The Brookings-Okun Event: “As Our Case Is New, We Think Anew, and Act Anew…”
UPDATE: Oh, excellent! Here is the transcript.
Heather Boushey and Larry Summers posted their prepared thoughts for last week’s Brookings-Okumn event. They are very good, and are well worth reading. The others–Wessel, Mankiw, Kearney, Wolfers–alas, did not. I am told that they were very good in the panel discussion. But where am I going to find the hour and a half to listen to it? And there appears to be no transcript. Serious bummer.
The most important point to emphasize, of course, is that Arthur Okun wrote his Equality and Efficiency: The Big Tradeoff in an America in which the top 0.01% got 1% of the income and the top 0.01-1% got 9% of the income, while today we live in America in which the top 0.01% gets 6% of the income and the top 0.01-1% got 18% of the income.
It was not completely implausible to argue back in the early 1970s that the United States had, for white guys and only for white guys, gone over the top of the redistributional Laffer curve and that further increases in social insurance no longer both raised the level of material prosperity and increased the rate of economic growth. Now, however, the claim that we are on the far side of some redistributional Laffer curve is ludicrous–our rich today are, in bulk and on average, not an entrepreneurial minority who are insufficiently incentivized but rather a rent-extracting minority who hobble the rest of us with their control over the levers of political-economic power.
…In the 40 years since… the bottom 90 percent saw their income grow by an annual rate of ¼ of 1 percent… while the top 1 percent saw theirs grow by 4.4 percent…. Okun pondered a trade-off between equality and efficiency just when those at the top of the wealth and income ladder began hauling off all the gains of economic growth…. When Okun was writing, the typical CEO earned about 25 times the typical worker. How could he know that today, they earn nearly 300 times the typical worker?… It’s hard not to see Okun’s legacy as the problem rather than the solution. His view… that the real problem was ensuring that we didn’t veer too far into ensuring equality steered us in the wrong direction…
…I suspect he would have rejected the terms of the debate slated to follow these remarks…. He would have recognized that there were likely limits on the amount of inequality reduction that could be achieved with policies that also accelerated growth. And so he would have recognized that as usual in economics there are tradeoffs…. So his balanced advice would have been to first implement policies that increase growth while increasing equality, and then consider those measures that involve trading off efficiency and equality….
For many years now, it has been the case that the income distribution has been growing much more unequal… the share of… the top 1% has risen… from about 8%… to around 20 percent…. With inequality higher and progressivity lower the case for progressive reform is strong…. Concern with issues relating to the cost of capital and the adverse effects of taxes in increasing it has been very legitimate at points in the past…. [But] at present… [with] zero interest rates… [and] corporate profits… at record levels, there needs to be much… more concern with the distributional aspects of capital taxation…. Okun recognizes the minimum wage can be dangerously high and excessively strong unions can do damage if jobs are taken away and inflation is promoted. These risks are remote…. The financial sector has shown itself to be less of a source of diversification and stability and more of a source of instability than most judged a generation ago…. The simultaneous emergence of high profits and low interest rates raises the question of whether monopoly power is on the increase. So the question of regulatory actions looms much larger…. Abraham Lincoln had it right when he said “As our case is new, so we think anew, and act anew.”
UPDATE:
JUSTIN WOLFERS: “I’m willing to stipulate there’s an efficiency/equity tradeoff…
…I think Okun’s focus on it is the result of the great confidence of economists of the day 50 years ago that we lived in an economy where we were somewhat close to that frontier. I think if you thought about today’s politics, you would be less confident. If you looked at the policy development subsequently, you would be less confident. I also think the scope of economics has changed now from a discipline that’s far more infused in both sociology and political science, and I think that pushes you to look beyond tax and transfer policy…. If you turn the question around and said is the implication of Okun that the pie needs to be smaller in order for each of us to have more equal slices, I think the answer is certainly not….
Discrimination. The effect of emancipation of women over the past 50 years has been one of the most important engines of economic growth, and of course, reducing inequality within households and within families. We have seen in some industries a rise in monopoly… rents…. Much of the American growth miracle was the result of people going to school. Thirty years ago, American men decided to stop going to school, so we haven’t had increases in educational attainment in several decades. American women, I think, have been somewhat more sensible…. When you look at pictures of Baltimore and you look at pictures of Ferguson, you see neighborhoods where investments could surely help both growth and inequality. The problem with mass incarceration was not on the agenda in Okun’s day, but surely is a huge issue in terms of both inequality and growth. We have seen the decline of the American Union movement. Unions certainly helped hold inequality down, the more functional among them could also help raise productivity. The less functional… maybe not…
DAVID WESSEL: “It seems to me it is striking when you read Okun’s book and he describes…
…inequality 40 years…. Okun writes that the richest one percent of American families have about a third of all the wealth, and the bottom half hold about five percent…. [Today] the richest one percent have over 40 percent of the wealth, and the bottom half have only one percent. Doesn’t that suggest there is a chance we are farther from the frontier?…