A Debate on Inequality, Opportunity, and Politics

April 13th, 2012 at 9:37 am

Had a rousing debate on inequality last night with Scott Winship from Brookings, moderated by Reihan Salam, both of whom lean conservative, and both of whom brought generally interesting and provocative views to the discussion.

The conservative take on the issue tends to fluctuate from mild denial (Winship, not Salam), to which I strongly object, to “is it really that big a deal?” with which I disagree but find interesting and challenging.

On the denial front, what you mostly get is the “if-you-just-adjust-it-this-way-or-that-way-it-all-goes-away.”  Scott raises immigration, incarceration, family structure, employer-provided health insurance, deflators, to name just a few.  Some of these don’t affect inequality, like deflators (although Scott cited research that finds prices grow more slowly for poor people); others cut “the other way”—incarceration disproportionately takes lower earners out of the mix, so putting them back in would widen the gap between lower and middle-wage earners.   Most of these are dealt with in the CBO data shown in the figure below, including health care, family size, taxes and transfer payments.   So, yeah, there’s a lot more inequality and forgive me if I won’t swim in de-Nile on this point.

More interestingly, both Scott and Reihan raised questions about how much all this inequality matters.

The first argument is that there’s nothing zero-sum about the rise in inequality.  Romney’s or Buffett’s or Gates’ or Zuckerberg’s gains are not anyone else’s losses.  That’s hard to accept, given that it’s not just that most people’s real incomes kept going up like they used to, just not as fast as those at the top.  Income grew more slowly for middle and low-income households and poverty rates were stickier (i.e., less responsive to growth) in times of rising inequality.   The divergence of median compensation from productivity suggests that in the age of inequality, the typical worker is simply not capturing as much of their contribution to growth as was formerly the case.

In economese, some of what these and other rich guys and gals capture are “rents” which are, in fact, zero-sum.   We see this most commonly in the growth of financial markets as a share of the American economy, an important factor in not just the growth of inequality but in the bubble-bust cycle that’s done so much damage of late.

In the 2000s, the median income of working age families stagnated and poverty went up, even as the economy grew and the capital-gains powered income of the top 1% soared (see figure).   Since the current recovery began, profits have soared, inequality is back on the rise, and the pay of average workers has stagnated of late.   My own longer-term analysis of the factors responsible for the diminished elasticity of poverty with respect to growth finds inequality to be the most important factor (see figure here).

The latter 1990s provides a very useful counterexample.  With true full employment upon the land–my favorite inequality antidote–inequality actually diminished between the middle and bottom (the top continued to pull away—cap gains, again), low wages grew with productivity for a New York minute, and poverty rates fell sharply.   Inequality, at least in the bottom half of the wage scale, compressed and a lot more growth reached a lot more people.

Similarly, Scott doesn’t buy that inequality negatively affects opportunity, despite all the arguments here.   From that post, I keep coming back to this anecdote, because I think it’s so emblematic of the problem:

…once you start looking for these linkages between inequality and opportunity, they show up everywhere.  Here’s a great example from this AM’s WaPo, where public schools facing budget cuts—the disinvestment in public goods noted above—turn to parents to raise funds, and not for one-off trips to Mount Vernon, but for science curriculum, guidance counselors, smaller class sizes, music classes, etc.  Of course, the affluent parents can raise hundreds of thousands; the poor parents, barely hundreds.  It’s a classic example of inequality reinforcing itself through educational opportunity.

One of the problems, admittedly, is that, as noted, this is anecdotal.   And most of the other evidence that inequality thwarts opportunity is too, showing that, for example, the inequality of enrichment expenditures on kids or college completion rates grew as income inequality grew.  It’s evidence but it’s circumstantial.

But it’s convincing to me, and to most others who’ve looked at this closely, so I don’t for a second buy the argument that inequality is economically benign.

More challenging was their point that income concentration is a lot more politically benign then I’ve been thinking.   As I argue in this deck (slides 16-18), hopefully well known to OTEers, while money in politics has long been a problem, it’s gotten a lot worse as there is so much more income at the top and so much more leeway for that income to “buy” the politics it wants.  Read Hacker and Pierson’s book, and you find it awfully hard to avoid the conclusion that we’re stuck in a nasty feedback loop, where the increased concentration of money in politics locks and blocks—it’s locks in policies that perpetuate its growth, and blocks policies that would ameliorate it.

An egregious example of late is that one person–Sheldon Adelson, whose net worth according to Forbes in $25 billion (yes, that’s  with a ‘b’)–by dint of the Citizen’s United decision, was able to keep a candidate in a national primary for months on end.  That strikes me as profoundly undemocratic, and is a potent symbol of how corrupt our political system has become.

But Reihan and Scott argued that perhaps this was less portentous than all that.  It was basically just a rich guy wasting some money, indulging a fantasy or something (hey, whatever turns you on, I guess).  As Scott put it, if Gingrich wins the election, I’ll have a point.  And of course he won’t.

That’s interesting, although it’s a bit weird to contemplate that allegedly smart investors would make such foolish investment.  But are they really that foolish?  They’re using their unimaginable riches to steer the ideology, and they’re doing it throughout the system, from local school boards to national elections.  This is scary and damaging to America.

I’m open to good arguments from smart people like Scott and Reihan.  But I simply don’t see how these extreme economic, social, and political imbalances are so benign.  I fear they’re cancerous, and if we allow ourselves to be distracted by adjustments to deflators or we over-discount correlations because we haven’t yet determined causality, that cancer will metastasize and America will be in real trouble.

Added bonus/penalty: here’s Scott and me debating this stuff on the radio yesterday.

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15 comments in reply to "A Debate on Inequality, Opportunity, and Politics"

  1. Michael says:

    “Anecdotal” is not an insult to conservatives.

    And yes, the wage/productivity split is the end of the moronic “non-zero-sum” argument. Inequality is negative-sum, because of the external costs of all the stealing.

    • Zlati Petroff says:

      The productivity-income gap is still under scrutiny and many people have brought up good reasons to doubt both its existence and its significance (using total compensation instead of wages to measure income, using the same deflator for both productivity and income instead of two different measures of inflation (i.e. Martin Feldstein), differentiating between individual and household income (i.e. household income has risen less quickly due to a decline in the average size of households), etc.)

      We also need to think long and hard about the difference between average productivity (i.e. real GDP per capita over some measure of average factor inputs) and median productivity. Comparing average productivity to median household incomes is dangerous because I suspect that the increases in productivity have been driven strongly by a small, small subset of workers/innovators.

      In other words, it is silly to complain that the median worker’s wages haven’t kept up with productivity, if the median worker hasn’t really gotten all that much more productive and the main contributors to productivity growth have been those whose wages have, in fact, increased the most (i.e. the Top 1%).

      So the productivity-income “gap” has not put an end to any argument at all and it’s not a great idea to accept it at face value.

      • perplexed says:

        -“In other words, it is silly to complain that the median worker’s wages haven’t kept up with productivity, if the median worker hasn’t really gotten all that much more productive and the main contributors to productivity growth have been those whose wages have, in fact, increased the most (i.e. the Top 1%).”

        You appear to be confusing productivity with economic rents. Capturing the gains of others’ productivity is not itself an enhancement to productivity. Paying monopoly taxes to health health care providers hardly constitutes an increase in wages, it simply transfers your income to someone else.

  2. Andi says:

    “true full employment…my favorite inequality antidote”

    Jared, it’s my favourite too. On slide 8 of your presentation there’s a graph showing full employment hovering around 5% unemployment, aka the NAIRU. Given that it’s at the heart of neo-liberal ideology, I’m surprised you accept it. Isn’t it a justification to use unemployment in the name of price stability, without actually achieving said stability?

    Prof Bill Mitchell has a great post examining the value of the NAIRU here http://bilbo.economicoutlook.net/blog/?p=1502.

    Would love to hear your thoughts.

  3. Tom in MN says:

    Can’t you show a correlation between reduced growth of GDP and increase in inequality? Once growth started to concentrate at the top didn’t the rate of GDP increase in this country drop? It’s not a zero-sum issue, it’s a negative sum — assets are going to where they don’t get used well for the economy as a whole.

    On the second point, didn’t Romney outspend everyone else in the primary due to his rich friends? And aren’t we going to see in the general election a competition between fewer large GOP donations and many small ones to the Dems?

    • Michael says:

      That depends on if you see increased GDP as a positive. Remember that conservatives hate (most of) America.

  4. Commentator NYC says:

    [ATTENTION: I did post this already but it fits much better at this entry than the other one by Dr. Bernstein. Please let me just post it here, too.]

    Dr. Bernstein,

    I cannot believe they let you get away with debauching Reaganomics on Kudlow.

    You always demand, “when has supply-side economics worked?”

    It worked for John F. Kennedy, Ronald Reagan, Bill Clinton (capital gains tax cut), and George Bush (II). This housing crisis is a horrible anamoly caused initially, i.e., CAUSED, by government quasi-spending in the form of coercion of capital markets to lend to the high risk poor (especially).

    The real gage of “trickle down economics” is the unemployment rate and actual economic mobility of individuals statistically measured, not wage levels which as you know prove nothing about economic mobility but rather capture static income levels.

    Please refer to this Pethokoukis post: http://blog.american.com/2012/04/obamas-inequality-argument-just-utterly-collapsed/.

    Statistics show people move up an income quintile every 10 years. That means over thirty years someone in the poorest quintile saw their income increase 466% since 1982 as they moved from quintile last to quintile second highest.

    The Buffett rule will not increase equality. It diverts investment resources from the PROVEN most productive investors on planet Earth, like Buffett, and hands it over to one of the worst, Barack Obama and the far left wing of the Democratic Party. This will hinder jobs and growth, albeit nominally since the figures are so small, which will only hurt the poorest and the weakest among us. It was exactly this approach to governance by which the Democratic Party ruined relatively well functioning cities like Detroit over the last 60 years.

    It’s the classic choice, help the poor by allowing increase income inequality or ruin everyone for the sake of equality in misery. Really yours is a subtle form of Marxist-Leninism that while marginal (for now) is far more destructive than it’s size would indicate generally. That’s how Democrats erode the fabric of a well functioning and just society. You promise the masses something for nothing.

    It might work – we’ll see. But I have faith in Kansas.

    You seem like a good sport on Kudlow and you do well there. But Moore is horrible in juxtaposition to you. He’s not an intellectual. I would be good. You see, I, too, care about the workers first and foremost. That is why I am for the most part a Reaganomicist. I lived the 70s as did you. I wouldn’t go back and far more I would not subject the poorest amongst us to that social depravity and economic blight.

    Write me please if you want. That e-mail is a good one.


    • Comma1 says:

      I imagine you are a “Reganomicist” probably because there is no other even moderately respectable Republican president besides Reagan. After all, post Reagan you have Bush I and Bush II (possibly the worst failure in the history of the country) and pre-Reagan, you have Nixon(Ford) a man who resigned for fear of criminal prosecution. That’s why your party worships Reagan. Without Reagan the republican party hasn’t had a mega-failure for a president in a long, long time. Otherwise you have to go back to Eisenhower who took office 70 years ago. Although I can tell you have not graduated in the last decade (from your comment about how much better our current economy is than the 70’s), I also know that you are likely not 88 or older (old enough to actually vote for a respectable Republican other than Reagan).

  5. perplexed says:

    -“With true full employment upon the land–my favorite inequality antidote…”

    Monopoly profits continue to tax everyone and distribute the revenues to the wealthy; even if we could get to full employment without controlling them. Ultimately we’ll need to stop swimming “in de-Nile on this point” as well. As Dean Baker points out so well, if we were pushing China to stop manipulating its currency instead of protecting monopoly profits at the expense of U.S. jobs we’d have a much better shot at full employment. The key impediment to this is the lack of representation that results from the control of our politics by the beneficiaries of this rigged system. Its not only the money actually used to buy adds & contribute to campaigns that counts, its also the threat of money being used to support your political adversary instead of you that keeps “our” representatives towing the line for their “funders” instead of their constituents. Grover Norquist can probably explain the implementation details for us.

  6. Fred Donaldson says:

    “Romney’s or Buffett’s or Gates’ or Zuckerberg’s gains are not anyone else’s losses.”

    That’s the cute argument of the elite.

    But, facts are facts, and I was CEO of a newpaper group, and part of my compensation was based on profits.

    If I kept salaries low, there were more profits. If I made people work extra hours without exra pay – more profits. If I pushed up their portion of health care premiums – you guessed it – more profits.

    Reduce payments to children,who deliver the newspapers. Lower the gas allowance on the lady who wakes up at 4 am to take the newspaper to the carriers. Make the reporters buy their own noteboos. More profits.

    More profits meant bonus for me. And I wasn’t the only management person in America with the same deal and motivation.

    And the ugly secret is that more profits are your job every day, even if you don’t get a bonus. You are judged on how little you pay and how much you make for the company.

    Of course, that secenario is when there is no union to defend workers.

  7. Red Planet says:

    1) I don’t know how you can say with a straight face that “rents…are not zero sum.” A dollar of speculative oil profits in the pocket of the Koch Family is a dollar out of my pocket, with no countervailing positive contribution to the overall economy. And the bailouts demonstrate that a dollar of profit on mortgage backe securities and credit default swaps is a dollar of taxpayer subsidy to the wealthy, on a time-delay cycle and exacerbated by excruciating job losses when the bill comes due.
    2) What’s fascinating about the graph is the clear demonstration that inequality is a bi-partisan phenomenon. The rampant, runaway profiteering of the 1% began early in the Clinton presidency and has continued apace, interrupted briefly only by economic downturns.

    • Jared Bernstein says:

      Because it’s a typo (fixed now)! The point is that my opponents claimed ineq is non-zero sum, but rents, as you caught, are. Which is why I framed it that way–but messed it up!


  8. James Edwards says:

    I know I’m late to the party, but Gingrich doesn’t have to win for the money to be well spent. Santorum had to lose. That was his whole raison d’etre. Gingrich split the anti-Romney vote. So he got the result he paid for.