Thursday, May 31, 2012

Stiglitz, "serious analysis", and "income inequality"

Here's Joseph Stiglitz in Vanity Fair on the 1% and the potential problems of increasing income inequality...

Let’s start by laying down the baseline premise: inequality in America has been widening for dec­ades. We’re all aware of the fact. Yes, there are some on the right who deny this reality, but serious analysts across the political spectrum take it for granted. I won’t run through all the evidence here, except to say that the gap between the 1 percent and the 99 percent is vast when looked at in terms of annual income, and even vaster when looked at in terms of wealth—that is, in terms of accumulated capital and other assets...
Yes and no. Let's start with clarifying that a big chunk of this is "measured" inequality. Most notably, the tax reforms of the 1980s encouraged compensation for higher-ups in companies to be in the form of wages rather than stock. On top of that, as average compensation rises, average workers have been taking more of their compensation in the form of fringe benefits-- most notably, within the govt-distorted/subsidized market for health insurance. Both of these dramatically alter the calculus on an income-based measure of inequality. A "serious analyst" would mention this-- or even document its impact.

Moreover, a serious analyst would note that income inequality is a static (vs. dynamic) measure-- a snapshot of one year at a time. Finally, serious analysts know that there are many causes of growing income inequality-- most notably, from the demographics of marriage and households to the impact of our lousy K-12 education system on the poor and middle class. (See also: globalization, the decline of unions, welfare reform and measured income.) How could he fail to mention these, at least in passing? (Maybe he does this in his book. Maybe he wants to get his VF audience more excited by the omission? Stiglitz's literary agent says he was born in Kenya. That might explain a few things.)

The debate is over its meaning. From the right, you sometimes hear the argument made that inequality is basically a good thing: as the rich increasingly benefit, so does everyone else. This argument is false: while the rich have been growing richer, most Americans (and not just those at the bottom) have been unable to maintain their standard of living, let alone to keep pace. A typical full-time male worker receives the same income today he did a third of a century ago...

This common argument from the Right is far from the full case, but is general true within a market economy. The counter-claim by Stiglitz is even more simplistic and false: that the poor have gotten poorer repeats the common canard based on lame, static analysis that the poor are the same people year-to-year. And using an income-based measure-- during a time period when compensation for the average worker has moved away from income-- is somewhere between inept and insincere. Is Stiglitz claiming to be a serious analyst?

From there, tongue-partially-in-cheek, Stiglitz turns to the following "selfish" reasons for the Rich to want less inequality.

The Consumption Problem-- poor people won't spend enough money, undermining the economy: This repeats the standard Keynesian over-emphasis on the (relatively obvious) role of consumption in an economy. And it confuses a symptom (low consumption) for its underlying cause (low compensation, caused in large part by the govt's K-12 education, family dysfunction, declining work effort, and a variety of laws that make it unnecessarily difficult for the politically unconnected to earn a living.)

The “Rent Seeking” Problem-- the pursuit of political power by the wealth: This is a valid concern and he does a great job describing political activity as "zero-sum". (This is a tough section for a lefty to absorb.) But he conflates offensive and defensive efforts in political markets. He amusingly critiques this form of govt activism while holding a naive hope in other forms of govt activism. He conflates wealth gained in economic markets with that gained in political markets. The former should be praised; the latter should be condemned (although its often embraced by those who say they're concerned about justice and income inequality). The issue isn't the 1% economically wealthy's use of political markets-- as much as the 1% politically connected use of political markets.

The Fairness Problem: Here, Stiglitz is right on the nose. His focus on opportunity over outcome is spot-on-- and usually ignored or downplayed by those on the Left. But where is economic opportunity squelched the most in our country? In the govt's K-12 education system that is set up as it is for rent-seeking by a powerful interest group! Only statists, racists, and self-interest greed-mongers could applaud the current system.

The Mistrust Problem: Again, Stiglitz is correct in fingering a big problem-- except that he's not focusing enough on political markets as a root cause of the distrust.


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