Tuesday, November 29, 2011

For whom exactly is inequality good?

According to a clip from Richard Epstein, inequality benefits everyone. His appearance on PBS, linked by Mankiw’s blog, gives the standard free-market trickle-down argument about income inequality. According to Epstein, when 1% of the people own ⅓ of the wealth, it gives the rest of us poor 99%'ers incentive to work hard, innovate, and strive for success, in the end creating an even bigger overall “pie” to distribute. Unequal distribution makes everyone is better off, so we should stop complaining about the haves and have-nots. But what is missing in Epstein’s rosy free-market idealist picture about the merits of inequality?
Decline of Real Wages

Epstein’s argument that all incomes have risen under neoliberal capitalism is wrong. Real wage data suggests that in fact real wages have stagnated over the last several decades, despite substantial increases in productivity and wealth. While the pie may indeed be bigger, certainly not everyone is better off. Further, the segment of the population most stricken by inequality and poverty are children and the elderly, who may be even worse off than originally estimated. 
Importance of Relative Income
Behavioral economists have been good at showing that what matters is not the absolute level of income, but rather how we earn relative to others. If more folks are falling at the bottom end of the income distribution, with lower and lower relative standing, then how are we all better off? In fact, some very influential behavioral economists from Mankiw's own institution and down the road at MIT, Michael Norton and Dan Ariely, have shown that most citizens would prefer a more equal society.
Political Power
It’s no news that income inequality undermines democracy. With resources concentrated at the top, some portions of the population can buy their way into political power and create major barriers to entry into elite circles. Epstein however idealizes perfect mobility in an unequal society. Even the Freakonomics blog was able to explain this point a while back, quoting Daron Acemoglu:
"First, people’s well-being may directly depend on inequality, for example, because they view a highly unequal society as unfair or because the utility loss due to low status of the have-nots may be greater than the utility gain due to the higher status of the haves. Second and more importantly, equality of opportunity may be harder to achieve in an unequal society … Third and most importantly, inequality impacts politics. Economic power tends to beget political power even in democratic and pluralistic societies. "


  1. It would seem to me (having woke up on my conservative asshole side of the bed this morning) that if real wages have stagnated and the "pie is bigger the rest of the pie must represent and increase in the returns to productive capital investment. Now would be the time to move towards more savings and less consumption in the current time period. If the working class would just invest more instead of buying bright and shiny things then they would be better off as well. We all love pie.

    *The preceding is what I would have wrote if I agreed with Epstein.

    My real comment is actually a question. How much room for theoretical debate do y'all anticipate in this space? When the Anti-N. Gregory readership questions the theoretical grounding of your posts do you respond or do you not grant things of the nature of above thelevel of validity that comes by acknowledging their existence?

  2. I think it's probably ok to speak for the group on this to say that anti-mankiw wouldn't deny honest opinion or the sharing of ideas. Rude or lude comments wouldn't be appreciated but I don't view your comment to be either.

    I think you may have some common ground in that spending all the time is not always and everywhere a good thing - particularly if that leads to unsustainable debt (or worse, a bubble a la the housing market). I think you also may find agreement (with some) that our economy is unlikely to turn around quickly until our private debt level falls - and that requires either more voluntary savings or more government intervention. For more on the latter, you should check out http://www.debtdeflation.com/blogs/.

    The problem is that, in a modern financial economy, it is not altogether apparent that increased private financial savings leads directly to capital investment In fact this was a key insight from JM Keynes. In other words, the loanable funds model is a sham. Further, if one notes simply that if people save by buying financial instruments, in large part those dollars are held in the financial sector - which is hoarding the money right now rather than lending it. And then even if they wanted to lend it, many firms don't see much profit potential right now because people aren't spending because they too are busy paying off debts. And if they don't see profit potential then there is no motive to spend on capital formation. So, if you agree with that, and if you agree we need a quicker turnaround, one option would be to erase debts via federal government action to help speed up the recovery process (like a hangover pill). That could come with its own set of problems of course....

  3. James, to be honest I don't understand your theoretical debate question. Maybe you could clarify with an example.

    And I think Epstein would actually respond to the real wages phenomenon in an even more crazy way than you suggest. Instead of replying to real wage decline by saying "well, this is what the poor OUGHT to do in order to evade their plight and to share somewhat in the wealth" (which, to be honest, is not a direct refutation of the argument that growth has not lifted everyone up -- it's simply a skirting of the main issue), he might actually argue that increased inequality of this type has been good for the efficiency of capital markets because it has provided good incentives for people to move into the financial industry which increases the liquidity of capital.

    Fortunately, the counter to this argument also comes from Keynes, whom Garth brought up. Keynes argued that increased financialization leads to an emphasis on short-term gains instead of long-term viability of sound investments. He likened the stock market therefore to a type of casino.

    In other words, the model of financial markets under which Epstein is operating is fama-esque or even worse, something from like the early 1800s where supply (of capital) creates its own demand, J.B. Say's argument.

  4. My comment is poor people maybe cannot admire the rich people. Because they can earn more money after working hard. But the government should gives equal rights with poor people and the wealthier classes. If the poor people have no equal rights, they could fight with the government and the rich people.

  5. Xicheng, I agree, but I also believe that inequality of income is correlated to inequality of opportunity. In other words, when you have a society that is built on status through economic inequality, then that society's institutions (including education) will reflect those inequalities.

    "Equal rights" is not enough. Exercising political rights will not necessarily ameliorate society's problems.

  6. The rich will continue to get richer while the poor gets poorer. The 1% is taking advantage of their monetary success instead of contributing to the rest of the 99%'s struggles. They exploit the working class's vulnerability. The incentive generated from this inequality will only lead to civil unrest because the majority of Americans are struggling on a daily basis to make ends meet. The consumers are exploited and enslaved into this whirlpool of following trends, while the entrepreneurs are the only ones gaining anything. The produces are the working class enslaved to their 9-5 jobs in order to provide for their consumptions therefore they are trapped in this rigorous cycle of inequality enforced upon them. Epstein suggests that Steve Jobs and Bill Gates successes were driven by the incentive for great wealth, Epstein completely disregard the technological success of their impacts on modern society, and may it seem like they were the true benefactors however it was the entrepreneurs who took advantage of their success and turned it into the chains and balls that they latched on to the 99% today.

  7. "when 1% of the people own ⅓ of the wealth, it gives the rest of us poor 99%'ers incentive to work hard, innovate, and strive for success, in the end creating an even bigger overall “pie” to distribute."

    Up to this point I saw no problem with Epstein's statement. This strive for success may not be directly due to 1% owning 1/3 of the wealth, but having little does cause some people to want more and maybe work harder for it. This doesn't mean that the poor become rich but they are hungry for more.

    Epstein's next sentence is where I find a problem.

    "Unequal distribution makes everyone is better off, so we should stop complaining about the haves and have-nots."

    Anyone can see that not everyone is better off. If everyone was better off than there would be no more poor, yet contradictory to Epstein's statement the poor still remain poor. After this statement Epstein's argument has lost all credibility.

    Now, to those complaining about the wealthy...
    Can you blame the wealthy for trying to pursue their personal happiness? If they are hurting the public while trying to do so than yes, they should be punished. But I do not know of any exploits that do not offer a choice. If there are than yes, you are right to be angry and something should be done, but for most leaders of the capitalist market it comes down to "will you buy my product?" If you are hold a grudge against them then don't buy their product. The rich aren't going to do anything about your protest. If you want someone to do whats in your best interests than go to your government. Stop electing the same politicians many say do not do anything, or maybe just go out and vote.

    1. Employment. There's an awful lot of "take my offer of terrible work conditions, or be unemployed and starve" out there in the abusive capitalist world. (This would be fixed if the government guaranteed everyone who wanted a job a job at a minimum living wage under decent working conditions, doing something useful.)

      Second, corporate looting -- this often destroys viable, functioning factories for the purposes of enriching the corporate looter, whether that's the CEO or the leveraged buyout operator. This form of totally unproductive wealth generation -- Romney's method of getting wealthy -- hurts the public and offers you no choice.

      Third, pollution. Companies hurting the public via pollution use their profits to campaign / bribe politicians to continue pollution.

      Those three were OFF THE TOP OF MY HEAD. The ability of the very rich criminals to buy the government is a major problem right now. Arguably they've bought both parties.

  8. Jonathan,

    I think you make some interesting and relevant points, but I don't agree with the level of autonomy and influence of the individual which you suppose toward the end of your comment.

    First of all, I would say that the mass production system has made goods extremely cheap as well as making it difficult for poor people to turn away (and maybe "buy local", or at least, stop buying products from companies they disapprove of).

    Second of all, the ballot box clearly is not working. The rise of the Democratic party in 2008 was partly a function of discontent with George Bush, but as we now know after 3 years into Obama's presidency, the lower classes are still dissatisfied with the path of the American economy. Clearly the ballot box is not working, which is partly why Occupy Wall Street has become more relevant.

    Finally, let's not fall into the same trap that Epstein does, and instead let's start to admit that the labor process is an important part of /any/ story of American democratic capitalism. It's not all about consumers, consumer autonomy and so on. Any real democracy will have a democratic workplace which works to mitigate an important source of power of elites in society (namely, a power derived from being the primary appropriater of surplus value or profits in society).

    thanks again for your comments!! We appreciate you taking an interest in our project

    1. The failure of the American electoral system to provide a real alternative is the issue of the day here -- the failure of the European political system to provide real alternatives is the issue of the day there. The success of Iceland -- even though it did require giant popular protests -- is the only positive model I can see so far.

  9. Right-wing propagandists like to confuse the value of *minor* inequality -- it's good for there to be *some* ability to do *somewhat* better than your neighbors by hard work -- with the value of *massive* inequality, where some people have multiples of the amount of wealth of others.

    Wildly guessing, I'd expect that the optimum level of inequality is probably such that nobody has more than twice as much wealth as anyone else. Possibly even a tighter band than that. Of course this could be studied empirically through studies of happiness, but I don't think anyone has ever created a society with enough equality to even get to the point where "more inequality" would be desirable, except perhaps on a small scale in some monastic-type environments!