Connecting the Dots on Income Inequality

I don’t think I’ve ever agreed with an op-ed by economist Joseph Stiglitz as much as I do this one in the New York Times, connecting the dots between income inequality, the policies that have been adopted in reaction to the financial crisis and subsequent “Great Recession”, and the phlegmatic recovery. I particularly liked this section:

Instead of pouring money into the banks, we could have tried rebuilding the economy from the bottom up. We could have enabled homeowners who were “underwater” — those who owe more money on their homes than the homes are worth — to get a fresh start, by writing down principal, in exchange for giving banks a share of the gains if and when home prices recovered.

We could have recognized that when young people are jobless, their skills atrophy. We could have made sure that every young person was either in school, in a training program or on a job. Instead, we let youth unemployment rise to twice the national average. The children of the rich can stay in college or attend graduate school, without accumulating enormous debt, or take unpaid internships to beef up their résumés. Not so for those in the middle and bottom. We are sowing the seeds of ever more inequality in the coming years.

I don’t agree with everything in the op-ed. I don’t know that I agree with anybody on everything. Dr. Stiglitz, sadly, shares the problem of too many pundits in commenting on our economic doldrums: his post mortem analysis of what happened is much better than his prescription for moving forward. He provides few solutions other than these implied approaches:

Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength.

and a few brief mentions at the end of the op-ed:

What’s needed is a comprehensive response that should include, at least, significant investments in education, a more progressive tax system and a tax on financial speculation.

We don’t need jobs in five or ten years; we need them now and I see very little in those prescriptions that will produce the jobs we need now. Is the reason jobs aren’t being created fast enough too much financial speculation? Or that our tax system isn’t progressive enough? In terms of marginal rates our system is already among the most progressive among developed countries. It would be even more progressive if the Congress and president hadn’t decided to reinstate the payroll tax.

Let’s define our terms. I think the problem of inequality in the U. S. is not that the people in the top 10% of income earners don’t earn enough or that the people in the top .1% earn too much. I think it’s that the people in the bottom 90% don’t earn enough. We will do more to improve income equality in the U. S. by increasing the incomes of the people in the bottom 10% of income earners than we will by lowering the incomes of the top .1% of income earners. Do the math and you’ll see what I mean.

Increased consumption, e.g. “investment”, of education and healthcare, in the absence of the creation of new jobs in education and healthcare, will do very little to improve income equality but will increase the incomes of the highest earners in those fields—causing the situation to deteriorate even farther. The increased “investment” in education of the last 20 years hasn’t increased the amount of health or education. It has increased the costs of administration in both areas.

Even assuming that more spending on education (we already spend more per capital on education than any other country in the world by a substantial margin) actually leads to more education, will that create more jobs? How would we be better off with PhDs in astrophysics working at the Jiffy Mart than with high school grads working there?

I think that Dr. Stiglitz is confusing today with the 1930s. Infrastructure investment, defined as roads and bridges, no longer consists of hiring large gangs of men with shovels. It involves letting contracts to a handful of approved, frequently politically-connected vendors who already own the equipment they need to do the job and employ the crews to do the work.

I do not believe that we don’t have enough roads or bridges. If anything, we have too many. I’ve documented this in the past. Towns of any great size already have ready access to an interstate highway (Any minute now someone will trot out the Civil Engineers’ report on bridges. It doesn’t say what you think it does—for example it doesn’t tell us which bridges are worth repairing.) Filling potholes in city streets may be worthwhile but I wouldn’t characterize that as investment. It’s ordinary maintenance. More of it would get done if we abandoned Davis-Bacon wages.

What are the actual reasons that we don’t have enough job creation in the U. S.? I think it’s mostly a combination of predatory monetary policy on the part of our trading partners, one-way free trade, subsidies to people in the top 10% of income earners, and rent-seeking having become a surer way to fortune than saving and investing. I would have loved to see Dr. Stiglitz’s proposals for dealing with those problems but, alas, he doesn’t mention any of them.

Update

David Henderson has a commentary on Paul Krugman’s NYT commentary on Joseph Stiglitz’s op-ed. Here’s an interesting point:

Acceptance of Friedman’s idea has strong implications for Keynesian fiscal policy. It implies that if the government temporarily boosts people’s incomes, either with a temporary tax cut or an increase in transfer payments, people will not spend anywhere near a dollar per dollar of tax cut or transfer payment, but will spend more like 20 to 30 cents per dollar. That strongly undercuts the multiplier part of Keynesian fiscal policy. Does anyone know if Krugman has used this reasoning in his discussion and advocacy of Keynesian fiscal policy?

11 comments… add one

  • steve

    “It implies that if the government temporarily boosts people’s incomes, either with a temporary tax cut or an increase in transfer payments, people will not spend anywhere near a dollar per dollar of tax cut or transfer payment, but will spend more like 20 to 30 cents per dollar”

    Tax cuts don’t lead to economic growth according to Henderson. Who would have guessed.

    Steve

  • There’s a key word in that sentence you may have missed, steve: temporary.

  • steve

    :-) No, I saw it. Name me one tax cut that was ever permanent. I’ve just never bought into that distinction. The Bush tax cuts were set to expire in ten years. Permanent or temporary? How long do tax rates go w/o changing? I dont find it that useful and suspect that whether or not the tax cut is spent depends on other factors. Guess the first word of the quote is important for me.
    Steve

  • Icepick

    Tax cuts don’t lead to economic growth according to Henderson.

    Hmm, that’s interesting. If that is true it follows that taxes hikes don’t lead to economic contraction. Or at the very least it implies that if an increase in taxes leads to economic contraction, then the contraction produced by the tax hike is permanent and can never be regained by lowering taxes.

    So why not raise all taxes on everything to 100%? At the very least let’s raise them to the highest rates ever recorded for a given tax – we’re not getting any economic benefit from having the rates lower. It can’t do any harm, at least according to Henderson. And if you can’t trust Henderson on these matters, who can you trust?

    Plus it’s the only responsible thing to do, in order to pay off the deficit. Hell, tax the entire GDP for a couple of years and the government will be running a huge surplus! Not that there will be any reason to cut taxes after the government is back in the black.

  • How about the Kennedy and Reagan tax cuts? To the extent that anything is permanent in life I think they are. Now the lower end of the Bush tax cuts look pretty permanent, too. Maybe “not explicitly temporary” (as the Bush tax cuts were) would be a better diction. As I understand the empirical findings explicitly temporary tax cuts are an inferior method of fiscal stimulus.

    I was always opposed to the Bush tax cuts on the grounds that they were the wrong tax cuts and I think that events have proven me correct. Whatever stimulus they provided evaporated nearly a decade ago.

    When the Democratic Congress, after campaigning against them for nearly a decade, failed to allow them to lapse, it cemented my disgust with them. I see a distinction between “political” and “solely political”. I don’t have a problem with politicians taking positions for political reasons but I do with them taking solely political positions. The Republican Party is not immune. The House’s approach to fiscal discipline is purely political, too. It’s either that or insane, take your pick. We can’t balance the budget by lowering taxes, increasing military spending, and maintaining Social Security and Medicare spending. Maybe in geological time.

    My opinion of both sides of the Congress is that they’ve reached a point where political victory is the sole objective.

  • PD Shaw

    I don’t think temporary is the operative word, perhaps its sustainable. Federal stimulus spending went through state and local governments and established government contractors, all of which understood the spending to be temporary, _plus_ understood that the state and local governments had severe fiscal problems that were not being addressed and would necessarily make this the last hoorah. That meant few, if any, new hires, and instead more overtime. That meant saving, or in the cases of some businesses using the money to retrench for a leaner future.

  • Those 2 paragraphs at the top that you quoted Dave are pretty good. I can see why many would agree with them. But what gets me is that Stiglitz just doesn’t seem to get that the problem isn’t just bad policy by…I don’t know…mistake. It is bad policy on purpose. Geithner/Obama/et. al. aren’t stupid. They are doing exactly what is asked of them by the guys who have essentially put them in power.

    My problem with income inequality isn’t just the income inequality, but also when you have an activist government where people can and do influence legislative outcomes and those who have the best chances at influencing legislative outcomes are special interests…which are often groups with lots of money (corporations, industry groups, labor unions, etc.).

    Or to put it more simply income inequality combined with a political system that makes rent seeking easy is a very serious problem.

    It would be even more progressive if the Congress and president hadn’t decided to reinstate the payroll tax.

    Or switch it over to something like a gasoline tax. People can more easily avoid the gasoline tax than they can the payroll tax so even though it would be a flat tax per gallon, it would likely end up being more progressive than a payroll tax. And since many luxury/expensive cars that the wealthy prefer are not as fuel efficient that would also increase the progressive nature of the tax.

    Like I said, we don’t have bad policy by mistake…we have bad policy on purpose.

    I would have loved to see Dr. Stiglitz’s proposals for dealing with those problems but, alas, he doesn’t mention any of them.

    1. Stiglitz is a liberal, so things like rent seeking are not very high on his radar.
    2. He is part of the status quo, look at where he has been employed.

    steve,

    Tax cuts don’t lead to economic growth according to Henderson. Who would have guessed.

    A temporary tax cut is one with an explicit end date. Permanent is thus when taxes are cut for the foreseeable future. It does not mean there is never ever going to be a tax increase ever again, but that the chances of one are not that good/well known.

  • But what gets me is that Stiglitz just doesn’t seem to get that the problem isn’t just bad policy by…I don’t know…mistake. It is bad policy on purpose.

    Steve, that passage is one of your best. I may sample it. That gets to what aggravated me then and aggravates me now about Obama’s economics team: they must have known. How could they not know? They saluted like good little soldiers and went around promoting what they must have known was inadequate policy anyway.

    He is part of the status quo, look at where he has been employed.

    Funny you should mention that. I had thought about updating the post by pointing out that according to the Chronicle of Higher Education the median salary for full professors with tenure at Columbia and NYU is $180,000. Add to that a $40,000 housing stipend for which they’re eligible and it’s pretty clear that Columbia professors are in the top 2 or 3% of income earners. I thought of working out a little math experiment showing the different results on income inequality between divvying up $1 billion among professors at Columbia (while holding their numbers constant) and divvying $1 billion among 10,000 of the lowest income earners.

    There’s a rabbinic saying: when a woman comes from a far country and tells you she’s divorced, believe her. When a Columbia professor tells me that we should be spending less on education, I’ll give that special consideration. Spending more, not so much.

  • Drew

    steve

    “The Bush tax cuts were set to expire in ten years. Permanent or temporary? How long do tax rates go w/o changing?”

    Steve, I’m not trying to pick a fight, but this is just sophistry. People make various decisions on various time horizons. Ten years is forever in business, and I suspect in personal finances. 1 or 2 years is basically nothing. For example: An employee hiring decision? 3-7 years. A capital investment decision? 5-7 years. A car purchase decision? 2-6 years. A home purchase decision? 5-10 years.

    You are so wedded to your philosophy that you make some very strange assertions. Taxes matter. Regulations matter. People right now are reacting to the environment.

  • Andy

    How could they not know?

    Don’t underestimate the power of hubris and wishful thinking. Plus, when it comes to partisan political players, there is always a healthy amount of kool-aid drinking.

  • Steve, that passage is one of your best. I may sample it.

    Of course.

    Plus, when it comes to partisan political players, there is always a healthy amount of kool-aid drinking.

    There is that, the Cult of the Presidency and all that. Still that does not mean they did not know, just that they put more value on being good sycophants.

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