Lane Kenworthy, Prosperity, and the Infinite Forms of “Redistribution”
I haven’t beaten the drum lately for Lane Kenworthy — perhaps the best researcher out there on the economic effects of income and wealth distribution. His years of careful, diligent (and voluminous) statistical and analytic work, tapping the best data sets available, and his cogent, coherent explanations of his findings, should get a lot more attention in the econoblogosphere. Lane Kenworthy rocks.
He’s especially good at trying to suss out causation, which he will be the first to acknowledge is always a difficult business in a discipline that’s inevitably dependent on retrospective data — where you can’t rerun the experiment, much less run it from the start with a randomized control group. (And natural experiments/control groups like the ones that Arindrajit Dube exploited to look at minimum-wage effects — adjacent counties across state lines with different minimum wages — aren’t thick on the ground.)
Nevertheless there are some excellent statistical techniques that can give a good indication of causation. Well-executed, they can really move your Bayesian priors. At the very least, they’re excellent at ruling out causation. Put simply, if there’s a significant negative correlation between presumed-cause A and presumed-effect B (or no correlation at all), you can feel fairly confident that A didn’t cause B. It’s difficult to prove causation with correlation; it’s much easier to disprove causation — to falsify a hypothesis.
But enough with the philosophical throat-clearing. Let’s look at one recent paper (PDF), a multi-country multi-regression analysis comparing rich countries, looking at income inequality and middle-class income growth. He finds that from the late 70s to the mid 2000s (all emphasis mine for easy scanning):
…an increase of 1 percentage point in the top 1 percent’s share of pre-tax income reduced growth of income for the median household by about USD530. In the most extreme case-the United States-the top 1 percent’s pre-tax share increased by 8 percentage points between 1979 and 2004. According to this estimate, that may have reduced median household income growth by a little more than USD4,000. The actual rise in the United States during those years was USD8,000, so the estimated impact of rising income inequality is not trivial
In other words, if the 1%’s share of income had not grown by 8%, median household income would have grown by $12,000 instead of $8,000. This bears out Lane’s rather intuitive, common-sense assertion earlier in the paper:
Household income growth is not a zero-sum game because the pie tends to get larger over time. Disproportionately large gains at the top, however, are likely to come at least partly at the expense of those in the middle.
Always careful, he adds:
At the same time, the data suggest that the income-reducing impact of a rise in top-heavy inequality has been overshadowed by the income-boosting impact of economic growth and of increases in net government transfers.…even after adjusting for these other influences, change in top-heavy inequality is not a very good predictor of growth in middle-class incomes.
So yes: income inequality in and of itself seems to have reduced middle-class income growth significantly. But obviously, of course, that’s not the only economic effect at play. (Only a wild-eyed, ideologically blinded, axe-grinding, bought-and-paid-for Republican would make that kind of foolish claim about some particular economic effect.)
Which brings me to another recent paper (prominently citing the previous one), that questions the Left’s rhetorical emphasis on (in)equality:
I fear the American left’s recent move to put income inequality reduction front and centre might be harmful rather than helpful. It may foster a conviction that the key to addressing America’s social, economic and political problems is to reduce the top 1 per cent’s share or the Gini coefficient. That could distract attention from more direct and effective efforts to address those problems.
Such efforts include fully universal health insurance; improvements in eligibility, duration and benefit level for various social-insurance and social-assistance programmes; wage insurance; early education; enhanced financial support for college; a minimum wage indexed to prices; an expanded earned-income tax credit indexed to average compensation; and monetary policy less tilted towards inflation avoidance. Policy changes like these would go a long way towards improving economic security, enhancing opportunity (and mobility) and ensuring shared prosperity in the US. Inequality of political influence could be lessened via direct reforms, such as reversal of the Citizens United decision, introduction of a strong transparency rule and public funding for congressional election campaigns.
I think Lane’s right. I’ll say it again: if you talk about fairness and equality, Americans change the channel. (They’re only somewhat more open to hearing about “opportunity.”) They want to hear about prosperity — especially widespread prosperity. And the programs Lane points to have a decades-long history of delivering widespread prosperity. Expanding those programs (and funding them with a tax system that actually is progressive) would make us all more prosperous.
And that’s exactly what Lane’s first paper demonstrates. No: just reducing inequality through redistribution doesn’t make everything peachy. No duh. (Though in the current environment of concentrated wealth and income it does improve things a lot in and of itself.) If you really want to increase prosperity, you use methods of redistribution that increase prosperity — like the programs that Lane details above. (Plus publicly funded infrastructure, research, etc.)
So the two things aren’t mutually exclusive. You implement programs that deliver widespread prosperity in and of themselves, and distributive effects also deliver the prosperity benefits of reduced wealth and income concentration. It’s a virtuous cycle, rolling forward on a path to American prosperity. Rinse and repeat.
In brief, widespread prosperity both causes and is greater prosperity.
Cross-posted at Asymptosis.
another way to “reduce inequality” that would be an easier sell than “taking from the rich” even for good causes, would be to fight “fraud as a business model” which even the rich can understand… if you explain it to them slowly… is not good for them.
Restoring some progressivity to the tax code would be a good thing, particularly if we started treating gains on most type of ‘capital’ as income. For example we seem to have a system that uses the same label for exotic financial instruments that have no object at all (and this by clear design and intent) except to extract rents off the top of other financial transactions in ways that don’t at all facilitate the financial worlds original task of providing liquidity. As compared to actual investment in production. Nope there are all just capital assets.
But progressivity in taxation shouldn’t become a goal in itself as it did with Britain’s Post-War Super-Tax (which in some cases had marginal rates above 100%). On the other side there is just as much danger, and much more misery in simply fetishizing capital in the ways that the Ryan Budget would do, that is by eliminating all taxes whatsover, Instead we need some utilitarian and data based analysis that would take the Laffer Curve seriously and not as a all purpose demonstration that wherever taxes on capital are they are too high.
But as important as all that is it pales in comparison with the single most important mindset that we can adopt given the current basic structure of the American economy:
More Jobs. At Better Wages.
Now it might be that after initiating this experiment and measuring it in ways that will make Steve and Lane happy we might find that we had missed the theoretical maximum amount of growth in GDP. On the other hand the immediate proximate effects would have been that many more people had jobs. At better wages.
Somehow something that was almost a societal concensus after WW II, the utilitarian foundational principle of “Greatest Good for Greatest Number” simply got discarded for some sort of Neo-Mercantisism that measured ‘Good’ simply and totally by ‘National Income’. And a dictionary that spelled ‘General Prosperity” as ‘Pareto Optimized’ or something. And slammed us right back into the old debate of the Nineteenth Century called “The Standard of Living Debate”. In short were industrial workers in England actually better off than their forebears in the country because they had access to goods that were previously considered luxuries (esp. tea)? If this reminds you of current arguments that say that poor people are not really poor becaue J.D. Rockefeller never had a cell phone well welcome to my world. Because it all just smacks of the same post-facto justification for inequality that have been advanced for centuries – and BTW well before the Industrial Revolution and the evolution of Capital as we know it today.
Bruce Webb: AGREED.
>>> fully universal health insurance; improvements in eligibility, duration and benefit level for various social-insurance and social-assistance programmes; wage insurance; early education; enhanced financial support for college; a minimum wage indexed to prices; an expanded earned-income tax credit indexed to average compensation; and monetary policy less tilted towards inflation avoidance <<<
Seen this before. Cart before the horse time. If we had the political MUSCLE to do all that we would also have had the labor market bargaining MUSCLE to avoid income so-called "inequality" (I call it the Great Wage Depression) in the first place.
Regional airline pilots — with as much as $100,000 of training and years of building up flight hours (newly raised to 1500 minimum) on instructor and other odd jobs or renting — get $500 a week typically and are squeezed for more work and less pay (like everyone else) all the time (while hoping to someday move up to the majors). Unionized truck drivers earn more than twice that — plus health and pension benefits.
Teamster Union National Master Agreement mimics the centralized bargaining found on continental Europe (and French Canada and Argentina and Indonesia) where everyone doing the same kind of job in the same geographic area works under one commonly negotiated agreement.
You are for this or you are for nothing — NO POLITICAL OR BARGAINING MUSCLE. So let’s start talking about centralized bargaining. We all would if the topic were hot already. Only way to make it hot is to make it hot.
BTW, someday, someway we have to re-introduce the kind of confiscatory taxation that existed in the US after WWII. Germany is the paragon of income equality (most thorough system of collective bargaining) but is the pits of accumulated income inequality — apparently because its estate tax is on 15-20%, according to Piketty.
After we get the $15 an hour minimum wage it may be possible to raise the issue of centralized bargaining with progressives — because one big happening will make the next SEEM (subjectively possible*). Ditto for reminding all how nice it was when taxes prevented concentration of wealth — once we have centralized bargaining.
(* Tell male humans — or human males — that you would like to change the rules of a baseball game right before the start and they will tell you you are crazy. Tell female humans and they would probably be willing to at least take a look.
(My other bigaboo: hunting pack behavior: males jump right past any discussion of how a practical innovation can be sold to refusing to think it is possible — skipping over any and all practical discussion in between — if the rules of society have to change too much. This was undoubtedly an important survival behavior when all had to get together to chase and kill small animals that were better than them physically, or not get killed by larger. Toughest thing to get past in politics.)
Denis
if it’s the toughest thing to get past in politics maybe we need to just recognize that that’s what we are… animals not as far evolved as we like to think.
i agree with you about collective bargaining, but if you can’t sell it to the workers (again) the politicians will never take you seriously… nor of course will the people who own them.
Denis
i forgot my point: you can’t sell it to the people who count if you talk about “confiscatory taxation.” even the poor don’t like the sound of that.
I don’t believe there is any legitimate reason to think that the extremes in pre-tax inequality in the U.S. have any beneficial impact on growth , and thus , “widespread prosperity”. Redistribution , via cash or in-kind benefits , is a poor second choice to improving market distributions – nobody likes redistribution. Upper-income earners resent supporting the “takers” and lower-income recipients of the benefits would much prefer to support themselves via decent wages for their work.
How do you change market disribution ? The same way we did it in the past – steeply progressive income taxes , which works both mechanically and through cultural norms. Sometimes it pays to attack a problem directly , instead of trying to finesse a solution.
Yglesias , unexpectedly , had a good piece on this recently :
http://www.vox.com/2014/4/18/5620702/case-for-confiscatory-taxation
“…an increase of 1 percentage point in the top 1 percent’s share of pre-tax income reduced growth of income for the median household by about USD530.”
It’s interesting he uses pre-tax income. What about income after taxes?
Anyway, the regressions are weak in explanatory variables. I’m sure, many significant factors are omitted.
PT perhaps you could explain, using real numbers, why the regressions are weak. And then if you would why anyone would be required, or given your posting history even to inclined, to accept on faith ANYTHING you were “sure” of.
Your last sentence would SOUND to the uninitiated to mean something. But I could train a. Capuchin Monkey to string together equivalent terms from the index of any Principles text you could cite. It has all the rigor of a claim “Nyah, Nyah, Nyah, I can’t HEAR you!
Or you could prove me wrong by resetting it with some rigor. Starting with the specific regressions that are weak and perhaps a selection of those omitted factors.
Or perhaps why post tax income would likely have any differential impact n the calculation. Instead you just pose the question to US. Maybe YOU could take a first stab at it.
Coberly,
50% of workers said they wanted to unionized in a poll a few years back. Somebody explain to Americans about the really effective way to unionize — the way that keeps Wal-Mart from undercutting the wages of until-now, middle-class supermarket workers, for instance — legally mandated, centralized bargaining, and the might kill for it. 🙁
Bruce, I don’t see any explanatory variables, just correlations using pre-tax income. So? The correlations explain nothing.
For example, it’s possible when the top 1% of income rises substantially that causes the top 20% of income to rise substantially too. More taxes are collected and spending on disincentives to work increase, e.g. for the bottom 40%, which reduces median income.
Bruce,
Why do you bother? It is a annoying. I have to admit I am tempted.
@Denis: “the centralized bargaining found on continental Europe”
Maybe you missed this post:
Its called, “Fixin’ The Roads” Folks. They’re full of holes and the bridges are falling down. Mud slides and cave ins, ya see it in the news most every day and its caused by NEGLECT. Failure to spend what it takes to keep things up to snuf. Its not cheap either. Want to KEEP what WE have built? Then those TAXES need to be raised to pay for that upkeep.
Gosh Darn:
I remember having a similar conversation with someone on one of Lane’s paper just recently. I will say what I said then too, job creation is the key to much of this. Job creation with good pay and much of the redistribution goes away as well at tax revenue issues. With Participation Rate at ~63%, we suffer a dearth of contributors to demand and tax revenues.
This comment:
in my opinion does not have a foundation to support what is being said. I would like to believe Lane is correct as it would buttress everything I have said previously concerning the ~1 million taxpaying households making >$500,000 annually. Steve point me to a key unlocking my dilemma of understanding.
I enjoyed the earlier conversation.
Run, you’ll have to explain why you’re skeptical.
Lane has said many times, btw, that good-paying jobs are key to addressing inequality.
What do you propose?
He proposes, among other things, MW and EITC. Those not only boost wages, but their demand stimulating effects would increase the number of people producers need to satisfy that demand.
And yes: just directing more of the flow to the lower end (no matter how it’s done) will in itself increase demand.
Steve:
Inherently, what Lane says appears to be true and I have always felt it was true. I think you already know this. I am looking for something more concrete as to why this:
occurs. Why does one impact the other? What did I miss as to the cause of a decrease of House Median Income when income is skewed heavily to the 1 percenters. When I go out and pitch this, the comments will be “why? why does this occur?” Everything may point in this direction; but, I have no foundation for it occurring.
I see Mark is keeping late nights reading blogs. I think he is younger than us so I kinda wonder why he would be indoors reading AB?
Throwing money at a road won’t fill the holes, or prop up a bridge. It takes LABOR and lots of it. The Rich won’t be out in the hot sun with a shovel or on that bulldozer. That’s the Poorman’s lot in life, the WORKER. Pay him well and the economy WILL follow.
PT:
“For example, it’s possible”
Well lots of things are possible. But that doesn’t get us anywhere. It seems to me that you have two possibilities here. One is to go all empirical on us and produce a competing theory that BETTER explains the data. The other is to go Popperian/Positivist on us and falsify this proposition. Both would be ‘scientific’ by most conceptions of the word.
But airily suggesting that something is “possible” doesn’t do anything at all. It is not the job of the promoter of any given proposition to eliminate any and all alternatives, it is only their responsibility to be open to valid critiques. Which don’t have to always and everywhere meet the criterial of the Falsificationists. But at least has to explain the data as well or better. This is particularly true since crtics of Siketty et al tend to operate right from posited ‘laws’ derived from ‘first principles’ and dismiss the historical process and data discovery from the git-go.
Run let me throw out a possible partial answer here to your question:
“Why does one impact the other? What did I miss as to the cause of a decrease of House Median Income when income is skewed heavily to the 1 percenters. ”
Historically and I suggest now the 1% tends to purchase a set of goods that is not produced by the working class as such. For example the wealthy have often spent large sums on art and jewelry and existing antique furniture in ways that don’t necessarily inject that equivalent amount of money into the larger economy. That is the process of billionaires making certain painters and furniture brokers into millionaires may not have the same velocity effects as taxing them on that same money and spending it on infrastructure. That is when I see Yglesias and others arguing that ‘spending is spending’ I go “Well not if it is just spent purchasing some other rich guys wine cellar so that he can buy that 1932 Bugatti.
That is to the degree that luxury spending never reaches the escape velocity that would take it out of the orbit of the top 1 or 5% it may just be chasing its own rocket trail. Sure some will leak out, the tips to the maitre d’ and the sommelier and the commissions to that genius in marble work will in part end up buying ordinary goods produced by ordinary workers. But there might well be some rate, flow and volume obstacles along the way.
For example it wasn’t like Louis XVI and Marie Antoinette weren’t SPENDING their income. It is just that maybe fattening the purse of the middle man who bought those sables from the factor who ultimately paid a pittance to some Siberian trapper didn’t exactly increase the velocity of money in the food stalls of Paris.
And yes this is speculative and certainly incomplete. On the other hand a system that measures the purchase and sale of a Matisse by one rich guy from another as some contribution to national income is a little crazy.
Bruce, the statement and my response to the statement is plausable, and may be one of many statistically significant factors. Certainly, the hypothesis wasn’t tested in the article above, which is very weak.
“An increase of 1 percentage point in the top 1 percent’s share of pre-tax income reduced growth of income for the median household by about USD530.”
It’s possible when the top 1% of income rises substantially that causes the top 20% of income to rise substantially too. More taxes are collected and spending on disincentives to work increase, e.g. for the bottom 40%, which reduces median income.
Bruce, do you think affluent people or low income people are more likely to buy a new car, for example?
And, I think, the tax on a new car is high, while a two-year old used car can be a good deal for a lower income worker.
Also, I may add, taxes and the costs of regulations are embedded in the price of new goods. It’s not just a sales tax, for example, along with other fees.
Late to this one for me but:
“Such efforts include fully universal health insurance; improvements in eligibility, duration and benefit level for various social-insurance and social-assistance programs; wage insurance; early education; enhanced financial support for college; a minimum wage indexed to prices; an expanded earned-income tax credit indexed to average compensation; and monetary policy less tilted towards inflation avoidance.”
I do not read anything in that as being activities that increase one’s prosperity. They are programs implemented to prevent the loss of one’s prosperity. They are programs implemented as means of reducing life’s risks as one works to provide their own prosperity.
That we refer to them in terms suggesting they are stand ins for the rewards of one’s labor is a big win for the conservative movement. They are necessary, they are properly a part of a healthy economy (an economy that is designed to help people be secure against the risk of living plus some left over for the expression and experience of individual freedom) but they are not alternatives if we are to accept the basic simplistic tenant of capitalism: hard work pays. To view these programs otherwise is to suggest a form of socialism as the dominate model to base our economy on and we all know the sour looks one gets from mentioning such.
We’re talking share of productivity when we talk income and income inequality. Even with the call for more jobs, it’s for not if share of productivity is not increased back to “equality” of 1 for 1. That was the equality. All else follows. But with it comes a massive middle class who then has the security to take on social causes like: environment, segregation, family planning, corporate crime etc.
Yeah, I get the EITC but it is still a means of not shifting the share of productivity. The tax code can not take the place of earned income from labor, it can not replace earned income from rise in productivity.
As to income tax. What is truly being taxed is the earnings and gains from productivity. Being that productivity and it’s increase is very much tied to government funded stuff, and that as one rises up the income line more of their income comes from increasing share of everyone else’s input to the productivity the income tax is a means of balancing the distribution of productivity earnings and gain. It is not confiscatory, it is not punishment, it is not stealing and all the rest any such words one chooses. It is one of the proper means for assuring that those at the top are not receiving excess productivity earnings or gains such that the ratio for those who earn all the productivity earnings from simply what their individual energy expenditures produce. That is 1:1.
As noted before, we used to use government to off load the risks of living as one looked downward of the income line. These programs suggested above were just that. Now it is, the thought is reversed.
As to why rising income with widening inequality, does not benefit all, how can it when inflation is considered and it’s viewed correctly as a widening of productivity gains vs rate of economic growth? If the 99 used to divide $0.91 and now they are dividing $0.76 it does not matter how large the pot gets as the increasing pot happens within the rate of total economic growth and inflation. As I think Bruce is saying, standard of living is relative to what is present today. If a refrigerator is standard and it now is more productive, that is not a rise in one’s standard of living. However, if over time the cost of a trash compactor comes down relative to one’s income (that is income rises to produce increased excessive earnings) such that there is a rising population with a trash compactor, then the standard of living rose.
With that, we are beyond this simple relationship because the capture of productivity is now codified with in the laws that create our economy. These laws have moved the control of productivity so that the capture of it’s earnings and gains are happening faster than the earnings generated and the rate of rise. As noted, the top 1% is pocketing money, claiming the earning at a rate faster than we as a nation are producing it. Their income has doubled faster than the GDP. There is no economic solution to this as it is completely related to the rules put in place to create this economy.
Bruce,
From a 1/ll/14, NYT article “The Vicious Circle of Income Inequality” by Professor Robert H. Frank of Cornell:
“One is that the higher incomes of top earners have been shifting consumer demand in favor of goods whose value stems from the talents of other top earners. Because the wealthy have just about every possession anyone might need, they tend to spend their extra income in pursuit of something special. And, often, what makes goods special today is that they’re produced by people or organizations whose talents can’t be duplicated easily.
“Wealthy people don’t choose just any architects, artists, lawyers, plastic surgeons, heart specialists or cosmetic dentists. They seek out the best, and the most expensive, practitioners in each category. The information revolution has greatly increased their ability to find those practitioners and transact with them. So as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.”
Steve,
Yes, Ken says “labor power is the strongest determinant of growth” — but does he offer any way to restore labor bargaining (and political) power to full balance with ownership (it really IS uncomplicated)?
It’s like Ed Lambert posing the same truth — but try to interest him in the only full power collective bargaining setup, successfully in place as long as 70 years and around the world and he talks of “cooperatives.” ???
Meantime I am a desperate American worker (or was; I’m 70). Here’s my experience as a taxi driver in America’s second-city:
One 30 cent raise in the meter mileage rate between 1981 and 1997 — at which 1990 midpoint the city began building subways to both airports, open up unlimited livery licenses, put on free trolleys between all the hot spots downtown, and, oh, yes, 40% more taxis. Similar outsourcing of our formerly good jobs (to ripped off immigrants) in New York City where I came from.
Centralized bargaining is the only mechanical structure that can actually solve all these problems (market and political) in one swoop. Does anyone here or anywhere want to begin to examine the way centralized bargaining might work in America — or how (easily) it might be sold and to whom. (I’m asking the human males to think outside the [pack hunting-social instinct] box — the female, individual gatherer humans can think for themselves).
BTW, not to belabor it everybody: please keep in mind that the E.I.T.C. transfers 1/3 of one percent of GDP $55 billion) — compares with a $15 an hour minimum wage which would transfer 3.5% ($560 billion). And nobody is going to lay off 45% of American labor over a 3.5% increase in overall prices.