Tag Archives: inequality

Bradford Delong on…I’m not sure what

I have a sense that this long blog post by Bradford Delong contains some key insights or kernels of wisdom, but I just don’t quite have the language skills to translate from econospeak to English. I’ll give it a shot:

  • The human economy consists of two layers – the supply-and-demand market system governed by prices as envisioned in economics 101 textbooks, built on top of something more biological, our “propensity to be gift-exchange animals”.
  • Gift-exchange animals want to form relationships. We want wealth, but we want to feel like we have earned that wealth. We want to give, but we don’t want to feel like we are being taken advantage of.
  • What we are paid actually has a lot to do with what country, city and family we were born into, and all the knowledge and groundwork that was laid by the people who came before us in that location, and in the world/economy more generally.
  • Based on the above, he claims to be for some system of fair income or wealth allocation – “we need to do this via clever redistribution rather than via explicit wage supplements or basic incomes or social insurance that robs people of the illusion that what they receive is what they have earned and what they are worth through their work.”
  • He never quite explains what this would look like. He quotes another blogger, who suggests infrastructure, education, entrepreneurship, and something about removal of urban land use regulation that doesn’t quite make sense.

So I don’t quite know what my personal take-away from all this is but I feel like there is something there and if I ruminate on it for awhile it might come to me.

ending welfare as we knew it

Washington Monthly has an interesting post on Bill Clinton’s welfare reforms. I admit, even though I lived through it I didn’t know much more than the sound bite version. The fuller version is that while he did allow Congress to drastically scale back welfare as it was known at the time, which was cash assistance to poor families with relatively few strings attached, he drastically scaled up the earned income tax credit, which ended up helping more people. The article ends by making an interesting case that the debate has actually shifted somewhat to the left since the 1990s, and there is actually somewhat of a bipartisan consensus that more is needed to fight poverty and help the poor develop job skills. At the same time, the poverty rate among children and minority children in particular is still shameful.

 

What did happen is that Clinton seized on one element of the conservative welfare reform agenda – work – and used it as leverage to create the broadest expansion of federal spending on poverty reduction since the New Deal. Welfare recipients should work, Clinton agreed, and the 1996 legislation set both a five-year time limit on benefits and imposed, for the first time ever, a requirement that recipients work to receive aid.

But Clinton also argued government’s obligation to “make work pay.” “No one who works full time and has children in the home should live in poverty,” said Clinton in 1996. It was a bargain that would win over the public, which soon shed its appetite for punishing the poor that conservatives had done their best to encourage. It also enabled Clinton to push through his ambitious agenda of new programs aimed at helping the working poor.

Clinton’s biggest win was the expansion of the EITC, which was framed as a precondition to passing welfare reform and which Congress passed in 1993. Today, the EITC is the federal government’s largest anti-poverty program, delivering $63 billion in benefits a year to nearly 28 million families. This makes it nearly four times the size of the federal block grants under Temporary Assistance to Needy Families (TANF) – the successor to AFDC. Researchers credit the EITC for dramatically increasing workforce participation for lower-income women (more so than the reform of AFDC). According to the Center on Budget and Policy Priorities, the EITC lifted 9.4 million people in working households out of poverty in 2013.

Nixon and basic income

In 1969-70, Richard Nixon made an attempt to guarantee a basic income to all families in America.

Richard Nixon was not the most likely candidate to pursue the old utopian dream, but then history sometimes has a strange sense of humor. The same man who was forced to resign after the Watergate scandal in 1974 had been on the verge, in 1969, of enacting an unconditional income for all poor families. It would have been a massive step forward in the War on Poverty, guaranteeing a family of four $1,600 a year, equivalent to roughly $10,000 in 2016…

According to Nixon, this generation would do two things deemed impossible by earlier generations. Besides putting a man on the moon (which had happened the month before), they would also, finally, eradicate poverty.

A White House poll found 90% of all newspapers enthusiastically receptive to the plan to pay an unconditional income to all poor families. The Chicago Sun-Times called it “A Giant Leap Forward,” the Los Angeles Times “a bold new blueprint.” The National Council of Churches was in favor, and so were the labor unions and even the corporate sector. At the White House, a telegram arrived declaring, “Two upper middle class Republicans who will pay for the program say bravo.” Pundits were even going around quoting Victor Hugo – “Nothing is stronger than an idea whose time has come.”

It seemed that the time for a basic income had well and truly arrived.

“Welfare Plan Passes House […] a Battle Won in Crusade for Reform,” headlined The New York Times on April 16, 1970. With 243 votes for and 155 against, President Nixon’s Family Assistance Plan (FAP) was approved by an overwhelming majority. Most pundits expected the plan to pass the Senate, too, with a membership even more progressive than that of the House of Representatives. But in the Senate Finance Committee, doubts reared. “This bill represents the most extensive, expensive, and expansive welfare legislation ever handled,” one Republican senator said. Most vehemently opposed, however, were the Democrats. They felt the FAP didn’t go far enough, and pushed for an even higher basic income. After months of being batted back and forth between the Senate and the White House, the bill was finally canned.

In the following year, Nixon presented a slightly tweaked proposal to Congress. Once again, the bill was accepted by the House, now as part of a larger package of reforms. This time, 288 voted in favor, 132 against. In his 1971 State of the Union address, Nixon considered his plan to “place a floor under the income of every family with children in America” the most important item of legislation on his agenda.

But once again, the bill foundered in the Senate.

McKinsey on Income Stagnation

The McKinsey Global Institute has noticed inequality in the world, and is concerned about automation making it worse. Part of their solution is – this is a bit shocking – “government taxes and transfers”. It appears they are talking about lower taxes and higher transfers, which they acknowledge might not be “sustainable”.

If the low economic growth of the past decade continues, the proportion of households in income segments with flat or falling incomes could rise as high as 70 to 80 percent over the next decade. Even if economic growth accelerates, the issue will not go away: the proportion of households affected would decrease, to between about 10 and 20 percent—but that share could double if the growth is accompanied by a rapid uptake of workplace automation.

The encouraging news is that it is possible to reduce the number of people not advancing. Labor-market practices can make a difference, as can government taxes and transfers—although the latter may not be sustainable at a time when many governments have high debt levels. For example, in Sweden, where the government intervened to preserve jobs during the global downturn, market incomes fell or were flat for only 20 percent of households, while disposable income advanced for almost everyone. In the United States, lower tax rates and higher transfers turned a decline in market incomes for four-fifths of income segments into an increase in disposable income for nearly all households. Efforts such as these—along with additional measures such as encouraging business leaders to adopt long-term thinking—can make a real difference. The trend of flat and falling real incomes merits bold measures on the part of government and business alike.

housing vouchers for all?

This article argues that if the U.S. took away the mortgage interest tax deduction, it could provide a housing voucher to everyone below the median household income. That’s hard to believe, but the key is probably that the median is well below the average, because of course the income distribution is skewed toward the top. I like my mortgage interest deduction. It is an important part of my retirement strategy and as I am a bit above the median (but hardly rich) it would be hard for me to support this policy.

Here’s another article on BillMoyers.com that says if you took away the mortgage interest tax deduction, the cap on social security deductions, the lower rate on capital gains, and tax-advantaged retirement accounts, you could double Social Security benefits for everyone. There’s a bit of a trick here – these ideas are presented as revenue neutral, because you can think of all these tax breaks as money the government is spending, rather than money it is not collecting compared to what it could be collecting or what it has collected under some past policy. It would be very easy to paint these as tax increases instead, of course. Still, I could be more easily persuaded to support this policy that the first one, because I would be guaranteed to get a portion of the higher taxes I am paying now back when I am older, and I wouldn’t have to worry so much about savings or home equity now. I would know that people who are both richer and poorer than me would all get the same share I would get, which I might be able to accept on grounds of fairness. I’m not out in the streets campaigning for this policy yet, I have to think about it.

inequality and mobility

The Federal Reserve Bank of Cleveland has an interesting study of income mobility in the U.S. It appears to be true that the poorest families tend to stay poor (between 2003 and 2013, 64% of families in the poorest 20% stayed in the poorest 20%), while the richest tend to stay rich (72% of families in the richest 20% stayed in the richest 20%). Looking at the table if you are in one of the middle quintiles, (between the 20th and 80th percentiles, your chances of moving up or down to the adjacent quintile look to be about even. This measure of mobility increased somewhat in the 80s and 90s, but appears to be on the decline since then. Mobility is harder to measure across generations, but it does appear to be much higher than within a single generation, which you would expect. Mobility in the U.S. is lower than in other developed countries, both the northern European socialist ones where you might expect it, but also the Anglo-American peers like Canada, Australia, and New Zealand, although the UK, France, Italy are in the same ballpark as the U.S. If you’re interested in this, stop reading my wordy description and go look at the data!

equality vs. equal opportunity

Continuing to think about European socialism-style equality vs. the U.S. narrative of equal opportunity and the pursuit of happiness. Our version makes more sense in some ways – everyone starts out equal, but then people who work the hardest, have the best ideas, or are willing to take risks get rewarded. This makes sense as an ideal – combine it with a safety net for those who don’t succeed through no fault of their own, and it could be a nice, practical vision. The main problem is that it is a narrative that can be twisted and co-opted by the rich and powerful to write the rules unfairly in their favor, ultimately creating the opposite of equal opportunity. Even darker, it can lead to a narrative where people who benefit from the rules being unfairly in their favor find ways to rationalize their success, convincing first others and then themselves that they had superior talents to being with. Here’s an article from Shelterforce that makes some of these arguments:

Upon closer scrutiny, however, the meritocratic ideal turns out to be quite pernicious.  Summarizing the conclusion of my recent article on the subject, I find that, while this ideal is highly unlikely to achieve its core objectives (except maybe on the margins), its pursuit nonetheless creates “a competitive individualist ‘rat race’ of a society, fundamentally anti-communal and anti-familial, where group solidarity is uncommon and compassion muted.” And, worst of all, it ends up legitimizing—and thus reinforcing—the very social and economic inequality it purports to rectify…

In particular, much of liberal urban policy focuses on what liberals see as a kind of “unholy trinity” of barriers, as I have labeled it, that stem from inadequate schooling, troubled families, and poverty-impacted neighborhoods. Yet there is a great body of evidence showing that efforts to break down these barriers yield only marginal results in promoting meritocratic social mobility for the urban poor, while at the same time imposing significant costs on the most vulnerable.

Mostly notably, we see various school reforms fail over and over, and even enhanced higher education produces surprisingly limited impacts. As a result, we end up blaming the educational system for the failures of the rest of society, which in turn opens the door to corporate-oriented policies designed to privatize and monetize public schools. At the same time, programs that intervene into family life, unless highly intensive, also produce only minimal results, and when such interventions are intensive, they tend to violate the liberty of poor parents to autonomously direct the development of their children. Likewise, efforts to reduce barriers arising from the effects of poor neighborhoods via housing dispersal policies or the creation of mixed-income communities also have been generally disappointing, while often disconnecting the vulnerable from crucial familial and communal bonds.

I still think we should talk about how to make equal opportunity, with an appropriate safety net, a reality in this country, as an alternative to the European socialist model, which is the main alternative. These are really the only two humane options. What could true equal opportunity look like? For the sake of argument, let’s say we had a 100% inheritance tax, with the proceeds distributed equally to all newborn babies. Universal tax-funded education, up to and including the highest level of education and/or practical skills training needed to succeed in the economy, including continuing education for adults to adapt as technology and economic conditions change. Universal and equal access to health care. Excellent public infrastructure serving and connecting all urban areas. Low barriers to changing jobs or starting a business. Now you have a platform where people can compete and cooperate to build wealth. Some will work harder, innovate more, take more chances and earn more financial rewards. Others will choose to play it safer, devote more time to family and leisure, or just enjoy life’s experiences with less material wealth. You would still need unemployment and disability insurance for those who fall through the cracks through no fault of their own.

free trade

I just thought I would counter yesterday’s discussion of “blowback economics” with a typical pro-trade argument from a mainstream economist, in this case Kenneth Rogoff at Harvard:

The rise of anti-trade populism in the 2016 US election campaign portends a dangerous retreat from the United States’ role in world affairs. In the name of reducing US inequality, presidential candidates in both parties would stymie the aspirations of hundreds of millions of desperately poor people in the developing world to join the middle class. If the political appeal of anti-trade policies proves durable, it will mark a historic turning point in global economic affairs, one that bodes ill for the future of American leadership…

The right remedy to reduce inequality within the US is not to walk away from free trade, but to introduce a better tax system, one that is simpler and more progressive. Ideally, there would be a shift from income taxation to a progressive consumption tax (the simplest example being a flat tax with a very high exemption). The US also desperately needs deep structural reform of its education system, clearing obstacles to introducing technology and competition.

Indeed, new technologies offer the prospect of making it far easier to retrain and retool workers of all ages. Those who advocate redistribution by running larger government budget deficits are being short sighted. Given adverse demographics in the advanced world, slowing productivity, and rising pension obligations, it is very hard to know what the endgame of soaring debt would be.

Like I said, I am still thinking these things through. I find the mainstream economic arguments very elegant and appealing, but clearly they haven’t led to the promised gains for everyone in either the developed or developing countries. I am suspicious of the trickle down claims, although I have spent time in so-called “middle income” countries in Asia and I can’t deny that even the relatively poor have made huge gains in areas in health, nutrition, and life span, even if monetary incomes are lagging. The fact that things are better than they used to be doesn’t mean they are as good as they could be. I would like to hear more details about these training technologies and education reforms that are going to make everyone competitive in the global economy – when are they going to be rolled out, how and by whom? Or if there is not a plan yet, who exactly is working on one?

Citi and Oxford on automation

Citi and Oxford have a long report called Technology at Work v2.0: The Future Is not What It Used to Be. Among the worrisome statistics and over-the-top infographics: 77% of jobs in China at risk due to automation, compared to 47% in the U.S. 77% seems like a recipe for serious unrest. 47% is still half. Still, maybe these are existing jobs and there will be new jobs created. Like robot repairman, for example. Being the guy who owns the robots seems like a very good option, if you can pull it off. Another eye opening statistic they show is the payback period for investments in robots at 1-2 years in China right now.

Thomas Picketty

This column by J. Bradford Delong is meant to criticize Thomas Picketty, but in the process he has a good summary of Picketty’s work:

Our reversion to the economic and political patterns of the Gilded Age is to be expected as the economies of North America and Europe return to what is normal for a capitalist society.

In a capitalist economy, Piketty argues, it is normal for a large proportion of the wealth to be inherited. It is normal for its distribution to be highly unequal. It is normal for a plutocratic elite, once it has formed, to use its political power to shape the economy in a way that enables its members to capture a large chunk of a society’s income. And it is normal for economic growth to be slow; rapid growth, after all, requires creative destruction; and, because what would be destroyed would be the plutocrats’ wealth, they are unlikely to encourage it.

Later Delong talks about how Keynes might rebut this argument:

Unequal wealth distribution, in this view, produces what Keynes called “the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” The result is an economy with relatively equal income distribution and a polity in which the wealthy have a relatively small voice.

So as the rich corral more and more of the wealth, they become more and more of a minority. Initially the 1% preys on the 99%, then the 0.1% on the 99.9%, and so on. At some point, there is not enough wealth or economic energy remaining for everyone else that the 0.001% need in order to keep accumulating wealth. At that point, they can try to employ some combination of propaganda and force to stay in power. When that breaks down, the balance of the force is restored (sorry, I just saw Star Wars today.) But what happens when the means of production and economic activity is almost entirely automated, and lies in the hands of a tiny minority? What if there is no limit to the force they are able to employ?