Highlights of my summer reading on the hot topic of income and wealth inequality:
Tyler Cowen’s July 19, 2014 essay in the NYT:
Policies on immigration and free trade, for example, sometimes increase inequality within a nation, yet can make the world a better place and often decrease inequality on the planet as a whole.
…We have evolved a political debate where essentially nationalistic concerns have been hiding behind the gentler cloak of egalitarianism. To clear up this confusion, one recommendation would be to preface all discussions of inequality with a reminder that global inequality has been falling and that, in this regard, the world is headed in a fundamentally better direction.
Income Inequality and Local Government in the United States, 1970-2000. Boustan, Ferreira, Winkler, and Zolt (NBER 16299, Aug 2010):
“[R]ising income inequality is associated with larger increases in tax revenues and faster growth in public expenditures at municipal, school district and state levels.”
Income Inequality and Poverty is a classic NBER piece from Martin Feldstein (w6770, Oct 1998):
The first part of this paper argues that income inequality is not a problem in need of remedy. The common practice of interpreting a rise in the gini coefficient measure of inequality as a bad thing violates the Pareto principle and is equivalent to using a social welfare function that puts negative weight on increases in the income of high income individuals. The real distributional problem is not inequality but poverty.
Gordon’s Misperceptions paper (NBER 15351, Sep 2009):
The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure.
Gordon usefully accounts for the misperception, a large portion being the flawed use of “households” as a unit of comparison during a time of major social transformation of household composition. The proportion of grandparents living alongside their progeny and even fathers living with mothers is dramatically different in 2014 than it was as recently as 1984, let alone 1954.
One puzzle for me is that Gordon claims “there was no increase in inequality after 1993 in the bottom 99 percent of the population” which is at odds with the observation made by Kevin Murphy and, separately and more recently, Peter Lindert (more below). My instinct, which might be wrong for many reasons, is that wage inequality spans the wage spectrum rather than being top-driven. Further, I suspect a big explanation is the regulatory suppression of labor demand. Put it this way: would you support drying up the demand for low-skill labor? You may think “never” but if you agree with minimum wage laws, then you don’t just want to suppress such demand which drives down equilibrium wages, you want to outlaw such demand. Secondly, every dollar of extra regulatory cost per worker is a much bigger wedge on low-paying employment than on high-paying employment. But by all means, layer on the paperwork with the best of intentions.
Making The Most of Capital in The 21st century, Peter Lindert (NBER 20232, June 2014)
On the cause of Great Leveling of inequality (1913-1973), Lindert suggest three superior theories to the one considered by Piketty, as the war/chaos/pessimism does not logically square with the universal leveling among defeated, victorious, and non-participating nations in WW1, WW2, and the Cold War. Lindert suggests (1) decline of the rate of labor force growth globally, (2) an acceleration of labor force productivity / public education, and (3) a shift away from labor-saving bias in technological change.
Lindert notes that many advanced economies did not experience a rising income gap after 1973, notably Germany, Switzerland, France, and Japan. That tells you something important. If you recognize that the top 1% are innovators and supermanagers – not inheritors of great wealth (a fact Piketty himself acknowledges) – then you must also realize this sliver of earners operate globally but realize income in a few countries. The founders and stock option holders of Google, Apple, MSFT are primarily American. The near-frontier economies with per capita incomes at 80% of the United States such as Japan, France, and Switzerland enjoy the consumption of the computer revolution, but they have in a sense exported the inequality that is a byproduct of its development. In other words, income inequality in the modern era is inescapably global. I think this reinforces Tyler’s message.
Lastly, don’t miss this short review of Piketty’s CAPITAL by Chris DeMuth. It is pithy, light-hearted and insightful.
Yet Mr. Piketty has no interest in expanding capital ownership: It doesn’t even make his list of inferior alternatives, and he dismisses capitalized pensions with a few uncharacteristic rhetorical slights. Like others on the left, he seems to have concluded that the only way to promote economic equality is confiscatory taxation—redistribution of capital returns rather than wider distribution of capital ownership. After Marx’s idea of comprehensive state ownership of the means of production proved to be hellacious and tyrannical, progressive attentions turned in a different direction. They would leave ownership—with all of its risks and tribulations—alone, and control its rewards through taxation and regulation.