Brown University Janus Forum Lecture: Inequality: Is America Becoming a Two-Tiered Society?
N. Gregory Mankiw and J. Bradford DeLong
Faculty Club at Brown University :: 5:30 PM – 8:00 PM :: October 17, 2016
My Presentation:
This presentation file: https://www.icloud.com/keynote/0gIuwcJ_jAF0MtGozXgE7_95Q#2016-10-17_Brown_Janus
Over at Project Syndicate: The Long-Run Economic Trend is Our Friend
These are days of grave disappointment at the state of the world. Sinister forces of fanatic religion-linked murder that we thought had been largely scotched by 1750 are back. They have been joined by and are reinforcing forces of nationalism, bigotry, and racism that we thought had been largely scotched in the ruins of Berlin in 1945. (There is a bright spot: the other principal fanaticism of the twentieth century, that of ideology, is comatose if not dead.) In addition, the state of economic growth since 2008 has been profoundly disappointing. There is no reasoned case for optimistically expecting a turn for the better in the next five years or so. And the failure of the globe’s institutions to deliver ever-increasing prosperity has undermined the trust and confidence which in better times would be strong factors suppressing the murderous demons of our age. Read MOAR Over at Project Syndicate
In these days of pronounced pessimism, it is past time to engage in enthusiastic and positive contrarianism with respect to the state of global economic growth not over the next five but over the next 30 years, and beyond at least to the next 60.
The reason that the 25 to 50-year economic growth future looks very bright is that the biggest of the macro trends that have been operating since the end of World War II are still, under the surface, at work. Technology continues to diffuse. World trade continues to grow. The population explosion continues to ebb. The innovative heart of the world economy in the global north continues to beat–albeit perhaps more sluggishly than it has since the 1880s (maybe). War and terror continue to destroy, terrorize, shock, and horrify, but on a scale much less than the holocausts and megadeaths of 1914-1978.
And these trends are likely to continue.
Our best source of summary information on global economic growth remains the Penn World Table research project started two generations ago by Alan Heston and Robert Summers. Take the geometric mean of individual country estimates of real GDP per capita as our first summary statistic of the state of the global economy. The Penn World Table then tells us that the world in 1980 was some 80% better off than it had been in 1950, and the world in 2010 was another 80% better off in measured material-well being terms that it had been in 1980. That places us today more than three times as well off as our predecessors in the 1950s were.
Moreover, this more than tripling of world material well-being is an underestimate. First, our real GDP measure was designed to be something Simon Kuznets could estimate quickly from data that was easily available. It does not not take proper account of use-value surplus accruing to users but only of market-value revenue captured by sellers. Over time the commodities we are producing are shifting in a direction that makes user surplus a greater and market value realized a smaller proportion of their total contribution to societal well being. And I find attempts to claim either that it has always been thus profoundly unconvincing given how much of our leisure and even our work time is spent interacting with information systems where the revenue flow is not of the essence but is only a small dribble tied to ancillary advertising.
Second, there is the case of China–and, more recently, of India. According to the PWT, China’s real GDP per capita in 1980 was more than 60% below of that of the country at the then-geometric mean of the world distribution. Today China is 25% above that moving benchmark. India in 1980 was more than 70% that benchmark, but since 1980 it has closed half the gap vis-a-vis the contemporaneous geometric mean. In the scatter of country experiences, India and China are only two counties. But they are 30% of humanity.
Now do not push optimism too far. There has been no sign of the world’s countries drawing together in their levels of prosperity. In 1950 two-thirds of countries had GDP per capita levels between 45% and 225% of the geometric mean of the world’s nations. By 1980 you had to widen that spread to 33% to 300%. And today it is 28% to 360%. That on the level of individuals the world economy is a more equal place than it was in 1980 is due to rulership that has been on the whole much better than average in China and India since the accessions of Deng Xiaoping and Rajiv Gandhi. But there are no more countries of the size of China or India to stand up. And few observers have anything like the confidence in and hopes for Xi Jinping and Narendra Modi that they had in their predecessors. It may be harder to find an export niche in the world economy to accelerate technology transfer in the future than it has been since the end of World War II. It may well be that the engine of innovation at the world’s leading technological edge will beat more slowly. But it will continue to beat. And technology will continue to diffuse. And the world will continue to grow.
Expect–terror that somehow triggers global nuclear armageddon aside–my successors in 2075 or so to be writing about how their world is, once again, three times as well off in material terms as we are today.
And beyond that? It is harder to project. We are already letting global warming, a potentially very large demon for the post-2080 world, out of the Pandora’s Box we hold. Our children’s children’s children will not thank us for that.
Musings on “Just Deserts” and the Opening of Plato’s Republic:
Greg Mankiw Defending the 1% proposes what he calls the “just deserts” theory of social justice:
What you have gained and hold by playing by the economic rules is yours: social justice consists in not cheating or injuring people, and not being cheated or injured in turn.
This is an old theory: we see it first in the western intellectual tradition nearly 2400 years ago, in the opening of the dialogue that is Plato’s Republic. It is advanced by Kephalos…
The other participants in Plato’s dialogue, led by Sokrates, conclude relatively quickly that Kephalos’s argument–taken up by his son Polymarkhos–is unphilosophical, and thus unworthy of consideration by those who want to gain a deep and true understanding of the subject. For the rest of the dialogue, Kephalos’s position–that justice consists of getting one’s just deserts: not injuring or cheating people, and not being injured or cheated–is abandoned. The live positions are, instead,
That justice consists of the right arrangement of human society, because a rightly arranged human society is an instrumental virtue that produces many many benefits.
That justice consists of the right arrangement of human society, a good and worthwhile thing both because of the other benefits it produces and a thing very much worth having in itself.
Ever since Plato, moral philosophers have followed his lead–or, rather, the lead of the characters in his dialogue–in this dismissal of “justice is neither cheating nor being cheated”. But, as Obama CEA Chair Jason Furman pointed out to me, that cannot be completely right. First, justice as what Mankiw calls “just deserts” has enormous psychological resonance for human beings. To the extent that moral philosophy exists to account for an help us understand the morality we human beings do have, dismissing a very large chunk of our moral intuitions as wrong simpliciter is not very helpful. Second, given that human beings have a strong tropism toward Kephalos’s “just deserts” position–that justice consists of not injuring or cheating people, and not being injured or cheated–anyone who tries to set out what a rightly arranged society is without taking account of this strong human psychological tropism will almost surely fail.
My tentative ideas on this are unfinished, and probably wrong.
But I would suggest that we might be thinking about the fact that humans are, at a very deep and basic level, gift-exchange animals. We create and reinforce our social bonds by establishing patterns of “owing” other people and by “being owed”. We want to enter into reciprocal gift-exchange relationships. We create and reinforce social bonds by giving each other presents. We like to give. We like to receive. We like neither to feel like cheaters nor to feel cheated. We like, instead, to feel embedded in networks of mutual reciprocal obligation. We don’t like being too much on the downside of the gift exchange: to have received much more than we have given in return makes us feel very small. We don’t like being too much on the upside of the gift exchange either: to give and give and give and never receive makes us feel like suckers.
We want to be neither cheaters nor saps. It is, psychologically, very hard for most of us to feel like we are being takers: that we are consuming more than we are contributing, and are in some way dependent on and recipients of the charity of others. It is also, psychologically, very hard for most of us to feel like we are being saps: that others are laughing at us as they toil not yet consume what we have produced.
And on top of this evopsych propensity to be gift-exchange animals–what Adam Smith called our “natural propensity to truck, barter, and exchange”–we have built our complex economic division of labor. We construct property and market exchange–what Adam Smith called our natural propensity “to truck, barter, and exchange” to set and regulate expectations of what the fair, non-cheater non-sap terms of gift-exchange over time are.
But we face a problem: How do we enter into a gift-exchange relationship with somebody we will never see again? And we have a solution: a cash-on-the-barrelhead exchange. We devise money as a substitute for the trust that in this transaction one is indeed in a gift-exchange relationship, rather than a sap being taken by a grifter.
And on top of this we have constructed a largely-peaceful global 7.4B-strong highly-productive societal division of labor, built on:
There are enormous benefits to arranging things this way. As soon as we enter into a gift-exchange relationship with someone or something we will see again–perhaps often–it will automatically shade over into the friend zone. This is just who we are. And as soon as we think about entering into a gift-exchange relationship with someone, we think better of them. Thus a large and extended division of labor mediated by the market version of gift-exchange is a ver powerful creator of social harmony. This is what the wise Albert Hirschman called the doux commerce thesis.
Now it is certainly true that economists do not talk about this once. For example, in Books I and II of his Wealth of Nations, Adam Smith definitely does write as if self-interest mediated by exchange is at the foundation of the social order. But Adam Smith the moral philosopher (as opposed to Adam Smith the proto-economist attempting to disrupt the 18th century discipline of “political oeconomy”) does not believe that. And it is not true. People as economists conceive them are not “Hobbesians” focusing on their narrow personal self-interest, but rather “Lockeians”: believers in live-and-let live, respecting others and their spheres of autonomy and eager to enter into reciprocal gift-exchange relationships—both one-offs mediated by cash alone and longer-run ones as well. In an economist’s imagination, people do not enter a butcher’s shop only when armed cap-a-pie and only with armed guards, fearing that the butcher will not sell him meat for money but will, rather, knock him unconscious, take his money, slaughter him, smoke him, and sell him as long pig. Rather, there is a presumed underlying order of property and ownership that is largely self-enforcing, that requires only a “night watchman” to keep it stable and secure.
This extended pattern of independence is a very valuable piece of our societal capital.
Thus, given these psychological and institutional facts-on-the-ground, in my view any rightly arranged society has to successfully do all of:
Achieving these results is complicated and difficult, for reasons related to [the water-diamonds paradox][]. But I am now far afield, and need to get back to my main topic…
Cf., also:
No Longer Fresh at Project Syndicate: A Brief History of (In)equality: Here we have a very nice set of slides http://tinyurl.com/dl20160725a. It comes from a talk in Lisbon given by Barry Eichengreen, my sixth-floor office neighbor here at the Berkeley Economics Department. The slides have one of the great virtues of economic history: We, unlike other economists, are allowed to at least gesture at and even glory at the complexities of a situation. We are not forced, as other economists are, into ruthless oversimplification in pursuit of conceptual clarity—to be followed by the intellectually-faulty imperialism overloading more of an explanation of the world on a simple model then it can rightfully bear. Read MOAR at Project Syndicate
In Barry’s view, with respect to inequality there have been and are now ongoing six important first-order processes at work over the past two and a half centuries:
The 1850-1914 great First Age of Globalization convergence of living standards and labor productivity levels in the Global North, as 50 million people left overcrowded agricultural Europe for resource-rich settler colonies and ex-colonies, and brought their institutions, their technologies, and their capital with them. Gaps of roughly 100% in wage levels between European sender and settler recipient economies shrank to 25% or so http://amzn.to/2a6aXz6.
The 1750-1975 enormous pulling-apart of the global income distribution, as some parts of the world were able to take full or nearly full advantage of industrial and post industrial technologies, and others were not. Measured at purchasing power parity, America was twice as well off as China in 1800. By 1975 it was thirty times as well off http://tinyurl.com/dl20160725b.
The 1870-1914 First Gilded Age rise of within-country inequality in the Global North, as entrepreneurship, industrialization, and rent seeking distributed the bulk of increases and productivity to the relatively well off and to the plutocracy http://tinyurl.com/dl20160725a.
The 1930-1980 Social Democratic Age great compression of the earnings distribution in the Global North http://tinyurl.com/dl20160725c.
The post 1980 divergence of outcomes within the Global North, as political economic choices lead to the coming of a Second Gilded Age to the Global North’s English-speaking portions.
I, however, think Barry’s talk is not economic-historiany enough. I would go further. I would start by adding five more first-order important factors and processes:
The extraordinary post-1980 reduction in and yet stubborn persistence of remaining pools of absolute poverty. Inequality is a maldistribution of the opportunities for Isaiah Berlin’s positive liberty. But as my ex-colleague Ananya Roy points out, absolute poverty is a deprivation of Berlin’s negative liberty as well—it matters little when you are in a cage without any money whether you could theoretically buy a key http://amzn.to/2ac721f http://tinyurl.com/dl20160725d.
The extraordinary nineteenth-century global shrinkage of slavery.
The global reduction of other caste barriers—race, ethnicity, gender—which limit people’s opportunities to make use of whatever wealth they have.
The post-1975 global-scale switch from increasing planet-wide divergence in wealth to convergence—although do note that, so far at least, all of the switch from the pre-1975 increasing divergence pattern is the result of two good growth generations in China, and one good growth generation in India.
The dynamic of compound interest backed by political-economic rent-seeking identified by Thomas Piketty—with the caveat that Piketty’s logic applies not very much to our past, even our 1980-2015 past, but may well be an important part of our 2015-2100 future http://amzn.to/2ab4rSI.
Complicated, yes? A matter for careful adjustment of institutions by those with social science expertise directed by elected leaders who share the people’s value, yes?
And, most important, I would finish by adding, underlining, and emphasizing a twelfth process:
Populist mobilizations to try to deal with problems of inequality have had consequences we can call “checkered” only out of politeness. Populist mobilizations have been directed in France toward installing an Emperor, Napoleon III, and toward overthrowing democratic governments of the Third Republic. Populist mobilizations in America have been directed at excluding immigrants from China to California, at excluding immigrants from anywhere save northwest Europe, at enforcing Jim Crow. Populist mobilizations in central Europe were turned toward imperialism as the problem was redefined as that Germany and Italy were “proletarian nations” that needed bigger empires. And only Naziism could surpass in its consequences the populist mobilizations that were turned to entrenching in power Lenin’s “party of a new type” and all of its imitators. The constructive responses were fewer: Extending the franchise. Progressive income taxes. Social insurance. Building society’s physical and, more important, human capital. Opening economies. Prioritizing full employment. Encouraging migration to where ample resources and, more important, good institutions were already established. History teaches us that those have been the reactions to inequality that have made the world a better place.
Of course, history also tells us that we fail to learn what lessons history has to teach us.
Over at Project Syndicate: A Brief History of (In)equality: BERKELEY – The Berkeley economist Barry Eichengreen recently gave a talk in Lisbon about inequality that demonstrated one of the virtues of being a scholar of economic history. Eichengreen, like me, glories in the complexities of every situation, avoiding oversimplification in the pursuit of conceptual clarity. This disposition stays the impulse to try to explain more about the world than we can possibly know with one simple model. For his part, with respect to inequality, Eichengreen has identified six first-order processes at work over the past 250 years.
READ MOAR of A Brief History of (In)equality at Project Syndicate
Must-Read: (2013): Aspects of Inequality in the Recent Business Cycle: “An issue of growing saliency…
…how… economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery…. I want to zero in on the question of whether inequality itself is undermining our country’s economic strength according to available macroeconomic indicators….
I will argue that at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis… 30 years of very sluggish real-wage growth… unusually large share of their wealth in housing… debt…. exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on. Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth….
I want to explore these issues today because the answers may have implications for the Federal Reserve’s efforts to understand the recession and conduct policy in a way that contributes to a stronger pace of recovery…. I hope my remarks spur more inquiry and discussion. I should also note that the views I express are my own…. To be sure, the increase in mortgage debt prior to the recession occurred across all types of households. But it was families with modest incomes and wealth largely in their homes that were the most vulnerable to subsequent drops in home values…. Given these developments, when house prices fell, household finances were struck a devastating blow. The resulting fallout magnified this initial shock, ushering in the Great Recession….
About two-thirds of all job losses in the recession were in middle-wage occupations–such as manufacturing, skilled construction, and office administration jobs–but these occupations have accounted for less than one-fourth of subsequent job growth…. It is not only the occupational and industrial distribution of the new jobs that poses challenges for workers and their families struggling to make ends meet, but also the fact that many of the jobs that have returned are part time or make use of temporary arrangements popularly known as contingent work. The flexibility of these jobs may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or ‘permanent’ workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace….
My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models…. The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their ‘realized shocks,’ closer to the front and center of the macroeconomic adjustment process…. Circumstances–the outsized role of housing wealth in the portfolios of low- and middle-income households, the increased use of debt during the boom, and the subsequent unprecedented shocks to the housing market–may have attenuated the effectiveness of monetary policy during the depths of the recession. Households that have been through foreclosure or have underwater mortgages or are otherwise credit constrained are less able than other households to take advantage of the lower interest rates, either for homebuying or other purposes. In my view, these effects likely clogged some of the channels through which monetary policy traditionally works…
Must-Watch: (2011): Barnard College Commencement: “Women all over the world, women who are exactly like us except for the circumstances into which they were born…
…[lack] basic human rights. Compared to these women, we are lucky…. We are equals under the law. But the promise of equality is not equality…. Men run the world…. I recognize that [today] is a vast improvement from generations in the past…. But… women became 50% of the college graduates in this country in 1981, 30 years ago. Thirty years is plenty of time for those graduates to have gotten to the top of their industries, but we are nowhere close to 50% of the jobs at the top. That means that when the big decisions are made, the decisions that affect all of our worlds, we do not have an equal voice at that table. So today, we turn to you. You are the promise for a more equal world…. Only when we get real equality in our governments, in our businesses, in our companies and our universities, will we start to solve… gender equality. We need women at all levels, including the top, to change the dynamic, reshape the conversation, to make sure women’s voices are heard and heeded, not overlooked and ignored…
Must-Read: : Did Inequality Cause the First World War? Contra Hobson-Lenin-Milanovic: “In a small section in his new book, Branko Milanovic argues that the First World War…
…was ultimately caused by income & wealth inequality within the belligerent countries… John A. Hobson, Rosa Luxemburg, and Lenin…. High domestic inequality => ‘underconsumption’ by the masses & ‘surplus’ savings by the elites => capital exports, i.e., search for overseas outlets for investment => the ‘scramble for colonies’ & imperialism => (a major cause of the) WAR…. But… Ferguson’s The Pity of War has many problems, but one thing he’s very right about is the war that never broke out in the late 19th century between Britain and France, or between Britain and Russia…. Annoyingly, the Great Powers kept on resolving colonial disputes peacefully… too much European compromise and cooperation….
Furthermore, the ‘financier parasites’ of Hobson and Lenin had simply the wrong interest… feared rivalry… for the very good and rational reason that they had everything to lose from it…. The colonial disputes which Britain took most seriously and was willing to go to war over–Egypt (Fashoda), South Africa (German tensions over Transvaal), Afghanistan (Russian relations)–were all related in some way to monopolising maritime access, and eliminating all traces of threat, to India…. All else… was largely open to negotiation. Except, of course, for the naval rivalry in the North Sea. What actually soured Anglo-German relations was that Germany’s naval programme was perceived as an existential threat…. German dreadnoughts just a ‘few hours from the English coast’ were somewhat more important than Samoa or the Caprivi Strip….
Germany’s rulers believed the country’s political standing and national prestige was incommensurate with its sudden and dramatic rise as an economic superpower…. Imagine the chafing if Taiwan, and not the PRC, still represented China on the UN Security Council…. Who actually took the decision to go to war in Germany[?]… ‘Structural factors’ still require some kind of mechanism exerting pressure on the actual actors…. Mark Harrison…. “No country went to war for commercial advantage. Business interests favoured peace in all countries. Public opinion was considered mainly when the leading actors worried about the legitimacy of actions they had already decided on. If capital and labour had been represented in the Austrian, German, and Russian cabinets, there would have been no war.”
The capitalist bourgeoisie did not have the final power in Germany (let alone Austria or Russia). And the small and specific group of decision-makers is identifiable…. Fritz Fischer… [argued] that Germany had already taken the decision to go to war in 1912, based on a high-level meeting that year which seemed eerily to reflect much of German behaviour in July 1914…. In all three [of] Germany, Austria, and Russia, a feudal-agrarian-military elite governed over an increasingly bourgeois-industrial society (but especially in Germany). Those decision-makers held the unilateral power to go to war. And they took the decision unaccountably. When it came to matters of war, it’s not even clear that the East-Elbian Prussian Junker class really cared about the opinions of the country’s industrial and banking magnates.
I must confess I am considerably more sympathetic to Hobson (if not to Luxemburg and Lenin). As I read Hobson, his argument goes thus: (1) Income inequality leads to underconsumption–which means that investment and government purchases must be high share of national income in order for anything like full employment to be maintained. (2) Governments that do not maintain near-full employment most of the time are likely to fall. (3) Governments that do maintain near-full employment most of the time are likely to persist in office. (4) Imperialist governments that spend public money on overseas wars for vent-for-surplus colonies are likely to have higher shares of exports, investment, and government purchases in national income. (5) Militaristic governments that seek military advantage over other European powers are likely to have even higher shares of government purchases in national income. (6) Thus the political-economic logic of underconsumption puts pressure on the political system to produce more high politicians in office who like to build, play with, and ultimately use their military toys.
This seems to me to be not implausible, in contrast to the Lenin-Luxemburg version of the argument, which I agree is very implausible.
Must-Read: : Mortality Inequality: The Good News from a County-Level Approach: “Inequality in mortality rates are a good indicator of economic wellbeing…
…but most of the existing literature does little to distinguish between developments in infants and adults. This column uses extensive US data to analyse mortality trends across all age groups. It finds that the health of the next generation in the poorest areas of the US has improved significantly and the race gap has declined significantly. Underlying explanations include declines in the prevalence of smoking and improved nutrition, and a major cause is social policies that target the most disadvantaged.