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)

By | December 13, 2013, 10:27 pm
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The extraordinarily capable and thoughtful Ezra Klein thinks that the [Washington Center for Economic Growth]() is wrongheaded–indeed, that the entire American left is now wrongheaded. And a number of us wish to register our dissent from his theses:

Ezra Klein: Inequality isn’t ‘the defining challenge of our time’:

The organizing economic concern of the American left is–or is becoming–income inequality… Zucotti Park… Bill DeBlasio… President Obama…. Income inequality is easy to worry about. It offend…. Those who aren’t unnerved by the datum that the income share of the top one percent has shot from about 10 percent in 1980 to more than 20 percent today can worry instead about inequality’s attendant consequence: declining social mobility…. But is inequality really the country’s most pressing problem?…


Jared Bernstein has been worrying about inequality since way before worrying about inequality was cool… [but] found that there wasn’t strong evidence for the idea that inequality is weakening demand–or for any of the other theories tying inequality to a weaker economy…. That doesn’t mean inequality isn’t hurting growth. It just means it’s difficult to find firm proof of it. But if inequality really was the central challenge to growth, would proof really be so hard to come by? Meanwhile, evidence of joblessness and weak growth are pervasive….

[Secular stagnation] is… a harder problem to mobilize a political coalition around. It doesn’t offend our moral intuitions so much as confuse them. Someone making $85,000 annually can look at the incomes of the top one percent and be angry and scared. They can hear that Germany has more social mobility than the does the United States and be offended. The plight of the long-term unemployed and the economy’s stubborn refusal to generate catch-up growth are more abstract…. It’s fair to wonder whether any of this matters. The Obama administration would like to boost demand. But Congress isn’t going to let them. Asking whether inequality or joblessness or growth is the defining economic challenge of our time is like asking how many John Boehners can dance on the head of a pin. But the same logic applies to inequality….

The game being played here is a longer one. Of late, inequality become a much more popular research topic…. Obama consigliere John Podesta founded the Washington Center for Equitable Growth, a think tank dedicated to funding research into inequality. The political system’s focus on the issue is leading to more thinking, more concern, more ideas and more pressure for action…. That 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… [and] a world in which growth and unemployment are top concerns are worlds in which very different policies… [are] top priorities.

And Ashok Rao:

Ashok Rao: The Defining Problem of Our Age:

Ezra Klein… misses a few important points and, I think, doesn’t do the best job of characterizing the progressive argument. Or maybe we’re in agreement, and I’ve misunderstood–it’s hard to tell (though, given that I’m commenting on a Wonkblog post, more likely than not)….

As long as your income is growing–even if not nearly as quickly as financiers on Wall Street–it’s not hard to foolishly convince yourself that you have a same shot at those riches…. But when the music stops the story changes. Inequality is a problem, politically and economically, precisely because of secular stagnation…. It’s worthwhile dividing problems into two categories: those that are urgent, and those that are important…. Let me be absolutely clear: the most urgent problem facing America today is unemployment…. But candidates for the most important problem are more diverse still… the tail risks from climate change… rising inequality and secular stagnation. But it is difficult to argue that growth is a uniquely more challenging problem….

The Wonkblog post suggests most of the connection between inequality and growth come[s] from a persistent demand shortfall resulting from income earned by those with a higher marginal propensity to save…. [But that] is hardly the most important link…. Most things we do to reduce inequality would also increase growth…. In fact, other than the second-best solution of the minimum wage, it’s not easy to think of something that–within the Keynesian model many people in this conversation favor–would reduce inequality without improving growth [right now]…. 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).

Let me now chime in.

First of all, we have a problem with words. “Economic growth” is usually taken to mean “increases in real GDP”. Increases in real GDP are usually taken to mean “economic growth”. But these two really should be distinguished. If real GDP grows because we are spending an extra 4% of our incomes on the services of financial intermediaries; but if we get no better corporate control, no better allocation of capital across industries and firms, less risk spreading, and more of a risk of financial crisis out of spending that extra 4%; then we have not really gotten any economic growth, have we? And if we spend an extra 3% of GDP on specialists, paying them more than GPs and having them do things done by GPs elsewhere, for no improvement in life expectancy, we haven’t really gotten economic growth, have we? And if we spend an extra 4% on health-care administration, that is money down the toilet, isn’t it? And if we imprison 1% of our population that’s another 1% of GDP that isn’t really economic growth, is it? All of these changes have taken place over the past generation. All of these are aspects of our massive increase in inequality. And there is the doubling of the top-1% share even though the top 1% have not grown noticeably more productive: they are supposed to deliver a more smoothly-functioning and faster-growing economy in return for their riches, and they have not done so. Half of the doubling from 10% to 20% of GDP is already accounted for, but the rest is another 5%.

Adding up all of these together, they mean that 17%-points of economic growth over the past 35 or so years really isn’t economic growth at all because it was diverted into rising inequality instead. Yes, that 17%-points over a generation is measured in real GDP. No, it is not really there if you look deeper and focus on what GDP is supposed to be a proxy for: human material welfare.

And then there are the political consequences of inequality. A more unequal economy is one in which the voice of the rich speak louder in the political debate, and the rich want to keep what is theirs. Before 1975 the U.S. made a uniquely large effort to educate its people, and win the race between education and technology. The result was a middle-class society for white guys (and, alas, for white guys alone). Then came what Robert Kuttner calls The Revolt of the Haves: the great pulling-up of the ladder of free public higher education. The consequence was another factor pushing for the great widening of income inequality, as America began to lose the race between education and technology. And the consequence was that 0.3%/year of American real economic growth simply vanished as we were no longer making the requisite educational effort to keep our population the best-educated in the world. Over 35 years that failure has made us another 10% poorer–and more unequal to.

And then there is the direction of innovation. For decades, Kevin Murphy, Andrei Shleifer, and Robert Vishny, in papers like “Industrialization and the Big Push” and “The Allocation of Talent” have been worrying away at the question of the relationship between equality and growth. An equal income and wealth distribution provides powerful incentives to concentrate innovation and investment in activities that, broadly speaking, add significantly to human material welfare. An unequal income and wealth distribution provides powerful incentives to concentrate innovation and investment in activities that, broadly speaking, temporarily appease the ennui and the boredom of the upper class. An equal income and wealth distribution focuses talented people on the positive-sum question of how they can be useful. An unequal income and wealth distribution focuses talented people on the negative-sum question of how they can displace one of the big-time rent-seekers and become a big-time rent-seeker themselves.

And we haven’t even gotten to the mechanisms that people like J.A. Hobson and Robert Reich and Joe Stiglitz think lie at the core of the relationship between inequality, overleverage, risk of financial crisis, and risk of secular stagnation: an unequal society producing a desire to keep up with the Joneses and resulting overleverage, and an unequal society with a poor and middle class without the money to spend to maintain aggregate demand at full employment through consumption and a satiated rich without the desire to bear the risk needed to maintain aggregate demand at full employment through investment and innovation.

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.


UPDATE: And Steve Randy Waldmann has a… stronger… reaction to the estimable Ezra Klein then the rest of us did:

Steve Randy Waldmann: interfluidity » Terrible.:

On the bright side, I guess I couldn’t ask for a better example of the phenomenon I described in “Standards of Evidence” than this piece by Ezra Klein. It’s terrible. I have no idea whether inequality is the “defining challenge of our time”. That’s a meaningless trope. But Klein’s frames the question as an excuse to knock inequality down a few pegs from the economic priority list…. Here’s the worst:

Economist Jared Bernstein has been worrying about inequality since way before worrying about inequality was cool. But in a careful paper released on the same day as Obama’s speech, Bernstein found that there wasn’t strong evidence for the idea that inequality is weakening demand — or for any of the other theories tying inequality to a weaker economy. There “is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth,” Bernstein wrote. That doesn’t mean inequality isn’t hurting growth. It just means it’s difficult to find firm proof of it. But if inequality really was the central challenge to growth, would proof really be so hard to come by?

Read Bernstein’s paper…. An intelligent reader would interpret Klein as saying that Bernstein looked for evidence, failed to find it, and concluded it just wasn’t there. In fact, Bernstein reviews the research and finds lots of suggestive connections between inequality and growth. The unfortunate bit that Klein quotes reflects a kind of handwringing on Bernstein’s part…. Bernstein offers a cautious invitation to take seriously evidence of connections between inequality and growth. Klein pulls the caution out of context and misuses it as an excuse to dismiss those connections….

There is no such thing as “the central challenge to growth”. Proof is impossible to come by with respect to all macroeconomic controversies. Klein vapidly handwrings that, “Growth simply isn’t producing enough jobs” without meaningfully addressing the question of how to achieve growth, or addressing the arguments that Bernstein carefully catalogs for why a broader distribution might be growth-supportive….

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?

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