It’s the Rent-Seeking, Stupid

Rex Nutting, writing at MarketWatch, concludes his post on how the increase in income inequality is the consequence, deliberate or inadvertent, of policy with this:

Ultimately, the next generation at the top will be, the friends, neighbors, classmates and children of the current crop.

The country that once boasted of equal opportunities has re-created a self-perpetuating aristocracy. And that’s not the America I dream of.

a view that, unfortunately, I think is quite correct.

The bulk of the post is largely contrasting two different explanations for the growth of income inequality in recent decades. One of those explanations is presented by Harvard econ prof Greg Mankiw and Mr. Nutting summarizes like this:

In his paper, Mankiw explains why the top 1% are doing so well while the rest of us sprint hopelessly to catch up: The rich are simply better than us. They make more money because they contribute more to society than we do. They are smarter, have the skills that are in high demand, have better entrepreneurial instincts, and work harder. What’s more, their kids inherit these traits genetically.

I would phrase it a bit differently in two sentences. The first, practically tautological, is that the rich are rich because they get paid more. The second is that they get paid more because they are smarter and work harder. The first, as I say, is obvious. The second, however, is fallacious.

It’s fallacious for two reasons. Essentially, the correlation between income and IQ is very loose. And I don’t think there’s any scientific basis for believing that the rich work harder than everybody else. That’s just an unbased assumption, without which the conclusion would not be true. In other words, it’s begging the question.

It might well be the case that all Ivy-educated lawyers are smart, work hard, and are rich. What’s mistaken is that Ivy-educated lawyers aren’t the only people who are smart and work hard and in all likelihood there are millions of those who are aren’t rich. Similarly with medical doctors. It might well be true that docs are smart, work hard, and are rich. But they’re a lot richer than other people who are even smarter and work even harder.

I would submit that the incomes of both of those groups, along with those of many, many others in the top 10% of income earners, are due to rent seeking. And that brings us around to the other explanation, this one from Josh Bivens and Larry Mishel, who find that the main reason for the divergence in incomes isn’t intelligence or hard work but rent-seeking.

As I’ve written any number of times here, I think that the stagnation of incomes of people in the lower four income quintiles while the incomes of those in the top decile have soared can be explained by four factors:

  1. The one-way system of free trade, in which most barriers to trade in the U. S. (except for things like legal and medical services) have been removed while those of our major trading partners, e.g. China, Japan, India, remain largely in place.
  2. The importation of large numbers of unskilled and semi-skilled workers, mostly from Mexico, whose willingness to work for low wages has eroded wages among the lower income quintiles.
  3. Technological changes which have tended to erode wages among those in the middle income quintiles.
  4. Enormous subsidies, most of which have gone to those in the top decile of income earners.

all of which have been the specific result of policies. To change the outcomes, change the policies. For example, want to reduce healthcare costs? Stop voting in “doc fixes”. Allow the wages of medical doctors to fall. Their wages will still be higher than their next-best alternative.

10 comments… add one
  • Ben Wolf Link

    Did you notice the Productivity and Costs revision for Q1 2013, showing the greatest drop in hourly compensation since we started keeping records, has gone virtually unreported?
    http://www.bls.gov/news.release/prod2.nr0.htm

    No one in Washington cares that workers are being squeezed to death so profits can increase. The chances of any sort of policy shift addressing inequality approach zero.

  • There’s a fundamental immorality to the policies being espoused by both sides of the aisle. If you’re proposing something that will demonstrably injure folks who are on the lower side of the income distribution, IMO you incur an obligation to remediate the harm you’re doing. That obligation obtains even if your preferred policy is beneficial in general.

    Immigration reform that incentivizes additional immigration by unskilled or low-skill workers fits into that category. The studies are ambiguous on how much it will hurt workers already here who are on the low end of the wage scale but nobody really doubts that they’ll be hurt.

    I know that you and I have our differences about precisely what policies we should be adopting but I hope that you recognize that every strategy I espouse has at least a hope of doing some direct good for the people most in need of help. That’s dramatically different from both mainstream Republicans and Democrats who IMO really don’t give a damn.

  • steve Link

    Stop the doc fixes if you want, but the real money is in private insurance. You need to be more aggressive than that if you want doc salaries in line with what they make elsewhere. Please note that since doc salaries account for only about 7% of total health care spending, we still have a health care spending problem.

    The weakness in your solutions is the failure to address the 0.1% which is where the money is really going. They have the wealth to affect public policy, and they do.

    Steve

  • Andy Link

    Steve,

    Insurance is, by definition, a middle man. I’m sure they are getting their cut, but how much are we really talking about? What about companies that self-insure? From everything I’ve read private insurance is gets 5-10% on top of what they pay for medical services. Not sure that is where the “real” money is, but it could be part of it.

  • That was an example, steve, not a definition. I could spend the rest of my life listing the examples of rent-seeking that primarily benefit the highest income earners. Patents, copyrights, government franchises, bank bailouts, directed bids, farm subsidies, road-building subsidies, the deduction of mortgage interest from income for purposes of the individual income tax. There are thousands, maybe hundreds of thousands of things like this.

  • steve Link

    Andy- I was referring to what they pay docs. Medicare pays much less than do private insurers. Medicare is driven to keep its rates close enough to private rates so that people will continue to see Medicare patients.

    Steve

  • jan Link

    Rent seeking, defined as a politicized manipulation of economic environments, goes hand and hand with social engineering policies like affirmative action, rent control, and now looming national HC. These are the sanctioned patterns of social progressives to rectify problems, molding a society ideally envisioned by them, rather than have it be a free flowing one, creatively led and grown by individuals via free market conditions.

    However, IMO, people left to their own efforts, talents, goals are more productive, growing wealth more equitably and better suited for all, than a centralized government who injects it’s finger of authority into every aspect of citizens’ lives. Because, as it is now, human beings are becoming nothing more than data entries, grouped by gender, age, ethnicity, and class, then juggled and manipulated through the ideological filter of some extraneous political agenda, to perform in ways insuring preconceived socially ‘fair’ outcomes.

    Yep, this was not exactly the governmental framework intended for future generations, developed by the founding fathers of this country. In fact, the governing model we are headed towards is more like the one immigrants earlier fled………

  • TastyBits Link

    @jan

    Rent seeking, defined as a politicized manipulation of economic environments …

    I would reformulate this as: economic manipulation of a politicized environment.

    The rent seekers glom onto the prevailing political issues: green energy and global warming on the left, increased oil production and defense spending on the right.

    When you find somebody working towards a social good (goal) who also is profiting from it, it is about the money. When you find somebody working towards a social good (goal) and they are losing from it, it is about the cause.

    I do not think Jesus, Ghandi, Mother Teresa, etc. were looking to make a buck, but I could be wrong.

  • That was an example, steve, not a definition. I could spend the rest of my life listing the examples of rent-seeking that primarily benefit the highest income earners. Patents, copyrights, government franchises, bank bailouts, directed bids, farm subsidies, road-building subsidies, the deduction of mortgage interest from income for purposes of the individual income tax. There are thousands, maybe hundreds of thousands of things like this.

    And the obvious solution is to increase government power so those with the most influence (e.g. those who are already rich and their cronies) can use that increased government power to get even richer….oh….wait…uhhmmmm…..

    Tasty,

    Everyone wants the benefits of rent seeking. And why not, who doesn’t like getting other people’s money for doing precisely nothing to earn it.

    And It isn’t merely picking the current political fad, although it certainly helps one’s case. Everyone thinks they should be considered a special snowflake and deserve something for nothing.

    Dave,

    Technological changes which have tended to erode wages among those in the middle income quintiles.

    Technological change has also helped create a middle class as well. While technological change undoubtedly eliminates some jobs it also creates others. This is probably your weakest of your four arguments.

    Enormous subsidies, most of which have gone to those in the top decile of income earners.

    This is probably the biggest factor by several orders of magnitude. Any policy that restricts entry into a market is basically a subsidies to incumbents in that market. With less entry the incumbents have more market power which translates into higher economic profits. This incorporates just about every single policy area there is: environmental, safety, standards, zoning laws, education, etc.

    Every time some twat says, “There ought to be law….” they are in effect arguing for rent seeking.

    That is pretty much 99.9% of Americans and both parties are equally guilty of catering to the biggest and most influential and wealthy of the rent seekers.

    This is why all the stupid partisan nonsense about Republican this or Democrats that is pretty stupid when it comes down to our economic future.

  • TastyBits Link

    @Steve Verdon

    Everyone wants the benefits of rent seeking. And why not, who doesn’t like getting other people’s money for doing precisely nothing to earn it.

    True, but the recipients usually do not dream up these schemes. I doubt the free cell phone program was designed by the poor folks who get them. More than likely, one of the designers will make a buck or two.

    Technological change has also helped create a middle class as well. …

    I never thought about, but this is an astute observation. It is amusing to hear the whining from those whose lively is the result of past technological changes and whose products are purchased by the same middle class created by those same technological changes.

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