Schmitt on Inequality

January 22nd, 2014 at 5:50 pm

If you’re interested in some incisive thoughts about the recent uptick in the inequality debate, you’ll want to read this piece by Mark Schmitt in TNR.

Like Mark, I find that talking about inequality per se is often challenging because it’s such a sweeping concept:

…it’s not that [inequality is] anything less than “the defining challenge of our time,” as President Obama put it in a speech in December. Rather, it’s too defining, too large. It’s a concept too sweeping and cluttered to lead to useful solutions. Economic inequality encompasses not only the gains of the very wealthy, but also the relatively modest gains of the merely well-off, the stagnation of the middle and working class, and the deepening, multi-generational struggle of the urban and rural poor. And that’s just inequality of income. Inequality of wealth—assets and debt—may matter even more, because even small amounts of wealth can ensure both economic security and economic opportunity…

Also, though he doesn’t mention this point, it’s not the case that any level of economic inequality is problematic.  Every economic system distributes money, wealth, power, opportunity.  So, when someone raises the issue as problematic these days, they’re really saying something about historically high levels.  Moreover, they’re often saying something about the impact of these levels on something else.

To Mark, and I agree, this latter point about the impact of our inequality problem points toward framing the problem is ways that lead to potential solutions.

We need a way to talk and think about inequality that presents it as a system, and then finds the points of intervention that might actually change the system. Where, in the current debate, is there a real, comprehensive explanation, a plausible solution that would have a real impact on inequality, and a potentially broad coalition, one that includes the dimensions of inequality that even skeptics purport to worry about?

He thinks money in politics is a compelling candidate.

When economic winners use their political power and influence to cement their gains, the resulting self-reinforcing inequality will lead to economic stagnation and immobility. As Princeton economist Angus Deaton put it in the conclusion of his recent book, The Great Escape, “The political equality that is required by democracy is always under threat from economic inequality, and the more extreme the economic inequality, the greater the threat to democracy.”

I agree here as well, and have worried in these very pages about the self-reinforcing dynamic where economic elites can both “purchase” the policy set that protects their winnings (supply-side tax cuts, industry deregulation) and block the set that threatens them (unions, minimum wages, progressive taxation, Keynesian stimulus).

So I like his choice but I think full employment might be even better.  Not only would it push back against inequality, but were we to pursue its policies, we’d put people back to work and provide many of those already working with something closer to the hours and wages they seek.

What say you, Mark?  I’ll tell you what: let’s get money out of politics and then get the jobless rate down to 4%.  Hey, it’s already Wednesday—let’s get to work!


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15 comments in reply to "Schmitt on Inequality"

  1. Robert Buttons says:

    >>where economic elites can both “purchase” the policy set that protects their winnings (supply-side tax cuts, >>industry deregulation) and block the set that threatens them (unions, minimum wages, progressive taxation, >>Keynesian stimulus).

    The second set of policies simply protects the winnings of a different group of economic elites. In particular, Wall St banks and politically connected Green energy executives have particularly enjoyed the stimulus.

  2. Dave says:

    Top economists have not yet seen enough evidence that inequality causes economic stagnation to call it an iron-clad case. I suspect what is missing, as is often the case in economics, is the identification of a causal mechanism.

    I haven’t gathered enough data to make the case yet, but there’s a good line of reasoning to follow here:
    1) We know that household debt has increased rapidly since the 80s, and that a housing bubble debt overhang is roughly half of the cause of our current stagnation.
    2) We know that the Federal Reserve has a mandate to maintain full employment, and if employment begins to drop, its main reaction is to lower interest rates, which induces more borrowing.
    3) Borrowing can occur by businesses for investment or by households for consumption.
    4) If the lowering of interest rates by the Fed doesn’t produce the expected stimulus, then they must lower rates more.

    Household debt is a significant problem. The Fed encourages borrowing to stimulate in the face of a slowdown. The only missing link is a direct cause, that lowering rates CAUSES consumers to borrow more — that this is not just a case of free-market dysfunction, but rather that it is the expected outcome by the design of the Federal Reserve banking system.

    I think it is pretty intuitive that the biggest borrowers tend to be the people with the least capital. But proof can be had by doing a detailed analysis of the living conditions of low-wage workers with regard to housing and other living expenses. You have to venture into social psychology a bit to get there, because you have to prove that there is a mathematical relationship that drives people’s tolerance for inequality — that is, at some point people WILL borrow if they can regardless of their balance sheet just to maintain normalcy. There are basic expectations placed upon workers, such as getting to work, taking a shower in the morning, feeding thyself, etc…

    I think it would help to see a detailed demographic analysis of the debt levels of households — what income levels borrow the most money, why did they borrow, etc…

    Giving the housing bubble, and given Greenspan’s comments as it was building to the effect that household balance sheets were healthy and could sustain higher borrowing, I think the proof can be as good as proof gets in macroeconomics.

    • Dave says:

      I should add one important idea here:

      Borrowing has been historically difficult. If you look at the trend of interest rates and financial innovation, they made it historically easy to borrow money.

      What were consumers to think of these developments? I think an intuitive ideas is to see interest rates at historical lows, and then to assume they must go up for some reason in the future just because they fluctuate, and to assume the right thing to do is to borrow now while rates are low.

      Does anyone see a flaw? This is not a mathematical formula, it is people’s lives. People were manipulated. Nobody understands why interest rates change over time, and nobody knows how to react, but the point of vulnerability was households with one or two working adults. They were the least informed and the most in need.

  3. Dave says:

    When rich people begin talking about making lots of money without any feelings of apprehension, humility or shame, you know things have gone too far.

    If a person were to interview for a job, even a very high-level managerial job, and they were asked what their goals were, and they were to answer, “To make lots of money!” they would almost assuredly not be hired. Why? Because their monetary gain is bound by their salary and bonuses, and that always comes out of the pocket of shareholders and upper management.

    However, when capitalists say they want to make lots of money, they almost always tend to believe that their limits our not bound by anything, that any money they make is newly created, that it doesn’t come at the expense of anyone else. Is that possible? Of course not! In most cases it does actually come out of somebody else’s pocket though competition. In some cases it doesn’t, but that is the exception to the rule.

    • Robert Buttons says:

      Thank you, Bill Gates for accepting the money I willingly gave you (even if you had enough). I have fewer dollars because of you, yet overall, your products have made my life much, much better.

      • Dave says:

        I’m not sure what this means. Are you serious or facetious?

        Have they made your life much better than otherwise possible? No. Do you think they have? Possibly, because it is what was there.

        So does the computer revolution belong to Bill Gates? I used Visicalc on an Apple with much the same results. Did Bill invent that? No.

        The computer revolution was happening no matter which companies gained control. If you want to talk tech, fine, we can do that, but let’s not talk user ignorance. Users believed and still believe that Bill was a genius. Not really. He as ruthless. That is all he was.

        • Robert Buttons says:

          The point is, Bill Gates got rich selling a product that I willing exchanged my money for. I was better off because I received his product. He was better off because he got my money. I could have just as easily bought Apple. So when one sneeringly says “How did he [insert capitalist here]?”, implying some malfeasance, the answer typically is, “he got rich improving the lives of others”

          • Dave says:

            You have limited choices. The market bears what it can bear. There where many superior competitors to Bill Gates that lost out because they weren’t ruthless.

            Ruthlessness doesn’t produce good products. It only produces rich people.

          • Mark Jamison says:

            The part you miss here is that the system of intellectual property as well as other features of our corporate laws and rules assisted Mr. Gates tremendously. We create a system that fosters certain behaviors and outcomes. At this point the system doesn’t favor labor or employees or, for that matter consumers. Our current set of rules, laws, and tax policy deeply favors folks like Mr. Gates.

          • Perplexed says:

            Back to the basics. If you look back at your econ 101 texts you’ll find graphs of supply/demand curves. At every point to the left of the intersection of the curves you’ll see (usually substantial) numbers of “buyers” who would be willing the buy the products at prices far above the intersection point. “Capitalism” would “force” all of the sales to occur at the intersection point price which would be very close the the marginal cost of the product in most cases. Monopolies are not “capitalism,” they are protection from the competition capitalism demands. The additional amounts everyone pays over the price at the intersection point are simply a government legislated “tax” on the buyers that, instead of going into government coffers to finance public investments, goes into the coffers of the monopolist. Just because you started from a point at which you were willing to pay a higher price doesn’t in any way mean “he got rich improving the lives of others.” He likely would have done fine improving the lives of other; but he got “rich” because the government permitted him to charge monopoly prices, protected him from competition and allowed him to retaliate against anyone who even attempted to compete with him, and redistributed money from his “customers” (maybe “victims” is a more precise word here) to Gates. It was truly his only “innovation.” DOS was converted largely from another existing program, OS2 (the current application that is now called “Windows” was built almost completely by IBM), his monopoly wiped out Lotus 123, Work Perfect, and Novel (the products available prior to MS Excel and Word and MS Networking) and ultimately left consumers with fewer choices, all at higher prices. This is not “capitalism,” this is “crime,” unless of course the government acts to decriminalize it in order to distribute income differently than a “capitalist” system would do. Its great that you’re so thrilled with your MS products at whatever price you paid but don’t forget that in a competitive capitalist economy you would have paid a lot less, had a lot more choices, and likely wouldn’t have to be constantly re-booting your system because it bogged down or locked up. Competitive capitalism would have solved that problem long before Gates will ever get around to it.

  4. Tom in MN says:

    I think political equality is the means by which we get to the end of full employment. I don’t think you have any chance of getting full employment policies enacted until you attack the political problem.

  5. Perplexed says:

    “When economic winners use their political power and influence to cement their gains, the resulting self-reinforcing inequality will lead to economic stagnation and immobility. As Princeton economist Angus Deaton put it in the conclusion of his recent book, The Great Escape, ‘The political equality that is required by democracy is always under threat from economic inequality, and the more extreme the economic inequality, the greater the threat to democracy.’”

    Possibly, but more likely to be “back asswards.” While surely the inequality itself produces additional problems, the inequality is largely a symptom of, not itself “the problem.” Deaton has it backwards as well, it is democracy that it always under threat from those who don’t care for “political equality.” Once the democracy is undermined, the inequality flourishes. The inequality is a bright, flashing warning signal that something has gone seriously wrong with our democracy. It has now become so “bright” that it can no longer be ignored. Acemoglu & Robinson, in their book “Why Nations Fail” cogently described the relationship with centuries of examples. Larry Lessig (“Republic Lost”) has been explaining the corruption of our democracy for years now ( Suspending our criminal and civil laws for the “select few” and selling indulgences to criminal bankers are also bright, flashing, warning signs of the same “corruption” problem.

    “It’s difficult to get a man to understand something, when his salary depends on his not understanding it” -Upton Sinclair

    Particle physics is complicated, gravity is complicated, chemotherapy is complicated etc,, etc,, Understanding how government granted monopolies and tax preferences combined with un-Constitutional exceptions from anti-trust protections for those whose product is labor generates inequality is not really very complicated. Why would we expect that economists, who refuse to even measure rents as a share of the economy, and have for centuries claimed that inequality was the result of “marginal products” and we needn’t worry about monopolies, would be able to provide any insights to or “cures” for the “inequality problem?”

    • Dave says:

      I think you are right, and there’s a potential cure:

      Public funding of economic research.

      If you look at the importance of economics compared to the number of people who achieve PH.D.s in economics, it is a HUGE number! This is such an important field of study and it receives almost nothing in the way of public funding.

      This is a failure of capitalism. Capitalism itself has no motive to fund economic research that might undermine its own profits. People must decide this is important and make laws to fund it. Academics aren’t enough.

  6. Thornton Hall says:

    Economists always talk about the “channels” that connect cause and effect. In the talk about inequality there needs to be much more clarity about how “money in politics” leads to gains by rentiers. The overwhelming majority of pundits within and without the Beltway have an implicit quid pro quo model that is wrong on its face.

  7. james igoe says:

    The debate is often framed as a business choice; it is a quality of life and equality choice.

    Many choices for a better America are obvious, but the people making the decisions are often the same people that benefit from the ‘broken’ system:

    – Reduce inequality (taxation, change laws that favor the powerful and wealthy)
    – Increase education, making it independent of financing
    – Provide nationalized healthcare
    – Rein in the healthcare industry
    – Rein in corporate power over government and politics

    Reducing inequality goes a long way. Often, suggested solutions for problems are merely band-aids, since the underlying problem is often a matter of resources.

    Lower inequality means:

    – Better health, reduced obesity
    – Less crime, less violence
    – Better educational outcomes
    – Better economic performance for all, not just a few

    Correlation is not causation, but working toward a better life for Americans, while reducing inequality, can keep America strong.