Musings on Krugman’s Musings on Inequality and Growth
Paul Krugman is skeptical about the alleged negative effect of inequality on growth
there have been a number of studies that seem to find a negative relationship, all based on some kind of international cross-section approach (some with time-series aspects too). So what is my problem? In general, I have doubts about the whole growth regression methodology, which has lots of problems in identifying causation (remember, that’s the methodology behind the Reinhart-Rogoff debt-threshold paper). Beyond that, there just isn’t a striking, simple relationship between inequality and growth; all the results depend on doing fairly elaborate data massaging, which might be right but might also be teasing out a relationship that isn’t really there.
He then presents Krugmanmetrics — a simple scatter of data from a small set of rich countries. The scatter shows almost exactly zero correlation.
My comment: Ah a post on a topic which I know something about.
First, a warning to a possibly careless reader, don’t reject the alternative.
Second, the sample is much smaller than the one usually analysed. The literature generally considers all countries for which data on inequality are available (note I didn’t say “high quality and comparable”). There is an advantage of looking at otherwise similar countries with extremely different GINIs, but the tiny sample means tiny power.
I recall statistically significan negative simple correlations between inequality and growth — it isn’t always true that the data have to be massaged.
I think it is important that the alleged stylized fact isn’t reported only by lefties — at all.
OK now how about causation. I think one hint in the data (which wouldn’t show up in the sample analysed here) is that extremely surprisingly high enrollment in primary and secondary school in poor countries is correlated with low inequality and subsequent rapid growth (look for cites of Roberto Perrotti).
Extreme cases of high enrollment, low inequality and high growth are the usual suspects — Japan and the four little tigers. Here it is interesting that dictators who delivered low inequality and high growth were not at all perceived to be leftists. Chiang Kai Shek was beloved by the (now painfully moderate) Bush Sr so much that he shouts £unleash Chiang” when serving at tennis (his son Jeb demonstrated that he doesn’t know who Chiang was — clearly presidential timber). He was despised by the international left, the international center left and the international center. Another hero of equality and growth was late dictator of South Korea Park Chung Hee, again a reactionary hated by the center and left (definitely including me, but not, it seems, most South Koreans who have elected his daughter Park Geun hye President).
This would tend to suggest that it isn’t true that anything which reduces inequality increases growth. There is a large literature seeking and failing to find an association one way or the other between high taxes and growth (remember don’t reject the alternative). I have no idea about the association between strong trade unions and growth.
Finally a whole lot of the raw correlation is due to Latin America in the 80s. They had extreme inequality and extreme suffering during the 1980s debt crisis. Was this the business cycle messing up the regression or the causal connection ?
i would suspect that the correlation if any depends on where you are in the “growth” curve.
i think we had pretty high growth and pretty high inequality during the start up of the industrial revolution. on the other hand we had pretty low growth and pretty high inequality in the 1930’s.
so ask not what the countries did in the past, ask what is affecting things now, and is “growth” really the answer? maybe all we need to do is tweak distribution a bit, and get the criminals out of power.
Dean Baker also has some musings on Krugman’s musings and Sandwichman has musings on Dean’s musings on Krugman’s.
Inequality, Growth and Leisure
In response to musings by Paul Krugman on inequality and growth, Dean Baker asks whether taking more of the benefits in leisure time might skew the appearance of the data. That is to say if the value of leisure wasn’t excluded from GDP, those countries that took more leisure — and, incidentally, are relatively more equal — would have higher growth rates.
Ironically, Dean doesn’t have the time just now to check that one out. Sandwichman has time but not Dean’s virtuosity with data.
As Krugman argues, “there just isn’t a striking, simple relationship between inequality and growth; all the results depend on doing fairly elaborate data massaging…” There isn’t a striking result to be had from the data for a good reason. There isn’t a single relationship in the underlying reality. The results are also constrained by what questions are being asked.
The presumptive question seems to be whether inequality is good or bad for growth. Is that the only question worth asking? Is it the best question? Dean framed his question about leisure as a supplement. He remarks, mock apologetically, “there is nothing wrong with taking the benefits of higher productivity in the form of leisure rather than income.”
There must indeed be “something wrong” with taking the benefits of higher productivity as leisure. Otherwise, why would economists echo, decade after decade, the lump-of-labor refrain against the “fallacy” of reducing working time? If there really was nothing wrong with taking the benefits of productivity as leisure, then, hey presto, that boilerplate injunction would be superfluous — inappropriate, even.
Are economists ignoring the obvious?
Sixty years ago, Simon Kuznets — who won the Sveriges Bank (“Nobel”) Prize for his pioneering work in national income accounting — was puzzled by his finding that for a limited sample of industrially-advanced countries, inequality didn’t increase with growth. He was puzzled, in part, because ceteris paribus, “the cumulative effect of such inequality in savings would be the concentration of an increasing proportion of income-yielding assets in the hands of the upper groups.” This was the famous inverted “U”-shaped Kuznets curve. Subsequent research by Thomas Piketty has shown the curve to be an anomalous statistical artifact of the periodization and country selection.
There are a multitude of factors that could explain the Kuznets curve anomaly and it is doubtful that knot could ever be untangled. But let me suggest a factor candidate. The period in which the Kuznets curve prevailed was the period in which the eight-hour day became standardized in the industrially-advanced countries. Instead of looking exclusively at the relationship between growth and inequality, might there not be greater insight gained from investigating the triad of growth, inequality and leisure?
“There must indeed be “something wrong” with taking the benefits of higher productivity as leisure. Otherwise, why would economists echo, decade after decade, the lump-of-labor refrain against the “fallacy” of reducing working time?”
Does a company really want to pay 40 hours of work in 32 hours? I think we all know what the payoffs are in health, productivity, etc. Maybe I am missing what I really want to say here. The ratio is so small for direct labor.
Not to splash cold water on the whole discussion but isn’t lower income inequality a reasonable goal in and of itself for the economy? Isn’t the distribution of the rewards from the economy important?
Even if it could be shown that high income inequality results in higher growth, a highly dubious proposition but the one that was the stated reason for the 1980’s changes to economic policies summarized as “supply side economics,” wouldn’t the fact that it required high income inequality now disqualify it from consideration? Quite rightly?
And if I wanted to be really contrarian, I would point out that many of the same people who are currently puzzled about what has caused our current high income inequality, usually put down to economic factors unknown and apparently unknowable, are the philosophical descendants and in some cases the very same people who had no question in 1980 that the income distribution of the economy was largely determined by the federal government’s economic policies, taxation, support for unions, the minimum wage, trade policies, capital controls, etc. That income inequality wasn’t the goal of supply side economics, it was the means to achieve the goal of higher growth and lower unemployment, a goal that wasn’t achieved, but which the proponents are willing to wait another forty or fifty years more to see if they finally kick in?
i think you are correct in your underlying thesis as to the cause of the current inequality. and politics being what it is, efforts to correct inequality will probably result in a better policy than we have today.
but i need to say that “inequality” by itself is probably not important.
as long as the people had “enough” (including enough leisure) there would be no point in committing the error of “envy.”
i have tried to show here in the past that it is easy and natural enough for a person to become very rich by doing something useful for his fellow citizens at a cheap price and modest profit (as a percent of sales). i am not a supply sider… quite the contrary…. but i don’t think mindless envy is useful either in politics or for your personal happiness.
this does not mean that i don’t think something should be done about businesses with a criminal business model, or the ownership of the government by the very rich. or the general bad behavior of “unregulated” business. or the exploitation of power to reduce a large part of the population to serious poverty and the rest of the population to the slavery of grinding anxiety.
A cynic might even wonder if the goal of the 1980s “reforms” wasn’t so much to stimulate growth and consequently employment as it was specifically to undermine unions, dismantle progressive taxation and the social wage, etc. The failure to lower unemployment, then, wouldn’t be so much a failure as a windfall.
“i don’t think mindless envy is useful either in politics or for your personal happiness.”
But red herrings and straw man arguments are useful? I don’t see the point of this “envy” bullshit — other than to seek to discredit critics of undeserved privilege.
I am sorry you feel that way. I think if I wrote more clearly or you read more carefully you would feel better.
The propaganda from the left re “equality” is entirely based on envy.
To pretend that they are credible” critics of undeserved privilege” is to assume that all of “the rich” have undeserved privilege.
How rich are you? (hint, by the standards of me and my peers, i suspect you are quite rich. would you like to share your income with us?)
or could we go back to addressing the causes of poverty and near poverty without “demanding equality”?
“The propaganda from the left re “equality” is entirely based on envy.”
Couldn’t be much clearer than that, Coberly.
one thing i have noticed about “liberals” (i used to think i was a liberal but i got driven out of the party) is that if you disagree with them, or even seem to disagree with them, they immediately resort to invective and gutter language.
Yet they tell each other how rude you (me) are … apparently because you did not observe all the courtier language required to address their exalted personages.
Now you will be glad to know that maybe most conservatives are the same way… less insistent upon courtier language perhaps, but just as dangerous if they think you are disagreeing with them.
the gods laugh at us.
Robert I suspect it is not only JEB that totally missed the point of his Dad’s yelling “Unleash Chiang!”
I think it far more likely, given the Elder Bush’s career, that far from this expressing an admiration for Chiang Kai-Shek it was instead in mockery of the ‘China Firsters’ associated with General Claire Chennault
and other fanatic anti-communists.
who originated one of the first “stab in the back” narratives in re Democratic Presidents and foreign threats and instead insisted that the answer was to “Unleash Chiang Kai Shek”. When in all reality and certainly by the end being unleashed was the last thing Chiang would have wanted.
In the version of this Bush story that I read the Elder Bush’s tennis game was the opposite of overpowering and he was indeed self-mocking by yelling “Unleash Chiang!” It pretty much had the same threat level as “Unchain Pee Wee Herman!”
I’m assuming that what is being suggested here is that Krugman’s statement is an a priori that growth is the only outcome factor of importance to measure?
His focus on growth as THE measurable outcome of equality/inequality is pathognomonic of the disease within the field of economics.
It’s not the counting of the dollars on either side of the equation that matters in the end to society, it is the equality in the reductions of the risks of life and living that the acquisition and holding of dollars are a marker for.
It is, as I asked ages ago when first publishing: What do we have an economy for? So we build the biggest, baddest most powerful engine? We measure the hp and torque and find that how many have their hand on the throttle makes no real difference. But, did it do any thing for society’s quest for life risk reduction? Are we even looking to find out?
When those living a life of higher risk today than their parents lived yesterday read statements like Krugman’s it’s no wonder people think little of the “science” of economics.
thanks for the explanation and good story.
i wonder if we are all ready to wish that Bush had gone all wobbly.
apparently it needs to be for one of us.
for what its worth I agree with McIntyre… me and Kahneman and Tversky go way back. me and Socrates go way backer.
but McIntyre is an example of what he is preaching against. He apparently believes that “settled science” is indeed settled. Woe to Galileo, Newton, Einstein, and Heisenberg.
Apparently we can’t allow “Darwin’s Black Box” in high schools because it might deform the brains of some budding young biologists.
Oh, and to save a step… me and Darwin go way back even more back than me and Socrates.
And what exactly did this have to do with the propaganda of envy?
skip another step: Newton and Einstein etc didn’t face much resistance exactly because science is not in the business of censorship. Galileo did not exactly because of the church, but because the “scientists” of his day were “of the church” and able to persuade the hierarchy that Galileo was dangerous…. but their motivation was as much professional envy as it was “religious.”
A lot depends on how you define growth. If you are talking about overall aggregate growth, that is one thing, if you are talking about about rising living standards, that is another thing. The relationship between the two measures of growth are a reflection of the level of inequality. This is all simple arithmetic. The problem is that aggregate growth and flat or falling living standards are a recipe for social instability and political repression. Even the Roman aristocracy had to buy off the middle class of citizens and freedmen with bread and circuses.
This brings up the problem of envy. A lot of well off people envy those less fortunate. Billionaires envy millionaires who don’t need to hire expensive security teams, hire fancy lobbyists and worry about political stability. The millionaires envy the well off who have decent jobs that could be paid to them as dividends. It goes down the chain with the working class stiffs envying the guys who need food stamps who envy those even less fortunate. It’s like Homer Simpson envying the guy in the next bed who didn’t need to breathe. He had a breathing machine.
“…and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for.” — Adam Smith, Theory of Moral Sentiments.
Krugman certainly doesn’t think that GDP growth is the only important thing. In fact he is eager to trumpet his doubts about the effect of inequality on growth exactly because he opposes inequality whether or not it is bad for growth. His aim is to argue that he is not ideological and doesn’t feel the need to argue that inequality has every bad effect imaginable in order to oppose it.
I think this is quite clear in his post (but I can’t tell from your comment if you too think it is clearly true that Krugman strongly supports equality for reasons other than its possible effect on growth).
Also in the thread there seems to me to be general agreement that GDP growth is not all important. I think that both Coberly and Sandwichman seem to me to agree on this (while disagreeing strongly about something but I can’t tell exactly what — no guys please don’t explain more — you’ve explained your disagreement quite enough — oh and please do be polite and excellent with each other).
Krugman “I personally am making an effort not to be greedy — not to claim that a drive against inequality, which I view as crucially important for social and political reasons, is also the cure for lots of other things.”
Coberly “is “growth” really the answer? maybe all we need to do is tweak distribution a bit, and get the criminals out of power.”
Sandwichman “The presumptive question seems to be whether inequality is good or bad for growth. Is that the only question worth asking? Is it the best question? Dean framed his question about leisure as a supplement.”
Daniel Becker “It is, as I asked ages ago when first publishing: What do we have an economy for? So we build the biggest, baddest most powerful engine? We measure the hp and torque and find that how many have their hand on the throttle makes no real difference. But, did it do any thing for society’s quest for life risk reduction? Are we even looking to find out?”
Simple Don “Not to splash cold water on the whole discussion but isn’t lower income inequality a reasonable goal in and of itself for the economy? Isn’t the distribution of the rewards from the economy important? ”
I think the opinion of the house is clear, and I agree with all of you.
Ok Robert, then the appropriate comment for me now is: Never mind.
I should have read his posting before commenting. (head bowed low)
This is a rare time when Krugman is actually correct. Correlation does not equal causation and even attempts to discern some correlation are a bit spotty and unreliable.
Poor growth (and poverty) can exist despite inequality not because of it.
It is quite possible that school outcomes are related to other causal factors unconnected with inequality (or at least not majorly influenced by inequality). Likewise, South America as a lot of problems unrelated to inequality…and it could be possible that inequality is the result of their other problems, not the cause of them. In other words, causation is reversed.
Regardless, I would argue that inequality is mis-measured in the United States, not as problematic as people assume, and in fact a benign-to-beneficial phenomenon in our economy. There is no wrong amount of it in a properly functioning economy.
Finally, Chiang Kai Shek was anti-Chinese Communist but he was not unsympathetic to communism/socialism in theory (since it played into his efforts to free China from Western imperialism at times). He cooperated with Russia in the 1920’s (Comintern) and sent his son, Chiang Ching-Kuo, to study in Russia in 1925 where he went under the name Nikolai Vladimirovich Elizarov. Ching-Kuo later succeeded his father from ‘78 to ’88 (I first arrived in Taiwan as a language student in 1989). He was a pragmatist and went with the suitor that provided the most payola and that was the Russia for a time and then the US.
And, also, I suspect that you portraying a simplistic summary of inequality in Taiwan during its boom years, and beyond. As with the States, changes in demographics distort some of the measures:
If no adjustment is made or households are all treated as the same in terms of how their welfare depends on their income, inequality decreased slightly from 1964 to 1975 and increased from 1980 to 1993. This is the general time series pattern reported in the literature on Taiwan’s income distribution. But as illustrated in Figures 5 and 6, when household income is divided by household size, inequality changes across households substantially, and the marked time trends in inequality of household incomes in both periods are eliminated.
Second, Taiwan’s wage inequality has continued to rise unevenly since 1980.
This, along with the decline of multigenerational families in Taiwan, indicates the prime importance of demographic factors in explaining Taiwan’s rising income inequality.
I think there is more inequality in Taiwan that is being measured, as is there in Japan, Korea, etc. Demographics mute the effects somewhat.
A short question for Kai-HK
Is somebody paying you to write this dissembling nonsense? You must be intelligent to know it is basically throwing sand in people’s eyes (i.e. the effects are too small to have the importance that you want to pretend that they have – and inequality is clearly so much a problem in the US that it causes riots). If you are not being paid, why do you do it? Do you think you are convincing somebody?
Some of the recent BEW graphs show that there is strong correlation between wage inequality and wage growth. Also the graph that showed negative growth on worker participation rates shows that even though they may not be perfectly correlated they reveal strong evidence that past economic and trade policies have not been working for the majority of citizens. If minimum wage rights become enacted nation wide it would have a net benefit of providing the masses with more disposable income to spend. Thus raising the tide for all ships and making the tax the rich schemes unnecessary. But with all the obfuscation by the rich capitalism is not the most efficient mechanism for distributing precious resources fairly through out society says Joseph Stiglitz. Greed will overtake guilt every time and justness must be put on par with profits. But imbalances in US supremacy and use of military and economic power exist to where the law becomes a weapon to bludgeon the peasants…
i agree absolutely, but the best answer, at this time, is not to bring out the red flags, man the barricades, and demand “Equality.”
The “Equality” demand is a straw-man construct of the Right. Nobody , save the occasional nutcase , is arguing for perfect equality. “Justice” better describes the demand , as in :
No Justice : No Peace
Which , btw , I see as a splendid rallying cry for the times.
Think on that , plutocrats.
The short answer for you, ‘no’. I am not being paid.
More importantly, what is your proof that inequality is causing riots in the US? I know you want to believe that inequality is causing the problems in Detroit, Missouri, Baltimore, LA and elsewhere but in almost all cases the problems in those cities do not stem from having too many rich people creating jobs but rather poor policies put forth by good-intentioned politicians (mostly Democrats) that have wreaked havoc on communities. These same politicians, who can’t admit they were complicit in the problem, then look for a convenient scapegoat…and as with all authoritarians when faced with a problem of their own creating they rally the majority to go after the minority, in this case the rich.
It is the lack of opportunity through poor economic policies, the hyper-criminalization of non-victim activities (having untaxed cigarettes, smoking pot, etc), and the creation of an entitlement mentality through an unequal application of the law and policies. All these are the result of a big, fat, intrusive government, not inequality.
There are communities in America with a lot higher income inequality in them than you will see in Baltimore, Detroit, LA, etc. There are countries with a lot higher income inequality than the US. You don’t see inequality-driven riots in those communities and countries.
I live in Hong Kong; it has the highest inequality in the world. No riots! We are making too much money to stop and riot over what other people are making. We certainly have our problems, but inequality isn’t a cause of any of them.
You are ascribing a causal relationship where none exists.
You as, ‘If you are not being paid, why do you do it? Do you think you are convincing somebody?’
For a Koolade-drinking unicorn-hugger like yourself, I am under no impression that I can change your mind. However, I still do it for the same reason one of my heros bucked the regime:
‘Cowardice asks the question: is it safe? Expediency asks the question: is it political? Vanity asks the question: is it popular? But conscience asks the question: is it right? And there comes a time when one must take a position that is neither safe, nor political, nor popular – but one must take it simply because it is right.’— Martin Luther King, Jr.
Finally, let me ask you a question, why resort to all these ad hominem attacks on my motives and my comments instead of sticking to the topic. Do you think you are convincing me…or just strengthening my resolve?
You state, ‘If minimum wage rights become enacted nationwide it would have a net benefit of providing the masses with more disposable income to spend. Thus raising the tide for all ships and making the tax the rich schemes unnecessary.’
Or…the owners of capital continue to move that capital overseas where it is provided a competitive return and investors that might invest their money in the US decide to go elsewhere. People could close, or automate, etc. Or all three which is what is happening with a greater degree. This drives out opportunity for those that want it.
You do not need to see what strong wage rights does to an economy, you saw what it did to Detroit and Flint, etc. Those guys had wage rights.
You can’t dictate a wage rate that is not competitive. Legislative law does not trump economic law despite how badly you wish it could.