Wednesday, October 1, 2014

The future of economic inequality


Something is happening in America. Perhaps it might be said that something is happening to America. Maybe we don't all agree on what that is, but the current Real Clear Politics average has 27 percent saying America is on the "right track" and 65 percent on the "wrong track." The Great Recession has long since ended, and the Dow Jones Industrial Average set another record a couple weeks ago, but most of are not feeling it. Poverty continues to hover around 15 percent, worse in regions with a weaker welfare state. Jobs created since the 2008 recession don't pay as well as the ones they replaced. There are serious, in my view justified, concerns about the future of employment, particularly for those of average and below-average skills, not to mention the sustainability of government efforts to enable equal opportunity.

Everyone surely knows that income inequality in America (and elsewhere in the West, but spectacularly so in America) has taken off in the last 35-40 years after long-term declines before that. It may be that we ain't seen nothin' yet. There are three ways of diagnosing this trend. If you'll forgive the straw men in this brief and hurried post...
  1. Capitalist apologetics. Inequality is not a problem. The market has rewarded the productive: The benefits have flowed to those whose work merits them. If you're not among them, you can either strive to join them or writhe with unseemly envy. Meanwhile, our job creators could use another tax cut, not to mention regulatory relief.
  2. Temporary disequillibrium [where I was until recently]. The problem of inequality is temporary. The gains for the working class in the mid-20th century can be attributed to efforts of labor unions and government regulation, which were made possible by settled methods of industrial manufacturing. The shift to a post-industrial economy created all manner of dislocation, which obsoleted labor unions and a lot of government efforts as well. But once things settle down we can figure out a new scheme to provide justice for all. In the meantime get all the education you can.
  3. Handbasket to hell. The problem of inequality is here to stay as long as we allow it. People of great wealth have used their economic and political power to achieve even greater wealth, and are trying to lock in those gains for themselves and their posterity. For most people, economic opportunity is becoming increasingly elusive.
With all this, the release of French economist Thomas Piketty's new book could not be more timely. It is worth reading, albeit his painstaking approach to his complex argument probably requires reading it slowly. It is the culmination of decades of data collection on Western economies. Its sales figures--#202 on Amazon as of this writing--are probably due more to the urgency of his subject matter than to his scholarship, but it remains an impressive work.

The data marshalled by Piketty suggest we're in situation #3; while he suggests a policy remedy he thinks would be effective, he admits that enacting it is unlikely. A number of other economists, like Tyler Cowen of George Mason University, have taken him to task for focusing on economic inequality, and to a degree they have a point: If a rising tide is or could be lifting all boats, who cares if some boats are rising faster than others? Inequality is an outcome, and we're all about opportunity not outcomes, but here's the rub: There isn't a good metric for opportunity independent of outcome. And additional data from Piketty's vast collection suggest that the superrich are sucking all the air out of the economy leaving less opportunity for everyone else... even if educational attainment becomes more widespread. "Education isn't doing it," said University of Wisconsin economist Timothy Smeeding (quoted in Porter).

Piketty argues that population growth and the dislocation of the two world wars, along with pro-labor government policies, produced the exceptional outcomes of the mid-20th century West. With populations in the West mostly stable, and no more world wars, we can expect growth rates in the 21st century to be close to the long-term average of 1-1.5 percent annually, not enough to fuel great waves of economic opportunity or inter-class mobility. The driver of inequality is not so much incomes as it is capital, with the landed elite of 18th century novels replaced by owners of buildings, business capital, and financial capital (p. 118). Capital ownership, now as ever, "is always more concentrated than the distribution of income from labor" (p. 244), whatever salaries are being claimed by CEOs and financial wizards. Currently in the U.S. the approximate distribution of capital wealth finds the top 1 percent owning 35 percent, the next 9 percent owning another 35 percent, the rest of the top half 25 percent, and the bottom half 5 percent (Table 7.2). Concentration of capital wealth is further exacerbated by the tendency of capital to grow faster than the economy as a whole (which Piketty repeatedly refers to as r > g), meaning inherited wealth has huge cumulative effects (p. 246).

The last quarter of Piketty's book consists of policy analysis and recommendations. He makes a largely moral argument for addressing the situation through policy, to wit, that increasing concentration of wealth denies the "meritocratic hope" (p. 422) of the West to provide economic opportunity and a political voice for all citizens. Life was not pleasant for folk in the 18th century, unless you were Mr. Darcy or in a position to marry him. He (Piketty, not Darcy) argues for a global tax on capital, immediately admitting that it "is a utopian idea" (p. 515), which would require systematic and accurate financial information, and coordination among countries. This will help to keep the wealth of society churning, and to keep governments solvent so they can continue to provide social benefits of education, health and security.

Piketty's argument is not unassailable. The data are the best that exist, but contain a lot of assumptions and holes. If you believe that inequality in America is driven by productivity or some other measure of merit, he's not going to convince you. If you believe that government screws up everything it touches, a tax on capital is not going to be floating your boat any time soon. The coordination among Western countries required to enact this tax and the infrastructure to support it seems impossible.  But Piketty does provide the best documentation yet that economic trends in America and the rest of the West are driven by forces bigger than individual-level variation; that addressing them requires frontal attack not tweaking what we have now; and that if we fail to address them they are likely to continue until they become intolerable.

John Kenneth White (Barack Obama's America: How New Conceptions of Race, Family, and Religion Ended the Reagan Era, University of Michigan Press 2009, p. 115) quotes from Benjamin Disraeli's 1845 novel Sybil:
"Well, society may be in its fancy," said Egremont slightly smiling; "but say what you like, our Queen reigns over the greatest nation that ever existed."
"Which nation?" asked the younger stranger, "for she reigns over two... Two nations, between whom there is no intercourse and no sympathy; who are as ignorant of each other's habits, thoughts, and feelings, as if they were dwellers in different zones or inhabitants of different planets; who are formed by a different breeding, are fed by a different food, are ordered by different manners, and are not governed by the same laws."
 
Is a common life, or even a country, possible if economic worlds and destinies are so separated?

SOURCES

Thomas Piketty, Capital in the Twenty-First Century (Belknap/Harvard, 2014) with additional materials online at http://piketty.pse.ens.fr/en/capital21c2
Eduardo Porter, "Income Inequality and the Ills Behind It," New York Times, 30 July 2014, B1, B8

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