Tuesday, July 23, 2019

POST FOR FEEDBACK - Jul. 23, 2019



Few economic issues capture the attention of the general public more than the debate over the presence of, and the appropriate response to, economic inequality. It is a rare topic in economics that can command space in regular media outlets, be it television news or mainstream publishing. Economic inequality can make minor celebrities of economists whose work is centered on the issue. In 2013, President Barack Obama called inequality “the defining challenge of our time,” and while we have moved into the later stages of the next business cycle after the Great Recession, the focus on economic inequality has remained with us. In fact, there is a worry that we now have a “two-track economy,” and that while one group has recovered from the recession and is continuing to reap the benefits of economic growth and technological progress, a separate group of economic actors is still mired in the conditions of the Great Recession, with marginal employment, stagnate wages, and decreasing economic outcomes.

While economic inequality has become the focus of much work in economics, it is not the case that a consensus has emerged. In fact, just as we talk of a “two-track economy,” it might be appropriate to talk of a “two-track scholarship” when it comes to economic inequality. While one group of economists is focused on the differences between groups and the limitations on the spread of the benefits of economic growth, another group is comparing the welfare of the lowest groups to the welfare of such groups in the past and determining that those in these lowest groups are also benefiting from economic advancement. French economist Thomas Piketty received worldwide attention with the publication of his book Le Capital au XXIe Siècle in 2013, with many English-speaking economists eagerly anticipating the publication of its English translation the following year, Capital in the Twenty-first Century. Since then, other major economists have written on the topic to widespread acclaim, including Jeffrey Sachs and Nobel laureate Joseph Stiglitz. But for ever major economist who agrees with Piketty that “the distribution of wealth is one of today’s most widely discussed and controversial topics,” there is another economist who agrees with Deirdre McCloskey when she writes of economic inequality with her typical acerbic forthrightness, “So what?”

It was McCloskey’s self-described “cheeky but always relevant question” that opened my eyes to the breadth of the gulf separating the sides in this economic debate. While the tools of science are designed to test hypotheses and approach consensus, these sides seem to grow even farther apart with additional research. Not only in terms of proposed causes of economic inequality, but especially in terms of results and seriousness of the problem. Indeed, even disagreeing on whether the phenomenon is a problem at all. The result is two groups of economists who are talking past each other instead of communicating.


The first thing that becomes apparent to anyone undertaking an in-depth reading of scholarly work on economic inequality is that words seem to have no concrete meaning. Similar or even identical terms will be used by two different economists to refer to two very different phenomena. At its unfortunate extreme, it does not require two economists to get two conflicting uses of terminology. In fact, Piketty spends 700 pages making the case that inequality exists by referring to income data, and then finishes with 50 pages arguing for a wealth tax, seeming to lose sight of the difference between income (a flow variable) and wealth (a stock variable). When economists write about inequality, they are often imprecise in their terminology regarding the types of inequality, the causes of inequality, and the effects of inequality.

Types of inequality include income inequality, wealth inequality, inequality of opportunity, unequal access to resources, unequal access to (or quality of) education, housing inequality, employment inequality, unequal capabilities, and more. Each variety of inequality is deserving of its own research and scholarship, but the work is often jumbled together under the umbrella of “inequality research.”

Much research on economic inequality is centered on what should be clearly labeled as income inequality. This is for the same reason that most direct taxation is income taxation: income is much easier to observe, track, and report than is wealth. In developed economies, most workers receive wages in formalized contractual arrangements with their employers, and these formal arrangements are relatively easy to monitor. Conversely, wealth can be held in a variety of modes, and these modes are accumulated over a lifetime of transactions. While most Americans support a progressive tax code for the purposes of having “the rich” pay more, the fact that income is taxed rather than wealth makes it so those paying more are not necessarily the rich but are in fact the more productive. In keeping with the dictum that “anything you tax you get less of,” taxing income is a drag on productivity. Likewise, a focus on income inequality is based on an inequality in productive ability and the marketability of each worker’s idiosyncratic production capabilities. Richard Wagner has written about the fact that the labor market is in equilibrium as a reason to not be concerned with income inequality. When two workers receive different wages, the worker with the lower income would switch to the other occupation, and this reduction of labor supplied in the low-wage occupation would push the occupation’s wages higher, while the increase of labor supplied in the high-wage occupation would pull that occupation’s wages lower. If instead of such equilibrating labor movements, we see a stable wage differential, then we must conclude that the occupations have equilibrated in some other, non-wage variable. Wagner points out that some high-wage occupations, such as medicine and law, require often-expensive formal training. Urbanization increases living costs, and so jobs in urban areas will have to offer higher wages to keep the labor market in equilibrium.

[Next: The real inequality that matters is wealth inequality]

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