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Archive for the ‘inequality’ Category

Many people are concerned about income and wealth inequality. I am not concerned about economic inequality as such; I care about absolute poverty (how many people live in misery because of wretched physical conditions), and I care about a broad distribution of opportunity (everyone’s having a “fair shot” at economic success), but I don’t see it as a problem if someone earns vastly more money than someone else, just as I don’t see it as a problem that poorer people tend to have more leisure time than richer people. Only those consumed with envy could see economic (or leisure!) inequality simpliciter as a problem, right?

But I actually don’t think people on the left care about economic inequality or leisure inequality or inequality of looks or appealing personalities or anything else of value, in themselves, either. They care about economic inequality because they think it has negative consequences, particularly for political inequality, and because they think it is a symptom of some deeper problem. I disagree on the first count and agree on the second. Let me explain.

Does Inequality Have Bad Consequences?

The fear of the left is that in an unequal U.S., the rich will “buy” politicians to do what they want. As a result, we will get more pollution and more redistribution that flows from the middle class to the rich. The so-called “oligarchy study” (the term “oligarchy” never actually appears in the paper) went viral recently, showing that the preferences of wealthy Americans (and organized interest groups) matter for policy change in the U.S., while, controlling for the preferences of wealthy Americans, the preferences of other Americans make little difference. But wealthy Americans and average Americans actually have similar views on most issues, and where they diverge, the wealthy often have clearly superior views: less likely to loathe immigrants and gays, to fear free trade, to oppose marijuana legalization, and to be narrowly ideological. In addition, the wealthy tend to be more skeptical of taxation and welfare programs than the non-wealthy — your views on whether that difference is problematic may vary according to your views of the welfare state.

Still, let’s assume that the influence of the wealthy on U.S. politics is baleful; does that mean that growing economic inequality would reinforce that baleful influence? It remains unproven whether more inequality will mean that the rich pay more in campaign contributions and get more out in policy terms. The most likely explanation for why the rich are influential is simply that they have similar levels of education and status to politicians and move in the same social circles and care about the same sorts of things. Studies looking at how campaign contributions “buy access” to legislators generally come up with very weak results. To take just one policy example, federal air pollution regulations have always ratcheted up, and air quality in the U.S. is vastly improved relative to 50 years ago, in part due to regulation and in part to technological changes. Rising inequality certainly doesn’t seem to explain these trends.

A bigger problem with the U.S. political economy (more…)

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Graduation is upon us. Many of my students are graduating with higher student loan debt than they would have imagined and limited job prospects. A few weeks back when I discussed future plans with several graduating seniors, there was a sense of dismay and a sense that the odds were against them given the poor economy and, more importantly, the trends in inequality.

The good news (which I guess could also be bad news, depending on the depth of your commitment to equality) is that the degrees they are earning may well contribute to inequality. A new paper by MIT’s David H. Autor turns attention to inequality among “the other 99 percent.” We have heard quite a bit about the growing concentration of wealth in the top 1 percent. As Autor notes:

Between 1979 and 2012, the share of all household income accruing to the top percentile of U.S. households rose from 10.0% to 22.5% To get a sense of how much money that is, consider the conceptual experiment of redistributing the gains of the top 1% between 1979 and 2012 to the bottom 99% of households. How much would this redistribution raise household incomes of the bottom 99%? The answer is $7107 per household—a substantial gain, equal to 14% of the income of the median U.S. household in 2012.

But what if we look at the “other 99 percent?” Here we have a story of the wage premium associated with higher education. And these gains simply dwarf the above-mentioned figures.

consider the earnings gap between a college-educated two-earner husband-wife family and a high school–educated two-earner husband-wife family, which rose by $27,951 between 1979 and 2012 (from $30,298 to $58,249). This increase in the earnings gap between the typical college-educated and high school–educated household earnings levels is four times as large as the redistribution that has notionally occurred from the bottom 99% to the top 1% of households. What this simple calculation suggests is that the growth of skill differentials among the “other 99 percent” is arguably even more consequential than the rise of the 1% for the welfare of most citizens.

Obviously there is a difference between cognitive ability and credentialing. My students who have majored in the “department of fashionable studies” will likely not make as great a contribution to inequality as might have been the case with a different major.

Bottom line: the paper is interesting throughout, engaging some important issues such as intergenerational mobility and the policy implications.

For additional coverage of the paper, see Jim Tankersley, Wonkblog. An interview with Autor can be found here.

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In my last post, I said “total net social spending” included net public spending and mandatory private social spending. In fact, it includes voluntary private social expenditures as well. The U.S. has by far the highest voluntary social expenditures in the OECD, so if you subtract those out, the U.S. net public and mandatory private social spending figure is no longer second in the OECD (and thus almost certainly the world, as poorer countries have smaller welfare states), only just about average.

But what does voluntary private social spending include? One big component is employer-provided health insurance. It seems to me that should be included in the size of the U.S. welfare state, even if it is not directly provided by the government, because the government subsidizes it (through the tax code), and because that spending is a substitute for government spending in other countries. If we exclude it for the U.S., we are not comparing like with like, since several other countries provide health insurance mainly or exclusively through the state. Put another way, if the U.S. provides so much social welfare privately, the need for the government to provide it is less. The U.S. welfare state is average-sized in spite of the fact that the private welfare system is enormous.

Now, does that mean the U.S. spends vastly more on the poor than most other OECD countries? Not necessarily. The majority of social spending in the U.S. does not go to the poor – but neither does it anywhere else. The elderly soak up a huge portion of social spending in almost all advanced industrial societies. Indeed, one way to measure how redistributive the U.S. welfare state is is to subtract the “post tax and transfer” Gini ratio from the “pre tax and transfer” Gini ratio. Of course, this is a static measure that does not take into account possibilities for mobility from one income level to another, and the extent to which “poverty traps” can contribute to lost mobility. Still, it’s a suggestive measure.

Using data from World Development Indicators Standardized World Income Inequality Database, I find that the tax and transfer system in the U.S. shaves only 0.08 points off the Gini ratio, a standard measure of income inequality (“1″ means most unequal, “0” perfectly equal). In most other countries, the number is much higher. In Sweden, it is 0.20. In Italy and Germany, is 0.21. Only Switzerland showed (slightly) less progressive redistribution.

So while the U.S. has one of the very largest welfare states in the rich world, it also has one of the least progressive welfare states in the rich world. By the standards of anti-inequality preferences, that’s a terrible record of inefficiency.

Updated with correct source for my data.

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It appears that President Obama’s address on inequality was the beginning of a larger move to the left and an embrace of economic populism. As Edward-Issac Dovere  (Politico) explains:

[Obama is] connecting to progressive populism with an aggressive, spending-oriented, activist government approach to the economy personified by Elizabeth Warren and Bill de Blasio. Obama’s already backed raising the minimum wage, the start of what White House officials say will be a 2014 domestic agenda — including his State of the Union address and budget — that centers around income inequality and what the government is doing to increase economic mobility.

And

Obama needs his base invested to help him recover from his low poll numbers and give his party a platform as Democrats try to make the House competitive and hold onto to their majority in the Senate. And those in the coalition that won Obama two elections — young people, African-Americans, Latinos, single women and immigrants — are precisely the ones hit hardest by the doldrum economy.

Will this strategy succeed? The answer would seem to hinge on three things.

  1. Success in shifting the focus from the sluggish economy (e.g., the “jobs deficit,” problems of long-term unemployment, dramatic reductions in the labor force participation rate) to inequality in income distributions and the claim that these inequalities (rather than economic policy or the intrinsic problems of recovering from a financial crisis) have impeded recovery.
  2. Success in convincing voters that the correct policy response to this situation is an expansion of social policy expenditures (e.g., increases in Social Security) and a higher minimum wage
  3. Success in convincing voters that they should, in essence, vote themselves a raise in the 2014 midterm elections since there are limits to what can be achieved through executive action.

I am skeptical that this strategy will succeed for a host of reasons (e.g., the contours of public opinion, the likelihood that ongoing problems with Obamacare implementation will dominate the news, the President’s lack of follow through on priorities announced in the State of the Union). But given the poor economic performance since the financial collapse there is likely a growing pool of desperate  voters open to these claims. They may  apply a sufficiently high discount rate to the future that the long-term fiscal consequences of expanded social policy expenditures will not matter much.

For those who are interested in reading more, see Alex Pareene, “Why Elizabeth Warren Baffles Pundits” (Salon), Frank James, “Is Economic Populism a Problem or a Solution for Democrats?” (NPR) and Third Way’s John Cowan and Jim Kessler’s op-ed (WSJ), “Economic Populism is Dead”

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Last week, President Obama gave a speech on economic mobility and argued that addressing economic inequality was “the defining challenge of our time.” He stated:

But we know that people’s frustrations run deeper than these most recent political battles.  Their frustration is rooted in their own daily battles — to make ends meet, to pay for college, buy a home, save for retirement.  It’s rooted in the nagging sense that no matter how hard they work, the deck is stacked against them.  And it’s rooted in the fear that their kids won’t be better off than they were.  They may not follow the constant back-and-forth in Washington or all the policy details, but they experience in a very personal way the relentless, decades-long trend that I want to spend some time talking about today.  And that is a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain — that if you work hard, you have a chance to get ahead.

President Obama asks (and answers) an important question: “if, in fact, the majority of Americans agree that our number-one priority is to restore opportunity and broad-based growth for all Americans, the question is why has Washington consistently failed to act?  And I think a big reason is the myths that have developed around the issue of inequality.” According to the President, the myths include: (1) “the myth that this is a problem restricted to a small share of predominantly minority poor,” (2) “the myth that growing the economy and reducing inequality are necessarily in conflict,” and (3) “the belief that the government cannot do anything about reducing inequality.” Even if these are correctly seen as myths (the address provides some qualifications) the problem may be found in the premise. (more…)

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I have great respect and (in many cases) affection for my friends at Bleeding Hearts Libertarians. But I am not a bleeding heart libertarian, and from the outset I have resisted its siren song, mostly over its endorsement of “social justice” as a moral and/or political ideal. Unlike Hayek, I do not think the concept is incoherent. But I think Hayek has a point, and my resistance to the concept I think tracks at least some of Hayek’s motivation. But that resistance is normative, rather than conceptual. Recent exchanges on BHL have helped me clarify my thinking about the point that concerns me.

Kevin Vallier posted this week on the topic, responding to challenges from David Friedman as to the cogency of the concept. The discussion that follows Kevin’s post is excellent, and I am highly sympathetic to many of those resisting Kevin’s analysis. However, I would mount an objection slightly different than those on offer there.

Start with a point of agreement. Kevin says,

I take it that the term “social justice” can be used to cover individual rights-violations. For instance, if John rapes Reba, he has committed a grave injustice, one that could be called a social injustice. However, this is not the conceptual home of the concept of social injustice.

He is surely right about this. Individual rights-violations are, by their nature, unjust. Since they are transactions between two individuals, they are also social, and we can, if we like, uselessly append “social” to our description of actions as unjust. If that is all “social injustice” means, there would be no quarrel here. As Kevin suggests, we need to look elsewhere for its “conceptual home.”

Kevin thinks that “conceptual home” is in the class of emergent properties. Here is his central claim:

Social injustice is an emergent property of certain kinds of social, moral and political practices. Let’s illustrate with the familiar example of institutional racism. I take it that an institution is racist insofar as it reliably outputs states of affairs where a racial group fails to receive its due based solely on the racial properties of its members. Thus, even if no one in the institution is racist, they participate in practices that result, say, in blacks having fewer opportunities than whites simply because they are black. In other words, the institutional rules operate such that unequal outcomes are caused primarily by racial differences, even if no one person is acting in a racist fashion. Institutional racism is a paradigmatic case of social injustice. It is an emergent property of a social institution that commits an injustice without any individual acting in an unjust fashion.

Emergent properties are an important class of properties, but Kevin’s proposal is unusual in deploying the concept in this way. Why? He is proposing that a normative property — social injustice — is emergent from non-normative properties (perhaps the distribution of “opportunities,” however those are measured). And this is curious. The typical deployment of the notion of emergent properties would, I think, involve the emergence of non-normative (let’s call them “natural”) properties from other natural properties. Many of the spontaneous orders we see in both natural and social science are of this sort. The structure of crystals is an emergent property in the sense that crystals have that structure because of other physical properties they have. Language-use is a property that humans have in virtue of various neurological and other biological properties we have. And so on. Nothing to see here. Emergence of normative properties from other normative properties is also, I’d think, unproblematic. That would be, for example, the liberal analysis of slavery. We see the large scale pattern of injustice as caused by an assortment of unjust individual attitudes, beliefs, and courses of conduct. Again, nothing to see here.

But the proposal that normative properties might emerge somehow from natural properties oughtn’t to be dismissed simply because it is unusual. If you work much with normative concepts, you become accustomed to the idea that things work differently when you are contending with reasons, norms, and the like rather than causes. If the world is a causal order, and it has normative properties, then somehow we have to end up with normative properties emerging from natural ones. The form of emergence that moral and other philosophers typically deploy is supervenience. Normative properties like goodness, rightness, and so on supervene on natural properties, in the sense (some sense; different theories give different accounts of this relation) that the normative properties occur somehow because the natural properties occur. If you are a hedonist, for example, you think that badness supervenes on pain, goodness on pleasure. Something (an act, a state of affairs) has the property of badness precisely because it also has the property of being painful.

And this gets us to what is interesting. Remember that, if the concept of social justice is going to be at all interesting, it cannot simply be redescribing the sort of injustice that occurs when individuals violate the rights of others. What does the social injustice supervene on? The crucial point is: whatever the answer to that question, it is not a property of individuals.

Is that a problem? I’m not sure. I am inclined to think that the essence of individualism at the heart of liberalism is a kind of moral individualism — the idea, roughly, that all sources of value, obligations, and so on are individuals. Does Kevin believe that? Here’s what he says:

I can’t speak for my co-bloggers, but from my vantage point libertarians all too often ignore social injustices because of their sometimes flat footed (dare I say “cartoon”?) moral individualism. I’m a moral individualist in the sense that I think injustices can only be done to individuals, families or to voluntary associations. In a real sense, I don’t think injustices can be committed against “Americans” or “blacks” understood as groups defined independently of their members. So traditional libertarians are right that emphasize that the idea of social justice can sometimes be deployed in inappropriately collectivist ways.

But social injustices can be committed independently of human design. That’s a significant claim that departs from many threads of libertarian thought popular today. And my view on the matter is one of the reasons I joined the blog.

How does the moral individualism Kevin endorses differ from “cartoon” moral individualism? I’m not sure.  Is it an aberration that in a previous paragraph he spoke of “a racial group failing to receive its due”? I think it is not an aberration, but a natural slide invited and made possible by adversion to social justice.

I believe (and I think Kevin believes) that groups are per se not due anything. There are certainly moral and political positions (positions worth engaging) that disagree. But these are certainly not within either the classical liberal or libertarian tradition, and they require a rejection of the moral individualism that I think is worth endorsing, and to which Kevin is paying lip service. And the issue here isn’t the defensibility of such a claim, but whether or not those committed to libertarian ideals and principles should embrace or reject the use of the concept of social justice.

Is this then just an unfortunate slip? The problem is, without the thought that the normative property (the social injustice) supervenes on facts about groups, rather than individuals, there is no injustice here to be found. And that’s just where the BHL’ers would like to be able to find injustice. It’s tempting to revert to the idea that the individuals in the groups in question suffer, say, from a deprivation of opportunities. But either those deprivations are by individuals, to individuals, in a way that violates the rights of the injured parties, or those are not. If they are, then we have plain old injustice, without a need to appeal to “social justice.” And if they aren’t, then it’s hard to see where the moral complaint is, nor what individuals are “committing” the social injustice. Here the view Kevin is proposing is trying to have it both ways. Skeptics about social justice think that is endemic to the concept.

It’s worth noting that in Rawls’ hands the problem has to be located in a different place. I can’t see that Rawls ever locates the injustice of social injustice in properties of groups. (Though groups figure into the specification of the remedy, in the form of the Difference Principle, I take this to be a feature of the solution to the problem, not part of the formulation of the normatively problematic state of affairs — the social injustice — itself.) In that sense, Rawls’ moral individualism is intact. To get to social injustice, as I understand him Rawls has to build the social properties at issue into the obligations of justice we have as individuals. That is, part of what it is for us to treat each other justly, as individuals, is on his view to establish and sustain social institutions with the properties called for by principles of justice. That way of conceiving of social justice has its own problems, not for this post (which is already too long as it is). Is it compatible with thinking that social injustice is an emergent property (to return to Kevin’s basic proposal). Perhaps. But if so the emergence is a 5th wheel: all the work in generating the social injustice is done by individuals failing, in effect, to act justly in establishing institutional arrangements that satisfy the principles of justice. I am skeptical that we do have obligations of justice of the sort that this interpretation of Rawls requires. One reason for doing so is that (like Nozick) I suspect that these obligations of justice are incompatible with obligations of justice I am much more confident we have toward each other (such as obligations generated by desert). That’s why I think there is something deeply problematic about the Rawlsian conception of social justice. Those reservations are not alleviated by recourse to thinking that social justice (or injustice) is somehow emergent.

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Roger Koppl argues this week at ThinkMarkets that “Income inequality matters.” He thinks it matters so much that he says it twice. He believes “Austrian,” pro-market, economic liberals should be speaking up more on this “central issue.” I think Koppl could not be more wrong. The issue deserves all the inattention we can muster for it.

The problem I think is not Koppl’s motives. He rightly says that we should “watch out for ways the state can be used to create unjust privileges for some at the expense of others.” He is certainly right about that. He argues that unjust state policies may be skewing market results in such a way as to increase inequality. He may be right about that. But he is wrong in suggesting that we ought therefore to be paying attention to income inequality. We ought therefore to be paying attention to those policies. Whether they produce greater inequality is neither here nor there.

Koppl gives four examples: (i) policies that privatize profits and socialize losses, (ii) bad regulation, (iii) collapse of the rule of law, and (iv) public schools. I can certainly join Koppl in a hearty wish that we not only attend to these unwarranted policies, programs, and tendencies, but that we do so with a degree of urgency prompted, in part, by their effects on the poorest and most vulnerable among us. But talking about inequality is precisely a distraction from doing so.

In a great paper of a few years ago, Harry Frankfurt argued that “Egalitarianism is harmful because it tends to distract those who are beguiled by it from their real interests.”* Frankfurt thought that focusing on equality was actually pernicious because it distracted us from attention to real harms, of which inequality is at most an indicator. And he was right. It may well be that, for example, the evisceration of the rule of law results in greater income inequality. But it also might not. Whether or not it does so, however, it is unjust, and it deserves our attention. Similarly for the increase in moral hazard and regulation, to say nothing of the deplorable system of public education. All of these need attention, and one prime reason they do so is because of their effects on those least capable of circumventing their evils. If we care about the poor, what we ought to care about is bad policy, not indicators that may or may not have anything to do with policies that are making people worse off. As long as we are worrying about income inequality, we are worrying about the wrong thing.

* In “The Moral Irrelevance of Equality,” Public Affairs Quarterly, April 2000.

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In my last post on this topic, I described an ideal system of federalism and its advantages and disadvantages. One of the concerns that progressives often have about this kind of federalism, which I wish to take seriously, is that it will lead to a growing gap between the incomes of rich and poor regions (such as states in the U.S.). In this post, I’m going to summarize my findings on the empirical evidence on the relationship between federalism and inequality.

What I want to explain here is the extent to which different countries feature regional convergence or divergence in per capita incomes. That is, in some countries rich regions grow faster than poor ones, and in others poor regions grow faster than rich ones. The way to measure that is with the “annual rate of convergence,” which represents the average rate at which the differences in per capita income between a poor economy and a rich economy disappear, all else equal. A figure of 2% would mean that 2% of the average income difference between a rich and poor economy disappears each year. Even when convergence is happening, that does not mean that measured inequality between regions necessarily goes down, because random shocks can intervene (such as oil discoveries or real estate busts). But it’s a key question whether federalism can cause regional economies to convergence faster or more slowly (or even diverge).

Here is how some countries differ in their measured rate of regional convergence over the 1995-2005 period, the longest and most recent period for which consistent data are available (regions are defined as the subnational tier of government enjoying the greatest economic self-rule, which is in turn defined below: states in the U.S., autonomous communities in Spain, provinces in Canada, Laender in Germany, counties in Denmark, etc.):

Some countries actually experience regional divergence, in which richer regions grow faster than poorer ones: Slovakia, Poland, Ireland, Hungary, the Netherlands, and Japan, most notably. The fastest converger in the sample is the European Union (the 15-member EU prior to the entry of the postcommunist states and Cyprus). In other words, the gap between poorer EU states and richer EU states was erased at a 5% annual clip between 1995 and 2005. Much of this remarkable performance had to do with the steep rise of Ireland, but even when Ireland is excluded, the EU is a star performer among these “countries.”

In the chart above, there is no clear relationship between how (more…)

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Constitutional debates swirling around the PPACA’s individual mandate have much to do with federalism. The core issue the Supreme Court is addressing is whether the federal government has essentially unlimited authority in economic policy, or whether they are yet some areas of economic policy-making (such as whether to compel commerce) exclusive to the states. As someone who believes that constitutions ought to be read according to – I don’t know – what their actual words say, I think the entire act is obviously unconstitutional. Article I, section 8 of the U.S. Constitution permits Congress to legislate in order to “regulate commerce…among the several states.” Thus, Congress has the authority to regulate interstate commerce. Not “anything that might be related somehow to interstate commerce,” plus “anything necessary and proper to any of those things.” Of course, no one on the Supreme Court, except perhaps Clarence Thomas on issues like this one, shares my judicial philosophy.

Putting the constitutional issues to one side, however, I want to address the desirability of the kind of federal system that classical liberals — and, perhaps, Justice Thomas — favor. We can summarize that federal system as follows:

  1. The primary regulatory authorities in the country are state and local governments.
  2. The economic role of the federal government is to ensure a common market: to prevent states from levying barriers to the free flow of goods, services, people, and capital, from tariffs to invidious regulations to local preferences in government procurement.
  3. The national court system protects basic human rights and civil liberties from infringement by federal, state, and local governments.
  4. State and local governments fund their activities almost exclusively out of their own resources. The federal government should not, in general, provide grants to state and local governments.
  5. State governments are politically autonomous, constitutionally sovereign, and independently elected. They may legislate freely within the bounds expressed above.
  6. State governments are permitted to form compacts to deal with externalities. For instance, states may choose to adopt uniform regulations on insurance so that companies can sell the same product in multiple states with a quicker approval process. Because states retain their sovereignty, they are free to enter and withdraw from such compacts at any time.

OK – so what are the arguments against this kind of system? (I go over some of the arguments and evidence in favor here.) One common objection to “states’ rights” is that state governments may violate the civil rights of some of their citizens. I share this concern, one reason I don’t think the term “states’ rights” is appropriate for my position; nevertheless, the concern is addressed with point 3 above. Another objection might be that problems like pollution and endangered species can cross state boundaries. Given a sufficiently small number of states, however, I do not see why they cannot contract with each other to solve their commons problems. What else?

There are two concerns about fiscal federalism that many progressives share that I take seriously: that inter-jurisdictional competition under federalism will undermine the welfare state, and that the system will lead to greater inequality among regions. The first concern (more…)

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The Question of Upward Mobility

Scott Winship has an interesting essay (lead story in this week’s print National Review but also available here) entitled “Mobility Impaired: The American Dream Must Move From the Bottom Up.” This is an issue that seems quite important to my students, many of whom are wondering whether the $50k+ per year education will bear fruit.

According to the research reviewed by Winship, there is clear evidence in the US of “pervasive upward absolute mobility” –albeit less mobility than in other wealthy democracies—but this is far less true when looking at the bottom:

What is clear is that in at least one regard American mobility is exceptional: not in terms of downward mobility from the middle or from the top, and not in terms of upward mobility from the middle — rather, where we stand out is in our limited upward mobility from the bottom. And in particular, it’s American men who fare worse than their counterparts in other countries. One study compared the United States with Denmark, Norway, Sweden, Finland, and the United Kingdom. It found that in each country, whether looking at sons or at daughters, 23 to 30 percent of children whose fathers were in the bottom fifth of earnings remained in the bottom fifth themselves as adults — except in the United States, where 42 percent of sons remained there.

The essay considers the role of education, divorce and race in mobility from the bottom and has some interesting reflections on the political and normative implications.

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Nobel Prize-winning economist Joseph Stiglitz argued recently that both the economic downturn of the last two years and the looming debt crisis are the fault of “a powerful ideology—the belief in free and unfettered markets,” whose “30-year ascendance” has “brought the world to the brink of economic ruin.”

As an economist, I can’t hold a candle to Stiglitz. Still I am puzzled by a couple of Stiglitz’s claims.

The first is his claim that the last thirty years has seen the ascendance of “deregulated capitalism.” It is not immediately obvious to me how to measure, and thus evaluate, a claim like that, but a few likely indicators seem to point against Stiglitz. For example, measured in constant dollars, government spending, both federal and combined federal, state, and local, have increased every single year during Stiglitz’s window (he said “the early 1980’s to 2007″; I represent below 1980 to 2007). Here is total spending:

As a percentage of GDP for the same period, total spending has remained fairly flat:

I could not find detailed numbers on regulatory burdens and costs before 1995, but in reports compiled by the U.S. Small Business Administration (a federal government entity) in 1995, 1998, 2001, 2005, and 2010 (all available here), total cost of regulatory burdens increased each year. Moreover, according to economists Veronique de Rugy and Melinda Warren, both total budget outlays of regulatory agencies and staffing of such agencies has steadily increased since 1980, outpacing both inflation and population growth. And economic regulation in particular—which may be what Stiglitz is primarily thinking of—has also increased throughout the period.

All of this is difficult to explain on Stiglitz’s hypothesis.

The second claim of Stiglitz’s that puzzles me is that during the last 30 years, “most Americans saw their incomes decline or stagnate year after year.” But whether measured in nominal or real terms, most incomes across the classes have increased since 1980, even if modestly. Here is income distribution from 1947 to 2007 in constant 2007 dollars:

Here is real median household income in constant 2009 dollars by race:

File:US real median household income 1967 - 2009.png

This indicates that most incomes have risen when measured in real dollar income. But even that leaves out the important fact that what those incomes can buy in terms of goods and services has increased dramatically. Because the cost of most goods and services tends to go down over time, and because innovation not only finds more efficient ways of bringing current goods and services to market but also produces new goods and services, what people can buy with their money—even if their incomes stayed relatively flat—has increased. Consider just one conspicuous example, the sharp decline in the price of computing power.

That point leads to my final comment on Stiglitz’s essay. Consider this passage, in which he offers his remedies for the fiscal challenges we face:

The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich.

Many people, including the president again just last night, have been calling for raising taxes on the rich as at least one part of the way out of the morass. The president suggested that by “the rich” he meant those making over $250,000 per year, which is about 1.5% of American households.

I shall make no comment about the economic sense of the president’s proposed policy, or about what seems to be his zero-sum-game conception of wealth. But let us try to gain some perspective on this definition of “the rich” by comparing it to worldwide standards. People making over $250,000 in annual income are, by any worldly standards—whether measured by the rest of the world today or, even more so, in historical terms—wealthy to a degree that would have been unimaginable just a few generations ago. But then again, everyone in America is.

For most of human history, people survived on something like $1–3 per day in current dollars. Over the last seven generations of humanity, however, that has increased by something like sixteen-fold (read McCloskey’s latest for the data). Average per capita income in the U.S. in 2010 was $47,200, approximately fifty times the average for most of human history. Not a fifty percent increase, not a five hundred percent increase, but a five thousand percent increase. Worldwide, average income in 2010 was $11,200—an astonishing increase by historical standards, but only one-fourth that of the United States.

Indeed, the proportion of the American citizenry whose income is above that of the current worldwide average is . . . do you have a guess? What would you have guessed? It is eighty percent. Eighty percent of Americans earn an annual income higher than the worldwide average, which includes about two-thirds of those Americans who currently pay no federal income tax at all. Today, effectively zero percent of Americans have incomes equal to or lower than double the average worldwide income for human beings throughout most of their history.

All Americans are rich—indeed, we are rich at unprecedented levels. We are not equally rich, but we are all rich. Perhaps therein lies the rub, what really is bothering Stiglitz and others? What if it turned out that the only way we could all have these unprecedented levels of wealth is if we allowed great inequality?

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The latest Economist has an interesting feature on inequalities among regions within countries. The article compares countries on their ranges in GDP per head (the ratio of richest region to poorest). Thus, we get charts like the following:

But range is an extremely crude concept for measuring inequality. In the U.S., the District of Columbia is by far the “richest” “state,” because its large number of commuter workers generate large GDP without figuring into the denominator. Moreover, the use of the range to illustrate dynamics over time is misleading:

This chart makes it appear that the U.S. has rapidly growing regional inequalities. But the increase here is being driven by D.C. again. The growth of the federal government has concentrated ever more GDP in the District, causing its numbers to look increasingly out of whack with the rest of the country.

A better approach is to compare rates of regional GDP per head convergence. Convergence is the phenomenon whereby poorer economies tend to “catch up” to richer ones. A rough-and-ready benchmark for “good” convergence is an annual rate of about 2%. Econometricians derive rates of convergence in GDP per capita by regressing annualized GDP per capita growth on initial GDP per capita for a dataset of economies. I have calculated regional convergence rates for Canada (provinces and territories), the U.S. (states and D.C.), and the European Union (member states before 2006) over various periods. Here are the results:

The “equalization” column indicates whether the federal system has extensive equalization payments that give grants to poorer regions. The EU does have a nominal equalization program, but it does not redistribute much money. Of these systems, only Canada has a truly extensive equalization program.

Despite this, Canada’s convergence record is the worst of these systems, although the differences between the U.S. and Canada are small. Over the entire 1981-2005 period, U.S. states converged at 1.9% per year, while Canadian provinces did so at 1.6% per year. The EU clearly has the best convergence record, with a massive 8.0% annual convergence rate during the 1995-2005 period, which saw the rapid rise of Ireland, Greece, Spain, and Portugal, relative to the rest of the EU. (Eastern European countries are not included in these numbers, because they had not joined the EU yet.)

This evidence suggests that decentralized federal systems do a pretty good job of getting rid of regional inequalities, even without equalization programs. In a paper currently under “revise-and-resubmit” at an economic geography journal, I present much more formal and systematic evidence to this effect. If and when it is published, I will revisit the topic.

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Rumble Rumble

Well, my guest blogging stint here has gone somewhat awry. My post on trade relations was sent in Tuesday morning last week, my time. By serendipity, the University’s public relations office called a half hour later asking if I could do an interview with Canterbury Television that afternoon on US-NZ trade relations. I said I could, but that I couldn’t leave campus; they were happy to come to my office for 2 PM. Very lucky call, that one.

I was putting on my coat at ten to one to meet a friend from the NZ campus libertarian organisation for lunch when things started moving. We’d had a very big earthquake in Canterbury back in September – a 7.1 in the middle of the night experienced from my bed on the second floor of an old wood-framed house. The next big aftershocks – the 4.9 on Boxing Day and the 5.1 mid-January – were enjoyed either at ground floor or while in bed. I got pretty good at guessing the magnitude of aftershocks from my office. For any decent one, folks would throw their guesses up onto the #eqnz Twitter hashtag. The crowdsourced seismograph performed admirably well* – often within a decimal point of the actual reading. But I wasn’t well calibrated for anything over around 4.8 while up on the fifth floor of the University of Canterbury’s Commerce building.

And so I didn’t have a very good read on how big this one was. I guessed a bit bigger than Boxing Day. That was more than a little wrong. The Canterbury Television building had collapsed; I don’t know whether the reporter who was to have come out to see me at Uni had left yet. They’re still pulling out bodies. Glad I didn’t go to them.

We came out pretty lucky. A tall heavy bookcase fell between rather than on my wife and a coworker when they were leaving her office. The kids were fine at home with my parents, who visit to escape the Manitoba winters. This year it’s been an adventure holiday for them.

Enough whining, especially as other folks have stories far better than mine.  Back to economics. Or, at least to economically informed whining.

Half the petrol stations in town were closed due to power outages. Most of the others couldn’t keep enough petrol in stock to meet demand. The port at Lyttelton where fuel’s usually offloaded took damage as did the tunnel which serves as main access for fuel tankers getting from port to stations around town. We temporarily had to source fuel from Timaru – the next port town a couple hours south of here.

We were caught in a bad equilibrium. We were assured that fuel supplies were sufficient to meet normal petrol demand. Normally, folks fill up, wait till the tank is near empty, then fill up again. When everybody knows that there will be enough petrol there tomorrow, and everybody knows that everybody knows that, things work out just fine. Suppose that everyone normally goes seven days between fills and suppose for simplicity that folks are evenly distributed across normal fill days. Expectationally, stations have to have enough fuel to fill the tanks of one eighth of the cars in town. When natural disaster strikes, precautionary demand for petrol jumps. Instead of waiting ’till the tank is down to an eighth, people fill up if the tank is half full. Because they might just have to drive pretty far pretty fast if things get worse. If we moved seamlessly to the new equilibrium, that would be simple. Twice as many transactions, each with half as much volume dispersed.

The problem is the transition. For a short burst, the petrol stations in town have to get a whole lot of folks filled up. After the transition, they go back to pumping the same amount of petrol to twice as many customers. During the transition it’s tough – especially if supplies are tight. Petrol stations are able to handle big increases in demand, if they’re prepared for them. Everybody fills up before heading out for holiday weekends and we tend not to have problems. But when it’s coupled with surprise and cutting the number of stations by a third or so and restricting tanker supply to the stations – we get queuing and empty petrol stations.

The civil defense folks could well have been right that there was enough fuel in Christchurch to meet normal demand. But meeting normal demand would seem at the boundary of capacity when the number of stations is reasonably heavily reduced. Meeting this kind of transitional increase in demand is impossible. But in the temporary shortage case, everybody tries to be first mover; you only hurt yourself by holding back as there may not be fuel left next time you drive by.

How to solve it? I suggested a temporary doubling of petrol prices. Let the petrol stations coordinate a $2/litre price increase that lasts long enough to get the running stations filled to capacity with fuel – a couple days would have done it. Those with urgent need would buy the expensive petrol; others would wait the couple days. Unfortunately, this would likely result in the lynching of petrol station owners. And maybe me with them. Normally we want big price increases to help encourage more supply to come into the market – the excess profits draw petrol tankers from farther away. But it’s not terribly plausible that there’s much margin for increased effort. The petrol companies were flat out getting more petrol here. So we could then call the extra $2/litre an earthquake surcharge with proceeds to be used for the various earthquake relief funds.

It’s unfortunate that folks’ first reaction to price increases in emergencies is “this guy is trying to screw me” rather than “man, supplies are tight!” I can’t count the times I’ve heard folks arguing that cell phone calls should be free in Christchurch for the duration of the emergency, despite lots of calls in the early hours for folks to keep off phone because power outages had massively decreased capacity and folks trapped in buildings needed to be able to call or text for help.

Most folks move from “We need it more” to “It should be cheaper.” And so stores do better by keeping prices constant and letting supply run out – the reputational costs of price hikes outweigh the profits from increasing prices and meeting demand. It’s an inefficient equilibrium. I’d even call it a market failure. And, a remediable one, at least for a temporary problem like petrol supplies. Government could ask the petrol companies to hike prices for a very short period, with the excess revenues going to the relief fund for the emergency. If it induces a black market with arbitrageurs bringing fuel in from out of town to sell above the out-of-town price but below the government surcharge price, so much the better!

More bizarre have been arguments that price increases would threaten the social solidarity on which cities rely during crises. I’d like to think that we’re a bit more resilient than that.

The fuel crisis is now long over, at least in the parts of town with power. But for a few days, folks in the Eastern suburbs with low fuel tanks were effectively trapped there by not knowing whether it would be possible to get fuel at any price if they went to the part of town where the stores were open. Those suburbs are also the poorer parts of town that were worst hit in this quake, the epicentre of which was east of town and shallow. For all the folks who harped on how a fuel price rise would hurt the poor, it was the poorest parts of town that were worst hit for want of petrol.

With no power and water in South New Brighton, we made a 6 am (no traffic – would have run out of fuel in traffic) dash out of that part of town late last week after I’d scouted a route by bike that would get us around the river – all the bridges were out – to the other side of town. We hope to get back home when services are restored over there. And hopefully when life gets back to normal, I’ll return to finish the guest-blogging session.

* Geolocated Twitter earthquake magnitude estimates combined with seismograph readings would have to be interesting data for somebody.

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Having slammed Ron Bailey’s “oil curse” thesis a few days ago, it now behooves me to give him kudos for an interesting piece interpreting political economy models of democratic transition and consolidation in light of the popular uprisings in the Middle East. Check it out; it’s well worth your time.

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This post concludes a series of posts on the topic of “American exceptionalism.” In my last look at the topic several weeks ago, I argued that one conception of American exceptionalism among conservatives – the idea that the United States is uniquely free or has a particularly small government due to its culture – is mostly mistaken. In fact, while the U.S. does have a relatively small government by high-income democratic standards, that relative smallness can be explained more or less entirely by its fiscal-federal institutions, which are also shared by Canada and Switzerland (and Switzerland has a much smaller government than the U.S.). In this post, I take aim at a conception of American exceptionalism more widespread on the left, the idea that the U.S. is uniquely sinful in its degree of inequality. To a significant degree this premise on the left mirrors the premise on the right of uniquely small government: the cost of that small government, it is argued, is more inequality.

The problem with the claim is simple: comparing the U.S. to Europe on inequality is inappropriate because (more…)

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