Bookblogging: The failure of trickle down

by John Quiggin on December 17, 2009

Another section of my book-in-progress, looking at the failure of the trickle-down hypothesis. Comments and criticism welcome as always.




Refuted doctrines


Failure

Although the trickle-down hypothesis never had much in the way of supporting evidence, empirical testing was difficult because its proponents never specified the time period over which the benefits of growth were supposed to percolate through to the poor. But, just as the crises of the 1970s marked the end of the Bretton Woods era, the global financial crisis marks the end of the era of finance-driven market liberalism. To the extent that any assessment of the distributional effects of market liberal policies will ever be possible, it is possible now.

The trickle-down theory can be examined using the tools of econometrics. But, at least for the US, no such sophisticated analysis is required. The raw data on income distribution shows that households in the bottom half of the income distribution gained nothing from the decades of market liberalism. Although apologists for market liberalism have offered various arguments to suggest that the raw data gives the wrong impression, none of these arguments stand up to scrutiny. All the evidence supports the commonsense conclusion that policies designed to benefit the rich at the expense of the poor have done precisely that.

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The US since 1970

US experience during the decades of neoliberalism gives little support for this view. In the period since the economic crisis of the early 1970s, US GDP has grown solidy, if not as rapidly as during the Keynesian postwar boom. More relevantly to the trickle-down hypothesis, the incomes and wealth of the richest Americans has grown spectacularly. Incomes at the 5th percentile of the income distribution doubled and those for the top 0.1 per cent quadrupled

By contrast, the gains to households in the middle of the income distribution have been much more modest. Between 1973 (the last year of the long postwar expansion) and 2008, median household income rose from $45 000 to just over $50 000, an annual rate of increase of 0.4 per cent.

Pasted Graphic.tiff

For those at the bottom of the income distribution, there have been no gains at all. Real incomes for the lower half of the distribution have stagnated. The same picture emerges if we look at wages. Median earnings for full-time year-round male workers have not grown since 1974. For males with high school education or less, real wages have actually declined.

One result has been that the proportion of households living below the poverty line [1]<span class=”Apple-converted-space”> </span>, which declined drastically during the postwar Keynesian era has remained essentially static since 1970, falling in booms, but rising again in recessions.

The proportion of Americans below this fixed poverty line fell from 25 per cent in the late 1950s to 11 per cent in 1974. <a href=”http://www.census.gov/prod/2008pubs/p60-235.pdf”>Since then it has fluctuated, reaching 13.2 per cent in 2008</a>, a level that is certain to rise further as a result of the financial crisis and recession now taking place. Since the poverty line has remained unchanged, this means that the incomes accruing to the poorest 10 per cent of Americans have actually fallen over the last 30 years.

These outcomes are reflected in measures of the numbers of Americans who lack access to the basics of life: food, shelter and adequate medical care.

In 2008, 49.1 million Americans live in households classified as ‘food insecure’, meaning that they lacked access to enough food to fully meet basic needs at all times due to lack of financial resources. 17.3 million people lived in households that were considered to have “very low food security,” a USDA term (previously denominated “food insecure with hunger”) that means one or more people in the household were hungry over the course of the year because of the inability to afford enough food. This number had doubled since 2000, and has almost certainly increased further as a result of the recession. http://www.frac.org/html/hunger_in_the_us/hunger_index.html

The number of people without health insurance has risen steadily over the period of market liberalism, both in absolute terms and as a proportion of the population, reaching a peak of 46 million or 15 per cent of the population. Among the insured, an increasing proportion are reliant on government programs. The traditional model of employment-based private health insurance, which was developed as part of the New Deal, and covered most of the population during the Keynesian era, has been eroded to the point of collapse. At the time of writing, it remains to be seen whether Congress will pass legislation to extend health insurance to the entire population.

http://www.census.gov/hhes/www/hlthins/hlthin08.html

Homelessness is almost entirely a phenomenon of the era of market liberalism. During the decades of full employments, homelessness was confined to a tiny population of transients, mostly older males with mental health and substance abuse problems. In 2007, 1.6 million people spent time in homeless shelters, and about 40 per cent of the homeless population were families with children. And this was actually an improvement – homelessness is one of the few social problems where policy interventions have been sustained and at least partially successful in the US.

In summary, the experience of the US in the era of market liberalism has been as thorough a refutation of the trickle-down hypothesis as can reasonably be imagined. The well off have become better off, and the rich have become super-rich. But despite impressive technological progress (the most striking elements due, as we have seen, to the public and non-profit sectors) those in the middle of the income distributions have struggled to stay in place, and those at the bottom have actually become worse off in crucial respects.

Naturally, there have been plenty of attempts to deny the evidence presented above, or to argue that things are not as bad as they seem. Some of these attempts can be dismissed out of hand. Among the most popular and the silliest, is the observation that even the poor now have more access to consumer goods, such as televisions and refrigerators than they had in the past. For example, Cox and Alm in their book Myths of Rich and Poor observe that n spite of the rise in inequality a poor household in the 1990’s was more likely than an average household in the 1970’s to have a washing machine, clothes dryer, dishwasher, refrigerator, stove, color television, personal computer, or telephone. ”

The common feature of all the items listed in this quote is that their price has fallen dramatically relative to to the general price level. This means that even if incomes were exactly the same as in 1970 we would expect to see a big increase in consumption of these items. And, obviously, if these items have become relatively cheaper, others, such as health care have become relatively dearer. Unsurprisingly, we find that it is in access to health care E[2] that poor and middle class households have become worse off over time.

There are some adjustments that should be made to the data, and make the picture look a little better than suggested by the statistics quoted above.

Household size has decreased, mainly due to declining birth rates. The most appropriate measure of household size for the purpose of assessing living standards is the number of “equivalent adults” derived from a formula that takes account of the fact that children cost less to feed and clothe than adults and that two or more adults living together can do so more cheaply than adults in separate households.The average household contained 1.86 equivalent adults in 1974 and 1.68 equivalent adults in 2007 (my calculations on <a href=”http://www.census.gov/population/socdemo/hh-fam/hh6.xls”>US census data</a>). Income per equivalent adult rose at an annual rate of 0.7 per cent over this period.

In earnings terms, women have done a little better than men, with median earnings for full-time year-round workers rising by about 0.9 per year over this period.<span class=”Apple-converted-space”> </span> Relatedly, the main factors sustaining growth in incomes for American households outside the top 20 per cent has been an increase in the <a href=”http://www.frbsf.org/publications/economics/letter/2007/el2007-33.html”>labour force participation of women</a> and a decline in household savings. Over the period since 1999, consumption financed by borrowing against home equity has been the main factor offsetting stagnant or declining median household incomes.

Finally, until the 1990s, the consumer price index took inadequate account of changes in product quality, so the decline in real wages was overstated somewhat. The Boskin Commission introduced changes to the CPI which, not incidentally, reduced the cost of adjsuting Social Security and other welfare payments for inflation. So, while the stagnation of the 1970s and 1980s might be overstated, that of the 1990s and 2000s is not.

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The bankruptcy boom

The failure of the trickle-down approach has been even more severe in relation to consumer finance. The idea that increasing income inequality was unimportant when households could borrow to finance growing consumption was never defensible. The gap between income and consumption had to be filled by a massive increase in debt. With sufficiently optimistic assumptions about social mobility (that low-income households were in that state only temporarily) and asset appreciation (that the stagnation of median incomes would be offset by capital gains on houses and other investments)these increases in debt could be made to appear manageable, but once asset prices stopped rising they were shown to be unsustainable.

In the US context, these contradictions have been resolved for individual households by a massive increase in financial breakdowns. Until 2005, this mainly took the form of a steady increase in bankruptcy, to the point where, as John Edwards pointed out in 2003, Americans were <a href=”http://johnquiggin.com/index.php/archives/2003/11/26/bankruptcy-and-divorce/”>more likely to go bankrupt than to get divorced</a>. Restrictive reforms introduced at the behest of the credit card industry produced a dramatic drop in bankruptcy (in part, the lagged counterpart a massive upsurge in 2003 and 2004 as people rushed to get in under the old rules). From 2006, onwards, bankruptcy rates resumed their upward trend, reaching 1.1 million per year in 2008 and appearing likely to match or exceed pre-reform levels in 2009.

In normal times the failure of bankruptcy reform, and the renewed surge in bankruptcy would have been a major issue. But in the crisis of 2008 and 2009, the upward trend has been overshadowed by foreclosures on home mortgages. During the boom, when overstretched householders could normally sell at a profit and repay their debts, foreclosures were rare. From 2007 onwards, however, they increased dramatically, initially among low-income ‘subprime’ borrowers but spreading ever more broadly. <a href=”http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&amp;ItemID=5681&amp;accnt=64847″>2.3 million houses were affected by foreclosure action in 2008</a>. In hard-hit areas of California, more than 5 per cent of houses went into foreclosure in a single year.

The myth of trickle down was sustained, in large part, by the availability of easy credit. Now that the days of easy credit are gone, presumably for a long time to come, reality may reassert itself.

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Econometric studies

The relationship between inequality and economic growth has been the subject of a vast number of econometric studies, which have, as so often with econometric studies, yielded conflicting results. Early studies focused on the relationship between initial levels of inequality and subsequent levels of growth. These studies consistently found a negative relationship between inequality and growth. On the other hand, increases in inequality appeared to be favorable to growth.

It is perhaps, not surprising that the initial impact of an increase in inequality should be favorable to economic growth. For example, if tax rates on high-income earners are reduced, they are likely to spend less money and resources on low-productivity investments designed to minimise tax. More importantly, perhaps, in the late 20th century, growth in inequality was closely associated with financial deregulation and the growth of the financial sector. The short-term effects of financial deregulation have almost everywhere been favorable, while the negative consequences take years or even decades to manifest themselves. So, it is unsurprising to observe a positive correlation between changes in inequality and changes in economic growth rates in the short term and medium term.

It is only relatively recently that studies of this kind of explicitly examined the trickle-down hypothesis. Perhaps the most directly relevant work is that of Dan Andrews and Christopher Jencks of the Kennedy School of Government at ANU, and Andrew Leigh of the Australian National University who ask, and attempt to answer, the question ‘Do Rising Top Incomes Lift All Boats’. Andrews, Jencks and Leigh , find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years between 1905 and 2000. After 1960, there is a small, but statistically significant relationship between changes in inequality and the rate of economic growth. However, the benefits to lower income groups flow through so slowly that, as income inequality increases, they may never catch up the ground they lose initially.

Andrews, Jencks and Leigh simulate some results for the US suggesting that even assuming that the increased inequality in the US after 1970 produced permanently higher economic growth, those outside the top 10 per cent of the income distribution would not have gained enough to offset their smaller share of total income over the 30 years to 2000.

And, as Andrews, Jencks and Leigh note the situation is much worse when the distribution of income within the bottom 90 per cent is considered. Households at or below the median income level (that is, those in the bottom half of the income distribution) have lost ground relative to those above the median, even as the population as a whole has lost ground relative to the top 10 per cent. And there is evidence to suggest significant adverse growth effects when inequality between the bottom and middle of the income distribution increases.

More importantly, the financial crisis, which was the inevitable result of the policies that generated the huge growth in US inequality, has wiped out years of income growth and asset accumulation for US households.

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Social mobility

The evidence that the United States, compared to other developed countries, is characterized by highly unequal economic outcomes, and that these outcomes have grown more unequal during the era of market liberalism is undeniable. Of course, that hasn’t stopped people denying it, especially when they are paid to do so, but at least such denials must be presented, in contrarian fashion, as showing that ‘everything you know about income inequality is wrong’. By contrast, the belief that this inequality is offset by high levels of social mobility is widely held in and outside the United States, and reflected in such epithets as ‘land of opportunity’.

In the late 19th century, the US was indeed a land of opportunity compared to the hierarchical societies of Europe, and many believe that this is still the case. But the evidence of international comparative studies is clear. Among the developed countries, the US has the lowest social mobility on nearly all measures, and the European social democracies the highest.

Ron Haskins and Isabel Sawhill of the Brookings Institution found 42% of American men with fathers in the bottom fifth of the income distribution remain there as compared to: Denmark, 25%; Sweden, 26%; Finland, 28%; Norway, 28%; and the United Kingdom, 30%. Other studies, using different measures of mobility, find the same outcome

Moreover, as market liberal policies have become entrenched, social mobility has declined. Not only have the well-off pulled away from the rest of the community in terms of income share, they have managed to pull up the ladder behind them, ensuring that their children have better life-chances than those born to poorer parents.

The evidence suggests that the distinction between equality of outcomes and equality of opportunity, a central theme in market liberal rhetoric, is inconsistent with empirical reality. More equal opportunities make for more equal outcomes, and vice versa.

It’s not hard to see why this should be so. The highly unequal outcomes of market liberal policies are often supposed to be offset by an education system available to all and by laws that prevent discrimination and encourage merit-based employment and promotion.

That might work for one generation, but in the second generation the rich parents will be looking to buy a headstart for their less-able children, for example by sending them to private schools where they will be coached in examination skills and equipped with an old school tie.

One generation more and the wealthy will be fighting to stop their tax dollars back from being wasted on public education systems from which they no longer benefit. Those who remain in the public system will lobby to get their own children into good public schools and ensure that these schools attract and retain the best teachers, benefit from fundraising activity and so on.

Education has traditionally been seen as the most promising route to upwards social mobility. But as inequality has increased, wealthy parents have sought, naturally enough, to secure the best educational outcomes for their children, most obviously through private schooling, expansion of which has been a central demand of market liberals. As a result, both the importance of ability as a determinant of educational attainment, and the importance of educational attainment as a source of social mobility have declined over time. A UK study found that ‘low ability children with high economic status’ (or, in more colloquial terms, the ‘dumb rich’) experienced the largest increases in educational attainment. This is reinforced, particularly in the US, by the increasing segregation of higher education on class lines.

The inequalities are even more evident in higher education. Thanks to scholarship programs, a handful of able students from poor backgrounds make it into Ivy League colleges like Harvard and Yale every year. But they are far outweighed by the mass of students from families in the top 10 per cent of the income distribution who have the financial resources to afford hefty fees the high quality high school education that gives them the grades needed for admission and the cultural capital required to navigate the complex admissions process. And of course, those with old money but less than stellar intellectual resources have their highly effective affirmative action program – the legacy admission system by which the children of alumni gain preferential admission. In the 1998 book The Shape of the River: Long-Term Consequences of Considering Race in College and University Admissions, authors William G. Bowen, former Princeton University president, and Derek Bok, former Harvard University president, found “the overall admission rate for legacies was almost twice that for all other candidates.” If inequality of outcomes is entrenched for a long period, it inexorably erodes equality of opportunity. Parents want the best for their children, and, in a highly unequal society, wealthy parents will always find a way to guarantee their children a substantial headstart.

While education is critical, high levels of inequality naturally perpetuate themselves through other, more subtle channels like health status. Barbara Ehrenreich’s Nickel and Dimed discusses the plight of the uninsured working poor in the United States. While the problem is worse in the US than elsewhere because of highly unequal access to health care, high levels of inequality produce unequal health outcomes even in countries with universal public systems. Children growing up with the poor health that is systematically associated with poverty can never be said to have a truly equal opportunity.

There are other factors at work. A widely dispersed income distribution means that a much bigger change in income is needed to move the same distance in the income distribution, say from the bottom quintile to the middle, or from the middle to the top. So, unequal outcomes represent a direct obstacle to social mobility.

Once you think about the many and various advantages of growing up rich rather than poor, it’s not at all surprising that widening the gap between the rich and the poor should also make it harder for the poor to become rich (or, for that matter, vice versa) so the evidence that, under market liberalism, social mobility is low and declining, should not surprise anyone. On the other hand, it is disappointing, if not surprising, that the myth of equal opportunity continues to be believed so many decades after it has ceased to have a basis in fact.

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The unhealthiness of hierarchies

Some of the most striking evidence against the trickle down hypotheses has come from studies of social outcomes such as health status, crime and social cohesion. Not surprisingly, the poor do worse on most such measures than the rich. More strikingly, though, a highly unequal society produces bad social outcomes even for those in higher income groups, who are better off, in purely monetary terns, than those with a similar relative position in more equal societies. Only for the very well-off do the direct benefits of higher income outweigh the adverse effects of living in an unequal society.

It is commonly thought that, while it is better to be at the top of the hierarchy than at the bottom, there are some offsetting disadvantages, particularly in relation to health. While the poor suffer from lack of access to good medical care and other problems, the rich are supposed to suffer from ‘diseases of affluence’ like heart disease, compounded by the stresses of life at the top. ‘Executive stress’ has become a cliché. So, to some extent there is thought to be a trade-off between health and wealth.

In place of this somewhat comforting picture, Michael Marmot has some disturbing news. People at the top of status hierarchies live longer and have better health than those at the bottom. This is true for a broad range of illnesses and causes of death. Moreover, the effect isn’t confined to the extremes of the distribution. At any point in a status hierarchy, people have, on average, better health than those a little below them and worse health than those a little above them.

Marmot’s work began with a study of British civil servants. The study population is interesting for two reasons. First, it excludes extremes of wealth and poverty. The civil service is not a road to riches, but even the lowest-ranking civil servants are not poor, on most understandings of the term. Second, the public service provides a clear-cut status hierarchy with very fine gradations.

Marmot’s study found, not surprisingly, that senior public servants, at the top of the status hierarchy, were healthier than those at the bottom. More strikingly, he found that, right through the hierarchy, relatively small differences in pay and status were associated with significant differences in life expectancy and other measures of health.

The same finding has been replicated across all sorts of different status hierarchies. As you move from the slums of South-East Washington DC to the leafy suburbs of Montgomery County, 20 miles away, life expectancy rises a year for every mile travelled. Among actors, Academy-award winners live, on average, four years longer than their Oscarless co-stars.

Along the way, Marmot demolishes the myth of executive stress. Despite their busy lives, Type A personalities and so on, senior managers are considerably less likely to die of heart attacks than the workers they order around. This is not a new finding, but the myth is sufficiently tenacious that Marmot needs to spend some time knocking it down yet again.

Marmot, along with others who have studied the problem, concludes that the crucial benefit of high-status positions is autonomy, that is, the amount of control people have over their own lives. Marmot’s analysis is not focused exclusively on autonomy. For example, he has a good discussion of social isolation and its relationship to social status. Nevertheless, his main point concerns autonomy, and this is by far the most interesting and novel feature of the book.

There is a complex web of relationships between health status autonomy, both self-perceived and measured by objective job characteristics. Low levels of autonomy are associated, not only with poorer access to health care, but with more of all the risk factors that contribute to poor health, from homicide to poor diet.

The centrality of autonomy is not, on reflection, all that surprising. Autonomy, or something like it, is at the root of many of the concerns commonly seen as part of notions like freedom, security and democratic participation. When we talk about a free society, for example, we usually have in mind a place in which people are free to pursue a wide range of projects. The distinction between negative and positive liberty, popularised by Berlin goes part of the way towards capturing this point, but a focus on autonomy does better.

The points are clearest in relation to employment. Early on, Marmot debunks the Marxian notion of exploitation (capitalists taking surplus value from workers) and says that what matters in Marx is alienation. He doesn’t develop this in detail, and the point is not new by any means, but he’s spot on here. It’s the fact that the boss is a boss, and not the fact that capitalists are extracting profit, that makes the employment relationship so troublesome. The more bossy the boss, the worse, as a rule is the job. This is why developments like managerialism, which celebrates the bossiness of bosses, have been met with such hostility.

So part of autonomy is not being bossed around. But like Berlin’s concept of ‘negative liberty’, this is only part of the story. Most of the time it’s better to be an employee with a boss than to sell your labour piecemeal on a market that fluctuates for reasons that are totally outside your control, understanding or prediction. This is where a concept of autonomy does better than liberty, negative or positive. To have autonomy, you must be operating in an environment that is reasonably predictable and amenable to your control.

Of course, the environment consists largely of other people. So one way of increasing your autonomy is by reducing that of other people, for example by moving up an existing hierarchy at their expense. Similarly when employers talk about increased flexibility in the workplace, they generally mean an increase in their control over when, where and how their employees do their job. Workers typically experience this as a loss of flexibility in their personal lives. In short, within a given social structure, autonomy is largely a zero-sum good.

But some social structures give more people more autonomy than others, and this is reflected both in average life expectancy and in the steepness or otherwise of status gradients in health. In general, higher levels of inequality on various dimensions are associated with lower average life expectancy and steeper status gradients.

In The Spirit Level, Richard Wilkinson and Kate Pickett build on Marmot’s work and other statistical evidence to produce a comprehensive case for the proposition that inequalities in income and status have far-reaching and damaging effects on a wide range of measures of social wellbeing, effects that are felt even by those who are relatively high in the income distributions.

Wilkinson and Pickett report two main types of statistical evidence. Following Marmot, they examine social gradients, that is, the relationship between individual outcomes and positions on the social ladder. Here there are two main results. First, in all countries, there is a strong relationship between social outcomes and social rank, much greater than can be explained by income differences alone. Second, greater inequality within a country is associated with a steeper social gradient.

Wilkinson and Pickett also report cross-section studies in which a number of countries, or other jurisdictions such as US states, are compared. The standard statistical approach here is regression analysis, in which differences in social outcomes such as life expectancy are statistically related to inequality levels, in a way that controls for other sources of variation, such as mean income levels. Among the outcome variables considered are measures of life expectancy and health status, crime and measures of ‘social capital’, such as trust.

The results are striking. Wilkinson and Pickett find a strong negative relationship between inequality and measures of social outcomes. The relationship is statistically significant, and undiminished by the inclusion of relevant control variables. [3]This result is, on the whole, unsurprising. If we consider the kinds of social relationships that contribute to hierarchical attitudes, stressful low-status jobs and so on, it seems unlikely that they will variations in income over the course of a few years, or even a few macroeconomic cycles. This is even more obvious in relation to the social outcomes such as life expectancy, it seems clear that they are the product of lifetime experience, rather than current income.

The United States is the obvious outlier in almost all studies of this kind. It is the wealthiest country in the world, the most unequal of the rich countries, and does poorly on a wide range of measures of social wellbeing, from life expectancy to serious crime and even on such objective measures as average height. In some cases, the poor performance primarily reflects the continuing black-white divide. In other cases, however, all but the very richest groups of Americans have worse average outcome than people with a comparable position in the income distribution in more equal countries, even though the average income of the non-Americans in these groups is much lower than that of the corresponding Americans.

Leigh, A. and Jencks, C. (2007), ‘Inequality and mortality: Long-run evidence from a panel of countries’, Journal of health economics, 26(1), 1-24.

Wilkinson, R. and Pickett, K. (2009) The Spirit Level: Why More Equal Societies Almost Always Do Better, Allen Lane, London.

[1] Unlike most developed countries, the US has a poverty line fixed in real terms, and based on an <a href=”http://www.census.gov/hhes/www/povmeas/papers/orshansky.html”>assessment of a poverty-line standard of living undertaken in 1963</a>.

[2] mergency health care remains generally accessible, and has benefitted from technical progress, which has contributed to declining mortality. But regular health care has become unaffordable for many, with the result that a wide variety of chronic conditions go untreated.

[3] Some other econometric adjustments, such as the inclusion of ‘fixed effects’ do weaken the findings. The interpretation of these adjustments remains controversial.

{ 34 comments }

1

Shmoe 12.17.09 at 9:28 am

I’m still in the course of reading, very engaging so far. However, it seems as if there are supposed to be graphs, illustrations, etc. If that’s the case, they aren’t showing up. I just thought I’d let you know. Thanks for the excerpt!

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JulesLt 12.17.09 at 9:32 am

Small point on the British civil service – while salaries are highly graded at the lower levels, at the senior level they are less so – under the argument that salaries need to be competitive with the private sector to attract good candidates.

Even before that liberalisation, there were still people being paid 6 figure (GBP) salaries, particularly senior Whitehall civil servants.

To a lot of people, that would be the road to riches. (The issue is, of course, that there is relatively little chance of moving up the ranks – of rising from Grade 1 clerk to Permanent Undersecretary to the PM).

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Z 12.17.09 at 1:38 pm

I think this part is a very efficient demolition of many of the talking points of these last 20 years or so. Congrats and keep on!

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Alex 12.17.09 at 2:41 pm

Possibly the most convincing chapter yet – and the most radical in implications, especially the section on managerialism. Note that Marmot’s point about it being power rather than class per se that does the work is empirically supported by the example of the civil servants. The civil service isn’t making profits from their labour, but the same phenomenon is observed.

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Hidari 12.17.09 at 5:09 pm

This may seem like a trollish diversion, but hear me out.

It’s a shame that many people are misled nowadays into thinking that Steven Pinker-esque Evolutionary Psychology (EP) is the mainstream in psychology (it isn’t) or even that it is a particularly important strand in psychology (as a quick look through an undergraduate textbook will again tell you, it isn’t). It’s a shame because, believe it or not , there is a lot of really good stuff in psychology, but it’s not, generally speaking to be found in the ‘just so’ stories of EP, or even the faux information science of cognitivism.

Instead the good stuff in psychology is social psychology and the ‘jewel in the crown’ of social psychology is attribution theory.

This is a way of looking at the way that people explain things. There are a number of ways that one can do this, but a key distinction here is ‘internal’ and ‘external’ attributions. For example, the classic example is of crime. ‘I did it, I accept that, and I take the blame’ is an internal attribution (i.e. internal to the person doing the attribution) ‘I blame society it wasn’t my fault’ is an external attribution.

Now, of course that example is about a negative thing (crime), and generally speaking (this is termed the fundamental attribution bias) people internally attribute for positive things and externally attribute for negative things.

The reason I am mentioning this is that this is closely related to an attributional ‘style’ which indicates the locus of control’ .

‘Locus of control refers to the extent to which individuals believe that they can control events that affect them. Individuals with a high internal locus of control believe that events result primarily from their own behavior and actions. Those with a high external locus of control believe that powerful others, fate, or chance primarily determine events. Those with a high internal locus of control have better control of their behavior, tend to exhibit more political behaviors, and are more likely to attempt to influence other people than those with a high external locus of control; they are more likely to assume that their efforts will be successful. They are more active in seeking information and knowledge concerning their situation.’

And another way of putting this, of course, is to say that locus of control indicates the extent to which people believe they have autonomy over their lives.

The whole article reference above is worth reading, but there are interestingly correlations between locus of control and health, and religiosity (specifically the kind of religiosity exhibited).

Needless to say there is also a correlation between social class, ethnicity and gender and locus of control. (Interestingly the first of these is a highly under-researched topic, perhaps indicating modern psychology’s American bias, and the extent to which American academics are loathe to acknowledge class differences in any way whatsoever).

However a (significantly) Dutch study found: ‘In a study of 2174 Dutch men and women aged 25-74 (Bosma et al., 1998), subjects with higher chidlhood socioeconomic status (SES) had much higher levels of “perceived control” (locus of control) in adulthood. In addition, “perceived control” appeared to be an important mediatorof the association of SES with later mortality. The association between SES and mortality (RR=2.6) was reduced substantially (RR=1.8_ agter controlling for levels of “perceived control”‘.

Moreover: ‘certain parental behavior patterns (i.e., overly strict, critical and demanding of conformity) are more common in low SES households, and may be viewed as a reflection of the parents’ occupational and other life experiences, which are characterized by low control and insecurity (Sennett and Cobb, 1973; Rubin, 1976). Similarly, an adult’s experience, which might include stressful, low control jobs, may shape their personality development (Kohn and Schooler, 1982). For example, Lefcourt (1982, p. 31) pointed out that locus of control is “positively associated with access to opportunity.”‘

Very very very broadly speaking, with man ‘ifs’ and ‘ands’ and ‘buts’: rich, powerful people internally attribute for good things, and externally attribute for bad things. With poor people (especially poor women, especially poor women from ethnic minorities) it’s the other way round.

So social class begins as an ‘objective’ phenomenon in capitalist society. However it quickly reproduces itself, so to speak, on the ‘subjective’ level. In our ‘wealth is everything, money talks and bullshit walks’ society, poor people are taught, by society and their parents, that they are worthless. Entry into the ‘workplace’, either through long term unemployment, or through gaining low wage, low job security, low prestige jobs, reinforces this. One learns the classic ‘internal’ attributional style for failure: ‘ I have failed because it’s my fault, because I am stupid and worthless. If only I was as brilliant as Simon Cowell! He has succeeded because he is so brilliant and wise. Or that Cheryl Cole. She’s good too.’ This then becomes a self-fulfilling prophecy (cf Learned Helplessness), which then results (probably) in lacking the ‘drive’ to ask for promotion, to seek alternative (better) employment, all of which also (probably) has a negative impact on physical and mental health. And this attributional style is then, in turn, passed on to the children. And so the ‘culture of despair’ reproduces itself.

All this would seem to fit in with the Marmot stuff quite well.

Anyway thought you might find that interesting! Make of it what you will.

6

Doctor Science 12.17.09 at 8:06 pm

You can think of Barbara Ehrenreich’s new book, Bright-sided, as being about the promotion of a false sense of control. The “positive thinking” movement (including motivational speakers, the properity gospel, life coaches, etc.) tells poorer people that all they really need to do is internalize the rich’s sense of control. If you *feel* in control, you *are*, and you will become rich and healthy “like magic”.

One of the things that struck me in “Bright-sided” is how the positive-thinking, prosperity-gospel crowd stress not thinking bad things about rich people. I think this is the great mystery of the American wealth shift since 1980: the rich are richer but the poor (and middle class) don’t hate them for it. Americans are worse off and are angry, unhappy, and afraid: but we aren’t *actually* in the streets, where maybe we should be.

7

Hidari 12.17.09 at 8:29 pm

‘You can think of Barbara Ehrenreich’s new book, Bright-sided, as being about the promotion of a false sense of control. The “positive thinking” movement (including motivational speakers, the properity gospel, life coaches, etc.) tells poorer people that all they really need to do is internalize the rich’s sense of control. If you feel in control, you are, and you will become rich and healthy “like magic”.

One of the things that struck me in “Bright-sided” is how the positive-thinking, prosperity-gospel crowd stress not thinking bad things about rich people. I think this is the great mystery of the American wealth shift since 1980: the rich are richer but the poor (and middle class) don’t hate them for it. Americans are worse off and are angry, unhappy, and afraid: but we aren’t actually in the streets, where maybe we should be.’

Well of course the ‘positive thinking’ idea is derived from ‘positive psychology’ which was, sad to say, developed by Martin ‘Learned Helplessness’ Seligman.

It’s a great shame because Learned Helplessness was a genuinely important idea and it has led to profound insights and genuine change for real people (cognitive behavioural therapy is really a kind of ‘attributional therapy’ with some behaviourism thrown ‘on top’ (or vice versa)).

The problems for Seligman (as with for most psychologists) is that he has forgotten that Being precedes Consciousness (by definition) not the other way round. People feel helpless, not because this is some ‘quirk’ that can be ‘cured’ by CBT but because they are helpless. Rich people feel ‘in control’ not because they ‘think positively’ but because they are in control. Also, again like most psychologists, he doesn’t recognise the social aspect of cognition and consciousness (he should perhaps spend a bit more time reading Vygotsky and Luria).

One of the best ways for the poor and powerless to regain their sense of control (and their dignity) is to engage in physical (not ‘mental’), social, collective action: to go on strike, to demonstrate, to engage in collective non-violent protest. So when you say ‘maybe we should be’ I would say: definitely, yes we should be, if only for our mental health. No one was around to measure it at the time, but I’m damn sure the British miner’s locus of control was more ‘internal’ after the ’72 and ’74 strikes than it was before.

8

John Quiggin 12.17.09 at 10:37 pm

These are great comments, and helping me to think about the “What next” section of this chapter? It seems to be impossible to address these questions satisfactorily within the separate disciplinary boundaries of the social sciences – economics, politics, sociology and psychology all need to be integrated.

That’s easy to say, and easy to read, but, in my experience much harder to do. Even in the context of a group blog like CT, the disciplinary divides are obvious, and at times quite sharp. Trying to get an integrated transdisciplinary research approach to the level demanded by academic journals, conferences and so on is exceptionally hard.

Fortunately for the purposes of my book, I can just point out the path we have to take, not work out how to actually get there.

9

john c. halasz 12.17.09 at 11:18 pm

“Early studies focused on the relationship between initial levels of inequality and subsequent levels of growth. These studies consistently found a negative relationship between inequality and growth. On the other hand, increases in inequality appeared to be favorable to growth.” – This is unclear: does “negative relationship” mean “negative correlation”? In which case, the “On the other hand” 3rd sentence is redundant, no? And, of course, the longer-run relationship needs to be considered, as you mention. But I’d suspect no simple correlation exists abstracting from the situation and dynamics of specific economies. And it might be worth mentioning the older notion of the Kuznets curve, whereby inequality increases in developing economies because of agriculture/industry shift and high savings required for capital investment/accumulation and decreases with developed economies, since that is exactly the opposite of “trickle down” tendencies in the developed world.

“Jencks of the Kennedy School of Government at ANU”? Do you mean “at Harvard”? If that’s the same C. Jencks whose written on the topic for NYRB, he’s an American.

Again, there is a problem here with U.S.-centric data. Health care is a peculiarly U.S. issue, as every other OECD nation, previously or during this era (e.g. Taiwan) has adopted some sort of universal health care scheme, which controls costs to some degree as % of GDP. (In the last cycle, U.S. health care accounted for some 29% of GDP growth and cost inflation accelerated; given that large trade deficits tend to shift economic investment/activity to non-tradeable sectors, the patch-work U.S. health care system, with its large information asymmetries, likely offered opportunities for rent-seeking, analogous to the inflation of the housing bubble). And the legacy of racism affects U.S. poverty/inequality considerations in ways not comparable to other smaller, perhaps more homogeneous nations. (There’s no mention here of the anomalous U.S. carcerial regime, with a .736% incarceration rate, which hugely disproportionately affects minorities and especially blacks). Probably similar anomalies apply to the hugely costly, high unequal and poor quality U.S. educational system. And, by the way, using Gini coefficients, the U.S. is and has been significantly more unequal that many comparable economies, ranging from a low 0f 38.4 in the 1960’s to a recent high 0f 47, compared to recent Gini’s of AUS 30.5, Canada 32.1, UK 34, PRC 47, Mexico 47.8, etc.

More generally, the effort here at “empirical” assessment of “trickle down” seem to me to concern normative assessments in welfare terms, such as e.g. the claim the inequality is bad for health, which the median CT reader is inclined to agree with or find persuasive, but other types would contest. (As a fairly typical example of the genre: http://economistsview.typepad.com/economistsview/2009/12/should-taxes-be-progressive.html). Perhaps it might have been addressed soto voce in some other section, but I see little indication here of the functional reasons or “reasons” why “trickle down’ economics might have taken hold, starting with the rise of monetarism:
globalization, de-industrialization, financialization, and changes in corporate organization re-structuring oligopolistic rents internationally. (In the U.S. case, the official external net debt stood pre-crisis at just $2.6 trillion, which leaves $2.9 trillion from recorded CA deficits since 1990 unaccounted for, which large excess earnings from “U.S.”-owned foreign equities gives, I think, a considerable hint why the vast trade imbalance was considered “sustainable”).

Of course, being a card-carrying DFH, I don’t exactly believe in any purely objective economic theory in the abstract, but rather all such theories are involved in underlying practical complexes with their concomitant needs and interests, such that they project specific perspectives on their “material”. (I would hold to such a “praxiological”account of epistemic issues in general, but the problem is especially acute with economics). I also don’t think the assumptions of “ergodicity” involved in comparative static results of economic models are plausible, so as to make cross-national, cross-temporal comparison entirely persuasive. And in general, the “free play” of chosen assumptions and parameters in economic models renders their claim for entirely objective status moot.

10

john c. halasz 12.17.09 at 11:25 pm

The link didn’t take, so I’ll try again, though it’s just a banal Bruce Barlett screed, to indicate how endless these sorts of disputes are:
http://economistsview.typepad.com/economistsview/2009/12/should-taxes-be-progressive.html

11

Tomboktu 12.17.09 at 11:32 pm

the belief that this inequality [of economic outcomes or incomes] is offset by high levels of social mobility is widely held“.

The idea of social mobility is seen, and reflected in your extract, as being about just upward mobility.

True equality of opportunity would require that the son or daughter of a judge, a FTSE 100 CEO, or an economics professor (etc., etc.) are as likely to be employed as a forklift truck driver, an office cleaner, or a check-out operator in the supermarket as anybody else’s child is to enter those “careers”.

I think it would be useful to point out that this is an implication of true equality in social mobility. (And it might be useful to note that the studies don’t ever seem to examine that, and seem to buy into the view that only upward mobility is what matters.)

12

Tomboktu 12.17.09 at 11:45 pm

13

John Quiggin 12.17.09 at 11:57 pm

@jch Thanks for some useful comments. I’m a bit puzzle by this

More generally, the effort here at “empirical” assessment of “trickle down” seem to me to concern normative assessments in welfare terms, such as e.g. the claim the inequality is bad for health, which the median CT reader is inclined to agree with or find persuasive, but other types would contest.

This is a positive rather than a normative claim. Granted CT readers are more likely to believe evidence in support of such claims than, say, Chicago school economists, but that’s a fairly generic fact about empirical evidence of all kinds on issues people care about. Are you trying to say something different than that people tend to be more ready to believe evidence that confirms their own views?

@Tombuktu. Thanks, also. I do mention downward mobility a few times, and my account of the barriers to upward mobility is largely based on the way in which the well-off can protect their children from downward mobility. On #12, my footnote [3] will link to Leigh’s critique of The Spirit Level. I have discussed this at a fair bit of length in a longer review, which I will also link to.

14

Alex 12.18.09 at 12:56 am

Surely part of the point of social democracy is that downward mobility shouldn’t be a disaster? If you want a decent life with opportunities to self actualise for everyone…

15

John Quiggin 12.18.09 at 1:38 am

@14 This is a good point. Under market liberalism, downward mobility is a disaster, and must therefore be guarded against at all costs, thereby ensuring that upward mobility becomes more and more difficult.

I think Ehrenreich has some of this in Fear of Falling which I must read, or at least scan, before I finish this.

16

Doctor Science 12.18.09 at 2:28 am

Hidari:

IIRC Ehrenreich interviewed Seligman for Bright-Sided, and he was a little bit embarrassed by the way his work was being used — but only a little, and he was taking the money.

I think the significance and goal of “trickle-down economics” can be summed up in one word:

trickle.

Whatever flows downward under “trickle-down” is not supposed to be much. Only a little, a drip, something that won’t change any fundamental balance. The poor damn well better be with us always, and grateful for what they get.

17

Martin Bento 12.18.09 at 4:46 am

“In the period since the economic crisis of the early 1970s, US GDP has grown solidy, if not as rapidly as during the Keynesian postwar boom.”

I’d like to see a graph or cite proving this. I know it is true that growth was higher before, but it is so contrary to what people hear that I think they are hesitant to believe it. I heard Fama was implying the opposite just the other day.

Other than that, I think this is one of the strongest sections of the book so far.

18

john c. halasz 12.18.09 at 5:46 am

@13:

“This is a positive rather than a normative claim. Granted CT readers are more likely to believe evidence in support of such claims than, say, Chicago school economists, but that’s a fairly generic fact about empirical evidence of all kinds on issues people care about.”

Well, I’m not about to launch into a lecture on the matter, since you’re a pro and would have a much more sophisticated understanding/appreciation of the issues involved. But “good” statistical data is hard to come by and usually requires some sort of “cleaning” to hold “good”. Raw U.S. “employee compensation” data includes CEO salaries, for example. And then there is the issue of the method of “cleaning” and the ostensible purposes it might serve. For example, a neo-con commenter at Mark Thoma’s “Economist’s View” site was flogging a study by prominent Northwestern U. economist Prof. Robert Gordon on U.S. income inequality, claiming that, if productivity statistics were “cleaned”, the gap between productivity gains and average/median wages was far less than commonly reported, (though it didn’t contest the gap between the top 1% and the rest, where much of the large “action” has been occurring). Since it was a gated paper and I had no access, other than the neo-con’s chosen excerpts, I have no idea on what grounds he was claiming the productivity data needed to be “cleaned” to enable “orange to oranges” comparisons and whether he was relying on labor productivity or “total factor productivity” and whether he was relying on the marginal-products-to-factors-of-production artefact as conceptually “normative” for his study. All kinds of such questions are raised, when trying to “prove” a matter with such data. And when cross-comparison of different data sets from different economies are at issue, the same sorts of issues multiply. That’s not to say that empirical/evidentiary support can’t be more or less for any given conceptual claim or hypothesis and that adjustments can’t be made. But it is to say that all such evidence, in one way or another, is organized within some conceptual framework, which it more or less supports, and such frameworks involve “prior” normative commitments with perhaps differing explanatory aims. Which is to say that the conflict of interpretations can’t be obviated, nor decided in some sort of “pure” way.

I wasn’t questioning your health data, as if it weren’t “positive”. But, of course, it offers some correlation between health levels/outcomes and income/status levels. There are then all sorts of “explanations” that might then be offered for such a correlation, ranging from bad behavior to unequal and inadequate access. And, to offer a sheer travesty, longevity data might be offered as “proof” that the welfare of women is greater than that of men, though I don’t think anyone here would warrant such a “conclusion”. But then the issue was really the aggregate “welfare” outcomes of systems/policies fostering increased inequality in income/wealth distributions, as offset by ostensibly increased aggregate growth in output, and such questions of “welfare”, which means, better, collective and distributive well-being, “eudaimonia”, are inescapably normative and depend upon differing “definitions”. Any aggregate statistical data presented on that question is bound to be a bit “thin”, if aiming at “objectivity”, and subject to competing claims. “Lesser health” might be shouted down with “flat screen TVs”! And why should “welfare” be assessed in terms of consumer preference functions, rather than, say, worker preferences? As if employment security, or better, voluntary control over conditions of employment, were not ingredient in any “welfare function”. I tend to be strongly on the side of agency/capabilities accounts of well-being, not because I’ve read the extensive academic literature and debates in “normative political philosophy”, which I haven’t, but because I’ve read Aristotle. I also tend to be strongly egalitarian in my preferences/commitments, plebeian-democratic, if not exactly “populist”. But I also recognize that there is nothing “objective”, neither in terms of evidence, nor reasons or concepts, that would completely vindicate such claims over against competing/conflicting commitments.

The positive/normative distinction, or, more broadly, the fact/value one, I would characterize as equally necessary and impossible, and, by no means, simple to disentangle. But my basic suggestion was not evaluating the alleged trade-off between economic growth and inequality in terms of alleged welfare enhancements, but rather regarding the structural transformations of advanced economies, (granted large differences), during the current era of neo-liberal hegemony, in which “tickle down” theory/ideology and concomitant policy regimes prevailed, in “purely” functional terms, as not aimed at enhanced “welfare'” at all, but rather rooted in the re-productive imperatives of dominant capitalist interests. Because, according to my basic understanding, the overwhelming functional “imperative” for economic growth, equal or not, is not the enhancement of human welfare, but rather the need to provide re-investment opportunities for profits, and thereby maintain the valorization of capital/rate-of-profit, and, not least of all, the financial structures that project it into the far distant future. That such a system involves crisis tendencies almost goes without saying, but to what extent are prevailing economic theories actually involved in an exercise of denial, in the name of “stabilization”, of the structural misallocations and social costs involved, and evading any consideration of functional alternatives to a system entirely dependent on the “private” appropriation and allocation of surpluses?

19

Martin Bento 12.18.09 at 10:20 am

If you’re going to point out that the decline in household earnings is partly attenuated by the shrinkage of the average household, I think it would also be good to also point out that it is magnified, in cost/benefit terms, by the dramatic increase in hours worked per household, chiefly as a result of woman entering the workforce at much greater level than previously, but also as a result of more people working more than 40 hours a week. There was political support in the US for AFDC (i.e., “welfare”) in the sixties because it was considered an unreasonable hardship for the mother of small children to have to be in the workforce. We may criticize the sexism of this, but still, the support evaporated when working mothers became the norm for the middle class, and the middle class didn’t see why it should support a living standard (full time motherhood) for the poor to which it was no longer entitled. In a sense, the most direct proof of the decline in living standards is that women entered the workforce without men being able to work any less; there is just more total labor that goes into supporting a family or couple economically, particularly towards the bottom of the scale.

20

Tim Worstall 12.18.09 at 11:36 am

“The proportion of Americans below this fixed poverty line fell from 25 per cent in the late 1950s to 11 per cent in 1974. Since then it has fluctuated, reaching 13.2 per cent in 2008, a level that is certain to rise further as a result of the financial crisis and recession now taking place. Since the poverty line has remained unchanged, this means that the incomes accruing to the poorest 10 per cent of Americans have actually fallen over the last 30 years.”

Eeek!

Yes, as you note, the US poverty line is fixed in real terms (three times the food budget in 1963 upgraded for inflation?). However, there’s more to it than just that.

The measurement of household income is odd: very different from the way everyone else does it. It is not after tax, after benefits (as everyone else does it). It is market income plus direct cash benefits. Which in effect means market incomes plus TANF (or whatever they call cash welfare these days). It does not include food stamps, medicaid, housing vouchers or any other form of benefit in kind. It also does not include the EITC which comes through the tax system.

Which leads to a few interesting distortions. For example, John Edwards was suggesting that there should be a million more housing vouchers, a much larger EITC and (sorry, forgotten his third one) in order to reduce poverty. Good ideas all. However, by the way that poverty is measured in the US this would not have changed the number defined as being poor by one single person. For we don’t count benefits in kind or those coming through the tax system when we define poverty.

Now, if this system had remained constant over all of those years then this would be interesting but wouldn’t detract from the point that JQ is making here, that poverty alleviation was going great guns and then stopped. However, there has been a large change in methods of poverty alleviation over the years.

There’s been a bi-partisan move to retreat from direct cash alleviation of poverty (like TANF or what is traditionally called “welfare”) and move towards poverty alleviation through benefits in kind (medicaid, food stamps, housing vouchers) and the tax system (EITC).

And the importance of this is of course that we count the former, cash welfare, as alleviating poverty when we calculate the number of people below the poverty line. But we do not count the latter (benefits in kind or through the tax system) as alleviating poverty when calculating the number in poverty.

So we’ve had, over the decades, a quite radical change in how we alleviate poverty but we’ve not in fact changed our definition of poverty to reflect that fact.

And when did this change in poverty alleviation start? When did the move to methods that we don’t count as alleviating poverty begin? When, in fact, did we start spending ever more on poverty alleviation without actually alleviating any poverty by the method we use to define poverty?

Umm, the EITC was enacted in 1975.

Quite. We stopped seeing the effect of spending on poverty alleviation in actually reducing poverty at about the same time that we stopped counting the effect of spending on poverty alleviation in actually alleviating poverty.

Census has figures on those “actually living in poverty” (rootle around, under “alternative methods of calculation” or some such) as opposed to those who would be in poverty if it weren’t for the benefits in kind and tax system alleviation efforts. Worth checking them out. Poverty has continued to fall substantially since 1974.

None of this is meant to obscure the fact that poverty as the rest of the world defines it (60% of median equivalised household income….a measure more of inequality or relative poverty than poverty itself but that’s an entirely different argument) is much higher in the US than in many other countries.

However, that screeching halt in poverty alleviation by the methods the US uses to measure poverty and its alleviation is more of an artefact of the methods used to do the alleviating and the calculating than it is of anything else.

21

James Wimberley 12.18.09 at 11:46 am

Homelessness. Wasn’t there also a very strong factor independent of overall economic trends, viz. the movement against institutionalization? The failure of the intended alternative, care in the community, to materialize is not of course independent of neoliberal ideology. You got rising homelessness in other countries like the UK that closed their mental hospitals but didn’t really buy into trickle-down.

22

Barry 12.18.09 at 2:48 pm

John Quiggin: “In the period since the economic crisis of the early 1970s, US GDP has grown solidy, if not as rapidly as during the Keynesian postwar boom.”

Martin Bento: “I’d like to see a graph or cite proving this. I know it is true that growth was higher before, but it is so contrary to what people hear that I think they are hesitant to believe it. I heard Fama was implying the opposite just the other day.”

I don’t have the figures readily at hand for the USA, but here’s the FAMA claim, debunked by Paul ‘Van Helsing to Chicago’ Krugman:
http://krugman.blogs.nytimes.com/2009/11/05/the-lost-generation/

IIRC, the figures for the USA look similar: growth declined, 50’s to 60’s, 60’s to 70’s, 70’s to 80’s, 80’s to 90’s, and 90’s to ’00’s (with the last going to look far worse, once the measurements for the ’01-’07 have the impact of the crash taken account of).

In a sense (and this is IIRC), John is actually incorrect with the phrase I quoted above; the period after the 1970’s were worse for economic growth in the USA overall. For the top 10%, and top 1%, I’m sure that they were far better.

23

Barry 12.18.09 at 2:56 pm

BTW, Paul Krugman uses the term ‘memory hole’ when discussing this. He points out that if one read only the right-wing economists, one would never know that many things (GDP growth, GDP per capital growth, productivity growth, media wage growth, etc.) were better before the Age of Reagan (and the age of Chicago, the Great Moderation, etc.) than during and after.

24

Glen Tomkins 12.18.09 at 4:21 pm

Was it even reasonable to suppose that capital is the rate-limiting step any more?

This was a very enlightening and succinct summary of the failure of trickle-down, for which thanks. But I can’t help, couldn’t help even at the time that trickle-down first came into prominent public discussion as the rationale for Reaganomics, think that the idea was obviously wrong because there was no reason to think that we suffered from any problem of the shortage of investment capital for which Reaganomical tax policy was supposedly needed as a solution.

I’m a complete economic illiterate, so by all means correct me if this presentation of the matter is either wrong, or so obvious that it’s accepted on all hands and already factored into everyone’s views on the matter. It seems to me that the whole idea of trickle down is based on the notion that, whatever hit the economy might take from shifting the tax burden onto consumers of goods and services, was more than outweighed by the good effects of leaving the wealthy more of their wealth, because these folks had so much money that the vast sums they had in excess of their need to buy goods and services would be used to invest in new or expanded economic enterprises, which would produce more and cheaper goods and services to benefit even the consumers who had to assume more of the tax burden up front. It seemed that this theory rested on the idea that capital formation was the rate-limiting step in our economy, or it would not be true that money diverted from consumption of goods and services, however that might have a bad effect on demand, would be so much better used in capitalizing business enterpises, that the end result of stealing from the poor to give to the rich would in fact be that the new enterprises fostered by this diversion would improve the lots of even the poor.

It certainly might have been true in Adam Smith’s day that capital formation was so constrained, that it often would be the rate-limiting step in the growth and developement of economic enterprises. The lowest in society that one might find any capital accumulation at all would have been among the merchant class, and really only the better and more successful among them would accumulate much money at all beyond the immediate need to merely hold their own enterprises above water, that they would have much left over for new ventures, or the expansion of existing ones. But isn’t that pretty clearly no longer the case, even remotely? All sorts of fools have way much more money than they know what to do with. If anything, the over-abundance of money with nothing useful to do has acted like the overabundance of nutrients dropped on an ecosystem, triggering a a cycle of algal bloom “investments” followed by deoxygenated wasteland. Most money that people have available after they have met their consumptive needs seems to go into side bets and meta-gambles, because of their sexier RoIs, than into actually building or expanding enterprises that actually produce goods and services. If anything, this hyperalimented environment, with too much money waiting to be committed, seems to suck capital away from the things we actually need capitalized, like new sewers, for example, in order to chase unsustainable RoI that is not based on anything that we would have called an investment back when that word was applied only to actually capitalizing things.

Well, maybe the dramatic ending we’re seeing now was not clear in 1980. Even I did not foresee it, so lesser mortals clearly must be foregiven for the same failing. But wasn’t it clear, even in 1980, that there was not the shadow of the beginning of any reason to think that capital formation was the rate-limiting step in our economy?

25

john c. halasz 12.18.09 at 10:53 pm

Tim Worstall @20:

“Cleaning” the data to make for cross-country comparisons of welfare is thorny, with lots of peculiar issues coming up. If, e.g., Americans have more housing space per capita, obviously greater land availability and thus lower land rents play a part, though it’s not clear that more space is necessarily a major welfare improvement. Or, public transport systems are generally spottier and more expensive in the U.S. than Europe, which is also partly a function of land and distances, though mediated by public planning or its absence, so Americans might spend more on transport, even if fuel costs are lower, (which especially affects poorer people with respect to the cost of accessing jobs). And, of course, Americans work more hours per capita annually, so higher total wages, if not productivity, is to be expected. And of course hedonic price adjustments over time need to be taken into account in assessing standards-of-living. But no one is exactly arguing that poor and equal is better than across-the-board richer but more unequal. Rather the argument is over decreasing returns to actual welfare with increasing inequality beyond some point of collective wealth generation, even if, as is not proven, greater inequality leads to larger gains in nominal wealth. (For one thing, though trivial, increased concentrations of wealth and income at the top lead to inflation of positional status goods for the wealthy, so that even if one were to attribute a high marginal value to welfare improvements for the already wealthy, vis-a-vis the broader population, there would be diminishing welfare gains to wealth, even as aggregate nominal growth might appear greater, due to increased economic activity oriented toward producing high-margin goods).

At any rate, though it doesn’t directly answer your query about the historical trend in poverty alleviation in the U.S., and whether poverty has not actually continued to trend down, inspite of measurement issues, (which I’d rather doubt and would ask for evidence on), here’s a comparative chart for poverty rates before and after transfers drawn from Wikipedia:

http://en.wikipedia.org/wiki/Welfare_state#cite_note-Bradley_et_al.-15

Scroll down to the “effects on poverty” section. The “absolute” part is in terms of 40% of U.S. median income and dates from 1999, the “relative” part is for 40% of domestic median income, though I have no idea exactly how the chart was complied and the data “cleaned” and whether U.S. median income is expressed in FX or PPP terms.

26

Martin Bento 12.19.09 at 6:17 am

Glen, that’s pretty much what I’ve been saying for the last two threads on this book. Don’t know how wide the agreement is. Also, that asset inflation directly (at least) suggests that investment capital is excessive, sort of what you’re getting at with the algal bloom metaphor.

27

Tim Worstall 12.19.09 at 12:02 pm

“At any rate, though it doesn’t directly answer your query about the historical trend in poverty alleviation in the U.S.,”

I don’t think I made a query about it, did I?

I’m making a statement. That the issues over changes in how poverty amelioration is counted and measured in the US mean that the specific comparison that JQ has used above, between pre 1974 and post 1974 poverty reduction, cannot be upheld.

For pre 1974 we were counting a lot of the things we did to lift people out of poverty and post 1974 this is no longer true.

It’s nothing to do with land, housing, PPP and the rest. It’s very simply that the pre 1974 poverty rate was calculated including poverty alleviation efforts and the post without including them (OK, that’s a bit strong. Without including some).

Which means that we cannot look at the change in poverty reduction in around 1974 and use it to say something about Keynesianism and neo-liberalism, or trickle down. For at least part of that change is simply to do with measurement issues, not the economic policy being followed at the time.

Try here, page 6.

http://www.census.gov/prod/2005pubs/p60-227.pdf#page=5

Adding in the EITC and non cash benefits we get a poverty rate of 8% or so for 2003.

We could say that’s only a few percentage points different of we could say that’s 50% different from JQ’s figure of 12 to 13%.

And the difference will be greater today as the EITC has been expanded since then.

28

john c. halasz 12.19.09 at 10:03 pm

@27:

Here’s a historical chart of the official U.S. poverty rate, which Quiggin was presumably referring to:

http://northshorejournal.org/LinkedImages//2009/09/Percent-of-people-in-poverty-for-2008.jpg

As to the pdf. link you provided, there was a lot of what I called data cleaning there. However, AFAICT, the alternative measures with revised taxes, transfers, inflation adjustments, etc. are still using the equivalent of the Orshansky line. Further, much of the point of the report was an effort, at Congressional request originally, to develop alternative measures of the poverty line by the National Academy of Sciences. And if you look at the chart on pg.12, all the alternative NAS measures are higher than the official rate, not 50% lower. Nonetheless, the historical trend lines of all the measures are similar to the official measure, so presumably the notion that the poverty rate increased after bottoming in the 1970’s and only lowered to that level during the Clinton boom, (when wage rates increased some 7%, for the first time since 1973, and unemployment rates declined and the E/P rate peaked), and trended up since then, remains intact. The EITC was expanded in 1996 IIRC, but welfare benefits were sharply curtailed as part of the “reform” bargain, so it’s not clear per se, without any evidence, of the effects of that change on poverty rates.

So if your nitpicking claim is this:
“Which means that we cannot look at the change in poverty reduction in around 1974 and use it to say something about Keynesianism and neo-liberalism, or trickle down. For at least part of that change is simply to do with measurement issues, not the economic policy being followed at the time.” It’s by no means been “proven” or backed up by solid evidence, unless you’re content to engage in denialism and cherry-picking.

The U.S. real median household income actually declined BTW between 2000 and 2007, pre-crisis, the first time ever that has occurred post-war during the recovery of a business cycle. And the U.S. real minimum wage peaked in 1968 and declined notably after 1980, and only recently was raised in a series of steps from $5.25 to $7.25, its 1980 level. Here’s a set of historical charts:

http://oregonstate.edu/instruct/anth484/minwage.html

29

piglet 12.20.09 at 4:37 am

“I’d like to see a graph or cite proving this. I know it is true that growth was higher before, but it is so contrary to what people hear that I think they are hesitant to believe it. I heard Fama was implying the opposite just the other day.”

Look up NIPA table 1.1.3 at http://www.bea.gov/national/nipaweb/SelectTable.asp. These are corrected for inflation. You have to calculate average growth rates yourself, I don’t know of any source for a good graph. The growth was highest in the 1940s and 1960s and lowest in the 2000s. For the record, I reject the claim that GDP is a meaningful measure of welfare.

30

Martin Bento 12.20.09 at 6:01 am

piglet, thanks. Though what I meant is that I’d like to see such a graph in the book. But maybe John will take a look at your source and come up with a chart.

31

john c. halasz 12.20.09 at 7:26 am

@29 & 30:

Here’s a link to a graph of developed economy growth rates post-war:

http://krugman.blogs.nytimes.com/2009/11/05/the-lost-generation/

IIRC, U.S. growth rates were lower in the 1950’s than other comparable economies, and picked up during the 1960’s.

32

Tim Worstall 12.20.09 at 11:19 am

“As to the pdf. link you provided, there was a lot of what I called data cleaning there. ”

Yes, that’s the point of the exercise. We know that the way that the number below the poverty line is calculated creates some distortions. We would like to remove those.

“are still using the equivalent of the Orshansky line”

Agreed. For that is how the official poverty rate, the one JQ quoted, is calculated.

I’ve already said upthread that US poverty rates would be very different indeed if the more usual 60% of equivalised median household income were used. Much higher in fact.

That isn’t my point at all. It is purely that *by the measure JQ is using* we’re getting an inaccurate picture of changes in US poverty rates. Purely and solely because of changes in the way that poverty alleviation is carried out and the way that we count this.

“The EITC was expanded in 1996 IIRC, but welfare benefits were sharply curtailed as part of the “reform” bargain, so it’s not clear per se, without any evidence, of the effects of that change on poverty rates.”

But we can predict exactly what the effect will be on measured poverty rates: which is precisely the point that I’m trying to get across.

Imagine, just for the sake of argument, that we spend exactly the same amounts on the EITC post welfare reform as we did on welfare pre reform. Also imagine that out there in the real world exactly the same amount of poverty is alleviated.

Yes, both are absurd and unreal assumptions but bear with me.

Now, the way that the US poverty rate is calculated, the effect of this change will be to increase the measured rate of poverty. For we include the income from welfare benefits as part of the income of the poor. But we do not include the income from the EITC as part of the income of the poor.

We’re spending the same amount of money and we’re alleviating the same amount of poverty. But the recorded poverty rate has just gone up.

Which means that if we want to look at the actual level of poverty we need to clean the data to take account of this known point.

Please note again: this has nothing at all to do with whether there is too much poverty in the US or whether more should be done to alleviate it. It is purely a point about data and measurement.

JQ’s point is that poverty was being reduced at a fair old rate up to 1974. Then it’s stagnated/fluctuated a bit. JQ goes on to use this as an example of how the end of Great Society Keynesianism and the advent of neo-liberal trickledown has meant that said poverty reduction has come to a halt.

However, there’s a known problem with the data being used to illustrate this point. At that inflection point, 1974, we also started to see a different method used to alleviate poverty. A different method which we do not account for in our calculations of how many people there are in poverty. So the numbers we have for those in poverty should be corrected for this change before we try to use that number to show that poverty alleviation has indeed slowed down/come to a halt.

This isn’t, by the way, a market liberal/neo-liberal attempt at a defence of anything at all. The point is vastly more useful running the other way.

It was PJ O’Rourke who made the point that we spend hundreds of billions of $ each year on poverty alleviation. Yet the number in poverty is the same as it was before we spent those hundreds of billions. The conclusion is thus that giving poor people money doesn’t cure poverty.

To which a supporter of income redistribution and the alleviation of poverty could (and should) respond: don’t be absurd. Of course giving money to poor people alleviates poverty. What you’re seeing is just an effect of how we measure poverty and what we do to alleviate it. Get the correct figures and we can see that it does and therefore we ought to be doing more of it.

Yes, I realise that Wikipedia probably isn’t the most rigorous of sources but this is interesting:

http://en.wikipedia.org/wiki/Earned_Income_Tax_Credit

“The EITC is the largest poverty reduction program in the United States. Almost 21 million American families received more than $36 billion in refunds through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation’s lowest paid working people, lifting more than 5 million of these families above the federal poverty line.”

That $36 billion and those 5 million familes are not included in the figures JQ used above. Nor are Section 8 housing vouchers nor food stamps.

To repeat, I’m not trying to say that poverty has risen/fallen in the US. I’m not trying to say that more/less should be done about it. I am purely trying to point out that there is a problem with the way that the numbers below the official poverty line are calculated, one that makes comparisons of the poverty rate pre mid 1970s and post 1970s more complex than the numbers that JQ used up at the top.

For we used to count as alleviating poverty the money we spent on alleviating poverty. Now we, largely, do not.

33

JoB 12.20.09 at 12:08 pm

John, Martin, piglet,

Here I was answering on the other thread apologizing to Martin for cheekily taking his clause as a counterfactual, pointing out that the issue of hoarding of power, and of big corporations, is distinct of that of trickle down (acknowledging that ‘what piglet said’); and asking John why he took a fuzzy thing like trickle down (making technical caveats but not avoiding a roughly egalitarian reading of his criticism) instead of something of more specificity like the taboo on taxes and not, for instance, the culture of CEO, Bill, Warren captains of industry myth which is where current modern exonomy seems to depart likewise from the different ideals of Marx and Hayek …

only to find that the thread was closed when I hit ‘submit’ :-(

Enough to make me paranoid enough to paste this somewhere before I hit submit over here ;-)

34

John Quiggin 12.21.09 at 8:26 pm

I will take note of the post-welfare poverty measures when I edit this chapter.

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