Monday, January 20, 2014

Academic Enabling of Inequality Denialism

-- Posted by Neil H. Buchanan

My Verdict column last Thursday addressed the renewed focus on inequality among mainstream politicians and pundits in the U.S.  In my short Dorf on Law post on Friday, I noted that that column had immediately elicited an especially funny example of the red-baiting that has become par for the course from right-wingers in this debate.

In today's post, I will make two broad points.  I will discuss another aspect of the big takeaway from my Verdict column, which is that academics (especially economists and economist wannabes) have enabled politicians and pundits to ignore (at best) inequality.  Before getting to that discussion, however, I will take a few swipes at New York Times columnist Bill Keller's recent Clintonian rejection of calls for redistribution.

Keller, of course, is one of the best current examples of the kind of pundit who pretends to care about inequality, but who always somehow finds a reason to reject doing much about it.  To some extent, of course, picking on Keller is far too easy.  He is lazy and self-satisfied, and he obviously does not care that his columns would not earn a generous B- in a college composition course.  On the other hand, he has a huge audience.  It is arguably worth the effort to do what one can to expose his sloppiness (and worse).

The column in question is, by now, almost a month old.  In a Dorf on Law post that was published the day before Christmas, I commented on some especially inane comments about taxes that Keller offered in the column.  The problems with the column, however, go far beyond muddled thinking about tax policy.

Hiding behind the cutesy title, "Inequality for Dummies," Keller offers a primer on how to slime progressives while pretending to referee the debate between liberals and "third way" Clinton alums.  Calling out Keller's rhetorical moves alone could consume several blog posts, but here I will focus instead on his identification of three key differences between "center-left" and "left-left" politicians.

First, he says that they disagree on "how to restart the engine of growth," with the "divide [being] over policies that might unleash the energy of the private sector."  Admitting that Keynesian policies are "vindicated by history," he nonetheless says that the center-left has a point that domestic consumption is already 70% of GDP.  Apparently, he thinks this is a high number, but he never explains why.  Nor does he acknowledge that fighting lingering stagnation with Keynesian spending programs would "unleash the energy of the private sector" not only by allowing the private sector to sell more goods to domestic consumers, but by encouraging it to invest more (to keep up with rising demand).  The ensuing investment would reduce consumption as a percentage of GDP.

No, he simply points out that Obama (of whom Keller strongly approves, precisely because Obama is manifestly NOT a redistributionist) wants to cut corporate tax rates, "do trade deals," cut deficits, and streamline regulations.  In other words, the big fight over how to restart growth is between those who would actually restart growth and those who would simply double down on the Republican agenda that has been driving policy for the entire period during which inequality became such a huge problem.  Inequality for dummies, indeed.

"The second argument is over entitlements."  At this point, the argument is pointless, because Keller has already revealed that he is incapable of acknowledging the difference among the three big spending programs: Social Security, Medicare, and Medicaid.  They are very different programs, and random statistics about aging tell us nothing about their long-term prospects.  No, he sees it all as being about "the stampede of baby boomers into Social Security and Medicare [that] will crowd out everything else."  This is nonsense.  He then endorses the argument that there should be "some restraint on entitlements."  Bold.  (Earlier in the column, he happily quotes a Third Way op-ed that accused populists of indulging a "you can have it all fantasy.")

"And a third difference between the near left and the far left is the question of making government more efficient."  (See what I mean about the rhetoric?  From "progressives" to "left left" to "far left.")  When Keller immediately admits that he is describing "not so much a policy dispute as a mind-set," he again tips his hand.  He assures us that "[t]he left responds to rising costs with rising subsidies; the center looks for ways to change incentives."  Right.  At all of my meetings with card-carrying left-leftists, we start by promising that we will never look for ways to change incentives.

So, Clintonian triangulators are right because they: (1) cling to failed supply-side bromides, (2) try to take away benefits from "entitled" elders, and (3) believe that only centrists care about incentives.  This is embarrassing stuff.  Sadly, it is also what counts as high-end analysis in political circles.

Where does all of this nonsense come from?  As I noted in my Verdict column, buffoons like Keller do not come up with this silliness out of thin air.  They draw their material third- or fourth-hand from economists and policy scholars, whose work is mediated through the think tanks in DC and New York.  I argued that even non-conservative economists ended up inadvertently contributing to the atmosphere that shouted down discussions of inequality.  I also noted that the growth-versus-equality divide was not a crazy analytical move in the 1960's and 1970's, when growth really did seem to help everyone.  What began as an agreement to treat inequality as a separate issue, however, ended up becoming an atmosphere in which people who tried to talk about inequality were told that they were irrelevant (or worse).  I cannot count how many times I heard someone in a seminar room say (to me or others), "Sure, but that's merely a distributional question."

This mutation of the academic debate over income inequality has an interesting analogy in another area of economic analysis.  The famous "Coase Theorem" supposedly says that distribution does not matter, so long as property rights are assigned to maximize efficiency.  At least, that is how even non-ideologues often summarize the theorem.  The standard hypothetical example is that it does not matter whether a polluter owns the right to dump sludge in a stream, or a property owner owns the right to prevent sludge from being dumped in a stream, because the two parties will in any case negotiate a price to optimize the amount of pollution.  The only thing that could prevent an efficient outcome is "transactions costs," which we agree to assume away.  The bottom line: distribution is not interesting or important.  Efficiency is everything.

The problem is, as the Canadian economist Dan Usher wrote in the late 1990's, that "The Coase theorem is tautological, incoherent or wrong."  Usher pointed out that the modern understanding of the theorem reversed the logic.  Ronald Coase never said, "After we assume away transactions costs, we can conclude that it doesn't matter who holds a property right."  He said, "Because we should not assume away transactions costs, we must be aware that it very much matters who holds a property right."

Moreover, Coase lived long enough to say -- repeatedly -- that people had gotten his theorem all wrong.  (See, e.g., here.)  Even so, it is easy to find people who will say that Coase proved that you can assume away transactions costs, and that distribution therefore does not matter.  In this case, of course, "distribution" is not about overall economic distribution between income classes.  Even so, the analogy is clear.  The "distribution doesn't matter" argument resulted from a group distortion of a perfectly respectable (and context-specific) argument.

But it is exactly that kind of ridiculously incorrect argument that ends up filtering into the op-eds in the New York Times and elsewhere.  Someone tells someone else that he read somewhere that economics is all about efficiency and never about distribution, and the people who want to sound smart echo that sentiment.  We see the sorry results, not only on the op-ed pages but in the policies of the people whom those self-congratulatory "centrists" support.


Shag from Brookline said...

Paul Krugman's NYTimes column today spefically addresses inequality and myths about the rich, in obvious (but not specifically stated) respons to David Brooks and his ilk on the subject. Earlier, PK had two blog posts on the subject. His column was appropriate to challenge Brooks at the same level, as many readers of the NYTimes may not utilized its website.

Add Joseph Stiglitz and other economists as critics of inequality.

David Ricardo said...

A major problem with the equality debate is that economists and others who decry the growing level of inequality imply that they wish to use government policy to redistribute income and wealth, i.e, take from the rich and just give to the poor, as a social and moral goal. From the view of serious professional economists, this is just simply not the case.

The primary goal of an economic society and economic policy is economic growth. The reason for this is that this is Pareto optimal. With economic growth one person’s economic status may be improved without lowering the economic condition of any one else. When this primary goal is achieved, secondary economic goals such as low unemployment and low inflation will also be achieved.

While economics with respect to both theory and policy is highly complex, after more than 70 years of Keynesian economics we now know how to achieve growth. It requires investment, both private investment and public investment. Private investment is driven by demand, (no, not by absurdly low taxes) and public investment is driven by the level of resources allocated to governments. And when there is less than full employment government can consume resources without denying any resources to the private sector. There is no crowding out.

Economic policy that uses government tax and spending programs to promote growth is the proper policy to promote growth. That this policy results in the allocation of economic growth to lower and middle income groups who have the highest marginal propensity to consume is beneficial to society is good also, but that is not the goal.

As an economist I do not support policy that promotes more equality for the sake of equality. I support policy that promotes more equality (progressive tax rates, government spending on education, infrastructure, law enforcement, regulation etc) because that promotes economic growth. If policy to promote less equality was necessary for economic growth, as was present in the 19th century before the development of capital markets and private savings and wealth accumulation was necessary for investment, myself and others would support that policy.

The problem of course is that proper policy conflicts with the political position of conservative economists, and they allow politics to override knowledge. Some also have great ambitions, such as to serve in a Republican administration or to be published on the opinion pages of the Wall Street Journal or to appear on Faux News and so they simply sell out. People like Paul Krugman and Mr. Buchanan do an admirable job of calling these people out. These people are 19th century charlatans living in a 21st century world.

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