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April 19, 2007
Samuelson Vs. Inequality
Watching Robert Samuelson contort himself over economic inequality is actually sort of fun*. In a column that accurately diagnoses the problem, it's remarkable how studiously he dodges identifying any causal mechanisms that could suggest the economy is in any way unfair, or tilted against workers. CEO pay, for instance, isn't going up because of cozy Board of Directors arrangements, but because of "globalization." Unions, apparently, don't exist. The ability of corporations to smartly use increased worker anxiety and global pressure to turn fewer profits into wage increases while jacking up salaries on the executive level is never mentioned. In fact, says Samuelson, "as for what's caused greater inequality, we're also in the dark." Particularly when you refuse to turn on the lights in the rooms you don't want to look.
But even if Samuelson's diagnosis is riddled with omissions, his prescriptive paragraph is both brave and trenchant. "It would be healthier if the trend toward greater economic inequality reversed itself spontaneously."
Yes Robert. Yes it would.
*Fun may be the wrong word here.
April 19, 2007 in Inequality | Permalink
Comments
Robert Samuelson,
A man who has taken the dismal science and made it more dismal still.
I keep hoping he will spontaneously cease to appear on Op-Ed pages, but no luck there either.
What.A.Tool.
Posted by: Klein's Tiny Left Nut | Apr 19, 2007 12:09:08 PM
"It would be healthier if the trend toward greater economic inequality reversed itself spontaneously."
This solution has much broader applicability. For example: "Iraq would be more peaceful if the militias spontaneously disbanded." Or: "Teen pregnancy would be reduced it teens spontaneously stopped having sex."
Hmmm...Samuelson actually seems to have a lot of influence in the administration.
Posted by: Tom Hilton | Apr 19, 2007 12:16:13 PM
This was also cute:
"The poor aren't poor because the rich are richer. Their poverty reflects low skills, poor work habits or bad luck."
Funny, I know plenty of people with low skills and poor work habits who are in fantastic jobs. Could personal connections be a factor? The perpetuation of the meritocracy myth drives me nuts.
Posted by: moo-cow | Apr 19, 2007 12:20:50 PM
Ezra,
I have never asked this before, but it's a fair question:
What is, in your opinion, the optimum distribution of income among economic groups, and why?
The reason I ask is I have never heard a goal, an optimum. All I have heard is "too much" or "not enough" or "fairness" or dirivatives thereof. These are all relative terms. Would a 10% reduction of the income gap be sufficient to satisfy the left? Less? More?
So...what's the plan, Stan?
Posted by: Fred Jones | Apr 19, 2007 12:37:58 PM
I think that for many people, though I don't presume to speak for Ezra in particular, the income inequality is the root cause of much more pressing symptoms, like, for instance, decreasing amounts of saving, inability to purchase sufficient medical care/insurance, etc. It's the very real effects that people are experiencing that is the real problem. The fact that income disparity keeps getting worse is simply to blame for these problems.
Of course, anyone should feel free to tell me if I'm way off. Wait, this is the internet, of *course* people will tell me if I'm wrong!
Posted by: Ben | Apr 19, 2007 1:19:32 PM
"as for what's caused greater inequality, we're also in the dark" -what Samuelson said
"...with our fingers holding the light switch down and our eyes squeezed shut." -what Samuelson should have added
Up there with Lizzie Borden for sheer self-denial of one's own role in the change of circumstances, I'd say.
Posted by: Chris | Apr 19, 2007 2:12:27 PM
Fred: Love the question.
I though the piece to be pretty good. Sure, it lacked much in strong opinion, but I think it reflects the realities pretty well.
Posted by: DM | Apr 19, 2007 2:14:41 PM
The optimum distribution question is hardly new here. A reasonable view is that the optimum is the least inequality consistent with the biggest overall pie, with special attention to those who get the least. There's no need to answer the question more precisely than that at the moment. As Samuelson implies, current inequality is well beyond what would meet that standard. The extra going to the rich isn't giving some needed extra incentive beyond what a more equal distribution would. I'd go farther and say it's very likely that a better distribution in our consumer-driven economy would increase the pie by giving consumers more buying power.
Moo-cow, I think Samuelson implicitly addresses your objection in the term "bad luck."
Posted by: Sanpete | Apr 19, 2007 3:38:34 PM
Well, Sanpete is not Ezra, but in response to him I would say that he didn't answer the question.
the optimum is the least inequality consistent with the biggest overall pie, with special attention to those who get the least.
WTF does that mean? I could argue that society is at that point right now.
Anyone else wanna take a shot at it?
Posted by: Fred Jones | Apr 19, 2007 3:58:46 PM
"A reasonable view is that the optimum is the least inequality consistent with the biggest overall pie, with special attention to those who get the least. There's no need to answer the question more precisely than that at the moment."
That's crap! I expect more from you.
Posted by: DM | Apr 19, 2007 4:01:54 PM
Isn't a Board of Directors simply a labor union for the executive staff?
Posted by: FS | Apr 19, 2007 4:21:29 PM
"It would be healthier if the trend toward greater economic inequality reversed itself spontaneously."
I believe the proper response to this is a sentence that includes the word "pony".
Posted by: Thlayli | Apr 19, 2007 4:24:53 PM
Sanpete,
The optimum distribution question is hardly new here. A reasonable view is that the optimum is the least inequality consistent with the biggest overall pie, with special attention to those who get the least. There's no need to answer the question more precisely than that at the moment. As Samuelson implies, current inequality is well beyond what would meet that standard.
I'd LOVE to see your empirical justification for that last sentence. Show me how you have determined that greater inequality than we have now would produce a smaller overall pie, or that less inequality would produce a bigger pie. I'm not interested in further speculations, assumptions, dogmatic assertions and the like. I want evidence.
Posted by: Jason | Apr 19, 2007 5:30:40 PM
It doesn't appear that anyone is willing to answer my question about what they think the optimum distribution would be, and I'm not surprised.
I believe that much of this is simply jealousy. They have it, you want it. And there is never a good number because you will always be jealous as long as there is a discrepancy.
That leads me to believe that you will only be happy when everyone is of one class and all have similar paychecks. I thought the Chinese tried this already.
Posted by: Fred Jones | Apr 19, 2007 6:01:11 PM
Fred, my answer was sufficient, for the reason I gave. You apparently didn't bother to read the entire post. We don't need and probably can't have some exact, fixed numerical answer; we mainly need to know where we stand in regard to the effects of current inequality and potential changes to it. That tells us which way to move. I doubt very much that the issues are so simple that any one set of numbers would adequately cover a variety of different circumstances.
Jason, I already explained a couple important points in the part you didn't quote. To expand a bit, most consumers these days spend every penny they make, just about. More pennies for consumers other than the rich, who are the only ones who aren't spending just about all their disposable income = more spending = more commerce, etc. I'll add that there's no great shortage of money for entrepreneurs and investment, so shrinking the part of the pie the rich get wouldn't be likely to significantly affect that. And the rich can still keep getting significantly richer with some additional redistribution. Therefore some additional redistribution from the rich to everyone else would very likely expand the economy, in current conditions. (The best way to do that is a separate question.) I have no idea what kind of evidence you want beyond that, but you're free to explain why you think what I've said isn't true, if you think it isn't.
Posted by: Sanpete | Apr 19, 2007 6:26:42 PM
Sanpete,
As I said, I'm not interested in your speculations. Speculation is not evidence. I could also speculate, without evidence, that greater inequality would produce a bigger economic pie by stimulating additional economic activity.
Again I ask, what evidence do you have that you think demonstrates that the current level of inequality is not optimal under your definition? What evidence do you have demonstrating that lower inequality would produce a bigger pie? What evidence do you have demonstrating that higher inequality would produce a smaller pie?
I think the answer is pretty obvious. You don't have any evidence. There probably is a relationship between inequality and GDP, but the relationship is complex, and there is no credible basis for the claim that reducing inequality would necessarily, or even just probably, raise GDP rather than lower it.
If you want to argue that the current level of inequality is too high, you'd be better off trying to argue for that proposition on grounds of fairness or social stability rather than economic efficiency. And even then, I think you'd have a hard time making your case.
Posted by: Jason | Apr 19, 2007 6:55:55 PM
Jason,
You might take a look at the economic conditions that prevailed in the late 1920s when the bulk of the American working class was paid so poorly that they could not purchase that which they produced. It had a bit of an impact on the size of the economic pie shortly thereafter.
The periods of tremendous growth in post World War II America, when inequality was much lower, would seem to be reasonable empirical evidence of this point as well. (You might also add all of the New Deal interventions in the market place, like the SEC, that led to a much more stable economy with greater degrees of consumer and investor confidence).
Obviously the economy is hugely complex and isolating any one data point as "proof" of a given proposition is seldom convincing to those in disagreement. Of course, if your default position is simply the market is perfect, that it will always lead to the optimal amount of growth and is indeed godlike in its propensities, there isn't much of a conversation to be had. And if you feel like fairness couldn't really be improved upon in this society, well, what can you say?
Posted by: Klein's Tiny Left Nut | Apr 19, 2007 7:49:35 PM
Klein,
Sorry, but you're just cherry-picking a limited period during which (according to you, at least) inequality went down and economic growth went up. Of course, I can play the same game in reverse: For example, during the 1990s, the United States enjoyed the longest period of sustained economic growth since the end of WWII. Yet inequality during this period was higher than inequality during the 50s, 60s and 70s.
The fact is, there is no consistent relationship between economic inequality and economic activity/growth from which one can conclude that the current level of inequality in the U.S is "too high". Even a much higher level of inequality than we have now (let alone a modestly higher level) may be consistent with greater economic activity. There are plenty of examples of countries with both high levels of inequality and high levels of growth (China and India, for example). And plenty of examples of countries with low levels of inequality and low levels of growth (countries in Europe, for example).
Posted by: Jason | Apr 19, 2007 9:40:10 PM
I could also speculate, without evidence, that greater inequality would produce a bigger economic pie by stimulating additional economic activity.
Go ahead, Jason. I'd love to see your logic, in the context of the current economy. I think you're flat wrong that there's no evidence that reducing inequality would raise the GDP. The principles I outlined, which you haven't disputed, make a good deal more sense than anything you've said so far.
It would be very easy to argue that the present inequality is unfair. Odd you should think otherwise.
Posted by: Sanpete | Apr 19, 2007 10:10:20 PM
I believe that you are railing against because of egalitarian concerns, a
misplaced sense of 'fairness'. I would invite you to look at this issue
historically. Every time there is a push in technology, a change in the
economy, there are those who will be able to take advantage of it, to
invest in it or start businesses that will profit from it so all of the
profits from this change go to those who already have. You wouldn't have
liked the way it went down during the industrial revolution after the
civil war at all. The poor do not invest. The poor do not start
businesses. Those who have the capital do and those are the ones that reap
the profits.
This is no big suprise. It is the natural cycle of new technology, it is a
worldwide phenomenon that has happened over and over everytime there are
big changes and quite frankly, I'm not sure you can do anything about it
if you wanted to other than try to make political hay out of it for those
who don't understand economics.
If you want egalitarianism in a capitalistic system, then you need a
stagnant economy with no new changes so that no one can get ahead by
filling others' needs, or you need a redistribution scheme, as the
Democrats propose, to take from those who power the economy and give it to
those who don't...which has fairness issues of it's own.
There is a function that those who have capital, and are willing to risk
it, perform. It's not always gravy. Remember the investment you made in
the software business that your son was working at? How'd that work out
for you? Business is risky. If there is no reward for taking that risk,
you will be hard pressed to get anyone to do it.
Posted by: Fred Jones | Apr 19, 2007 10:13:27 PM
Sanpete,
Go ahead, Jason. I'd love to see your logic, in the context of the current economy.
I just did. Higher inequality could stimulate higher economic growth, by stimulating spending, or investment, or labor, or in other ways.
I think you're flat wrong that there's no evidence that reducing inequality would raise the GDP. The principles I outlined, which you haven't disputed, make a good deal more sense than anything you've said so far.
Noting the mere possibility that reducing economic inequality could increase economic activity is not evidence. You haven't produced any evidence. You've simply asserted that reducing inquality would increase economic activity through higher "consumer spending" and "commerce." You've offered no evidence that such an outcome is even just probable, let alone certain. You've offered no evidence that reducing inequality would not harm the economy by reducing the amount of capital available for investment. You've offered no evidence that reducing inequality would not harm the economy by reducing the incentive to work. You've offered nothing except unsubstantiated speculation. That's not evidence. Please don't engage in any more speculation and tell me it's "evidence." It isn't. Where is your data? Where are your studies? Where is your peer-reviewed research? Where are your real-world examples?
It would be very easy to argue that the present inequality is unfair. Odd you should think otherwise.
It's not at all "odd." If that argument is "very easy" then make it.
Posted by: Jason | Apr 19, 2007 10:40:03 PM
Jason, you seem to be making no distinction between argument and mere assertion. I've given an argument, based on premises about the current economy and basic economic principles. You, on the other hand, have made mere assertions, giving no argument for them. Not the same.
You've simply asserted that reducing inquality would increase economic activity through higher "consumer spending" and "commerce."
Not so. I've pointed out that we have a consumer-driven economy, that consumers other than the rich are spending almost all their disposable income, and that if the non-rich consumers had more money, they'd spend it, increasing the economy.
You've offered no evidence that reducing inequality would not harm the economy by reducing the amount of capital available for investment.
Not so. I've pointed out that there is no shortage of capital available for investment, as evidenced by the low rates, ease of getting loans, and the fact that the investor class currently have more money than they know what to do with, as Samuelson notes. Easy money, relatively speaking.
You've offered no evidence that reducing inequality would not harm the economy by reducing the incentive to work.
True. I see no reason to do so. Currently the only people who lack the need to work are the rich. Suppose we increased the EITC, increased medical benefits for all but the rich, and raised taxes on the rich to pay for this. How would that decrease the incentive to work?
I don't want to argue about the fairness here. One subject at a time.
Posted by: Sanpete | Apr 19, 2007 11:42:28 PM
Sanpete,
I've given an argument, based on premises about the current economy and basic economic principles.
Your "argument" rests on unsubstantiated speculation about the effects of reduced inequality. For the umpteenth time, that's not evidence. Where is your evidence?
I've pointed out that we have a consumer-driven economy, that consumers other than the rich are spending almost all their disposable income, and that if the non-rich consumers had more money, they'd spend it, increasing the economy.
You have produced nothing to support your assertions that (1) reducing inequality would increase consumer spending, or (2) that diverting money currently used for other purposes to consumer spending would increase rather than reduce economic growth.
I've pointed out that there is no shortage of capital available for investment, as evidenced by the low rates, ease of getting loans, and the fact that the investor class currently have more money than they know what to do with,
No, you haven't "pointed out" those things, you have merely asserted them. Where is your evidence? Where is your data? Where are your studies? Where is your evidence that the primary constraint on GDP growth in the current U.S. economy is the amount of consumer spending rather than the amount of investment, or the amount of some other type of economic activity? Stop asserting and produce your evidence.
Suppose we increased the EITC, increased medical benefits for all but the rich, and raised taxes on the rich to pay for this. How would that decrease the incentive to work?
Isn't it obvious? The more income and benefits a person receives from the government (or some other source) for doing nothing, the less incentive he has to engage in paid labor to acquire those things. The more the government pays a person for being unemployed, the less incentive he has to get a job. The more a person is paid for manual or unskilled labor relative to intellectual or skilled labor, the less incentive he has to increase his job skills through education and training. And so on and so forth. You can see this effect quite clearly in comparisons between Europe and the U.S. Europe is characterized by bloated welfare states, strict labor market regulation, and resulting high levels of unemployment.
Posted by: Jason | Apr 20, 2007 12:28:37 AM
Sanpete,
the investor class currently have more money than they know what to do with, as Samuelson notes.
Samuelson says no such thing. In fact, he says the "the rich often appear caught up in a race to out-consume each other." He says the rich are spending their money--precisely what you claim the economy needs. But he also notes, correctly, that "the lifestyle gap with much of the middle class has shrunk." This is because so many types of goods and services that used to be considered "luxuries" and were confined largely to the rich are now available in some form to ordinary Americans--big houses, fancy cars, exotic vacations in foreign countries, gourmet food and drink, ever-more-sophisticated forms of entertainment and communications, cutting-edge medical technology, and so on.
Posted by: Jason | Apr 20, 2007 12:47:58 AM
You have produced nothing to support your assertions that (1) reducing inequality would increase consumer spending
I have indeed given an argument that giving more money to consumers other than the rich would increase consumption, which necessarily increases the economy.
You have produced nothing to support your assertions ... (2) that diverting money currently used for other purposes to consumer spending would increase rather than reduce economic growth.
I have given an argument there is enough and to spare of money for investment, and the increase in consumption will obviously lead to growth.
If you don't agree that there is plenty of money for investment these days, then just say so. I've heard and read plenty to persuade me that there is, but I don't intend to try to persuade you of it. I've given my reasons, and you can reject them if you think they aren't true.
Samuelson says no such thing.
I think the reference to the "How to Spend It" supplement is clear enough.
Where is your evidence that the primary constraint on GDP growth in the current U.S. economy is the amount of consumer spending rather than the amount of investment, or the amount of some other type of economic activity?
You can invest a billion dollars in producing new widgets, but if no one buys them you aren't going to make any money. If no one has enough money to buy them, you're sunk. It's demand/consumption that drives markets; investment is mainly a way to meet demand. If we disagree on this I'll be interested in what alternative view you have. In any case, you don't have to accept that for my argument to follow. All you need to accept is that more spending will enlarge the economy.
The more income and benefits a person receives from the government (or some other source) for doing nothing, the less incentive he has to engage in paid labor to acquire those things.
So? You asked about decreasing the incentive to work, not the incentive to work for some particular goods. Increasing the EITC will provide extra money, but far from enough to retire on. People who receive it must still work to live, and it's highly unlikely that a significant number will reduce their work to compensate. An extra thousand dollars doesn't do that. It just gets spent. The same applies with increased medical benefits. The increased disposable income in the amounts in question with current proposals is far more likely to result in more spending than in cutting back on work.
Posted by: Sanpete | Apr 20, 2007 2:33:11 AM
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