Political Economy

As Henry mentioned this morning, I’ll be doing a series of guest posts at Crooked Timber this week. I’m grateful for the invitation. My posts will be on strategies for reducing income inequality in the United States.

Here’s the problem (more discussion here):

There are two linked components to this rise in inequality: the surge in incomes for those at the top of the distribution and the slow growth of incomes for those in the middle and at the bottom.

Is this really a problem? Would it be better if income inequality were reduced? I think so, for the following reasons.

1. Fairness. Market processes have produced enormous incomes for various financial operators, CEOs, entrepreneurs, athletes, and entertainers in recent decades. A good bit of this is due to luck — being in the right place at the right time, genetic talent, having the right parents or teacher or coach, and so on. I don’t mind some inequality due to luck, and I recognize that monetary incentives are helpful. But the current (or recent, I should say;  the downturn will reduce top incomes somewhat) magnitude of inequality in America strikes me as unfair. An income of several hundred million dollars when the minimum wage gets you about $15,000 is too much inequality. What’s the proper amount of income inequality? I don’t have a precise answer, but that doesn’t mean it’s wrong to feel that our current level is excessive.

2. Inequality’s consequences. Even if you don’t worry about exorbitant incomes in and of themselves, there’s no avoiding the fact that they have consequences for the incomes and well-being of Americans in middle and lower parts of the distribution. The social pie isn’t zero-sum. But our economy hasn’t grown faster in the past few decades than it did before, so the dramatic jump in incomes among those at the top has come in part at the expense of the rest of us. The following chart offers one way to see this. It shows GDP per family and median family income over the past six decades. Relative to growth of the economy, incomes in the middle (and below) have increased slowly since the 1970s.

As Robert Frank has pointed out, super-high incomes also have led to an arms race in consumption, especially in housing. Spending among the rich has escalated dramatically, encouraging middle- and upper-middle-class households to take on more and more debt in order to keep pace.

Over the past decade a number of social scientists have looked at the effect of inequality on other societal outcomes. We have studies suggesting that inequality is bad for education, health, crime, economic growth, economic mobility, civic engagement, political participation, political influence, and political polarization. I’m not convinced that all of these findings are correct, but some of them are quite plausible.

So what should we do? Stay tuned.

That’s the title of a paper I’ve written for the Whitlam Institute in Australia, available (PDF) here. Here’s the Whitlam Institute Press release. This piece by Mike Steketee in The Australian is a good introduction, focusing on the most controversial (in Oz political terms, anyway) implication of my argument, the need to raise more tax revenue in the long run.

There’s “an obituary of Brian Barry”:http://www.timesonline.co.uk/tol/comment/obituaries/article6010790.ece in today’s Times,

“The Irish Times”:http://www.irishtimes.com/newspaper/ireland/2009/0306/1224242371838.html?via=mr

RYANAIR SAYS it is serious about plans to charge passengers for using the toilet on its aircraft. “It’s going to happen,” chief executive Michael O’Leary told journalists yesterday about the proposal, which garnered huge publicity worldwide when he threw it out as a vague possibility last week. Mr O’Leary said aircraft manufacturers had told him there were technical and safety issues about using a coin-operated system on toilet doors, so the proposal now was that passengers would swipe a credit card to gain entry. He said that if the airline was prevented from charging passengers on the way in to the toilet, it would impose the charge when they were on the way out.

When and if Ryanair introduce their proposed transatlantic service, I wouldn’t be surprised if they charge more for the toilets, to extract the maximum benefit from their enhanced bargaining strength two hours or so into the journey.

I’ve always thought that the social expectations associated with Ryanair flights are a microcosm for a certain kind of gung-ho libertarian ideal of market society, in which every possible social interaction is conducted through the cash nexus (if Michael O’Leary thought he could get away with charging you for the attendants’ smiles, he would). There are some quite clear efficiency benefits to this – externalities are internalized, and if you are determined _just to travel_ (and to carefully work around their ways of squeezing you for extra cash) their flights are very cheap indeed. But you can also expect that they will charge you for everything that they possibly can, and take full advantage of every bargaining asymmetry going. This is pretty unattractive to people to me, but it may perhaps be attractive in principle to others (I have no doubt that O’Leary is using the ‘charging for toilets’ story quite calculatedly to drum up publicity for his company). Perhaps these people discover whether they like it in practice as well as in principle the next time they weave their way from the airport bar to board a three hour flight, and discover that the strip on their credit card has become demagnetized …

Update: Thanks to commenter Ray, it appears that Michael O’Leary has admitted he was “taking the piss”:http://www.irishtimes.com/newspaper/ireland/2009/0307/1224242448956.html (sort of; reading between the lines of his statement, and knowing a little bit about O’Leary, I’m strongly inclined to think that he at least investigated the idea’s feasibility) .

“Boeing can put people on the moon, design fighter aircraft and smart bombs, but they can’t design a bloody mechanism to go on doors that will accept coins,” he admitted. Mr O’Leary also confessed that it would not be possible because some “bureaucrat in Brussels” had decreed that establishments where food and drink is served have to provide toilets free of charge.

If it hadn’t been for those meddling Brussels bureaucrats, he’d have gotten away with it!

With even Alan Greenspan and Lindsey Graham now in support, and the alternatives canvassed in the Geithner “plan” thoroughly discredited (even Wall Street hated it), large-scale nationalization of US banks now looks inevitable. But, as Obama has observed, this kind of thing seems alien to US culture.

This looks like a classic Lakoff framing problem. How can the obviously necessary, also be made to seem natural? There have been a couple of approaches so far.

The first is to emphasise that the Federal Deposit Insurance Corporation routinely takes over failed banks. So, as Paul Krugman puts it “nationalization is as American as apple pie“.

The second is to focus on the ultimate goal which is to return the banks to solvency and private ownership. Hence the lovely euphemism coined (I think) by Calculated Risk “preprivatisation”

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“Andrew Gelman”:http://www.stat.columbia.edu/~cook/movabletype/archives/2009/02/i-received-a-fr.html is puzzled.

I received a free copy in the mail of an introductory statistics textbook. I showed the book to Yu-Sung and he said: Wow, it’s pretty fancy. I bet it costs $150. I didn’t believe him, but we checked on Amazon and lo! it really does retail for that much. What the . . . ? I asked around and, indeed, it’s commonplace for students to pay well over $100 for introductory textbooks.
Well. I’m planning to write an introductory textbook of my own and I’d like to charge $10 for it. Maybe this isn’t possible, but I think $40 should be doable. And why would anybody require their students to pay $150 for a statistics book when something better is available at less than 1/3 the price?

… It just mystifies me that, in all these different fields, it’s considered acceptable to charge $150 for a textbook. I’d think that all you need is one cartel-breaker in each field and all the prices would come tumbling down. But apparently not. I just don’t understand.

Well, perhaps “crack economist Greg Mankiw”:https://crookedtimber.org/2008/03/04/principles-and-practices-of-economics/ might be able to solve this particular mystery. Or, perhaps, not so much. But more simply, I think that the obvious public choice answer is that the costs of this particular arrangement are borne by the students, who constitute a captive market, rather than by the professors, who actually choose the textbook that is required. All that you need are some very moderate side-payments to persuade self-interested professors to adopt particular textbooks (perhaps even just lowering their search costs by sending them free copies). So the cartel-breaker would have to provide sufficient inducement to the professors, which seems rather unlikely given that they would not be making monopoly profits, and hence would be outbid by those who _are_ in a position to capture them.

Of course, if the professor is teaching their own textbook to large undergraduate intro classes and making large amounts of money from each semi-compelled purchase, then no sidepayments at all are needed (not all professors being as conscientious as Andrew Gelman). There’s clearly an opening for some enterprising grad student to write a paper (perhaps for the _Journal of Economic Perspectives_ or some such) on the characteristics of this very interesting market …

The _Financial Times_ published an article based on an interview with Jean-Claude Trichet today (the article itself seems to be borked, along with the rest of the FT’s website, but the interview itself, which is more informative in any event, is available “here”:http://www.ecb.int/press/key/date/2008/html/sp081215.en.html ). In the interview, Trichet suggests that large scale deficit spending is a bad idea because of ‘Ricardian effects.’

Consider the Ricardian effects, the level of confidence or the lack of confidence that you observe in the various constituencies of economic agents, particularly at the level of households: they suggest that there are certain situations where if you do not behave properly you might lose more in terms of confidence than what you are supposed to gain through the additional spending.

and

Every nation has its own Ricardian effects and its own assessment of the situation. I do not want to comment on any particular country, because my duty is to look at the continent of 320 million fellow citizens as a whole. But I fully accept that there are differences in the capacity of households in various cultures to accept a deterioration of their situation, and again, the Ricardian channel tells us that one might lose more by loss of confidence than one might gain by additional spending.

Is this plausible? The broad political economy literature on consumer behaviour that I’m aware of would suggest that this argument rests on some fairly heroic assumptions about individual information (and in particular their awareness of the possible long term consequences of government spending – and this leaves aside the claim that for some reason they will systematically _overestimate_ the consequences tomorrow of deficit spending today). As best as I’ve been able to tell from a quick glance at the WWW, the claim that Trichet is making is a controversial one, which lacks solid empirical support. But then, my understanding of macro theory is based on fast-disappearing memories of my BA coursework. So is there any solid empirical basis for the claim that strong Ricardian effects exist and are a real issue for policy makers? Or is this just a theoretical figleaf to cover over the less abstract political-economic reasons (to do with institutional prerogatives, inter-state relations, worries about defection etc) why the European Central Bank really wants to keep controls on national spending? This is not a rhetorical question – I honestly don’t know the answer, and would appreciate information from those who know this literature better than I do.

I see Henry just linked to his bloggingheads exchange with Dan “the blogger” Drezner about the end of capitalism as we know it, and such minor political twiddles. I was just about to link to it for him (I thought maybe he was being modest.) Good stuff. I’m John Holbo and I endorse this podcast.

One quick note. Round about minute 21 Drezner remarks that “the $64,000 question is going to be: which bureaucracies are put in charge of these crises?” Funny choice of figurative figures. What is it really? The 640 billion dollar question? 6.4 trillion? (I’d link to that spot in the diavlog but, honestly, the site loads so damn slow for me. I recommend downloading the mp3 or getting it through iTunes or wherever.)

(1) When I heard the kerfuffle about Obama’s radio discussion on civil rights and the constitution, I went back and listened to it, drawing two major conclusions. First – that anyone who expects him to appoint lots and lots of radical judges, is likely to be very disappointed; he has a small c conservative understanding of what the judiciary can do. Second, I was reminded how much I missed _Odyssey_ – it was the best radio show I have ever been on, and more generally, a really first rate contribution to public discussion. A full audio archive is “available here”:http://www.chicagopublicradio.org/audio_library/od_ra1.asp.

(2) Via Josh Cohen, Archon Fung and ABC news have put together “MyFairElection”:http://myfairelection.com/, which seems a very useful exercise for those of you who are (unlike me) eligible to vote next week. It combines Google maps with data on polling stations, allowing people to report problems such as long lines etc, and (if it works according to plan), provide a ‘weather map’ of voting conditions across the country.

(3) I did a Campaign Free edition bloggingheads “with Dan Drezner”:http://bloggingheads.tv/diavlogs/15457 yesterday on changes in the global economy. The dialogue stopped early because Dan had to pick up a sick kid from school, but was pretty interesting for me, at least – in contrast to many of these conversations, which involve battles over set piece positions, I found myself actually rethinking what I understood to be going on and its implications during the process (so, a real conversation, or something like it).

“Arthur Goldhammer”:http://artgoldhammer.blogspot.com/2008/10/france-inc.html (whose blog on French politics is one of the treasures of the blogosphere).

Sarkozy has announced the creation of a French investment fund with a capital of $200 billion. He is also temporarily suspending the taxe professionnelle. Call it an investment fund or sovereign wealth fund. Call Sarkozy a socialist in wolf’s clothing (as one MEP did the other day). Mock his inconsistency or praise his political versatility. In fact he’s merely doing what leaders of all the advanced industrial countries will be doing shortly, if they are not doing it already: trying to minimize the damage of the recession by turning on massive government investment. This can do a lot of good, especially if it is seen not solely as countercyclical spending but as a chance to do something about decaying infrastructure and make foundational changes with a chance for long-term impact. In France it’s hardly unprecedented for major capital spending to be directed by the state, whether under the Commissariat au Plan, through state-controlled-or-influenced enterprises, or directly by the Ministry of Finance. Sarkozy always danced nimbly between the neoliberal and state-capitalist camps. If the last two decades were the neoliberal decades, the coming two are likely to consecrate the hegemony of state capitalism. Sarkozy has been quicker than most to draw that conclusion and try to get ahead of the tsunami. Let’s see what happens next.

“Tyler Cowen”:http://www.marginalrevolution.com/marginalrevolution/2008/09/ive-always-want.html points to this “NYT article”:http://www.nytimes.com/2008/09/18/business/worldbusiness/18rescue.html on the international fallout from the current market crisis in the US.

Is the United States no longer the global beacon of unfettered, free-market capitalism? In extending a last-minute $85 billion lifeline to American International Group, the troubled insurer, Washington has not only turned away from decades of rhetoric about the virtues of the free market and the dangers of government intervention, but it has also probably undercut future American efforts to promote such policies abroad. [click to continue…]

Part of Alex Tabarrok’s “argument”:http://www.marginalrevolution.com/marginalrevolution/2008/09/why-libertarian.html for why libertarians should vote for Barack Obama:

The libertarian voice has not been listened to in Republican politics for a long time. The Republicans take the libertarian wing of the party for granted and with phony rhetoric and empty phrases have bought our support on the cheap. Thus – since voice has failed – it is time for exit. Remember that if a political party can count on you then you cannot count on it.

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Amartya Sen turns 75 later this year (on November 3rd, to be precise), and we are going to celebrate this. In academic style, of course. “Kaushik Basu”:http://people.cornell.edu/pages/kb40/ and “Ravi Kanbur”:http://people.cornell.edu/pages/sk145/ have edited a 2-volume Festschrift, aptly called “Arguments for a Better World“:http://www.oup.com/uk/catalogue/?ci=9780199239993. I am not sure when Sen is going to read those 1400 pages, but that detail shouldn’t spoil the party. And Basu and Kanbur are also organising, together with the Institute for Human Development “a conference”:http://amartyasenconference.net/ to celebrate his birthday. That event will take place in New Delhi on the 19th and 20th of December. “The Call for Papers”:http://amartyasenconference.net/call-4-paper.asp, which so far I haven’t seen circulating, is only open to young economists and social scientists, with ‘young’ being defined as those under 40. It’s a pity, though, that political philosophers are not invited to submit papers, given Sen’s important contributions to that field.

Cato Unbound is “currently carrying an interesting contribution from Leif Wenar”:http://www.cato-unbound.org/2008/05/12/leif-wenar/we-all-own-stolen-goods/ on how to combat the “resource curse”. Leif proposes a two-stage strategy for attacking the problem of kleptocrats who use the state monopoly of violence to extract resource revenues whilst their population lives in poverty. The first step is to prosecute (in American, and presumably also European courts) traders in goods stolen from peoples by their rulers. The second step is to go after stolen natural resources that get incorporated into manufactured goods elsewhere (say in China) and then imported into the US. Here Wenar advocates a tariff on those goods, the proceeds of which would be paid into a fund to be held for the benefit of the people whose resources have been stolen, with the fund to be disbursed to them when their government meets minimally acceptable standards.

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