People who are smarter and better known than me took on Ezra Klein’s Wonkblog piece: Inequality isn’t ‘the defining challenge of our time’. I’ve collected some of the responses here. The usual format for these posts is to list links alphabetically by author, but in this case I’ve broken that rule in order to provide a better order for reading.
This is the piece that started everything.
None of that will matter much now. But it will matter eventually. When the left next gets a chance to make economic policy, what will they choose to do? A world in which inequality is the top concern is a world in which raising taxes on the rich is perhaps the most important policy choice the government can make. A world in which growth and unemployment are top concerns are worlds in which very different policies — from stimulus spending to permitting more inflation — might be the top priorities.
This is the paper that Klein uses to make a central part of his case, namely: that there isn’t enough evidence that inequality affects economic growth.
But even if future research fails to find causality where there is now just correlation, there are still good reasons to push back against such excessive levels of inequality that not exist in the U.S. economy. Fundamental American precepts – such as basic fairness, the conviction that opportunities and upward mobility should be available to all, and the social contract that links hard work and playing by the rules with a chance to get ahead – are at risk when inequality is where it is today. This will remain try no matter how inequality impacts macroeconomic growth.
For this reason, the high unemployment policy that Congress is pursuing with its current budget policy is a key factor in the upward redistribution of income that we have seen in the last three decades. This means that people concerned about inequality should be very angry over budgets that don’t spend enough to bring the economy to full employment (also an over-valued dollar). So Ezra is absolutely right that progressives should be yelling about unemployment, but inequality is a very big part of that picture.
This is Berstein’s response to Klein and Paul Krugman.
Finally, since I’m saying here that stronger demand can reduce inequality, am I not contradicting my recent work cited by both K’s which argues that linkages going the other way–high inequality leads to slower growth–are hard to find? Nope. First, clearly growth alone is insufficient to reduce inequality. The economy’s been growing most of this time that inequality’s been increasing. You need full employment, which btw, brings you back to Larry Summers’ concerns that were central to Ezra’s argument.
Second, my point here is that full employment enforces a more equitable distribution of growth. That’s not saying anything about the impact of inequality on growth itself, though the theory I develop in my CAP paper does introduce what I think are potentially important feedback loops between inequality, debt bubbles, and recession, with a generous sprinkling of money-in-politics to close the loop.
Brad DeLong: Is the American Left Wrongheaded? And Is the WCEG Part of the Problem?: Ezra Klein vs. Ashok Rao and Brad DeLong and **UPDATE** Steve Randy Waldmann: Friday Focus (December 13, 2013)
It was fifty years ago that Brookings Institution economist Arthur Okun gave his Godwin lectures at Harvard: Equality an Efficiency: The Big Tradeoff. In it, he set forth the dominant metaphor that governed and governs our discussion of growth and inequality: the leaky bucket. The market, Okun said, produced a level of real production and a distribution of income. You could transfer wealth from rich to poor to get a better and more equal distribution of income–there was a bucket. But whenever you did so you disrupted incentives to produce to some degree–the bucket was leaky, and so when you transferred you got less to the poor than you had taken to the rich. It was, Arthur Okun thought, the job of Brookings Institution economists to how and where the bucket was leakiest and so at what angle to hold it and how close to full to fill it in order to do the most good.
And this leaky-bucket metaphor is the dominant framework within which Ezra Klein thinks.
And, as the Fearless Soon-to-Be-Ex-Leader over here at Equitable Growth John Podesta says, this is a wrong and unhelpful America. Take a look at America’s economy and polity over the past generation, and tell me, if you can do so with a straight face, that any aspect of the large upward leap in inequality we have experienced has paid any benefits at all in terms of true–not measured real-GDP, but true human material welfare-enhancing–economic growth.
I don’t think you can. I certainly can’t. And I can see lots of micro places where higher inequality has itself deranged incentives and focused activity in the wrong places and so dragged down true real human material welfare-enhancing economic growth.
Well, I’m not infuriated, but I would argue that Ezra has gotten this one wrong. And yes, I’ve expressed skepticism about the simple argument that inequality accounts for our slow recovery; the evidence surveyed in Jared Bernstein’s excellent new paper on the subject eases my skepticism somewhat, but it’s not entirely gone.
The key point, however, is that the case for regarding inequality as a major, indeed defining challenge — and as something that should be at the center of progressive concerns — rests on multiple pillars. Taken together, the reasons to focus on inequality are overwhelmingly convincing, even if you can be skeptical about particular arguments.
You might be tempted to say that the depressed economy still deserves priority, because recovery is in everyone’s interests, so we should be able to achieve consensus on good short-run macro policies even as we debate inequality. That is, you might be tempted to say this if you’ve been living in a cave these past five years. In practice, debates over macroeconomic policy are just as polarized as debates over inequality — and along pretty much the same lines. That is, the same people who screech “Class warfare!” if you bring up the rising share of the 1 percent also shriek “Greece! Zimbabwe!” if you advocate expansionary fiscal and monetary policies.
Policy should be focused on generating higher standards of living for the vast majority (consistent with preserving our planet for the following generations). If you accept this, then addressing inequality and growth become a pretty similar enterprise. Frankly, I don’t much care what happens to the top one percent, whether their incomes fall, are flat or continue to skyrocket. This group seems to do all right without much help. In a Journal of Economic Perspectives paper that I co-authored with Josh Bivens, we argue that rising pay for executives and high earnings in finance have driven the growth of top one percent incomes, and that these groups are collecting rents above their economic value. This means we could eliminate their income surge and leave aggregate growth unaffected! See, we could do both at once—fight inequality and generate more income for the vast majority.
Neither inequality nor growth are the “defining problem of our time”, but they are born of the same ill, low aggregate demand. In times when demand is high, society will tolerate much more inequality and growth will be limited by supply-side factors. In fact, that’s the reason growth per se is not a problem of our time. If we were experiencing inflation despite low growth rates, it is difficult for the wonks of the world to do anything about it. That is the realm of science and engineering.
But we’re not there yet and, as far as I can see, the most convincing arguments suggest that both inequality and growth are first cousins. You would really need a Republican to find a way to better one without bettering the other (and, arguably, the farm bill is a perfect example to this effect).
People concerned with inequality in fact argue not to tear down the rich but to raise up the rest — at the expense of the rich to the degree that is necessary, but not just because. We argue for policies like basic income, wage subsidies, and, yes, more inflation-tolerant macro policy and more fiscal stimulus where those policies help support the poor and middle. A focus on inequality sometimes does create wedges between us and other “progressives”. We might not be so excited, for example, by a fiscal policy that is “expansionary” by virtue of a deficit accounted for in large part by tax expenditures to the rich. We might celebrate less than a Democratic party that treats inflation in the price of real estate and financial assets as unambiguously good news.
A policy apparatus for which inequality is not a “top concern” might content itself with spurring demand by protecting and increasing the wealth of the politically-connected rich, on the theory that anyone’s misfortune hurts at the margin and providing support to the non-rich is politically impossible. But that’s, like, totally science fiction, right?
Ezra Klein’s column asking whether it really makes sense for a President presiding over a prolonged spell of mass unemployment to proclaim income inequality (rather than, say, mass unemployment) the defining challenge of our time has set off a lot of interesting arguments around the web, along with a depressingly large quantity of egregious misreadings. People should note that just because something is bad (cruel treatment of non-human primates, for example) doesn’t necessarily make it a contributor to high unemployment or necessarily a more urgent social priority than high unemployment.
This is Klein’s response to several of these:
All that said, income inequality and social mobility really are startling trends that people should be very worried about and that the political system should be working aggressively to solve, or at least ameliorate. I don’t have many policy disagreements with the folks focusing on inequality. But politics is about prioritization, and what politicians end up doing is in part driven by what problems their political coalitions are most worried about. Next time someone like Jared Bernstein is advising the president of the United States about what her top economic priority should be I’d prefer if the answer was full employment rather than inequality, and I’d prefer if her political advisers agreed.