the relative economic strength of larger cities.

Wisdom from Erik Hurst

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He says,

The facts are real wages moved very strongly with employment across regions. Nevada was hit very hard by the recession, for example, while Texas was hit much less hard. Wage growth, both nominal and real, was about 5 percent higher in Texas than it was in Nevada during the Great Recession.

Pointer from Tyler Cowen.

The point is that we do not have a single aggregate economy. If you think that every state faced identical demand conditions, then the state with the higher real wage growth (Texas) should have had the worse unemployment. And Hurst goes on to point out how the regional data make it difficult to defend the view that wage stickiness is the cause of unemployment. In fact, he refers to work, which I noticed earlier, that suggests a PSST story.

I don’t think I previously knew about this thinking, which also agrees with mine:

When we all come together as individuals, we may create agglomeration forces that produce positive or negative consumption amenities. Thinking about it this way, when a lot of high-income people live together, maybe there are better schools because of peer effects or higher taxes. Or maybe there are more restaurants because restaurants are generally a luxury good. Or maybe there’s less crime because there is an inverse relationships between neighborhood income and crime, which empirically seems to hold. So, while we value proximity to firms, that’s not the only thing we value.

Expensive Cities and Labor Immobility

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Peter Ganong and Daniel Shoag write,

Though lawyers still earn much more in the New York area in both nominal terms and net of housing costs, janitors now earn less in the New York area after housing costs than they do in the Deep South. This sharp difference arises because for lawyers in the New York area, housing costs are equal to 21 percent of their income, while housing costs are equal to 52 percent of income for New York area janitors. While it may still be “worth it” for skilled workers to move to productive places like New York, for unskilled workers New York’s high housing prices offset the nominal wage gains.

Once again, land-use regulation is accused of being a major culprit. And along those lines, discussing Tokyo, Alex Tabarrok writes,

Rising housing prices are not an inevitable consequence of growth and fixed land supply–high and rising housing prices are the result of policy choices to restrict land development.

However, note that in a post devoid of politics or vitriol, Paul Krugman writes,

In today’s world, core headquarters functions – the stuff done by top executives and highly paid experts – can be unbundled from the more mundane operations of a company. These high-end functions are also the ones that benefit most from the agglomeration economies of a big city; not to mention the amenities such a city offers to people whose salaries are enough to let them afford decent housing despite high prices.

Meanwhile, it’s no longer necessary to have all the back-office operations in the same place, requiring that a lot of less-well-paid workers deal with high rents even as they suffer on the long subway ride in from Queens.

Pointer from Mark Thoma.

The point is that with modern communications technology, the upper echelons no longer have to be close to all of their mid-level staff.

This particular form of unbundling may or may not be the major factor. However, I think that patterns of specialization have shifted in ways that allow the affluent to invade some major cities and drive out the less-affluent. My view is that, as with colleges, affluent residents are a powerful attraction to other affluent residents, so that you head toward an outcome in which there is competition for “admission” to the high-end cities. For a variety of reasons, including differences in tastes, many of the less-affluent do not enter this competition.

Finance, Fragile, and Anti-Fragile

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Tyler Cowen writes,

The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

America’s mortgages are structured so that the lender-investor is going short on volatility. If interest rates do not move much, the lender does well. If home prices do not move much, the lender does well. But if interest rates rise, the lender is stuck with a below-market asset. And if home prices fall, the lender gets stuck with a house with a value below the amount of the loan.

Tyler is saying that for the typical financial market player, going short on volatility is a great personal strategy. When it works, you get a nice salary and bonus. When it fails, someone else–a shareholder, a taxpayer–bears much of the cost.

If you know your Nassim Taleb, you will recognize going short volatility as “fragile,” with the opposite strategy as “anti-fragile.”

I wonder if stock market investment is one of those fragile strategies nowadays. You can make money year after year going long the market–until it stops.

Anyway, Tyler argues that the changes in the income distribution of recent decades

a) have been focused at the top 1 percent, not between the 99th percentile and the lowest percentile

b) been driven by finance

c) and within finance have been driven by these short-volatility, fragile strategies.

He is pessimistic about regulators’ ability to stop the short-volatility strategies. I think he is wise in that regard.

A Modern Jubilee Year?

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In an email exchange, I wrote

“I have been reading War Peace and War by Peter Turchin, and I came across this:

When land becomes a scarce commodity. . .Those who do not have enough land to feed themselves will have to start selling what they have to make up the difference. As a result, they become poorer. By contrast, those who have more land than they need to feed themselves will have a surplus income that they can use to acquire even more land. Thus, the rich get richer.

This might explain the custom of the Jubilee year. To stop what otherwise would be a strong tendency for wealth to concentrate, particularly when a society is typically operating close to the Malthusian margin. If you don’t employ such a custom, the society is likely to disintegrate.

This also may account for the laws against usury. People on the brink of starvation will need to borrow. If they are charged interest, you will have poor people getting poorer and rich people getting richer.”

To which, my correspondent replied,

That makes sense. Does this spark any more thoughts on how this concept/phenomenon plays out in today’s world where land isn’t necessarily the key commodity and what an equivalent system might be to abate the issue?

My thoughts.

1. As an aside, land is still an important source of wealth, but it is not the land per se. Rents are high in Cambridge, but that is not because of the fertility of the soil.

2. That is not the only difference between our economy and the sort of agrarian society that Turchin is focused on or which gave rise to the Jubilee year. We no longer are in a Malthusian population situation. In the developed world already, and pretty soon almost everywhere, we have the demographic transition, in which the number of children born to each woman falls dramatically. Humans have created many tangible assets (roads, sewer systems, communication tools, factories, etc.) as well as intangible assets (rule of law, pro-social norms and customs, knowledge, etc.) As a result, there is no reason that people have to be pushed to the margin where they have to sell everything they have in order to eat.

3. Still, there may be other forces that cause the rich to get richer and the poor to get poorer. Let’s not worry about the rich getting richer, but instead worry about why the poor might be getting poorer. Maybe poor people pass along genetic endowments to their children that are adverse. Maybe poor people lack access to mainstream banking, and this makes their everyday transactions more costly. Maybe poor people are stuck with bad schools.

4. Suppose we believe that poor people themselves best understand why they are poor. In that case, it would be better to give them money than to have legislators and bureaucrats design packages of benefits like food stamps and Medicaid and so on. My own guess is that this is the best way to go (although like anything else, it would not be perfect). In that case, the modern equivalent of the Jubilee year would be to get rid of all the social programs and replace them with a fairly large cash payment. This is known these days as Universal Basic Income. It has proponents and opponents on both ends of the political spectrum.