Highlights on Inequality

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.



What I’m Reading

HUMANE Act proposed by a GOP Senator and DEM Congressman should give us hope that immigration reform is possible in an incremental, bipartisan fashion.

Does Inequality Matter?  I keep thinking about a village of nine people, incomes equal (Gini coefficient = 0) when a poor migrant arrives with no income. He joins the village and is treated charitably.  But suddenly there is inequality. The Gini coefficient rises by ten percent. Which begs the question: is the measure of inequality a useful way to think about poverty, or economics of a society generally?

Ideas for Renewing American Prosperity. This is a reprint of articles from the WSJ’s anniversary issue (125 years), which included essay by many colleagues  at Hoover.

Exit Strategy note … the man who invented the term “Exit Strategy” was Clinton Sec. of State, Warren Christopher.  His papers are now part of the Hoover Institution Archives.

What is the right number of new Americans?

America welcomes over one million legal immigrants every year, thanks to the most open & generous policy in the world. That’s a good thing. But is 1.1 million in 2013 the right number?  Is there too much of a good thing?

Keep in mind: we are talking about legal immigration. These are the people playing by the rules, waiting in line, getting their green cards, and doing what it takes to qualify for U.S. citizenship. But if 1.1 million is helping to boost our economy and enrich our culture — America is a nation of immigrants, after all — why not 1.3 million?  Seriously, why not add 200,000 green cards just for foreign scientists, engineers, and entrepreneurs?

I asked these questions to a panel of nearly 40 top scholars, conservative, liberal, centrist, and nonpartisan. The answers appear in this new publication from the Hoover Institution that our team put together over the past few months. It’s called Peregrine and I could not be more proud of the result.  Please take a look.

Three Failures on Immigration Reform

Watching President Obama stand outside the White House under this afternoon’s mid-summer sunshine and express frustration with the failure of his 5-year strategy on immigration reform, one could sense his emotions. But on a moment’s reflection, the failure of immigration reform rests entirely on the President’s shoulders.

Obama claimed that he would be taking executive action in the coming weeks. Although I am a proponent of greater immigration, his speech struck me as a huge mistake. What today’s White House narrative reveals, in fact, is insincerity. True, a bipartisan bill did receive 68 of 100 votes in the Senate one year ago (on June 27, 2013), and that legislation has indeed languished because the House of Representatives won’t consider it, not even in committee.

The real story is that Republicans in the House were never willing to pass a comprehensive bill, certainly not one with a hint of amnesty, and the administration knows it. Indeed, one has to wonder if the goal of pushing the all-or-nothing big bill was ever anything more than a media tactic.  Either the President is shedding crocodile tears or he really believes that Republicans in the House – not the Senate, he reminds us – don’t like foreigners.

In his remarks, Obama called out Speaker of the House John Boehner (R-OH) for inaction.  That’s off target. The blame belongs on the Democrats and their failed tactics. Three failures stand out.

First, the evidence is pretty strong that leading Democratic politicians prefer that reform festers unresolved. If Barack Obama really wanted to change immigration law, he would have supported comprehensive reform as a Senator back in 2007 when it was championed by President Bush (Republican) and Senator Kennedy (Democrat).  The even more damning fact is that the Democratic Party had majority control of the Senate and House for two full years in 2009 and 2010 after Obama became President. Nancy Pelosi, not John Bohener, was Speaker. Why wasn’t comprehensive legislation passed then?

Some say that the White House was too busy in the first two years of the Obama Presidency, a ridiculous defense. Candidate Obama had promised action – “I can guarantee that we will have, in the first year, an immigration bill that I strongly support.” – and he turned his back on it when in office. Despite the weak economy, the White House had time to push for and enacted the hugely expensive, controversial Affordable Care Act. The White House had time for lots of other legislation, even time to enact “Cash for Clunkers.” But no time for immigration reform legislation.

Second, the President has constantly taken executive action in favor of policies he likes and disregarded parts of laws he dislikes or that are inconvenient. The White House refuses to enforce major provisions in its own signature legislation on health care, and it has overstepped its authority on immigration law as well. Left unsaid in today’s remarks is the fact that two years ago this month, (June 15, 2012) President Obama took executive action on immigration by changing the law through the DACA memorandum. The memo granted what critics call amnesty for undocumented children. It’s more complicated than that, sure, but nobody can deny the action sowed uncertainty, confusion, and the sense this White House could do whatever it wanted. If Americans aren’t clear about the implications of the memo, do you really think the impoverished people of Central America are? And yet we are to believe the surge of children arriving at the southern border are unrelated? Rubbish.

Why would any legislator trust this administration to be an honest broker now? Talking to staffers around Washington, one discovers that the President’s constant threat of more executive fiat is an ever-present destabilizer. Even the President’s Democratic allies admit off the record to the media that this White House is absolutely terrible at fostering trust and good will, even among Democratic legislators.

Third, Democrats have failed to offer incremental reforms, even though it has been clear that nothing comprehensive is viable. If the White House was sincere about wanting to work together, indeed to lead, then it should describe a handful of smaller policies that would work as legislation. Where are the private meetings on incremental legislation? Where is the outreach to top staffers in the House and Senate to craft a small, consensus bill that has 90% support (say on STEM graduates). Where is the effort to re-establish a functioning legislative process?  Nowhere.

To recap: President Obama was elected in 2008 and sworn into office in January 2009. For the next two years, Democrats controlled the Senate and House of Representatives. No bill on immigration reform appears to have been considered by Nancy Pelosi’s House of Representative or the Senate during that time. Eighteen months after the 2010 elections, in mid-2012, President Obama took executive action via the DACA memorandum, an action that could be seen as fomenting an influx of undocumented children. In mid-2013, the Senate passed a comprehensive immigration reform bill despite widely acknowledged resistance among House Republicans. Senator Harry Reid (D-NV) ruled out anything less than the whole comprehensive bill, a position never rebuked by the White House. The White House today says that the lack of a vote in Boehner’s House, unlike the lack of a vote in Pelosi’s House, has forced his hand.

What one sees is a White House taking executive action on immigration five months before an election. It happened in 2012. It is happening in 2014. Coincidence?

When the President neglected to offer any vision of compromise today, one suspects that he has none.


Smiles (not standards) to VOX

I haven’t been overly impressed by VOX until I saw this great piece on occupational licensing.

Licensing raises costs and reduces consumer choice, and research has found that these costs are economically significant. For example, economists Morris Kleiner and Alan Krueger have found that licensing is associated with about 18% higher wages on average, and those higher costs are often passed on to consumers. Economists have estimated that entry restrictions on non-physician health care workers cost consumers over $100 billion per year.

The clash of interests – consumers versus workers – leaves the poorest consumers with less money and, sadly, worse care.  One of the surprising graphs at VOX shows how people in states with more dental licensing end up with fewer teeth.

Frustration with occupational licensing is a source of bipartisan agreement. Economist left and right are against it; politicians left and right are for it.  However, it’s also an issue where you don’t hear much meaningful discussion of alternatives, and I think that’s because the only real alternative is libertarian.

There’s a larger parallel to education and health policy. The tendency is for governments to “solve” problems by centralizing authority and then setting standards which the public must then obey. Is this effective? Common Core is the latest effort to set standards, Meanwhile, parents are given fewer choices over which school or teachers they have to accept. I suspect that the market is much better at setting informal standards on teacher quality than the school district is at setting formal standards — if a true teacher choice market existed (imagine parents having complete control over which public classroom their children were assigned).

Do you think education consumers would prefer formal standards or choices?  Would you prefer choosing your college and major or an alternative world where the US Dept of Education established and enforced college-level education standards for all courses?

I’m smiling.

Leadership versus Management?

Dear readers,

I would greatly appreciate your answers to a survey here. This is for my research about leadership culture and talent management at all types of employers to shed some contrast on the way the Pentagon works. It follows the research that backed up my 2012 book, Bleeding Talent.  Please take a few minutes to answer it – privacy guaranteed – and share with any colleagues. Getting this survey to military veterans would be especially helpful, but I’d like to gather insights from you whether you wore the uniform or not.


Survey link is https://www.surveymonkey.com/s/LeaderTalent1

Tim Kane
Research Fellow  |  Hoover Institution  |  Stanford University

P.S. Here are some reviews of Bleeding Talent that may be of interest:
National Review: “It is essential reading.”
JFQ: “His survey resonated across the Services.”
New York Times: “As an all-volunteer force, the young men and women who serve these days are top drawer; it is the institution that is idiotic, he argues. And [Kane] has a drastic remedy in mind: a dose of classic economics.”

WIRED article on the game of Go, and computers

I recommend this very good WIRED article about computers, go, and intelligence at a high level:

And while programmers are virtually unanimous in saying computers will eventually top the humans, many in the Go community are skeptical. “The question of whether they’ll get there is an open one,” says Will Lockhart, director of the Go documentary The Surrounding Game. “Those who are familiar with just how strong professionals really are, they’re not so sure.”

According to University of Sydney cognitive scientist and complex systems theorist Michael Harré, professional Go players behave in ways that are incredibly hard to predict. In a recent study, Harré analyzed Go players of various strengths, focusing on the predictability of their moves given a specific local configuration of stones. “The result was totally unexpected,” he says. “Moves became steadily more predictable until players reached near-professional level. But at that point, moves started getting less predictable, and we don’t know why. Our best guess is that information from the rest of the board started influencing decision-making in a unique way.”