Tuesday, 11 February 2014

What's the inequality problem?

Inequality is a big issue these days. Lots of people are struggling to understand what it means, and what that might mean for public policy. The occupy movement, which was itself a response to the GFC, is probably responsible for much of this current wave of awareness.

Media attention is fickle though, and judging by some of the crap that gets coverage this inequality thing could all just be a non-issue media beat-up - amirite?

Yes yes, it could be. But "the media" do get it right sometimes and symptoms should be checked out anyway. The road from issue to policy is long & winding though. 

Problem definition is the first step on that road. It is tempting but foolish to jump to solutions. Following the spirit of Ernest Rutherford, we need to start by thinking hard about the problem. So let's have a go at inequality, specifically income inequality.

Income inequality has increased significantly in the USA (recently) and NZ (ages ago). Redistribution policies via the tax and welfare systems must have softened the blow, but it was still a biggie. That's my assumption. 

So what asks Paul Walker, twice, eager to profess ignorance though he obviously reads widely. Why should we care about inequality?

Poverty is one answer. Unless the whole country grows fast enough, an increase in inequality will push some into poverty. How sure are we that the worst-off citizen has a better deal now than they did before? If you take a Rawlsian view, progress has not happened unless the worst-off are better-off than they previously were.
Ghost of Paul Walker: "Oh, but anyway, that doesn't matter. Because (a) consumption, not income, (b) poverty is relative, (c) social mobility, and (d) let me take another look; I'm sure there's a 'd' down there somewhere."
Get the idea? In the immortal words of the Dude, there are "a lotta ins, a lotta outs, a lotta what-have-yous."

I agree, and they need to be considered, otherwise we'll stuff up the policy response. So let's do that. Paul is quite right to insist on rigorous analytical standards. Policy changes definitely should be properly analysed/justified.

But even while this is (hopefully) going on, let us notice that the multi-dimensional nature of "inequality" presents a huge challenge to analysts, for two reasons
  • it's complicated - causes and effects of inequality are both relevant; and
  • serious analysis might be revolutionary. 
Regarding the latter point managerialism is endemic, and it drives inequality in two ways:
  • by stretching out the top end of the income distribution; and
  • by suppressing bottom-end wages to enhance shareholder returns & justify managerialism.
So here's the deeper issue. Once you start thinking seriously about inequality, you will end up asking some very fundamental questions about how our society is organised and whether that should change. It seems to me that a proper inquiry into inequality would raise revolutionary questions.

So I'm not surprised that Paul doesn't want to talk about it, but I also think this attitude is unbecoming of anyone claiming to practice the virtues of economics. I get that you might just not care, but don't go suggesting that there's no argument when you haven't even thought about it seriously.

Also, kudos to Matt and Bill who both sense there is something interesting in here.

21 comments:

  1. I'd thought that Paul was asking why we would care about inequality per se rather than about poverty. If poverty is why we care about inequality, why shouldn't we just care about poverty? Or, in a world in which you get your preferred policies to deal with poverty, is there any remaining reason to care about income inequality?

    I also wonder why it's *income* inequality that has folks so fired up when there are plenty of plausible other inequalities worth worrying about that aren't sufficiently strongly correlated with income to address them through income measures. For example, ugly people have way worse dating prospects. I remember seeing data from OKCupid that moving from low to high on attractiveness had the same marginal effect on dating as getting something like $150k more in annual salary. Would you rather be a poor musician who dates easily, or a hedge fund manager putting in 16 hour days and utterly unable to date? I'd pick the former, but transfers run from the latter to the former.

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  2. Hi John,

    A couple of references you might find interesting -

    http://wer.worldeconomicsassociation.org/papers/the-evolution-of-economic-inequality-in-the-united-states-1969-2012/

    http://www.eastonbh.ac.nz/2013/12/economic-inequality-in-new-zealand-a-users-guide-summary/

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  3. Hi,

    I suspect Paul is saying "let's not treat some measure as a silver bullet solution to the worlds ills". He is 100% right in this view.

    The key things economists should be doing are articulating trade-offs, and articulating them in a way that captures the essence of what trade-off exists. Doing so on the basis of synthetic aggregates like GDP and income inequality is unbecoming - they are symptoms that bear only a functional relationship to what we do care about, social welfare!

    However, a lot of what we see is people using static measures of statistical dispersion and acting as if this captures the "truth" of fairness. Such an attitude, without careful thought on mechanisms and the translation to social welfare, is likely to lead to bad policy!

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  4. I'm hearing fervent agreement that inequality is a multidimensional set of symptoms, and that the underlying problem(s) are still eluding definition.

    Thanks Jeremy for the links & Eric for the example.

    Matt: I think you'd agree that economists can't be of any help at all until there is a clearly defined/articulated problem. Let's ignore the tossers and get started on problem definition.

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    1. Indeedy - and I suspect that we will run into a "myriad of problems" which we will need to articulate through trade-offs. And I'm good with that - ultimately that is what economists dream of trying to articulate in the first place! Glad to see the amount of movement thinking about these issues is getting on NZ economics blogs.

      I'd just say that I read Paul's post as saying almost exactly the same thing you are - before saying we should "solve" anything lets define what the problem is :)

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  5. Cheers Matt. I look forward to more discussion on this topic.

    It is interesting how others read Paul's posts. I got the strong impression he was saying "this inequality stuff is all crap and I can't figure out why anyone sensible would waste their time on it".

    If so, that leads to the same place as us (problem definition), but he arrives with very different plans (rock throwing rather than wrestling with the issues).

    I would love to be proved wrong, and will be keeping an eye on Paul's site to see if he does get constructive.

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