How (not) to defend entrenched inequality

The endless EU vs US debate rolls on, but now with an odd twist. Although the objective facts about economic inequality, immobility and so on are far worse in the US than the EU, the political situation seems more promising. (I’m not talking primarily about electoral politics but about the nature of public debate.)

In the EU, the right has succeeded in taking a crisis caused primarily by banks (including the central bank, and bank regulators) and blaming it on government profligacy, which is then being used to push through yet more of the neoliberal policies that caused the crisis. And, as we’ve just seen, formerly social democratic parties like New Labour in the UK, are pushing the same line.

By contrast the success of Occupy Wall Street have changed the US debate, in ways that I think will be hard to reverse. Once the Overton window shifted enough to allow inequality and social immobility to be mentioned, the weight of evidence has been overwhelming.

This post by Tyler Cowen is an indication of how far things have moved. Cowen feels the need, not merely to dispute some aspects of the data on inequality and social mobility in the US, but to make the case that a unequal society with a static social structure isn’t so bad after all.
Update Cowen offers a non-response response here. Apparently, disliking arguments for inherited inequality, such as his point 3 (because of habit formation, social mobility reduces welfare) is a “Turing test” for reflexive leftism.

Cowen makes seven arguments, ranging from weak to risible. He is an able economist, and no fool, so the weakness of the case he makes reflects the difficulty of making bricks without straw. I’ll reorder his arguments from weakest to strongest and respond to them in turn.

3. For a given level of income, if some are moving up others are moving down.  Do you take theories of wage rigidity seriously?  If so, you might favor less relative mobility, other things remaining equal.  More upward — and thus downward — relative mobility probably means less aggregate happiness, due to habit formation and frame of reference effects.

This is an ancient argument against income redistribution (Bentham had a version of it, IIRC) but it’s surprising to see it extended to the case of intergenerational mobility.  Apparently, expensive tastes, once acquired in childhood, can’t be dispensed with without great suffering.

5. How much of immobility is due to “inherited talent plus diminishing role for random circumstance”?  Is not this cause of immobility very different — both practically and morally — from such factors as discrimination, bad schools, occupational licensing, etc.?  What are you supposed to get when you combine genetics with meritocracy?  I do not know how much of current American (or other) immobility is due to this factor, but I find it discomforting that complaints about mobility are so infrequently accompanied by an analysis of this topic.

A lot of handwaving here. The supposed genetic role is assumed, not supported by any evidence to produce a suggestion that declining mobility arises because the US has now become more meritocratic, and therefore more efficient at promoting people of high ability. There’s plenty of evidence going the other way, notably including the fact that class matters much more than it used to in getting admission to high-status colleges..

4. Why do many European nations have higher mobility?  Putting ethnic and demographic issues aside, here is one mechanism.  Lots of smart Europeans decide to be not so ambitious, to enjoy their public goods, to work for the government, to avoid high marginal tax rates, to travel a lot, and so on.  That approach makes more sense in a lot of Europe than here.  Some of the children of those families have comparable smarts but higher ambition and so they rise quite a bit in income relative to their peers.  (The opposite may occur as well, with the children choosing more leisure.)  That is a less likely scenario for the United States, where smart people realize this is a country geared toward higher earners and so fewer smart parents play the “tend the garden” strategy.  Maybe the U.S. doesn’t have a “first best” set-up in this regard, but the comparison between U.S. and Europe is less sinister than it seems at first.  “High intergenerational mobility” is sometimes a synonym for “lots of parental underachievers.”

Another version of the same argument.  The only notable point is the observation that “smart people realize this is a country geared toward higher earners”.

6. I am more than willing to hear arguments than a less mobile society is a less stable society, or otherwise a society which makes worse political decisions.  But I haven’t seen serious arguments here.  By “serious arguments” I mean those which take endogeneity into account and go beyond noting that Denmark is a better polity than Brazil, and so on.

Granted, there doesn’t appear to be a lot of hard statistical evidence here (commenters, please prove me wrong on this). But there is a ton of US political rhetoric from the past (right up to the last six months or so) that would suggest great social and political benefits from living in a ‘land of opportunity’.

2. Measured mobility in the United States does not seem to be falling, or at least not falling much, as shown by Scott Winship.

This is a general class of argument I find unimpressive. Although statistical evidence is hard to find after a point, it seems pretty clear that at some point in the past income mobility was greater in the US than in Europe. And the evidence is clear that the reverse is true now. So, arguments of this kind amount to picking particular subperiods where you get negative results. There’s a further problem in that Winship’s summary of the data is unreliable. For example, this study  shows that “transmission of high-income status significantly increased” but Winship only reports the finding that “he transmission of low-income status remained stable”.

1. If the general standard of living is rising (and I am more than willing to admit problems in this area for the United States), mobility takes care of itself over time.  I find it more useful to focus on slow growth, if indeed that is the case.  Just look at income growth for non-wealthy families and that is more useful than all the mobility measures put together.

Maybe so, but as Cowen admits, the evidence is in, and median household income has been falling for a decade. Lower down the scale, the poverty rate is rising. Over the last 40 years, income growth for non-wealthy families has been much weaker than for wealthy families, and much slower than in the postwar decades. As Cowen must surely remember, when this fact was pointed out, defenders of the US system used to claim that it didn’t matter because the US system allowed lots of economic mobility. Some, like Paul Ryan are still pushing this claim.,

7. I would like all measurements in this area to take into account the pre-migration incomes of incoming entrants.  Denmark, which doesn’t let many people in, is a much less upwardly mobile society once you take this into account.  Sweden deserves more praise, and in general this factor will make the Anglo countries look much, much more supportive of mobility.

This is about the only argument worth taking seriously. But, in previous debates of this kind, it’s turned out that taking migrants into account doesn’t change much. The US would be a particularly complicated case because of the large number of undocumented migrants, many (most?) of whom return home at some point.

To sum up, Cowen’s post is an exercise in defending the indefensible, and its weaknesses reflect that. As Mitt Romney’s tax returns show, wealthy Americans have the rules rigged in their favor from day one. And that’s assuming they obey the rules. Unlike the poor, they can mostly cheat with impunity. In these circumstances, it’s unsurprising that US inequality is so deeply entrenched. The only surprise is the suddenness with which the facts have become common knowledge.

It remains to be seen how this will play out electorally, but there are at least some promising signs. Eight months ago, the situation in the US, seemed if anything even worse than in Europe. Obama seemed determined to capitulate to the Repubs, with the support of the entire centrist establishment, still committed to the idea of bipartisanship. Political discussion was dominated by the claims of the Tea Party, essentially identical to those of the European Austerians. The debt-ceiling debacle, the success of Occupy Wall Street and the recent Romney revelations have changed that. First, the fact that the Repubs are extreme reactionaries, uninterested in any kind of bipartisan compromise, has finally sunk in to all but the most obtuse centrists.[1] Second, the point that the rich play by different rules from the rest of us has been made glaringly obvious.[2]

Given the weakness of the economy, and the absence of any real action from the Administration between the initial stimulus and last year’s Jobs Plan, Obama’s re-election can’t be taken for granted. But it’s looking increasingly likely, and his SOTU speech will hopefully make commitments that will be hard to retract after November.

fn1. I don’t buy the 11-dimensional chess version of this story, but the slapdown of Obama’s painfully sincere attempts to reach across the aisle was exactly what was needed

fn2. It would be great if we could see a similar transformation regarding civil liberties, the permanent War on Terror and so on, but I’m not holding my breath. SOPA and the TSA can provoke outrage, but NDAA not so much, at least for the moment.

46 thoughts on “How (not) to defend entrenched inequality

  1. Dan :
    And how exactly would you propose the reshape the economy without enlightened and courageous leadership?

    The real issue is to reshape ownership of the productive apparatus of the economy. We need to move (by steps) from corporate capitalist and oligarchical ownership to a capitalist-cooperative system. By this I mean we remain basically capitalist but companies must be cooperatively owned and managed by the workers. Cooperatives would still compete with each other in a capitalistic fashion. Non-working shareholders would be phased out. Retirees would get a pension equal to the basic wage. The separate managerial class would be phased out. The public sector would be expanded to provide a job guarantee (in the public service) and a full and better range of public and human services including health, mass transit a dirigist energy and national infrastructure policy and so on.

    The largest peronal income in the country would not be permitted to more than 10 times the basic wage which would be legislated with the job guarantee. Personal and family wealth would face punitive taxes once it reached 10 times the average wealth. Money sent off-shore to avoid these measures would be confiscated. Rich individuals who persisted in attempting to circumvent these laws could face prison. Those emigrated in protest at this more equal society would be exactly those greedy exploiters you don’t want. Let them go but not their wealth.

  2. Inspiring stuff, but who drives the change? Or, to put the question more broadly, how to get from here to there?

  3. Dan :
    Inspiring stuff, but who drives the change? Or, to put the question more broadly, how to get from here to there?

    Like McCain, I tend to believe it’ll take 2 election cycles for the brown stuff to finally hit the wind farm, but I’m also worried about much larger issues in the US between now and then, like the collapsing of their currency.

  4. @Ikonoclast

    I don’t need to agree with your precise specifications, or even agree that in practice they are all feasible to like the overall thrust of your outline.

    I think one could scale in radically progressive taxation between 10 and 25 times average wealth and income. I have no problem with people sending some or all of their after tax income overseas. I don’t agree with imprisoning recalcitrants trying to evade taxation. Asset confiscation would serve adequately. We want to spend as little on prisons as possible.

    I’m not sure how you could phase out “the managerial class” or even if this would be desirable. Effective and efficient managers contribute to good work environments and good outcomes. Assuming accountability and a viable model for the work unit and the other egalitarian measures, I’ve no problem with management.

  5. dear Ikonoclast
    sounds a bit like an updated proudonian/syndicalist model of federations of workers’ co-ops – not that i’d disapprove in the least if it were to transpire. hell, throw in a bit of social credit & i’d even vote for it, if it came to that. but as for maximum wealth being measured at ten per cent of the ovarall average, wouldn’t that mean a static overall average wage over time & no increase in wealth for anyone? and, ultimately, wouldn’t that be a matter for the worker/owners co-ops to set for themselves & their members, as part of the (presumably) healthy competition, in a hybrid, capitalist-co-operative economy, between different worker/owner co-ops for business, resources & the recruitment of appropriately skilled or cashed up fellow worker/owners?
    yours sincerely
    alfred venison

  6. @alfred venison

    but as for maximum wealth being measured at ten per cent {times [orig]} of the overall average

    Now …

    wouldn’t that mean a static overall average wage over time & no increase in wealth for anyone?

    No, not necessarily. It would place some constraints on inegalitarian distribution of wealth and income, but if the value of production rose by 10%, it would not constrain movement within the tolerance band — e.g. people on half average wealth and income taking a much greater than average share of new wealth, or even those who were 8 times as wealthy as the average becoming 10 times as wealthy.

    It would tend to militate against extreme maldistribution of wealth and income however, where “extreme” was defined as starting at one order of magnitude of positive difference.

    How enterprises arranged their business would be a matter for them, whereas the taxation system would deal with the results.

    One potential problem might be the issue of non-taxable benefits. In taxation regimes seen as confiscatory, an enterprise might simply “pay” people in short hours — giving them the maximum money prior to the confiscation threshhold, and then cutting their working hours. A person who only works 5hours per week and still gets 10 times the average income is not much less privileged than someone working 30 hours per week and getting 60 times the average income. You’d also have to define job perquisites quite broadly as well to avoid evasion or artificial schemes.

    In a way, this is why consumption-based taxation ought to have a place in the system, if only because it complicates evading the reach of taxation. It also captures more revenue from extra national tourism. A system that allowed more flexibility and a smoother tax curve as people’s incomes entered the confiscatory threshholds but clawed back through purchase of services and goods, revenues that could be used to supply non- or semi-liquid benefits to those on or near the bottom of the distribution might end up being a more egalitarian in its outcomes than a regime that simply sought to confiscate everything above a specific relative threshhold.

  7. I’m sure “my” suggestion needs plenty of work on it. Of course, these ideas are not original.

    What ought to be clear to people is that something has to change. Corporate oligarchic capitalism is about to fail spectacularly and a lot of people, in the billions probably, are going to get hurt very badly. The oligarchs may manage to insulate themselves for another decade or two except where revolutions occur.

    Corporate oligarchic capitalism fails or soon will fail all the following tests. I mean the tests of

    (1) Democracy;
    (2) Equity;
    (3) Peace;
    (4) Sustainability;
    (5) Fulfillment; and
    (6) Aesthetics.

  8. dear Fran Barlow
    i’m not so worried about differences in personal wealth if those differences have been earned fair & square (conditions apply). i don’t have a great problem with some people having more money wealth than others. some people seem to need a lot of expensive material goods to be happy, others appear at least equally happy with less stuff. if its their gig to accumulate a lot of money to buy a lot of stuff in order to be happy as they see it then i have no great problem. my problem is if its their gig to accumulate a lot of money to buy political influence. that’s a problem i’d work on by some kind of political campaign finance limits.

    if a worker were to be very good at some skill, or average good at some skill in high demand, then worker/owner co-operatives should be able to offer above average to get that person’s skill for their co-op rather than a competing co-op. conversely, a worker with skill in high demand should benefit from any worker/owner co-op willing to pay higher than average to get that skill for their enterprise.

    but, most importantly, who gets to decide the “threshold of excess”? at what point is a worker with a skill in demand earning “too much” for it? and when does a worker/owner co-op with a burning need for a particular skill pay “too much” for it?
    ideally, it should be the prerogative of each worker/owner co-op to pay what it thinks is an acceptable wage for scarce skills it needs. it should be allowed workers with skills in demand to earn more for those scarce skills while they are rare & in demand.

    if there were to be limits on wages/labor costs then such decisions would need to be decided by some kind of federation of participating worker/owner co-ops. and conversely, of course, if limits on wage/labor cost was something a federation of worker/owner co-ops wanted, argued for & voted for then i’d have no problem with that. but i think the greater problem is with unlimited political campaign financing.

    anyway, this is just “pipe-dreaming”.
    yours sincerely
    alfred venison

  9. @alfred venison

    I’m not in favour of wage control. It’s much more efficient to allow enterprises to pay as they see fit and allow the portfolio of tax measures to do fairness and adequacy for all.

    I also don’t accept your boolean on inequality. Within certain bounds, inequality is probably unavoidable in practice, and the net social benefit of attempts to force equality would be sharply negative. On the other hand, allowing gross inequality leads to what we have now — a situation in which a tiny minority of the world sets policy in ways that buttress both their privilege and political monopoly. That makes the inequality not a mattter of quantity, but of quality. Even in Australia, the difference between the culutral significance of the CEO of NAB or BHP and a 16-year-old apprentice pastry chef is not captured merely by the proportion of the former’s income that the latter earns. When one asks how the “gods” of Wall St or Warren Buffett compare with a child labourer in Sierra Leone, it’s hard to prefer biological to cultural taxonomy and say these two beings are even of the same species. Yet in theory, according to the official culture, they are equals.

  10. Ikonoclast’s “capitalist cooperatives” will not destroy the threat of economic crisis.

    Co-operative capitalism is just as contradictory as hierarchical, oligopoly, capitalism, and just as threatening to society.

    Technically you abolish capitalism with the economics of socialism (democratic or undemocratic). However at the level of humanity, you create a better and more stable society with “democratic socialism” mixing plans and free markets as best suits circumstances.

  11. According to Wikipedia, as at July 1 2010 the Australian minimum wage was equivalent to $20,000 international dollars (in round numbers) and this was 50% of 2009 per capita GDP (again in round numbers).

    This seems reasonable on the face of it but I am am not sure how it pans out in detail for people living on that sort of money.

    At the top end of the scale, there seems to be no real justifiction (IMO) for anyone to earn or have income of more than 10 times that i.e. $400,000 international dollars. Certainly no manager or even CEO is worth more than that. The current mythology that top CEOs create value an order or more above that order (e.g. $4,000,000) is just that; mythology.

  12. dear Fran Barlow
    sorry for misconstruing your position & thanks for the correction. not sure, though, how i did a “boolean”, but it behoves me to be sure i’ve not been misconstrued due to “category error”.

    its only against the backdrop of Ikonoclast’s hypothetical society, back at #25 as i took it then (particularly the part about companies cooperatively owned & managed by the workers in competition with other worker owned & managed companies) that i’d be sanguine about worker/owners who were able to accrue more money wealth than others by working the parameters of that system.

    i’m not at all in that way sanguine about differences in money wealth in the present system where a lot of it has been gained by coercion, fraud & expropriation. in a society where worker/owners controlled the means of production & the usufruct from the surplus this would be less a problem, imo. the nub is getting from here to there, of course.

    but, crucially, my sanguine attitude, in addition to Ikonolast’s hypothetical society of competing worker/owner co-ops, is crucially also contingent on, at least effective, political campaign contribution/expenditure controls. i’m ok for comrade worker/owners to work & be paid more or work & be paid less, in order to accrue more money wealth or to accrue more time wealth, but not in order to accrue money wealth to buy unhealthy amounts of political influence.

    in the present situation, some kind of political campaign finance reform would do a lot to bring issues & a better quality of policy debate back to politics, imo.
    yours sincerely
    alfred venison

  13. Dan :
    Campaign finance reform would be a great start and is also happily within the existing Overton window.

    Absolutely (!), without that, it’s almost pointless implementing other much needed reforms.

  14. Arguments that the distribution of wealth reflect meritocracy are easily combatted by observing that the distribution of wealth looks nothing like a bell curve.

  15. Brian it’s a bit sad when one has to say Newt Gingrich, is probable the best republican on offer, at least he is a straight down the line rogue and his motives will probable be limited to robbing the treasury.

  16. “Why would merit (whatever that is) be normally distributed?”.

    Because life is a normal distribution, once you understand the maths you will understand why.

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