Posts Tagged ‘inequality’

OECD-income inequality

Back when I was a kid, the country where kids-who-weren’t-me were starving was India, and my parents regularly told me to finish what was served to me at supper because somehow that would help those needy children. (I confess my smart-aleck answer to my parents was to tell them to send the uneaten food to India or wherever for the hungry kids. Problem solved.)

That was pretty much Tim Worstall’s response to the latest OECD report on inequality, In It Together: Why Less Inequality Benefits All. Poverty is the only thing that matters, and the poor in the United States aren’t really poor—not in comparison to the “really poor” elsewhere in the world. So, clean your plates and be thankful you’re not like “them.”

they’re worried that rich Americans have ten times the incomes of poor Americans, not that any and every American has an income many multiples of that of someone who is truly poor. For example, if you’re on the average amount of governmental help to aid you in beating poverty in the US (that’s around $9,400 a year) then your income, from that source alone, is some 25 to 30 times that of someone living in real, absolute, poverty.

Myself, I think that’s the only inequality that we should be worrying about: and absolute poverty the only sort of poverty we should be worrying about. As I then go on to insist that the absolute poverty is being beaten by globalisation, and the relative inequality in the OECD countries is also being caused by globalisation, then I say that this is all a very good idea indeed. Let rip with yet more globalisation and trade, the absolutely poor will continue to get richer and the in-country inequality can rise for all I care. And given the link between the two I even tend to applaud the rising in-country inequality as evidence that that absolute poverty continues to be beaten.

But it’s not just Worstall: that’s pretty much the usual response from conservatives these days (from a recent commentator on this blog through Bruce D. Meyer and James X. Sullivan to Deirdre McCloskey) when the issue of inequality comes up. Don’t worry about inequality and keep hoping that—someday, somehow—poverty in the world will be eliminated.

Except it hasn’t, and it isn’t. What the OECD report shows is:

1. Poverty within the OECD nations (no matter how measured) increased during the most recent economic crisis.

2. Inequality (in the distribution of both income and wealth) has also increased—and not just in terms of those at the very bottom, but especially with respect to the bottom 40 percent of the population.

3. The growth in poverty and inequality has negative effects on overall economic growth.

4. And, finally, redistributive measures do not have a negative effect on growth.

There is nothing in the clean-your-plate attempts to ignore the existence of already-grotesque and still-rising levels of poverty and inequality that can effectively counter or overturn those findings—much less respond to what I consider to be the key finding in the report:

The most efficient policy package will address inequalities at the point where they originate rather than trying to pick them up only at a later stage.

In other words, additional growth won’t solve or eliminate those inequalities. We need to tackle the point where they originate: by radically transforming the existing set of economic institutions.

economist-naked

I’m taking nominations for the best examples of dismal economic scientists.

While I wait for your suggestions, I’m going to offer two of my own nominations: Tyler Cowen and Paul Romer.

I am nominating Cowen because, in his argument that the economy probably needs a “reset,” he only focuses on lowering workers’ wages. First, he makes no mention of resetting corporate profits or the incomes of those at the very top, as if what they manage to capture were completely off limits. All the adjustment in the new, “grimmer future” will be born by those at the bottom. Second, he completely overlooks the mechanisms of his own economic theory: if lower rates of economic growth are the product of lower rates of growth of available workers (a key factor in the theory of secular stagnation), then the relative scarcity of workers should mean higher—not lower—wages. In other words, Cowen is determined to make sure all the costs of the new, slower-growing economy will be born by shifted onto those who can least afford it. For that reason, I nominate Cowen for the title of dismal economist.

I also want to nominate Romer, who continues to double down on his “mathiness” argument, by asserting (against all the work that has taken place in the philosophy of science in recent decades) that (a) there’s a single truth, (b) that truth can only be obtained via science, and (c) mathematical modeling is the singular method for making progress in science to obtain truth. There are so many things wrong with each of those assertions it’s hard to know where to begin. And I won’t, at least right now. Let me just say Romer deserves his nomination as one of the most dismal economists because of the extraordinary arrogance, pretentiousness, and ignorance of the following statements:

About math:. . .I’ve seen clear evidence that math can facilitate scientific progress toward the truth.

If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy.

About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth.

If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy.

And please do not write to tell me that science is a social process or that the progress it makes toward the truth can be irregular. I know.

Me, I’m not too busy to discuss either the fundamental injustices of contemporary capitalism or the often-worthless and dangerous role mathematics, truth, and science have played and continue to play in the discipline of economics.

I’m also not too busy to post additional nominations for dismal economists.

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We know (e.g., as a result of the 2013 Pew Research Center survey) that most people in the world believe that current economic arrangements favor the well-off and that economic inequality is a very big problem.*

And they’re right: the economy system in most countries is fundamentally unfair (favoring those at the top over everyone else) and that, as a result, the gap (between those at the top and everyone else) is a problem that needs to be solved—if not within the current economy system, then in a different one.

But we also know, since at least the pioneering study by Dan Ariely and Michael I. Norton, that people’s beliefs about inequality are quite different from actual levels of inequality. That notion is confirmed by a new study, by Vladimir Gimpelson and Daniel Treisman, “Misperceiving Inequality.” What they show is that, on a wide variety of measures (of income and wealth inequality, poverty, earnings for different jobs, and so on), what people think they know is often wrong. Perhaps even more important, they show that the perceived level of inequality—and not the actual level—correlates strongly with demand for redistribution and reported conflict between rich and poor.

Why should this matter? Because representations of the economy that minimize the existence of inequality or the problems associated with inequality are bound to reinforce the systematic misperceptions found by researchers.

That’s exactly what much mainstream economics accomplishes. It deflects attention from the existence of inequality (e.g., by focusing on growth versus distribution) and from the economic and social problems created by inequality (by attributing inequality to forces like globalization and technological change beyond our control or invoking more education as the solution).

Mainstream economics therefore forms part of what Gimpelson and Treisman refers to as “ideology,” “which may predispose people to ‘see’ the level of inequality that their beliefs and values convince them must exist.” And the strength of mainstream economics in the United States—in colleges and universities as well as in the media, think tanks, and in government—is one of the main reasons Americans, more than citizens in other countries, tend not to believe in inequality.

*Specifically, the public in advanced (median of 74 percent), emerging (70 percent) and developing (70 percent) economies are mostly in agreement that the current economic system generally favors the wealthy and is not fair to most people in their country. And, in 31 of the 39 countries surveyed, half or more of the population believe that the gap between the rich and the poor is a very big problem in their societies.

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Special mention

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Issa

From Jessica Roy [ht: sm]:

Worth over $448 million, Republican congressman Darrell Issa is by far the richest congressman in America, so he has a lot to be thankful for. Know who else has a lot to be thankful for, at least according to Congressman Issa? America’s poor people. After all, it’s not like they’re living in one of those *sniffs* third-world countries.

“If you go to India or you go to any number of other Third World countries, you have two problems: You have greater inequality of income and wealth. You also have less opportunity for people to rise from the have-not to the have,” Issa said, according to CNN Money. America has actually made “our poor somewhat the envy of the world,” he added.

Personally, I’m more envious of the guy with the $448 million than I am of the 48 million Americans living below the poverty line, but that’s just me.

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Special mention

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I remember my dismay, when I first began teaching economics, how enthralled my colleagues (at least the liberal ones) were with Arthur Okun’s notion of the fundamental tradeoff between equality and efficiency (which they supplemented with John Rawls’s theory of justice). No critique of capitalism, no critique of political economy. They believed the democratic process would find the appropriate balance between market efficiencies and nonmarket interventions to create greater equality.

I was never happy with the idea of such a tradeoff (or, for that matter, with the veil of ignorance), because it was based on denying the fundamental injustice embedded in a capitalist economy—the appropriation and distribution of a surplus produced by the majority for the benefit of a tiny minority at the top. And no amount of celebrating the supposed efficiencies of capitalist markets (which, for the most part, were simply assumed) or tinkering with the distribution of income (with tax-based redistribution) was going to fix that.

But what strikes me now is ultimately how disastrous was the framework developed by Okun (and by Rawls), given what has happened to the distribution of income and wealth in the United States since then (since 1975, when Okun first published Equality and Efficiency: The Big Tradeoff and when the first revision of Rawls’s A Theory of Justice appeared).

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Consider, for example, the distribution of income. In 1975, the top 1 percent managed to capture almost 9 percent of national income; by 2013, its share had risen to over 20 percent.

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A similarly dramatic change has occurred with the pay of top corporate executives. The CEO-to-worker compensation ratio has risen from 28 when Okun wrote to 296 today.

top wealth

And, of course, the distribution of wealth—which has always been more unequal than the distribution of income—has also worsened: according to Emmanuel Saez and Gabriel Zucman [pdf], the share of the top 0.1 percent rose from 7.6 percent in 1975 to 22 percent in 2012.

I have every reason, then, to be even more critical of Okun (and, for that matter, Rawls) today than I was then. The idea that there was a tradeoff between equality and efficiency (or, in Rawls’s case, the notion that those at the bottom might benefit from inequality), and that we shouldn’t veer too far in creating more equal economic outcomes in the name of efficiency (and of justice), steered us away from imagining and implementing policies and institutions that would have prevented the return to a more and more unequal distribution of income and wealth. As a society, we could have taken such measures but we didn’t.

In retrospect, Okun’s approach (and that of Rawls) was the problem, not the solution.