Welcome friends!
Did you see the interesting article by Nobel prize winning economist Joseph Stiglitz in the New York Times recently in which he argued economic inequality was interfering with our recovery from the big recession we had a few years ago? Pretty interesting stuff, but what really caught my eye was the way it seemed to me to tie into some of my earlier musings about microeconomic theory and its relationship to macroeconomic theory.
First let me summarize a few salient points from Mr. Stiglitz’s article, just to pique your interest in reading it yourself. (Which you definitely should.) In his introductory remarks he notes “even the free-market-oriented magazine The Economist argues ... that the magnitude and nature of the country’s inequality represents a serious threat to America.” A little later he marvels that “even after four decades of widening inequality and the greatest economic downturn since the Depression” we still haven’t managed to do anything about it. Moving to the heart of the matter, he argues that inequality is holding back the economic recovery in four ways: 1) “The middle class is too weak to support the economic growth that has historically driven our consumer growth.” 2) The middle class is too weak to invest in the future through education and starting or improving businesses. 3) The weakness of the middle class is holding back tax receipts, “especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks.” 4) “Inequality is associated with more frequent boom-and-bust cycles that make our economy more volatile and vulnerable.” He also notes in passing some other interesting tidbits relating to distributional issues, such as that “children in other rich countries like Canada, France, Germany, and Sweden have a better chance of doing better than their parents did than American kids have” and that more than a fifth of American kids live in poverty, which is apparently “the second worst showing of all advanced countries” and puts us behind countries like Bulgaria, Latvia, and Greece. (OK, don’t get all huffy on me now. I’m sure he didn’t mean there was anything wrong with those countries; he was just making an observation that might be a little surprising to some people.) He also touches on the rather anemic and unbalanced recovery we’ve been having thus far, remarking that ever since the recovery began “most of the increase in the nation’s wealth has gone to the very top.” (I think one can actually say that for most of the increase in the nation’s wealth over the past three or four decades but that’s neither here nor there.) He goes on to suggest there are all manner of “excuses” for inequality and notes specifically the position of those who feel trying to do anything about it will make us all worse off. He characterizes those excuses as “self-serving, ignorant falsehoods.” He then addresses those who have difficulty with the idea of evaluating particular market results with the observation that “market forces don’t exist in a vacuum - we shape them,” and he argues we can either shape them positively, as some other countries have, or negatively, as he implies we have. However, he ends on a positive note with the following observation: “The good news is that our thinking has been reframed: it used to be that we asked how much growth we would be willing to sacrifice for a little more equality and opportunity. Now we realize that we are paying a high price for our inequality and that alleviating it and promoting growth are intertwined, complementary goals.”
Wow, that’s a lot to think about coming from a professional economist. Usually when we hear from economists we hear from the Panglossian University of Chicago “Bubble, what bubble?” type. You know the sort of thing I mean. “Whatever happens on the market (inequality, bubbles, recessions, depressions; doesn’t matter) is by definition socially optimal; so don’t worry, be happy.” I have to admit I had no idea our thinking had been reframed in the manner Mr. Stiglitz describes. I guess I haven’t been following things very closely. Back when I was going to school the generally accepted view was that any attempt to “interfere” (yeah, I know; favor a particular result much?) with whatever distributional results happened to fall out of what we all considered a near enough approximation to a perfectly competitive market system would inevitably destroy the incentive system and unleash all manner of dire economic consequences. Indeed, I remember one of my undergraduate acquaintances explaining what would happen if we ever tried to address inequality with a bit of folk theater he had picked up from his local pastor: “You want more equality? OK, here’s your share: a nickel.” (It works better if you’re there in person and can smirkily brandish a nickel at the appropriate moment, but you get the idea.) I recall at the time I wasn’t necessarily convinced about the size of the payout. Why would it cost so much we’d all end up with only a nickel? But it did seem generally plausible to me that if we tried to do something different from whatever we were currently doing then there would be some cost, so I bought into the general idea we would basically have to buy reductions in inequality by giving up some output. I recall that as a liberal (yes, even then) I wasn’t as outraged at the notion of this sort of tradeoff as some of my more conservative companions, who I think considered the idea of having to pay something to reduce inequality conclusive proof we should never even consider such a thing. My thinking at the time was we spend resources to accomplish all manner of other social ends, reducing the number of murders and so on, so if we happen to be concerned about inequality for one reason or another (such as holding utilitarian ethical beliefs and I don’t mean the faux utilitarianism of professional economists but real utilitarian beliefs, or associating inequality with social instability or various other social ills) then I suppose we should be prepared to pay a little something to address it. But I guess none of us were thinking at all about any countervailing macroeconomic benefits that might arise from reducing inequality. So it’s nice to know at least some rather accomplished economists now believe there really is no such tradeoff and that if we happen to be concerned about inequality we could address it while simultaneously improving our overall economic situation. Well, I suppose it’s more than just the absence of a tradeoff, isn’t it? It’s a pretty good reason to reduce inequality even if one doesn’t see any ethical problems with inequality, per se. Might put a little something in all of our pockets.
Thinking about this evident lack of coordination between the microeconomic (market incentives) and macroeconomic (total demand) strands of economic thought relating to addressing inequality got me thinking once again about the strand that supposedly involves tradeoffs just on the microeconomic side. That would be the argument that underlies that nickel argument I was just discussing. More generally, I’m thinking about the type of argument in which pursuing certain social policies, such as reducing inequality, that do not involve accepting free markets (by which I mean in both labor and product markets) leads to an ostensible tradeoff between whatever social goal one has in mind and economic “efficiency” (in the sense of so-called Pareto efficiency if one wants to get all theoretical about it). I’ve tried to discuss the aspects of this argument that seem intellectually troubling to me before in some of my other posts (see the posts tagged with the redistribution label), but rather than just going over it again I thought I’d get all loosey goosey this time and just talk about what I think is going on in a more metaphorical way. So let’s do a little thought experiment this time.
Imagine you’re in a car and you can either drive directly off a nearby cliff or take a road that goes in a roundabout way to the next town. Now if you’re talking about getting to the bottom of the cliff then just driving your car over the edge is definitely the most efficient way to get there. Yes, you could rent a hot air balloon, wait for the wind to go in the right direction, waft over the cliff, and then jump out of the basket, but that’s all rather complicated and costly. On the other hand, if you’re talking about getting to the next town, then driving your car along the roundabout road I just mentioned isn’t really the most efficient way to get there. If you weren’t in your car but at the airport, which is unfortunately currently closed, then you could jump on a plane and get there much quicker and at lower cost. Now in this world it so happens economists focus on transportation rather than on economic issues, so what would economists make of the problem of deciding what to do in this case? Well, they might start by explaining they consider the choice of destination to be outside their professional purview because it would involve making what I suppose one might call “inter-destinational” value judgments, which are impossible under their chosen metric of value. So they can’t really talk about the relative merits of the bottom of a cliff and the next town. Indeed, they prefer to just talk about destinations X and Y, which they consider theoretically equivalent. Anyway, they’re quite certain a UFO exists that can easily take one at little or no cost between any such destinations one might choose, so talking about destinations is not only outside their purview but is also just not really very important. (No, they’ve never seen this UFO but they’re economists, dammit, not aviation investigators.) They go on to explain you could choose the roundabout road to X (i.e., the town), which would be inefficient, or you could choose the more direct path to Y (i.e., the bottom of the cliff), which would be efficient. Now they certainly wouldn’t want to tell you what to do; that’s up to you. All they know is you can choose to be efficient or inefficient. Oh yes, and they top if off by reminding you that even if you were to go to Y when you really wanted to go to X you could easily take the low cost UFO from Y to X with no problem at all. But, if you still preferred to be inefficient rather than efficient for no apparent reason whatsoever, such as perhaps being an idiot of monumental proportions, then that would be your choice. All they ask is that you keep in mind there would be some tradeoffs in terms of efficiency. So that’s basically how the intellectually unwary in our little parallel universe end up at the bottom of a cliff waiting for an imaginary UFO that is never going to arrive. The moral of our story is that it’s rather confusing to start throwing around words like “efficiency” before you have a goal in mind and that once you have a goal in mind it’s a lot easier to talk sensibly and realistically about the best way to get there.
Did I get a little too clever for my own good just then? Wouldn’t be the first time, and I’m pretty sure it won’t be the last. Translating into economic terms, I’m thinking of the starting points (i.e., the car and the airport) as beginning resource distributions. You’re at one (the car) and not at the other (the airport). The methods of travel are the market structures (i.e., adopting the “efficient” solution means adopting a free market structure and adopting the “inefficient” solution means adopting some type of modified market structure). The ending points (i.e., the other town and the bottom of the cliff) are final Pareto Optimal market results about which one has preferences since one is operating under a coherent ethical system that implies beliefs about the distributional issues that distinguish them. The UFO represents the transfers that can theoretically take one from one Pareto Optimal market result to another Pareto Optimal market result that economists are always waving their hands at. Oh let me just spell it out for my more prosaically minded readers: I’m saying it’s not really just a matter of adopting free market arrangements irrespective of where you would like to be in terms of distributional issues with the idea you’ll just move things around once you get to any free market result, if necessary. You need to know where you want to go, which involves stepping outside the framework of economic theory, and then you need to think about the best way to get there, which might involve free markets, or maybe free markets with transfers, or maybe non-free markets for labor but free markets for products, or I suppose if it’s just certain goods you’re worried about in a distributional sense then maybe non-free markets for certain products but free markets for labor, and so on. If the metaphorical airport is open, that is, if we already have a distribution one finds ethically unobjectionable then, yes, a free market is the way to go. If it’s not then the issue is a bit more complicated. Sorry to muddy the water, but if you think the problem is any simpler than that I’m afraid you may be deluding yourself.
So why do so many people seem so ready to accept the idea of these phantom tradeoffs? Well, if we’re talking about the US, I suspect part of the reason is many people in this country are just very uncomfortable talking about distributional issues. Indeed, I suspect the vast majority of people who see red whenever they hear the word “redistribution” are not thinking at all about the supposed impact on overall economic growth or Pareto efficiency or anything of the sort. I suspect they’re thinking mostly about their own ethical beliefs relating to our distributional system, which I suppose one might infer are that the people who currently have economic power should have it and those who do not should not. However, for some reason they don’t like to say as much, so they jump on any theoretical result that offers the possibility of linking the distributional issue to some broader issue they think may be less ethically controversial. But that just leads to so much confusion. Look, it’s alright if you have beliefs about distributional issues. Everyone does. Economists can profess to have no such beliefs in their professional capacity as economists because in that capacity they’re acting as only half a person, ethically speaking. That is, they’re just not looking at the entire range of ethical issues one needs to consider if one is going to come up with a coherent social philosophy. They hit above their intellectual weight in the context of popular social philosophy because they’re sloppy when it comes to ethical issues and other people don’t notice or at least profess not to notice. But you and I are in a different situation. We want to be intellectually honest and we need to come up with a coherent social philosophy. So just speak up for your ethical beliefs and I’ll speak up for mine and we’ll work something out. If certain economic phenomena are legitimately linked to certain other economic phenomena then that’s fine, we can discuss those and take them into consideration. For example, if reducing inequality is linked to increasing overall economic output then that’s good to know because we now have two things we might consider ethically relevant and a positive argument tying them together, so we have lots of things to talk about in that case. But let’s not go about discussing phantom relationships and tradeoffs simply because we don’t like to talk plainly about our distributional beliefs. That’s just silly.
References
Stiglitz, Joseph. Inequality Is Holding Back The Recovery. New York Times. January 19, 2013. http://opinionator.blogs.nytimes.com/2013/01/19/inequality-is-holding-back-the-recovery/?src=me&ref=general.
