new empirical research on unions and upward mobility

At various points during Anti-Mankiw's history we've devoted ourselves to a topic that is often completely ignored by the mainstream: institutions. And even when they are talked about, it's usually in the context of their distorting or enhancing effects on economic efficiency. Schooling, we are told, raises the productive potential of the individual by imparting on him or her the skills or signals conducive to success in the labor market. Unions, we are told, distort labor market equilibrium by artificially raising wages. No matter the story, you can bet that it has something to do, in the end, with economic efficiency. [Read this post which sums up Anti-Mankiw's view of the education debate with the mainstream quite well.]

Those devoted to a social economy approach, on the other hand, realize that mainstream economics' views about efficiency are overly simplified at best and downright biased at most. Boiling efficiency down to a simple, monetized concept of "welfare" in which outcomes are compared to an idealized market equilibrium is inappropriate when other social desiderata are relevant -- such as health, or stable living standards, or a sustainable environment. In the social economy approach, unions are signals of a stable society because collective bargaining can be used to counter employer power.

New state-level evidence from the U.S. presented by our colleague at UMass Eric Hoyt as well as CEPR senior economist John Schmitt shows that there is at least a weak positive relationship between union density and various measures of upward economic mobility (see the link for the details -- it's a short post and would be a great teaching resource in an intro-level course). Such evidence goes a long way in furthering the social economy approach to economics, in which economic mobility is dealt with in a concrete manner. While Mankiw may suggest time and again that education is the means by which economic opportunity is realized, neither the data nor the theory -- from a social-institutional standpoint -- validates his claim (at least, not as education is currently done in the U.S.!).

Hoyt and Schmitt, on the other hand, suggest an alternative institution for enhancing economic mobility and have the data to back it up.

Deus ex machina in economics

Deus ex machina refers to a plot device in plays or stories, where a sudden solution emerges seemingly out of the sky to solve particularly perplexing problem in the story’s events. For the economic story and unemployment problem, the “machina” part becomes quite literal. When in doubt, blame machines and technology.

Back in the roaring 2000s, Mankiw posted this brief explanation of technology and inequality:

“1. There is little doubt that U.S. income inequality has been increasing for the past three decades. (The trend in world inequality is very different.) Most economists who study the topic attribute the trend primarily to changes in technology that reward skilled workers relative to unskilled workers. Education and other skills are more valuable now than they were in the past.”

That certainly fits in swimmingly with the standard neoclassical recipe- preferences, factor endowments, and technology- but should we really be blaming our income inequality and high unemployment on schools and machines? Exactly how does this work?

On Mankiw’s blog, he recently added some comments on his “it’s education, stupid” stance mentioned in our last post, with some words from economist Erik Brynjolfsson. Stagnation via technology is the premise of a new e-book by Brynjolfsson and Andrew McAfee entitled “Race Against the Machine”.  The authors claim that the digital age, with increasingly sophisticated computer usage and expansion in communications tools, has had a distinctly different effect on the economy than other periods of technical change. Instead of creating more jobs than it destroys, the digital form of mechanization has given us a net decrease in jobs by taking over much of the work. Maybe more importantly, the benefits of increased productivity are more likely to be unevenly distributed in favor of those “superstars” which the technology favors.

While Brynjolfsson and McAffee still pick focus on workers' skills not keeping pace with technology, the second part of their premise actually offers a much more in depth story as to exactly why technology may enhance inequality. Turns out, the authors claim that our social institutions that govern things like distribution of wealth have not kept up with these rapid changes in technology. Although the authors pick up the "blame the victim" rhetoric, I would argue against their claim that workers' skills are not keeping up with technical change, since of course, educational institutions and human capital investment are socially determined just like any other social institution. That means that ameliorating supposed skills mismatch through education doesn't work unless you radically alter the educational system itself, to something equitable and attainable. (In fact, education too may exacerbate inequality.)

Building on part of their argument then, it’s not education, technology, or inefficient workers; it’s inefficient and outdated institutions that have led to the divergence in income levels over the past several decades. 

The most introductory and famous example of sticky, inefficient institutions can be found in Paul David’s famous paper noting the presence of inefficient institutions, showing how the standard QWERTY keyboard layout caught on despite being slower than other options. So maybe institutionalized inequality, perpetuated in part by the logic and rhetoric of mainstream neoclassical economics, is a part of our inefficient and clunky distribution system that allows technology to exacerbate wealth and income inequality. 

In the story of unemployment then, machines and even education can no longer be our economic scapegoats. Instead, we should recognize it’s the social institutions that constitute our economy that should be of real concern. Let's start going to the root of the problem.

A Response to Mankiw and His Defenders

Mankiw seems genuinely concerned that his protesting students ironically had to miss his lecture on income inequality.   It is important to give Mankiw and his EC 10 text-of-choice (presumably his own “Principles of Economics 6e”) the credit deserved: he mentions income inequality and says it may be a problem depending on one’s political or philosophical persuasion.   Unfortunately, that is about the extent of the credit one can extend.

We take two broad issues with Mankiw’s NPR interview response to his students’ walkout:

1.  Mankiw’s coverage of income inequality is inadequate for an economics course(s)
2. Mankiw misses the broader point that he and his textbooks do not promote plurality of discussion on a wide range of topics beyond income inequality and its relation to economic activity

It’s clear what Mankiw’s lecture on income inequality is all about by looking at his official lecture notes.  He spends some time comparing the poor and the rich in the United States and across countries, and then quickly moves to discussing problems with measurement of income inequality.  And here’s where the bias kicks into overdrive.  According to Mankiw, measures of income inequality are drastically biased upward due to 4 things:

1. The values of in-kind transfers are often ignored when measuring inequality.  The problem is that that is not necessarily true.  For example, the US Census, in its measures of inequality began valuing in-kind government transfer programs back in 1982. 
2. People can borrow and save, therefore ‘smoothing out’ their incomes over time.  The problem with that is that poor persons, almost by definition, have little means of borrowing on credit as they often lack collateral. Second, they have little ability to save since living closer to the poverty line means dedicating just about all of income to subsistence.
3.  If what we really care about measuring is inequality of living standards, then one should compare wealth or permanent income, not transitory income levels.  Again, that is all fine and good except for the statistic is unlikely to improve for poor persons who have limited resources.  
4. Income measures fail to account for the fact that the poor have opportunities to lift themselves up.  Unfortunately, Mankiw fails to mention any barriers to doing so that exist in our society, political power, institutional limitations, or otherwise.  

The rest of Mankiw’s discussion of the income distribution can basically be summed up in 1 sentence:

The problem of income inequality is important, but something more for politicians and philosophers to further a discussion on after comparing the cost of improving income equality, at the expense of economic efficiency.

There is no discussion as to how economics (and students of the discipline) can contribute to the discussion other than as a distant, silent observer.  That is likely why it is nearly the last chapter in this microeconomics textbook – for Mankiw the discussion is an afterthought in economics, as opposed to an integral part of it – so it’s ok if instructors that use his textbook skip the chapter entirely.  Perhaps more importantly, Mankiw’s chapter on income inequality is, to the degree it is discussed, entirely from a microeconomic perspective.  He completely ignores the macroeconomic links between the income distribution and wages, profits, and economic growth.  In his GDP chapter (the macroeconomic measure of living standards) he fails to discuss other measures of income inequality that many nations use because of GDP’s inadequacies (like the Human Development Index, or the Genuine Progress Indicator) which largely stem from the lumping profit (rich) and wages (middle class / poor) into one aggregated measure of supposed well-being. 

All this said, it is disappointing that the protesting Harvard students focus so much of their attention on income inequality and fail to really focus in on the broader problem- that Mankiw and his textbooks perpetuate an ahistorical, assumption laden, non-complex market based dialog, often times ignoring other schools of thought that may have something interesting or useful to say on a topic.

Behavioral economics often points out how unrealistic some of the assumptions of textbook economics truly are, and in fact perfectly rational economic actors are more or less sociopathic.  Some heterodox schools of economics discuss how income inequality is directly related to boom/bust cycles of capitalism and therefore are not just explained by a human capital premium.  Environmental economics also discusses the relationship between economic growth, business cycles and environmental degradation beyond simply discussing market-based tax solutions.   Finally, Mankiw largely ignores the relationship that politics and economics have – and specifically the relationship between political power and economic power of which political scientists are all too familiar with understanding.  Were he to truly recognize the issue, he might have an answer for one of the biggest concerns of the Occupy Wall Street movement: why, essentially, rich people  were given preferential financial/political treatment over poor people when it was the rich people who were in large part responsible for the recent economic calamity that directly hurt the poor.

At the end of the day according to EC 10, economics is about being able to explain only a small part of individual and national choice behavior – the unrealistic perfectly ‘rational’ part - and applying only one kind of solution – a kind of economic bandage (taxes etc.), in the rare instance choice behavior isn’t so perfect or in equilibrium.  For Mankiw, economics can be boiled down to brief, vague principles.  Students around the globe are brainwashed with this limited kind of homo-economicus thinking that would make Adam Smith roll over in his grave.   Luckily, some students are waking up from the haze.  

-anti-mankiw