Sunday, October 20, 2013

GUEST POST: A cordial challenge to conservatives- Some misunderstandings on Income Inequality

This is a guest post from Alex Lenchner aka 'Curious Leftist'. He's an Economics specialist with a keen mind and a fine pedigree for analysis and debate - make sure you check out his excellent blog /s. I'm excited to host this post - while I disagree with some of his opinions, Alex reminds me that left-right political engagement is crucial. In the end, whatever our political colors, the vast majority of us seek a just, prosperous American future. I digress... Over to you, Alex!

One of the things I've noticed in politics is the way Republicans misunderstand or ignore liberal arguments against inequality. And to to be fair, income inequality is a tricky subject to talk about. Even the very best of economists struggle to find the best way to measure inequality. There are different types of compensation, e.g. labor income (wages), benefits, and transfers. There are different ways to measure income inequality, e.g. at the individual, family, or household level. There are also things that we should consider like hours worked. And don't forget that pesky thing called inflation. Trying to put all of these factors into an empirical paper can be a real mess, so on some level, I understand the lackluster debate over income inequality. But despite these complications, two things are clear when looking at the data, decoupling and income growth divergence are real and sizable (1). These are two incredibly important problems that show how income inequality has been growing the past few decades.

More often than not, most people can't even get past step one. The conventional debate on the subject is rife with political rhetoric that obscures the issue and gets us nowhere. Don't get me wrong, there are some right leaning economists and academics that cut right through the talking points and get straight to the heart of the problem. The points they bring up and issues they raise are good for the political debate and they help bridge both political parties to a sort of mutual understanding. But these people are often in the minority and there voices aren't heard all that often. The people I'm primarily talking about are Republican politicians, members of the GOP, right leaning journalists, and plenty of others. Even many on the left are bad about this. So with this in mind, it would be beneficial to some clarity on the issue.

There are 4 main issues I have with Republican arguments on inequality:
  1. The false dichotomy between growth and distribution
  2. While too much government regulation may be a problem, it isn't the problem
  3. Income inequality is not purely due to individual initiative. Instead, it is mostly an institutional phenomenon
  4. Liberals are not against income inequality per se
The False Dichotomy between growth and distribution

This I see all the time, especially from Paul Ryan, a GOP favorite. Take this quote: “Are we interested in treating the symptoms of poverty and economic stagnation through income redistribution and class warfare, or do we ant to go at the root causes of poverty and economic stagnation by promoting pro-policies that promote prosperity?”

This is a classic example of a false dichotomy. We can either redistribute income or promote economic growth, but not both. But liberals often talk about inequality because it can hamper growth. The fact is, high levels of inequality can lead to a less efficient and productive economy. Cutting public investment leads to under-investment in infrastructure, R&D, and education at multiple levels (2). The ways firms treat their workers and the amount workers are paid all factor that go into worker productivity. In fact, fairness is a very important factor that goes into worker productivity and motivation (3). Although the idea of “fairness” is rarely clear and has a heavy degree of subjectivity, there is a growing sense that the present disparity in wages is unfair. And there is some date to back this up, as the wedge between wages and worker productivity has risen considerably since the 1970s:

Factor this with the rapid rise in executive pay (4), then there will be a feeling of unfairness throughout the economy. So with this in mind, redistribution, i.e. changing marginal tax rates on the 1 percent (or through some other method of taxation) to help increase public investment and lower the gap between worker and executive pay could increase productivity and efficiency in the economy. We can redistribute wealth, thereby reducing income inequality, and make the economic pie bigger.

While too much government regulation may be a problem, it isn't the problem

Many Republicans and Conservatives like to make the claim that government regulation is primarily to blame for income inequality, In just about every speech they give examples of small businesses trying to do something and being blocked by government regulations. The Republicans are not whistling Dixie here – they are sinking their teeth into very public angst about government being too large.”

All of these stories amount to mere anecdotes. While government regulation is certainly a problem for our economy, it isn't the problem. No political institution is perfect. Interest groups are going to have some influence on the political process and there is bound to be excessive regulation over some sectors in the economy. But to say that regulation is the primary reason for our present state of inequality just ignores history. The fact is, inequality has been rising since the 1970s. Over this period we've had a number of presidents with various economic policies and doctrines. Yet despite the continuous dynamic shift between more and less regulation over several administrations, inequality has continued to increase. What the right seems to underestimate is the importance of monopoly rents and the increased monopolization of markets as a result of imperfect information, network externalities, and anti-competitive practices. Other factors like regulatory chapter and inadequate enforcement of laws also play a role, but that's different from regulatory burden.

Income inequality is not purely due to individual initiative.

You don't normally see this claim from the right, that inequality is purely due to differences in individual initiative, but it sometimes pops ups (5). Inequality is shaped by individual and market forces, but individuals and markets don't exist in a vacuum. They are constantly being shaped by thing like the government, social rules, institutions, and other structural forces. Skilled manufacturing jobs are being replaced by unskilled service sector jobs. Skill biased technological change has replaced many unskilled workers with machines. Financial liberalization and free capital movements have resulted in global financial stability, causing unemployment on a large scale. Even things like racial and gender discrimination are still alive and well (6). And this just scratches the surface. Looking at this from a common sense approach and blaming inequality on laziness and lack of effort might seem practice, but it ignores decades, if not centuries of research and theorizing. With this in mind, it would be absurd to attribute inequality solely on individual initiative.

Liberals are not against income inequality per se

Many on the right have perceived the liberal crusade against inequality as a desire for “equality of outcomes”. And you see this claim a lot (7). But it's nothing but a strawman and shows the true extent of how many Republicans and GOP members misunderstand the liberal position on inequality. Inequality is going to happen in a market economy. The desire for profits and gain is a vital component in the capitalist system and it's bound to lead to inequality of varying degrees. And, for the most part, capitalism is a great system, and I've seen very few liberals attack the institution outright. What liberals emphasize are the things that constantly influence markets, e.g. institutions, social rules, norms, habits, and a ton of other factors. Some of these structures and constraints are good, some bad, and some negligible. But many of these factors lead to imperfections in the market system and cause differences in well being across the board. Often, these differences in outcomes aren't due to individual actions. It things like this that liberals are concerned about, and believe that a number of institutions, like the government and unions, can help fix. Will the process be perfect? No, and it would na├»ve to think otherwise. But it's better than ignoring the problem.

While you might see some liberals make very dumb comments, you shouldn't extrapolate those examples to all liberals. The fact is, liberals and many on the left are primarily concerned with equal opportunity, not equal outcomes.

Conclusion

Now, none of these arguments I made are original in any sense, but I hope they provided some clarity on an issue that is often obscured by political games. I definitely used vague phrases like “the right” and perhaps I generalized too much. But with that aside, the only way to make any real headway on the problem of inequality is to find a common ground between both political parties. And the only way for that to happen is for those on the right to better understand the arguments those on the left and vice versa.

Footnotes:

  1. As Ben Bernanke notes: “First, since the 1970s, R&D spending by the federal government has trended down as a share of GDP, while the share of R&D done by the private sector has correspondingly increased. Second, the share of R&D spending targeted to basic research, as opposed to more applied R&D activities, has also been declining. These two trends--the declines in the share of basic research and in the federal share of R&D spending--are related, as government R&D spending tends to be more heavily weighted toward basic research and science. The declining emphasis on basic research is somewhat concerning because fundamental research is ultimately the source of most innovation, albeit often with long lags. Indeed, some economists have argued that, because of the potentially high social return to basic research, expanded government support for R&D could, over time, significantly boost economic growth.” (http://www.federalreserve.gov/newsevents/speech/bernanke20110516a.htm)

  2. Joseph Stiglitz highlights an important case study that demonstrates these effects: “A detailed case study by Krueger and Mas of the plants that manufacture Bridge/Firestone tires provides a particularly chilling illustration. After a profitable year management demanded moving from an eight-hour to a twelve-hour shift, which would rotate between days and nights, and cutting pay for new hires by 30 percent. The demand created the conditions that led to the production of many defective tires. Defective tires were related to over one thousand fatalities and injuries until the recall of Firestone tires in 2000”.

  3. Lucian Bebchuk and Yaniv Grinstein concluded in their empirical study on the growth in executive pay, “the analysis indicates that the growth in pay levels has gone far beyond what could be explained by the changes in market cap and industry mix during the examined period. The growth of pay involved a substantial rise in the compensation paid to the executives of firms of a given market cap and industry classification. Although equity-based compensation has grown the most, its growth has not been accompanied by a reduction in cash compensation.” (http://www.law.harvard.edu/faculty/bebchuk/pdfs/Bebchuk-Grinstein.Growth-of-Pay.pdf)

  4. Bill O'Reilly tends to makes this claim: “Nobody gives you anything. You earn it.” (http://nation.foxnews.com/income-inequality/2012/05/14/oreilly-fire-income-inequality-bull)

  5. See the classic study “Are Emily and Greg More Employable Than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination,” American Economic Review 94, no. 4 (September 2004): 991–1013






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