Tag Archives: inequality

An economist’s righteous anger

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I really enjoyed reading Angus Deaton’s Economics in America: an immigrant economist explores the land of inequality. It’s a collection of essays regarding different aspects of the economy, centred on issues of inequality, and also concerning the discipline of economics itself. Many of the essays originated in his ‘Letters from America’ for the Royal Economic Society newsletter, now updated and reorganised. But they are models of clarity and accessibility, and the book would be an ideal read for students, or just people who want to understand better the economic mess we’re in – we, and particularly the US.

For the author’s righteous anger about the deep seated inequalities in America, from historic racial inequalities to the stitch up of citizens by the monopolistic health and pharma industries, or by the successful lobbying of politicians by business, shines out from every page. Many of the chapters cover some aspect of this, and quite a few on the Affordable Care Act and the opioid crisis – one of the factors behind Case and Deaton’s now-classic work on ‘Deaths of Despair’.

In one essay there is a nice tribute to the late Tony Atkinson. I didn’t know him, but it is hard to think of an economist spoken of with more affection by those who did, and his work on inequality and economic welfare was foundational. (Our recent symposium on welfare economics was inspired by him.) Deaton points out that in his Inequality: What Can Be Done (an excellent book too) Atkinson argued that innovations ssuch as self-driving cars or wearables should be vetted for social desirability before being licensed for sale: “As with much else that Tony wrote, I predict this idea will become widely discussed in the near future.”

The book concludes with reflections on economics itself. Deaton writes: “The discipline has becom unmoored from its proper basis, which is the study of human welfare. Lionel Robbins famous definition of economics – the allocation of scarce resources among competing ends – was a wrong turn, a terrible narrowing of scope.” Citing Hilary Putnam, he argues that economics should be a ‘reasoned and humane evaluation of social wellbeing’. The final line: economists need to spend more time with philosophers. I agree.

This is a great read. Highly recommended.

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Classes, elites and people

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I was very excited to get a proof copy of Branko Milanovic’s new book, Visions of Inequality From the French Revolution to the End of the Cold War, a while ago. The book is out in early October so it seems ok to post about it now. For anybody interested in inequality – and we all should be – anything by Milanovic is an essential read. His collation and interpretation of global inequality data is masterly, and his perspective from a socialist background (he was born in former Yugoslavia) is always interesting.

This new book is an intellectual history of how economists of the past have perceived and analysed inequality. The chapters cover Quesnay, Smith, Ricardo, Marx, Pareto, Kuznets and then – for the second half of the 20th century – a cluster of neoclassical economists during the period the book labels as ‘the long eclipse of inequality studies’. The Cold War involved in the west the myth (in economics although not in life) of a classless society. The book aims to describe each thinker’s ideas about the dynamics of income distribution, but not their normative perspective. Hence the discussion of Marx covers the evolution of wages and the downard tendency of the rate of profit but not the labour theory of value and alienation.

As I’m no expert on the history of thought, I learned a lot from the earlier chapters. The earlier thinkers all framed their analysis around the concept of social classes: “Classes were the natural concepts around which income distribution was ‘built’.” With Pareto, the analysis shifted to interpersonal distribution within a framework of the social hierarchy (the eltie vs the rest), and then with Kuznets and the later neoclassicals to individuals. This was partly driven by the availability of data on individual incomes from income tax records, after the introduction of direct taxation. The distribution among individuals could be sliced in different ways – location, education, occupation – but the background context of social structure faded. And then, after around 1960, economists’ interest in income distribution faded too. Why?

One comment Milanovic makes in the introduction struck home: “The puzzle was solved when I realized that the discipline of economics, as it was taught and studied betweem 1960 and 1990 in the West, was really designed for the period of the Cold War. …. Inequality seemed like a problem that was going away, and this reduced interest in studying it.  … Each side [in the Cold War] had to insist that it was more equal and less class based than the other.” The book quotes Kuznets’ 1955 AEA Presidential Address calling for economists to begin to look at processes of long-term change – technology, demography, social frameworks: “Effective work in this field necessarily calls for a shift from market economics to political and social economy,” Kuznets said. Of course, this did not happen and economics doubled down on the market framework. “We might say that economics as a field stagnated or even regressed, at least in its understanding of income distribution under modern capitalism,” Milanovic comments.

This has changed in recent years, with the empirical work of economists like Milanovic, Saez and Piketty – I would add the prescient prior work of Tony Atkinson (Inequality: What Can Be Done is a terrific overview and battle cry), who was ahead of his time. Visions of Inequality ends with a call to augment the study of individual incomes with a greater focus on non-labour income, on household income rather than the individual wage earner, and on global inequality. My addendum would be the distribution of unpaid work within the household and the community. It’s an exciting time to be studying inequality thanks to the data and recent scholarship, and an important time given how unsustainable the current distribution has become – after all, the term ‘elite’ has become an insult in political debate. This book is a great scene setter for the modern debate, not least in illustrating the link between ideas of inequality and the times in which ideas are formed.

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Domestic solutions to global problems

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Trade Wars are Class Wars by Matthew Klein and Michael Pettis is an excellent account of the global imbalances that have emerged in the 21st century, contributing to the GFC among other consequences. “A core argument of this book is that the distribution of purchasing power within a society affects its economic relations with the rest of the world,” they write. They trace the imbalances problem to the inequailities of income and wealth within China and Germany that mean domestic demand in each case is inadequate to absord domestic production, so the two run large current account surpluses with the rest of the world. “People who cannot buy what they produce must rely on foreign demand for their output.” Hence the ‘class wars’ of the title.

While the US should have been in the same position, given how unequal it is, foreign demand for US assets means it has run a consistent deficit instead: “For more than six decades the United States has satiated savers in the rest of the world at the expense of its own workers” – the dollar being an “exorbitant burden” in this perspective. (Another great virtue of the book is spelling out the fact that balances balance and so the capital account will be in deficit if the current account is in surplus; and if some people are saving – eg the rich in surplus countries – others will have to be borrowing – Greece, or ordinary Americans before the GFC.)

A lot of the commentary has focused on the bilateral US-China trade deficit and the “China shock” due to offshoring, but Klein and Pettis argue that the link is less direct than Chinese vs American factories, and must include an account of capital flows. It portrays inequality within China and Germany, rather than China’s low-wage manufacturing capabilities, as the root cause. The book is just as critical of German as of Chinese domestic policies: “Germany’s ideological and constitutional commitment to fiscal rectitude caused lasting harm to ordinary Germans.” The harm has taken the form of welfare cuts, eroded protection in the labour market, massive under-investment in infrastructure. One doesn’t think of Germany as particularly unequal. Yet although the average German is twice as rich as the average Spaniard, the median German is much poorer – about as wealthy as the median Polish person.

The book refers back to the writings of John Hobson in the early 20th century, when the US was the surplus economy in its gilded age, and Britain the bearer of the reserve currency burden. In Imperialism: A Study (1902) Hobson wrote: “When the distribution of income is suchas to enable all classes of the nation to convert their felt wants into an effectiove demand for commodities, there can be no over-production, no under-employment of capital and labour, and no necessity to fight for foreign markets.” Inequality and the competition for overseas markets led to what what he described as “the greed of empire.” It didn’t end well a century ago, and it isn’t going so well now.

Trade Wars are Class Wars is a tale of three economies, China, Germany and the US. I’m not sure where others fit in – including the UK, also highly unequal but with a (Brexit-augmented) current account deficit. (Greece gets a walk-on role.) Still, I found the argument persuasive and in any case reducing within-country inequality from today’s socially-destructive levels can only be a good thing. It’s a terrific book.

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Geography as destiny

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I just read Enrico Moretti’s (2012) The New Geography of Jobs, having not done so before now because I’d read quite a lot of his papers. Anyway, now I have and it’s very good. It’s a nicely accessible survey of the literatures on trade/tech and jobs, and on the geographic aspect – the concentration of skilled people in cities and growing divergence. The evidence it cites is entirely US-centric but the drivers obviously apply elsewhere, even though their effects in other countries are not exacerbated by the  unattractive features of US society. So I would recommend this to anybody who would like a readable big-picture overview of what has been happening to jobs and incomes in recent decades. The major irritation is that the notes aren’t flagged in the text & you just have to root around at the back of the book to see if a given statement has a reference attached to it.

The conclusions are a little bleak in terms of policies to address the growing divergence between rich skilled places and the left-behinds.Being in the right place matters. There are spillovers between people, so even as a graduate you do better in terms of earnings the more other skilled people are around you, but non-graduate occupations also have higher earnings in high skill places.

Overcoming the gaps requires a Big Push, the book concludes (I like this allusion to Rosenstein-Rodin, although that literature doesn’t seem to be cited here). Only governments can do these, given the amount of co-ordination involved. Many interventions are just too small scale to have a hope. Looking at the Big Push of the Tennessee Valley Authority, Moretti and his colleagues concluded it was successful in raising productivity in the region but not wages, because the labour supply increased as workers moved in from elsewhere. However, a couple of pages later, he points out that the prominent successful clusters of today did not come about because of a Big Push. Most were organic developments, albeit aided of course by government investment in R&D or defence – see Margaret O’Mara’s book The Code on Silicon Valley which I described in the previous post.

So this is rather sobering. My hunch is that policies will need to rest on a better understanding of the relationships between human capital investments (a college degree is the key variable seemingly driving so many outcomes from earnings to voting pattern to subjectove well-being), social spillovers, intangible assets, amenities including nature and housing, and produced capital especially communications infrastructure. In other words, what assets are there available to people living in in a given place, and to what extent do these complement and substitute for each other?

Anyway, I enjoyed the book even if it left me feeling a bit glum.

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Angry Man

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Angrynomics by Eric Lonergan and Mark Blyth is a rip-roaring read, and I wish I’d been in the pub with them as they discussed the state of the world and how to set it to rights. Not that I wholly agree with them, although disagreeing would obviously be half the fun. Normally I hate dialogue formats, as they’re usually constructed as a kind of semi-polite Punch and Judy show, presenting polarised views that are never intended to be reconciled. Lonergan and Blyth – it even sounds like a Victorian music hall act – agree on the basics so they riff of each other here in a more positive way.

Their basic thesis is that there are two kinds of anger abroad in the world: moral outrage (good) and tribal anger (bad), both reactions to the way the global economy has affected people since 1989.

Increased inequality is part of the story, genuine economic grievance in the rust belt and its equivalents, and another part is the cynical exploitation of tribalism or identitarianism by some politicians. So Lonergan and Blyth wear their left-of-centre hearts on their sleeves. The dialogues then describe and discuss the economic aspects of the political changes amply described in the now-extensive ‘decline of democracy’ literature – the micro, the macro/monetary, inequality (including, importantly, intergenerational), technological change – concluding with what to do now.

One huge gap evident right at the start is a passing parenthesis that the expression of anger is a largely male phenomenon. The book never picks this up; there is surely an important gender aspect to the way work has changed.

I disagree with dating the anger phenomenon to the collapse of communism in 1989, which removed a coherent (albeit flawed) ideology to oppose neoliberalism. Surely the hinge was the crisis of the 1970s, Thatcher and Reagan, and the early 1980s recession. That was the start of de-industrialisation, and the scarring of people’s economic prospects for the rest of their lives, and their children’s. These sea changes take time and there is never a single moment. As the book notes, too little has been reformed since 2008/9, but my view is that looking back with the hindsight of 2030, the combination of the Financial Crisis and the Covid depression will prove to be another hinge. (The book pre-dates the pandemic.)

As for the proposals, I think they get the role of competition all wrong, blaming excessive competition in tech and telecoms – whaaaaat??? – for the race to the bottom in employment practices. Amazon reports low profits because it reinvests so much revenue in continuing world domination, not because it has scrappy margins due to competitors snapping at its heels. I understand little about current monetary and alternative proposals, but as a diehard microeconomist find it hard to understand how administered negative prices in a market dominated by the state (ie central bank) can function well. Regulate the financial sector firmly – a big yes. The book has an interesting idea about government auctions of collective data rights – like spectrum auctions – which answers my profound objection to the proposal ‘create property rights in personal data and sell them’, namely that the value in data is collective, is due to aggregation.

Anyway, my copy has a combination of big ticks and scrawls of ‘nonsense!’ in the margins. A very satisfying read.

 

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