Responding to Alan Viard
Thanks to Alan Viard for a provocative analysis of the principles of Crunchian economics. Not surprisingly, we disagree on many fundamental points.
Alan found principle #1 ambiguous, and since it’s central to a) the book, and b) my understanding of the economy, let me repeat the principle and try to clarify.
#1: Economic outcomes are generally thought to be fair, in the sense that market forces dole out rewards to those who merit them. But that’s not always the case. Power, whether it’s based on political clout, wealth, class, race, or gender, is also a key determinant of who gets what.
This seems crystal clear to me, but maybe that’s because I view many of the economy’s outcomes through this lens. Simply put, I see evidence of large and growing gap between overall economic growth and the living standards of working families. And I see disproportionate power—not merit, not marginal product, not efficient resource allocation—as one driving force behind it.
I see this in the path of the real median family income, which for the first time in the history of the data going back to 1947, appears, as we enter the current downturn, to have failed to regain in prior cyclical peak.
I see this in the median male wage, which in real dollars stands at almost exactly the same level as it did in 1973, though the size of economy has more than doubled since then.
I see this in the 23% of market income accruing to the top 1%, the highest income concentration since 1928.
I hear it in the stories Barbara Ehrenreich tells of and writes about.
I see the power dynamic being played out in real time in the “heads we win, tails you lose” bail outs occurring in financial markets.
I suspect Alan and I could argue about the etiology of each one of these, but they’re all real, they’re all occurring—that cannot be denied. And they’re at the heart of the Crunch.
Getting back to econo-turf, I don’t believe there should be a lockstep growth between productivity and median wages or incomes, though amazingly, there used to be: between the mid-1940s and the mid-1970s, they both precisely doubled. Since then, median family income has grown less than a third as fast as productivity growth. Inequality is a main cause of the disconnect—that’s all I’m saying, and I don’t think that’s at all controversial among analysts of these trends.
Re Alan’s “thought-experiment”—“I doubt that he would be nearly so concerned if cash wages were growing more rapidly than labor productivity”—I suppose he’s right. When the wages and incomes of the bottom two-thirds increase in some measure—not lockstep—with overall growth, and do so consistently, i.e., for more than a few years, I’ll shut up (which might be enough to get Alan and his AEI colleagues to pray for a lower Gini coefficient!).
Now, re “supply-side mumbo-jumbo:” I don’t mean any disrespect to the very smart economists one encounters in Alan’s world—him, of course, but also Greg Mankiw, Glen Hubbard, and others, but my experience is that they all far, far overstate the extent to which people respond to tax incentives.
I suspect their debate is a lot more nuanced than the ones I get into, say, over at CNBC with Larry Kudlow and Stephan Moore (he’s on the Wall St. Journal editorial board). But in the hurly-burly of tax policy debates, the conventional discussion maintains that minor tweaks in the tax code—e.g., raising the top marginal income tax rate from 35% to 39%—will devastate the economy as wealthy people stop working and investing. You can say I’m being hyperbolic, but I hear this mantra constantly on CNBC, in the WSJ, and from the highest ranking politicians, including candidate McCain.
Alan writes that I am “…far too dismissive of the statistical and theoretical evidence that tax cuts do affect incentives.” It’s true: I really don’t care about the theoretical evidence. But if you’ve got compelling empirical evidence that tax changes of the magnitude we are contemplating in the current debates in which you and I are engaged—e.g., the ones proposed by Hillary and Obama—will be seriously damaging to the economy, please show me…quick (I don’t doubt that the statistical signs of the effects go the way you suggest, btw—it’s the magnitudes about which we disagree).
Tomorrow (Wed), I’ll post a globalization question and my answer. Look forward to your take, Alan, and thanks again for playing along.
Economic outcomes are generally thought to be fair, in the sense that market forces dole out rewards to those who merit them.
Unless "merit" is derived from (equivalent to) the recipient's contribution to productivity, then, this proposition is arguable in ethics, only.
Nothing wrong with that, but we don't need an economist to do the arguing.
April 8, 2008 10:44 PM | Reply | Permalink
Guys like you have been seeing the powerful as grasping, selfish, evil, and unfair for at least the last 2000 years.
Most American workers are pretty clearly overpaid. Third-worlders - especially Chinese - can do the same jobs for far less money. The only reason Americans have jobs at all is due to the power of their unions and their votes...but, of course, that's not the type of power you're criticizing, is it?
Grow up. The last thing you want in the modern world is a universal meritocracy. It would look much like the worlds of sport and entertainment. A few very talented individuals would command virtually all the wealth.
April 8, 2008 11:52 PM | Reply | Permalink
"A few very talented individuals would command virtually all the wealth."
If their talent happens to lie in being particularly 'grasping, selfish, evil, and unfair,' perhaps; but universal meritocracy can hardly be blamed.
April 9, 2008 12:39 AM | Reply | Permalink
It is true that the wealthy have more than they need, while there are people who cannot earn enough to pay for basic needs. I would say that while many wealthy people do give to charity, they are still supporting economic policies that are oppressive. One such policy is lending for an interest rate. Lending was originally a form of charity, now it has become a for-profit business. That is a policy that clearly is oppressive. It is by design a way to suck wealth from those who have less. That creates poverty in society as well as consolidates wealth and power.
April 9, 2008 1:13 AM | Reply | Permalink
Plato--somewhere--has one of is characters (not Socrates) define justice as giving everyone their due. Although Plato has Socrates punch holes in that definition, I think it is as good as any in ethics as far as it goes, which is not very far since we have to solve two problems 1) devising an algorithm for mapping people (and their actions) to what they are due under certain prevailing economic (and other sundry) conditions, and 2) devising a system that insures that that particular allocation is carried out (taxation, etc)
So to say that this algorithm is simply what every particular individual winds up under an existing economic system (e.g. free market supply side economics, etc) is rather absurd. Does the sociopath who inherits billions from his parents merit that amount of wealth? I know of no ethical theory that makes such an absurd claim.
That's different from the claim that the sociopath is entitled to the wealth because s/he has aquired it fairly under present rules.
To say that those who advocate for a lower Gini index are implying that the top of the income level is populated by grasping evil selfish people is a total red herring. I don't think that anyone makes that claim that I know of although you hear supply-siders make that kind of straw man charge all the time.
The moral case to be made for a lower Gini index has nothing to do with resentment of the poor towards the rich. It can only be justified by a theory of distributive justice such as Rawls’ or Nozick’s.
Economist have to be careful not to conflate what is good for economic growth with what is a just distribution of wealth. Adam Smith was confused about this in a fundamental sense thinking that free markets would automatically result in just distributions. The modern version of this is that supply side economics will automatically result in a just distribution.
You can define a just distribution as the result of supply side economics just as you could define a just distribution as that which is recommended by your local fortune teller. Definition can be arbitrary.
To arrive at a philosophically viable definition of just distribution requires, as Ellen says, getting into a serious ethical discussions.
April 9, 2008 1:16 AM | Reply | Permalink
Your problem is the one that most economists have, but you have it in a different form.... Economists are reductionist, everything social is reducible to economics. Thus, typically, they cannot understand political power, which is not economic and cannot be represented as economics.
However, in your case you are somehow trying to absorb political power into economics (still without the proper tools, which are found political science, political theory and ethics).
Don't count on many economists understanding you, you are reducing the world to the wrong thing (power, rather than pareto optimality). And, as Ellen says, fairness is a normative concept, it doesn't fit in economics.
April 9, 2008 1:18 AM | Reply | Permalink
Hasn't 'our economy' been absorbed by political power?
April 9, 2008 1:34 AM | Reply | Permalink
No. It hasn't. No doubt certain sectors rely more on influencing powerbrokers than others, but those sectors do not the whole economy make. I see this everyday while evaluating start-ups and then trending their progress. Very few of these new enterprises have the backing of "power." They succeed or fail based on their creativity, drive and sometimes dumb luck.
April 9, 2008 2:03 PM | Reply | Permalink
Isn't it critical to understanding 'our economy' to have an agreed upon definition of 'productivity' (as well as any of the terms we commonly use)?
And isn't the value of one's contribution to that productivity largely determined by those who are given or assume the authority to define it for whatever particular interest or agenda they may wish to realize or promote?
Keeping in mind, esply these days, for example, that when we're hungry we want to eat food, not gold bullion.
April 9, 2008 1:27 AM | Reply | Permalink
I was merely pointing out that when dealing with questions of merit, we are dealing with a normative concept that belongs squarely in ethics. And it does have relevance to economic theory. I don't think that most economist have moral blinders. That pareto optimality is desirable is again a normative issue itself. Why should we maximize utility at all? That is the foundations of Utilitarian ethics. So you cannot get away from normativity in economics.
By the way the notion that merit can be equated with productivity is a non starter for me. People with disabilities might not be as productive as others but that does not diminish their merit to obtaining social goods.
Remember Life Liberty and the Pursuit of Happiness are considered inalienable rights in our constitution. A blind person's merit (to pursue happiness for example) is not diminished by her diminished productivity.
April 9, 2008 2:48 AM | Reply | Permalink
@Andrew Strat
I was merely pointing out that when dealing with questions of merit, we are dealing with a normative concept that belongs squarely in ethics.
No.
Merit as used here is almost a synonym for ability. Who can get a job done faster, cheaper, better. When the tasks are simple and well-defined it's easy to know. Complex tasks pose bigger challenges; real-life tests provide the only answers and even they are ambiguous; for example, peace-time generals often don't cut it in battle.
Despite the difficulties we usually have a pretty good idea of who might be good and who doesn't stand a chance. The real problem is that the losers never like their position and always try to show that the game was rigged, unfair, not relevant.
April 9, 2008 8:02 AM | Reply | Permalink
Assuming you are correct with winners being the ones who can do a job "better, faster, cheaper" then how do you defend the successes of George W. Bush or Paris Hilton? Are they "better, faster, cheaper", or just the fortunate recipients of already concentrated wealth and it's associated power?
April 9, 2008 8:42 AM | Reply | Permalink
You'll never be able to boil down the economy into a single "better, faster, cheaper" bucket. That assumes a purely commoditized model, which is nonsense. If it were the case then forget the idea of brand and franchise.
April 9, 2008 2:08 PM | Reply | Permalink
@gonzone
how do you defend the successes of George W. Bush or Paris Hilton?
You've chosen poor examples. Paris Hilton's job is to fascinate the public. She's very good at it. George W. Bush won the Presidency because he had certain qualities which are difficult to describe or quantify and which may not be relevant to success or failure in his position. President of the United States is one of those jobs which are too difficult for anyone - no ability or set of abilities guarantees success.
However, there are plenty of examples of people who have money they didn't earn and who hold jobs they wouldn't have without their connections to power. Not all such jobholders are rich or well-born. Nepotism reigns among union members too...and among relatives of government employees (civil service notwithstanding).
Despite the caveats I stand by my contention. Connections open doors but responsible positions, which determine the fortunes of others or which require demonstrable success, are not long held by incompetents. Paris Hilton - despite her efforts and wealth - simply cannot get the parts that go to Keira Knightley.
April 9, 2008 11:37 AM | Reply | Permalink
Merit as used here is almost a synonym for ability. offensivetoyou
I do think the word "merit" carries a moral weight absent from the word "ability" which is not resolved by hedging ("almost"), but I have a different question.
Before judging the "merit" of the actor, must we first judge the "merit" of the enterprise the actor is engaged upon? Ought the "economy" reward the investment banker whose specialty is convincing managers of other peoples' money that the latter won't survive their upcoming quarterly reviews unless they buy the crap the investment banker has on offer?
April 9, 2008 11:55 AM | Reply | Permalink
@Ellen
Before judging the "merit" of the actor, must we first judge the "merit" of the enterprise the actor is engaged upon?
We do...by throwing money at the enterprise or not, by showering it with praise or not, by legally encouraging or forbidding it.
Ought the "economy" reward the investment banker ...?
In an uncertain world salesmanship will always have value. In an uncertain world there will always be crooks and liars...and there talents will often be rewarded.
April 9, 2008 12:28 PM | Reply | Permalink
Is-Ought.
I guess you're on the descriptive side and I'm on the prescriptive one -- and never the twain shall meet?
April 9, 2008 12:50 PM | Reply | Permalink
The thing I think economists get wrong is that they tend to tie everything to money, which is just little green pieces of paper that in reality have no value at all. And backing it with gold is no better, gold is only good for looking pretty and conducting electricity. And I love the earlier comment that American workers are all overpaid..... that is such a relative statement and he relates it to the Chinese worker..... Stop focusing on the paper and start focusing on what really matters......
April 9, 2008 12:31 PM | Reply | Permalink
@thoth
Stop focusing on the paper and start focusing on what really matters......
If you think the paper's unimportant just send it to me. Gold is acceptable, too. If I decide I've gotenough I'm sure there will be others equally willing. No doubt the line will be endless...
Jackass. Pretentious jackass.
April 9, 2008 12:53 PM | Reply | Permalink
Couple thoughts:
Why would productivity and median income trend together? If we look at the recent decade's productivity gains we see that a large portion is the result of automation. Automation lowers production costs, which usually means fewer laborers of lower skillsets are required. It increases profit margins, which would go to the remaining laborers based on contribution; the guy watching the lights on the control board gets nothing, while the MBA who installed the automation gets a big bonus. This can be demonstrated across industry sectors and across the last 100 years.
April 9, 2008 2:20 PM | Reply | Permalink
The naturalistic fallacy merely states that you cannot logically derive a "ought" sentence from purely "is" premises and that's correct.
I suppose the reverse is true too.
However nobody would maintain that ethics does not have to take into consideration factual matters and that a full-blown economic theory can be restricted to the purely descriptive.
The point Ellen makes about "the enterprise" the person is engaged in needing valuation is correct. The Capitalist system does not have merit a priori any more than Marxist economics does. If economics is drained from all normative content you are trying to achieve (maximize production, distribute wealth justly, etc) then it cannot get off the ground to start with. Blind maximization of utility, regardless of who gets it and to what end, is absurd.
Not even the egoist (which I suspect offensive favors) would go for that. So if you have a system that maximizes utility at a Gini index of 100--that is if you have an economic system which operates at maximal output when one person gets all the wealth and the rest get nothing--not even offensive would be able to stomach that as desirable merely because it is a maximal system.
April 9, 2008 10:48 PM | Reply | Permalink
Help: TPM staff publishes only a few lines of my blogs
I tried unsuccessfully four times to get TPM staff to address the problem I’m having with my blogs. Only a few lines of them get published, and when a MORE hyperlink does appear, it goes back to the few lines. I can never get to the entire piece in each blog. This was especially vexing when I achieved Recommended Reader Blog status and notified all my friends and relatives.
In frustration, I’m putting this notice up in every conceivable spot at TPM that I can. Help! I’m trapped in TPM Hell. User name: johnhughmcfadden; email: johnhughmcfadden@hotmail.com
April 10, 2008 6:02 PM | Reply | Permalink