Will Wilkinson has gotten a lot of Internet love for his article “Thinking Clearly About Economic Inequality” (Free Exchange, Real Time Economics, Yglesias, Klein, Cowen, Rortybomb), which argues that increasing inequality is not as bad as people like Paul Krugman make it out to be. I thought it was a rhetorically clever but deeply misleading attempt to blur the obvious issue – economic inequality is increasing – by looking at it through a dizzying array of qualifying lenses.
Wilkinson marshals an impressive number of arguments to try to make the point that increasing income inequality is not the metric that we should focus on. I’ll try to take them one at a time. (Wilkinson’s arguments are summarized in the numbered paragraphs; the others are my responses.)
1. It isn’t income that matters, but consumption, since the way that income translates into utility is through consumption. “Why do we want income at all? So we can acquire things that we value.”
OK, I guess, although this ignores the desire of rich people – or even moderately well-off people – to provide for their children. Besides the psychological utility that they gain, this just means that the imbalance in consumption between rich and poor will be spread across future generations. The imbalance doesn’t go away. But this argument isn’t the big problem.
2. Actually we need to look at lifetime consumption, because people engage in consumption-smoothing. And “the run-up in consumption inequality has been considerably less dramatic than the run-up in income inequality.”
First, Wilkinson’s quotation seems to acknowledge that consumption inequality has been increasing. Second, you would expect increases in consumption inequality to lag increases in income inequality. When rich people get much, much richer very quickly – as happened in the last decade – they are not going to be able to consume that increased income as fast as they earn it. It will get deferred, or inherited, and will show up later. Poor people, by contrast, will attempt to maintain their consumption even as their incomes fall, going into more debt. This is why increases in consumption inequality lag increases in income inequality. It’s not a good thing.
Even more simply, if I make more money than you do over my entire lifetime, then over the course of my lifetime I will consume more than you (or my children will consume more than yours). Unless Wilkinson thinks that today’s successful hedge fund managers are actually going to be extremely poor in future years, this effect will not go away.
3. Furthermore, when we value consumption, we can’t look at market prices (nominal consumption); instead, we want to know the value to the consumer of the consumption. So instead we should just look at happiness. And here happiness gaps have been shrinking, not rising.
Wilkinson is honest enough to acknowledge that even the Stevenson and Wolfers study he cites for narrowing happiness gaps over the past several decades also found that “the trend toward greater equality in happiness stalled and began to reverse course in the 1990s, due in part to widening inequalities in happiness (and wages) between individuals of unequal levels of education.” And this is the period Krugman is most concerned with. But he then ignores this point in his analysis.
I’m as much a fan of positive psychology and happiness research as anyone. I am a believer, based on both personal experience and on reading summaries of the research (I’m not a research psychologist myself, of course) that above a certain level of income and wealth – which I would put somewhere squarely in the middle class – money simply does not make you happier. But this is the first time I’ve heard an economist try to justify economic inequality on the grounds that it is happiness that matters, not money. This is what you would expect from the medieval Church, not the Cato Institute: although you think you want more material things, actually you don’t, because the only thing that matters is salvation in the afterlife.
4. Wilkinson then tries to explain why increased income inequality does not translate into increased happiness inequality (although Steven and Wolfers actually say that it has translated into increased happiness inequality since the 1990s). There are two parts to this argument, but basically they collapse down to one. First, he says that the quality of budget-level products has increased faster than the quality of luxury-level products (like refrigerators), so that the differential in material comfort is decreasing for a given differential in monetary consumption. Second, he says that rich people are actually taxing themselves by spending huge amounts of money on “real estate with ocean views, or Ivy League diplomas, or goods like yachts” that do not provide value commensurate to their cost. (Along the way, he gets in a dig at the luxury goods industry, which he claims provides shoddy quality at extravagant prices, but that seems to me like an anecdote at best; after all, a Park Avenue duplex is still a lot better than a studio in Yonkers, whether or not Hermes scarves are as good as they once were.)
First off, remember that we’re talking about changes here – changes in income gaps, in consumption gaps, and in happiness gaps. Wilkinson’s argument, that increasing income gaps coexist with decreasing happiness gaps, requires more than just the observation that happiness as a function has a decreasing slope (doubling your consumption doesn’t double your happiness). It requires some evidence that the marginal happiness benefit of consumption is decreasing over time. If the shape of the happiness curve is the same in time 0 and time 1, then increasing consumption gaps will produce increasing happiness gaps, though perhaps not at a linear rate. Increasing consumption gaps can coexist with decreasing happiness gaps only if the happiness curve is getting flatter fast enough to compensate for those increasing consumption gaps.
And here Wilkinson undercuts his own argument. He points to the relatively small practical difference between a $300 refrigerator and a $10,000 refrigerator, which is far bigger than the difference between no refrigerator and a refrigerator – which was the relevant difference maybe fifty years ago. Good point. But he also talks about how vanilla and pepper suffered the same fate – only much longer before. The lesson is that different products and services that people want change over time, and at different times, from being rare luxuries to being relative commodities. Just because one former luxury good is now a commodity good doesn’t mean there aren’t other valuable goods that many people cannot afford.
Take organic fruits and vegetables, for example, which many parents would like to buy for their children, but are simply too expensive for tens of millions of households. Or private school in places where the public schools are not very good. Or being able to move out of an area that is plagued by air pollution, or by crime. These are not frivolous luxuries like Sub-Zero refrigerators. Or even take air travel, which has gotten much cheaper over the past three decades and that we commonly think of as having been “democratized.” Flying a family of four even just from the Northeast to Orlando can easily cost $2,000 in air tickets alone – something that is far beyond the reach of many families who would love to take their children to Disney World just once in their childhoods. In short, for all the product categories where you can say the rich are wasting their money on Sub-Zero refrigerators, there are other product categories where having more money makes a big, big difference in your material quality of life.
And let’s not mention health care, which is literally a matter of life and death.
Finally, there’s something strangely patronizing about this argument. Wilkinson cites research showing that the rate of inflation for the basic necessities that poor people buy – food, shelter, clothing – has been lower than the rate of inflation for other goods, like “home cleaning, lawn care, psychotherapy, and yoga classes.” That is an important finding. The implication is that, relatively speaking, the buying power of the poor (and hence their consumption) has grown faster than their income, while the buying power of the rich has grown slower than their income.
If the falling relative price of basic necessities (other than health care, of course) has reduced the proportion of people who go without basic necessities, then that is a great thing. But that is not the same thing as a decrease in inequality. Whether or not the poor have what social scientists think they need – food, shelter, and clothing (but not health care!) – they may still want home cleaning, lawn care, psychotherapy, and yoga classes. In this model, more leisure time, better psychological balance, and less back pain are all valuable things that rich people have much more of than poor people. And no matter what you do with the numbers, if nominal consumption inequality (inequality in the amount spent on consumption) is going up, you cannot make inequality in consumption of these goods go down. In a simple model, rich people benefit the same amount in nominal terms as poor people from a fall in the price of necessities, and therefore if the nominal consumption gap is increasing, the gap in the amount of money left for yoga classes is necessarily also increasing; the rate of inflation of yoga classes cannot change that. Given an increasing nominal consumption gap, rich people may have a lower percentage rate of growth of abstract consumption units than poor people, but their level of consumption will always grow faster than that of poor people.
Ultimately, the “rich people are fooling themselves” argument relies on a theory of false consciousness: rich people don’t know what is good for them and are wasting their money; poor people are better off not taking yoga classes. But this, I fear, moves us out of the realm of economics altogether. I know that behavioral economists for decades have been showing that people make irrational choices. Fine; let’s try to help people make more rational choices. But remember, it’s still their money. And they want more of it. How people spend their money reveals how they value things, and if they pay $50 per hour for yoga classes, then maybe yoga classes are worth $50 per hour to them, at least in their conscious brains.
From a moral standpoint, if there is a problem in one person having ten times as much money as someone else, that problem does not go away because he blows it on cocaine. From a policy standpoint, whether or not people use their money in ways that increase their happiness, money is the thing that they care about, and trying to base policy decisions on happiness is both paternalistic and impractical. If it turns out that rich people are no happier than poor people, should we simply stop worrying about poverty?
Wilkinson brings up a lot of interesting ideas and cites some interesting research, but does little to challenge Krugman’s core point: people like money, people use money to buy stuff, the money gap between rich and poor is increasing, and the stuff gap is increasing as well. I’ll accept that nominal consumption inequality may be growing slower than income inequality (although I suspect the difference is just being deferred into later decades), and inequality in stuff actually consumed may be growing slower than nominal consumption inequality (due to different inflation rates), but I don’t see a solid argument for why they aren’t growing. And that’s still a problem.
That was just the first nine pages – hopefully I’ll be back to talk about the rest.
By James Kwak
The Baseline Scenario 
“1. It isn’t income that matters, but consumption, since the way that income translates into utility is through consumption. “Why do we want income at all? So we can acquire things that we value.””
It isn’t income that matters, but wealth. In some societies wealth cannot be spent at all. In some, wealth is periodically destroyed. (That is consumption in a way, but you have to be wealthy to be able to destroy it effectively.) In developed societies, wealth confers power. Sometimes it does so via consumption, but sometimes the threat of consumption is enough to confer power.
“3. Furthermore, when we value consumption, we can’t look at market prices (nominal consumption); instead, we want to know the value to the consumer of the consumption.”
Well, if the value of money is proportional to wealth, or something similar is the case, then the wealthy person has to gain a lot more money — or equivalent goods — than a poor person to obtain the equivalent value. That’s why Wall Street executives need humungous bonuses. Pobrecitos!
James Kwak: “When rich people get much, much richer very quickly – as happened in the last decade – they are not going to be able to consume that increased income as fast as they earn it. It will get deferred, or inherited, and will show up later. Poor people, by contrast, will attempt to maintain their consumption even as their incomes fall, going into more debt. This is why increases in consumption inequality lag increases in income inequality. It’s not a good thing.”
Some months ago Bill Maher read something by an economist written in the 1930s (IIRC) to explain why the income inequality of the Roaring 20s led to the Great Depression.
Edit: Instead of “something” I meant to say “something to that effect”.
I think most wealthy people are miserable. If they did something extraordinary to amass that wealth, it was probably to the detriment of their personal relationships. And I think most actually resent their children.
But that is a superficial, “it’s lonely at the top” kind of misery; it doesn’t exactly compare to a poor person trying to figure out what they can pawn so they can visit a doctor for some antibiotics.
I would like to add to your point about happiness not increasing above a certain level of monetary compensation. I think there is no doubt that is true. Once certain needs are met the rest increases happiness very little. The counter to that is that once you have a lot of extra there is greater angst with loss of money. Taking money from the rich will always result in more gnashing of teeth than taking from those who already have learned to live without. The thought of moving down a tax bracket or two is surely to result in great wailing.
Since income inequality does not matter, why don’t we just tax away everyone’s income beyond a certain point that we will call the happiness threshold. This is would be the point where more money will not make them more happy. I wonder what arguments they will come up with to defend income inequality…
There is social and financial stability where there is a broad-based middle class. It comes from closing the gap between the very rich and very poor.
Let them eat cake.
“From a m oral standpoint, if there is a problem in one person having ten times as much as someone else…”
Well, that doesn’t seem to be a moral problem to me. Are you saying 9 times is moral but 10 is not? If so, please explain how you derived that analysis. If it’s not what you mean, why build on an assumption you don’t believe? There are many, many explanations why that ratio would exist between two people and be considered perfectly justified. One may work harder – 60 hours vs 40 does not necessarily translate into 1.5 times income, there are increasing returns in many endeavors. One may have invested more time and effort in her training – a good student vs. a lazy one. One may have more skill than another – a neurosurgeon vs. a a garbage collector. One may have made better decisions at critical junctures – I had a college tour recently given by someone from a rural midwest town where he came from a class of 11 people and he was the only one to strive for college, the rest were content to marry at 18, and so on. For another example, some lenders may have prudently avoided making subprime loans while others didn’t – the latter may be bankrupt and the former earning 100 times more than the latter. Immoral?
The actions of people can be characterized as moral. Although there will be debate over the meaning of that word. But a ratio of numbers is not moral-izable. It;s just an arithmetic statement, morally neutral through and through.
I also note that an American who is on the short end of the 10:1 ratio you lay out, is also on the long end of that same ratio as measured against most of the planet. Are you immoral merely by virtue of your salary?
A 1:10 difference in income IMHO is still within a definition of broadly based middle class, eg, $100,000 to $1 million income difference. With $100,000 at the lower end say :)
The problem arises when you have income differences of say 1:1000, eg. $10,000 to $10,000,000, which may be an indication of where the US economy is already at.
This is going to get a bit technical.
Krugman says that rising inequality is a problem. Wilkinson, in the part of his article that I review, doesn’t actually say that rising inequality wouldn’t be a problem; he just says that inequality isn’t rising. So for purposes of argument, I wanted to leave aside whether inequality (one person making 10x another) is a problem; more narrowly, I just wanted to argue that IF it is a problem, then the fact that the rich person may squander his money doesn’t make the problem go away. That’s why I phrased it that way. I very explicitly did not state that a 10x multiple in income or wealth is or is not moral.
Whether one person making 10x another is a problem obviously depends on the circumstances.
@mark,
James didn’t say that there was a moral problem with one person having ten times as much as someone else. To the extent that he hypothesized about that level of income inequality defining a moral problem, it was completely ancillary to the point of that sentence, which was that if income inequality is a moral problem, it remains a moral problem regardless of how the wealthier person spends his income.
Read the whole sentence.
“From a moral standpoint, if there is a problem in one person having ten times as much money as someone else, that problem does not go away because he blows it on cocaine.”
I think poor & middle class people have been sheltered from the full extent of income inequality by the credit bubble. The decline in consumption is actually in part an expression of inequality that was delayed by easy credit. This undercuts Wilkinson’s argument that copious consumption by the poor and middle class alleviates income inequality.
I also wonder whether ‘happiness’ measurements include stress. I think that health care insecurity causes a great deal of stress. So does housing insecurity. These stresses have soared in the last year.
Someone is ‘well off’, I would argue, if they do not have housing or health care insecurity. Note that anyone with job insecurity in our system has health care insecurity as well.
There has got to be a better example than organic fruits. Most people don’t care enough to buy cheap non-organic fruits which provide essentially the same benefit as organic fruit.
Disney World is a good example. I grew up in central Florida and its a magic place. It would be nice if they built more and more lower-middle class people could go. (If more people just went it’d probably explode–the crowds are bad enoug as-is!) Still, I doubt there are many goods as good as value as Disney World that are so expensive.
Most of the other things you mention (good schools/education, health care) only apply to poor/very low middle class people basically who are exempt from the whole happiness discussion because everyone agrees they would be happier with more money. Some middle class people choose not to buy helath insurance because they’re idiots but that isn’t anyone else’s fault if it makes them unhappy.
There are three possible responses to this type of casuistry. One is to ignore it since even critical commentary adds to its currency. The second is laboriously to deconstruct every contrived argument and distorted ‘fact.’ This presumes that there is really an intellectual debate going on, which is not the case. The third is to see this as the sophisticated propogandizing of a dogma whose proponents are attached to as a matter of faith. Think the Society for the Propogation of the Faith in Rome. We have seen much of this dogmatic resistance to even the most dramatic contradictory evidence over the past year – including persons and circles at the highest policy-making levels. The Bernankes, Geithners, Rubins and Summers of the financial world clutch onto their dogma the way a drunk clutches a lamp-post in a wind storm. The response should be unparing denunciation of ideological fanaticism spiked with a large dollop of material interest.
Therefore, I advocate a combination of ‘1’ and ‘3.’
cheers,
Michael Brenner
The whole argument is founded on the two (unspoken, class war eliding) libertine, er, “libertarian” lies, that:
1. Wealth just magically appears in a harmless way.
2. The wealthy use wealth in a hermetically sealed, harmless way.
Both of these are of course grotesque lies. To correct them:
1. The way the superrich achieved such wealth imbalances in the first place was through a relentless assault on wages, work conditions, standards of living for the non-rich, public services, and environmental services. They polluted, gutted the safety net, ruthlessly privatized profits and socialized costs, stripped consumer protections, commodified health care, privatized the law itself, constructed the military-industrial complex (among other corporate welfare complexes) and expanded the empire, waged wars.
All of this was horrendously expensive, and all of it was done on the backs of the non-rich.
That’s how they acquired this wealth in the first place.
2. They have been similarly ruthless, aggressive, destructive in the way they use this wealth.
Where this wealth became too prodigious, and there was nothing else left to do with it, they used it to blow up bubbles, to turn human society – home, street, park, school, playground – into a rancid casino. And when this bubble blows, and this casino burns down, it everyone other than the rich who pay the price with their suffering and anguish.
Most of all, in their filthy hedonism they drove up the prices of every necessity and right, like health care and housing, and beyond that everything subject to the travail of inflation, condemning everyone else to the slave treadmill, a lifelong rat race until you collapse, all to just try to keep up in a world where the pace is set by soul-dead monied vermin.
This wealth abyss is the most intense, horrific zero-sum game, where every cent redistributed upward is lashed out of the skin of those below, and where the spending of that cent rains as acid fallout on those below.
But to these vile cadres it’s all a pleasant ivory tower exercise. Just like every other aspect of their ideology, it has to be distilled through as many layers of fantasy filtering as possible to cleanse it enough to make it presentable in their prostituted journals, from which the traitor MSM can then take its marching orders.
One important consequence of income inequality that you don’t discuss is the resulting inequality in political power that always increases as income inequality increases. The political power is used to influence many things including whether income inequality will continue and the possibility of development of ruling class whose position amd power in society is inherited and continues to be passed down through many generations. Think ot the Rockefellers or Kennedys. Their political power comes from the marked income inequality of an earlier era.
ADDENDA:
1. I should have specified that the dogma in question is market fundamentalism/Social Darwinism.
2. There is a powerful affinity of interest and ideas. I have yet to see one of these pieces from a college lecturer with a spouse and child who earns $32,00 per annum after spending 8 years in grad school.
3. Americans are peculiarly ahistorical. We, and the rest of the industrialized world, went through all of this for 150 years before achieving the enlightened social contract implicit in the post-war consensus on the social welfare state and an active role for government in regulating the market and capping great accumulations of wealth. That so many in this country yearn for the 1920s if not 1890s testifies to profound ignorance, extreme parochialism, reckless ideologizing and political obtuseness of the first order.
cheers,
Michael Brenner
“The way the superrich achieved such wealth imbalances in the first place was through a relentless assault on wages, work conditions, standards of living for the non-rich, public services, and environmental services. They polluted, gutted the safety net, ruthlessly privatized profits and socialized costs, stripped consumer protections, commodified health care, privatized the law itself, constructed the military-industrial complex (among other corporate welfare complexes) and expanded the empire, waged wars.”
You know, I never thought of the guys who founded Google in that way before. They’ve sure been busy, heavn’t they? You’ve really opened my eyes with your absurd overgeneralizations, thanks.
Thank you, and thanks to Professor Kwak for his explanation (although I am puzzled how, in an “if then” proposition, the only “if” is “completely ancillary” to the “then”).
Who actually produces, with their hands, all our food, clothing, shelter, transportation & energy? Is it rich people or poor people? And who says the rich are more important than the poor? The rich say so. Because they are in control of our government.
Is this good for the long term viability of our country? Not looking that way right now.
Many of these rich are nothing more than embezzlers who gain control of these companies & take advantage of the less greedy workers to enrich themselves. Jack Welch is a prime example. Anyone remember all the financial stuff that came out about his pension during his divorce? The only number I remember is $15,000 per month for flowers.
And what’s the ratio of CEO to average worker pay now? Like 400 to 1? Like quadruple the ratio in Japan & other highly productive countries.
Our ideas about great income and wealth come mostly from things like the Forbes lists. How accurate are they? Do we have any trillionaires yet? At the time of Rockefeller’s death, his personal net worth was estimated at $1.4B, if GDP was $92B at the time, he was worth, then, 1.5% of GDP. Did the stewards help that fortune grow consummate with GDP, one wonders, or more? Are the various entities connected with the family worth in the ballpark of… $210B? Small potatoes, but still enough to influence a politician or 10,000, right?
Hang on — lot’s of tenuous connections here. Will Willkinson, was (is?) associated with the Koch Family’s Mercatus Center, the goofy Tyler-Cowen-led free-market think tank that apparently has cooperated on some projects with the Templeton Foundation. Templeton — king of the vultures — who loved to profit from distress, and reportedly was not adverse to creating that distress himself (great business plan!). There’s a company called “Brand Mercatus” who works with very large entities. They brand. They repeat messages over and over and over again and build trust in brands. A bit like what these think tanks do, right? Any relation? Their Malaysia-based CEO and celebrity, Peter Pek, has worked on a few Murdoch Family papers and projects. According to their website, they started in London, and it looks like things still might be run out of London, but who is in charge over there? Any direct relation between Mercatus Institute and Brand Mercatus? Between the Koch Family / Templeton fortune, and Murdoch?
I wonder if income/wealth inequality are at the root of the structural problems in our tax system; making us unable to fund health care reform, etc. because the taxable income of the very wealthy fluctuates so much from year to year.
How does one look at our current tax policy and determine the difference in revenues if, say, half of the income of the top 1% were distributed evenly through the bottom 50%? Would the system be more stable?
And just to point out, one problem with income disparity in the US is access to the legal system.
Well, since you made it so easy…
Income inequality exists. Income equality doesn’t. It never has on any relevantly broad scale. All efforts to achieve it have failed. Humans are too diverse in their capabilities, their preferences, their behavior for equality of results across a broad population. A significant sample of the world population was enrolled, mostly on an involuntary basis, in an experiment from 1945 thru 1989 where a number of states purported to establish income equality, but they abandoned the experiment, recognizing that the general welfare had suffered to too great an extent to warrant continuation of the experiment. As well, the non-elite recognized that equality had not actually been established, rather the elite had captured significantly greater assets for themselves, betraying the ideal and the legitimacy of the experiment. All empirical data tell us that income inequality is inevitable.
In addition, your premise that “income inequality does not matter” is false. To many people, it is important to do better than the average in order to advance one’s ranking within the group. Whether you like that or not, it happens, ergo, your premise is inaccurate.
Those are two defenses of the existence of income inequality.
You just stole the plot of William Gibson’s next book.
10:1 differences are a problem only when the one making 10x produces less or the same wealth (not money mind you) as the person making x. The problem is non existent if the person actually works and produces close to 10x more. There are certainly people who are more productive than others, however I’m not sure anyone is 1000 times more productive than me and I know there are those who make 1000x what I make.
Just sayin’
Income inequality is not just an economic issue! It has pervasively corrosive social costs. See “The Impact of Inequality: How to Make Sick Societies Healthier” by Richard G Wilkinson. It would be worth paying an economic cost, if indeed there were one, to reduce inequality.
That paper is literally one of the most irritating things I’ve ever read in my life.
Leave it to a conservative to say that the dramatic income disparity between those at the very top and everyone else is irrelevant – because we’ve been consumption equals all this time.
First, where are those stats? What does that mean? My five yr old van gives me equality to someone with a fully loaded Porsche Cayenne that cost six figures? Because driving is much better than walking – so it doesn’t matter at all what you drive?
And are we not in a crisis right now because today’s consumption was done with tomorrow’s dollar? Debt-ridden consumption from people who make no money does not equality make…
The little people – the ones with the average salary of $50K – an annual income level that has gained no ground at all in the last decade – if they even have a salary these days – have lost serious ground since Reagan.
Leave it to the Cato Institute to spin such real disparity into a non-issue because the little people are just has happy with their cheap knock-offs – purchased through fabulous new credit options that provide even bigger profit margins to the already wealthy.
And if you believe this – did you hear – Goldman Sachs turned an enormous profit this year based solely on the collective wisdom of their crack staff…..
According to Lucien Bebchuk and Jesse Fried’s book, Pay without Performance, here’s how the income disparity has grown in recent years:
“Between 1992 and 2000, the average real (inflation-adjusted) pay of chief executive officers (CEOs) of S&P firms more than quadrupled, climbing from $3.5 million to $14.7 million. Increases in option-based compensation accounted for the lion’s share of the gains, with the value of stock options granted to CEOs jumping ninefold during this period. The growth of executive compensation far outstripped that of compensation for other employees. In 1991, the average large-company CEO received approximately 140 times the pay of the average worker; in 2003, the ratio was about 500:1.”
@Mark,
Since you are puzzled, I will help you out.
The “if then” proposition was, in fact, “if income inequality is a moral problem, then, how the wealthy guy spends his higher income is irrelevant.”
The statement about the 10:1 ratio that you focused on in your response was unnecessary to make the “if then” statement (i.e., completely ancillary), and probably should not have been uttered, if only to avoid the ensuing confusion.
Does that clear things up?
Yup! 1:1000 might be under estimating when we consider say $10,000 for a low income single parent family and those at the top 1%.
When reading this all that came to mind was the “Pioneers” who got gwb selected. Who gives a flying RF if they are happy with their personal consumption? They got to purchase what really counts: Political Power.
Good income & wealth data websites –
http://www.taxfoundation.org/news/show/250.html
http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
Makes you want to bite a mule in the a$$.
Maybe not so far-fetched. Here’s the plot of a new Victor Ostrovsky book (broken into blog-friendly snippets):
Looks like Brand Mercatus has a well developed Investor Relations business segment:
http://www.brandmercatus.com/units_Invest.htm
If you try to find out a little more about the company, by clicking on the “international partners” link, you get nothing. Click on people, and you get a generic description of people.
http://www.brandmercatus.com/#
Here is a law firm with offices both in the UK and US that recently represented “Mercatus Partners LLC” “in its acquisition of Boston based Financial Research Corporation (FRC), from parent company Citigroup Inc.”
http://www.mintz.com/news.php?NewsID=1738
Economic Civil Disobedience
If Wilkinson fails to appreciate the reason why rich people are stupid enough to buy luxury goods, I suggest he read Theory of the Leisure Class. His main source for the notion that the goods rich people buy have declined in value seems to be Dana Thomas’ Deluxe: How Luxury Lost Its Luster. Apparently he glanced at the cover because the contents say nothing about a decline in the quality of Hermès’ products. In any case, the function of a fancy handbag is not to hold your glasses, but to signal social status.
One problem with rising income inequality is exactly the sort of social barriers these luxury items signal. Social marginalization can carry real costs.
Thanks for making my point for me.
1. So far as I can see, neither Google nor any other big internet company “innovated” much more than being first to fill a vacuum. While they may deserve some return for that, I certainly don’t see any justification for the return they and others get.
I’m aware that the propaganda nowadays is how the internet had some Wild West phase where anything could have happened, that there were numerous potential strange attractors, and that it was the heroic innovation of a few online entrepreneurs which caused things to fall out the way they did.
Well, I find that doubtful. I think the way things have turned out was, given the premises of an increasingly corporatist system, the most likely way.
2. So how convenient that “the way things turned out” was a way which made a handful very rich, and teased many others with a bubble and crash, while for the masses it simply generated (1) more costs: now it’s an economic necessity to have a PC and an online connection (but as library hours and services are being cut back as part of the standard capitalist battle plan during a self-generated crisis, public online access is now beleaguered, and I don’t see Google leading the way in setting up public internet centers); (2) lifestyle degradation: now it’s perceived as a necessity to be online and “connected” in general. Cf. Bruce Sterling’s profound analysis of the class war aspect of all these gadgets. “Connectivity is poverty.”
3. The taxpayers paid for the internet in the first place. Where’s our cut of the proceeds from these windfall recipients?
4. As per the usual practice, the second it got big enough Google switched to feudal entrenchment, anti-entrepreneurial, rent-seeking mode. Everywhere you look it’s accused of anti-competitive practices.
5. While its record is perhaps not as bad as some others, it has still acted typically in cooperating with repressive governments like China. So we know all the rhetoric and alleged idealism is nothing in the face of profits uber alles.
6. Then there’s ominous power-creep like the book-scanning project. This was clearly intended to be a massive theft and power grab in the first place, and was only scaled back in the face of resistance.
Again, whatever the merits of book scanning in itself, why should it be undertaken for profit, by such a powerful, concentrated entity?
While Google has not been so overtly rapacious and fascistic as e.g. Monsanto, in the end I don’t trust it as custodian of the world’s books any more than I’d trust Monsanto with seeds.
Nothing of any importance can be left in the hands of corporations. We know that’s suicide.
7. That leads to the broader trend, pushed by all the online feudalists, and cheerled by the likes of Wired, of the pauperization of intellectual and creative workers, who are now supposed to become a new kind of serf on a new kind of plantation, ruled and mined by a new kind of landed master.
And all this for what – so that a handful of guys, who never “innovated” anything special, but rather were lucky enough to be in the right place at the right time to take advantage of the system’s logical development (after the taxpayers had already done all the real work of building the thing), can now embody a new megarich, megapowerful center of entrenched feudal wealth and privilege?
That’s your pro-corporatist argument? Pathetic and vile.
And since you picked the example, I’ll assume that’s the best you can do.
I just read that one of the reasons Constantinople was so vulnerable to civil war in the 14th century was due to the fact that other than the western states it had developed no middle class which, according to John Julius Norwich served as a puffer between the poor, i.e. peasantry and dispossessed (fugitives).
… made me think that once the Detroit auto worker will have stopped to be middle class he will have stopped providing a stepping stone for his children or grand-children up into their dream professions (remember: it takes three generations to make a lady …)
also he will have stopped being the possible next step up the ladder for the ones below him – if you take out the puffers/stepping stones only the dream of from rags to riches which resembles the dream of the lottery ticket will remain but no way of working your way up without the big luck hitting you
“How Luxury Lost Its Luster”
the rich ones of today must be a bunch of misers because if they buy couture by Armani they buy stuff that is only affordable to them because it has been ambroidered in India
… would it be embroidered in Milan or Paris it would exceed their means ;-)
Though I am happy for the Indian embroiderer for getting a chance to make a hopefully decent living
I worry that we have discarded all that handicraft knowledge accumulated over centuries i.e. instead of ideas flowing back and forth over the continents from craftsman to craftsman, now Milan or Paris are only creating the ideas and the needle workers are only in India
I feel there is something very unhealthy brewing in such a very large division of labour
Really enjoyed this post. I would be interested to see what the data has to say about income gap vs. comsumption gap lags (thought that was a great point).
One main comment:
“And here Wilkinson undercuts his own argument. […] he also talks about how vanilla and pepper suffered the same fate – only much longer before.”
I think what he’s getting at here is that for a concave utility function, if two people’s consumption levels increase by the same fixed amount, the difference in utility will decrease. And then if these levels increase by the same amount again, the difference will decrease again.
We might think of the first time to be a time when rich people have spices like vanilla and pepper while poor people don’t. After the first increase, rich people might have refrigerators while the poor only have spices. And after the second increase, rich people might have expensive refrigerators while poor people have normal refrigerators.
However, *if* the utility value of spices > value of refrigerators > value of the fancy features of an expensive refrigerator, then inequality steadily decreased.
Of course we have to examine the relevant inequality signs, but although “different products and services that people want change over time, and at different times, from being rare luxuries to being relative commodities”, I think Wilkinson would argue that each of those events decreased inequality.
“If it turns out that rich people are no happier than poor people, should we simply stop worrying about poverty?”
Do you think it’s possible a significant amount of your disagreement with Wilkinson is due to him being more utilitarian?
Or maybe a better description of your objection is that you think nominal spending is a better proxy for welfare/utility than any speculation based on the relative value of spices and fancy refrigerators?
so what is the modern class structure supposed to work like… if the system supports a viewpoint that accelerates and obfuscates the reward / responsibility system so that the working classes are responsible and the wealthy are just rewarded regardless of contribution and downright results… it would seem that giving rewards for giving rewards is the primary concern, the politics of taxes ‘thats like paying bills in poor mans terms’ has been increasingly shifted to the poor by mutilating the tax base into a subsidized wealthy funk
.
I dont think the realization that at some point being rich is not good, its leadership thats immensely valuable and that takes accountability… we only have so many mansions and 3rd homes to go around so a class of wealthy ‘deciders’ is absolutely neccesary… but who these people are and should be, what culture they adhere to, and the waste of perverted economics and debt should be factors to BANKRUPT failures and RISE UP a new ‘super class’ of dignified wealthy cohorts to a great society
.
if we just reward rewarders you get back into boom bust speculation cuz there just only so much awsome property and way to many sick and empty people… we need real leaders, and we just dont have them
Excellent post, James. A further problem that is missed by analysis of consumption inequality alone is the disparity in assets arising from unspent income of the rich. Asset accumulation gives the rich a valuable sense of economic security (compared to the often-paralyzing insecurity on the part of the poor and uninsured that has been shown to perpetuate poverty traps.) Assets also enable the rich to take (good) risks that multiply in further upward mobility, as well as to simply enjoy leisure and join in society and social networks, rather than taking a second job at night. The result is even more profound: those with economic security enjoy important advantages in political power issuing from the ability to devote time (not to mention money) to political action; they can take time away from work to advance a cause and organize friends to do the same. The insecure, by contrast, cannot so easily do so.
Wilkinson grew up in a very blue-collar Midwestern town, Marshalltown, Iowa. The two big employers in Marshalltown for many years were Swift meatpacking plants and Lennox furnace. Wilkinson should know better than to write that crap.
there is nobody like an ex-smoker to “prosecute” smokers
or in German “Die schärfsten Kritiker der Elche waren früher selber welche. (F.W. Bernstein)” (the hardest critics of elks formerly were elks themselves)
I will go a step further than James, who is ever so polite. Wilkinson’s article is a feint. There are three classes of arguments for wealth inequality:
– Economic (inequality maintains strong incentives to produce). Of course, this assumes that most incomes do not derive from rent-seeking activities and/or socially destructive behavior (and this is arguable, particularly given the financial fiasco).
– Moral (People with money deserve it, because they contributed significantly to society… This too has been undermined by the financial crisis, which has clearly rewarded people who didn’t produce anything and harmed people who did.)
– Political (People with money have power, and they use the money to preserve that power.) Unlike the other two arguments, this is de-legitimizing.
Wilkinson’s argument is a feint, because it argues not that the wealth differential is legitimate, but that it really doesn’t matter that much… (Unless, of course, you want to buy off a Congressman or endow a think tank like the CATO institute.)
Ultimately, however, almost the entire article breaks down to a simple fact.
The price of manufactured goods (including basic commodity food) has been declining due to automation, while the (relative) price of services has been increasing because these are less subject to automation. Automation has also decreased the quality differential between certain types of goods (e.g. value clothing, vs. luxury clothing).
So, for the cost of a music lesson for your kids these days you can buy a huge bag of dried beans and rice. Music isn’t a necessity, but beans and rice will keep you alive for a week.
The primary exception – health care – is a service industry.
The other classes of semi-necessary items that have increased in value are scarce items, notably things like real estate (in areas with high demand). Unfortunately, this is not a “minor” issue in which wealthy people squander money (the jokes on them! hah hah).
The fact is that choice of residential location determines school quality, maternal and childhood exposure to toxins, access to public services, and crime safety.
So in terms of “basic needs”, the relative cost of keeping a human being alive has decreased (assuming we do not take into account the environmental/health costs associated with our agro-industry). In other words, poor people receive ample resources to survive – assuming they cheaply provide their labor.
However, they less healthy (large correlation in many studies). Less able to weather a disability, and more likely to suffer serious unhappiness after a disability: http://www3.interscience.wiley.com/journal/118661820/abstract?CRETRY=1&SRETRY=0. Less able to provide for their children. Have less economic security. Are more susceptible to shocks in basic-needs goods (e.g. the price of gasoline).
Much of Wilkinson’s argument is that the wealthy can hurt themselves with wealth in a semi-objective sense (which is not really objective) – and certainly, one can think of things like unnecessary plastic surgery, cosmetic aids, expensive an dangerous health/weight loss supplements, travel to exotic destinations with exotic diseases, etc…
But many of the things Wilkinson dismisses are in fact highly beneficial toward quality of life in a semi-objective sense:
1) Living in a safe neighborhood with well-funded schools
2) He cites yoga as one of those luxuries rich people can do with out. I am not a practitioner, but an increasing volume of research has linked yoga (among other forms of exercise) to reduced hypertension risk, better cardiovascular outcomes, improved strength/flexibility as we age, reduction in insomnia, and other beneficial outcomes.
3) Ditto for joining an expensive health club
4) Regarding psychotherapy, he cites this as something one can do without. But what about things like psychological treatment for children with disabilities (e.g. autism). There can be a HUGE quality of life difference for wealth vs. nonwealthy families that have an autistic child.
A quick qualifier, the Political argument _for_ wealth inequality is the Burkean one: at least society is stable; instability is worse than inequality, and any attempt to make the system more equal will destabilize it.
Actually, James, he notes that income inequality is rising, but that is irrelevant because we can, all of us, buy refrigerators of our own….
Thus, the happiness of the American dream is not threatened by the dramatic transfer of wealth to the already wealthy, according to Wilkinson.
Your interpretation seems to have slipped at one point. You say the lower rate of inflation for necessities than for luxuries implies “the buying power of the poor (and hence their consumption) has grown faster than their income, while the buying power of the rich has grown slower than their income.”
The buying power of the poor is not determined by the cost of necessities relative to luxuries but by the cost of necessities relative to income. You do not cite evidence that the rate of inflation for necessities has been lower than the rate of increase of poor people’s income. I doubt you can; my hazy recollection of various reading suggests the reverse is true.
Ha ha, yes! You’re right, it is delegitimizing, since it’s so obviously self-serving – of course the guy with the wealth is going to say that.
Meanwhile it offers nothing to the person who has nothing to “stabilize”, so for him it’s invalid on its face.
Of course, we have no Burkean conservatives left in the world.
We have only gutter Hobbesian louts.
A society that has seen a dramatic loss in jobs in the last year (millions now unemployed – even more underemployed) is not stable.
To concurrently reward the financial sector, whose bad bets resulted in the collapse of the global economy, with astronomical bonuses as unemployment rises to rates not seen in a quarter of a century, is also not a stabilizing influence.
IMHO, our attempts to make the system less equal have been exceptionally destabilizing.
Libertarianism objectively equates to corporatism. This blog shouldn’t get drawn into the weeds with the likes of Wilkinson. He is obviously an odious shill, and he speaks to no one who could play any sort of role in rescuing this country.
Great rebuttal! But, it’s also worth noting that Mark’s arguments are very typical of a majority of people who still believe that ‘free-market capitalism’ would be fine if it wasn’t for the crooks currently running things.
Unfortunately, our current problems stem from the fact that this economic system is running according to plan, and was never either ‘free-market’ or ‘capitalist’ by choice. It is pure corporatism that aims to return society to neo-feudalism.
When one cuts through all of the PR, the corporate agenda is all about creating monopolies, toll-gates and extending hereditary rights (i.e. patents forever) to assure that those in power stay in power.
Controlling all of the levers of power, who is to say that the current financial crisis wasn’t modeled on Sun King’s brilliant plan to take absolute control of France by forcing the nobility to spend and borrow themselves into his favor? Does easy access to money in a culture that demands it be spent on conspicuous consumption of luxury goods, (Mc)mansions and ‘keeping up with the de la Jones’ sound familiar to anyone?
Louis, like today’s neo-monarchists, inflated a massive credit bubble with the express aim of bursting it for his advantage and profit. He consolidated his control on the nobility by forcing them in his debt, just as surely as our contemporary ‘Rulers of the Universe’ forced today’s masses into debt-slavery.
The problem is, what to do about it? Signing online petitions, protesting or trying to reform the system all seem useless to me. I am starting to believe that we must start to set up an alternative system from the ground up. One that promotes different ideals, but also practical alternatives to our current choice between wage-slavery or homelessness. But where and how to start?
During WW2 and following up until the 70s the top marginal tax rates were ca 90%.
Thatcher and Reagan changed all that. It didn’t work out quite as promised.
William Pfaff had a recent column related to this topic here:
http://www.williampfaff.com/modules/news/article.php?storyid=414
and otherwise Wilkinson’s effort only reminds me of Galbraith’s observation:
“The modern conservative is engaged in one of man’s oldest excuses in moral philosophy; that is, the search for a superior moral justification for selfishness.”
If greater income equality is a good thing we should be able to look back at times of greater equality and recognize them as “better”. I don’t see it. A rising tide may not be good for everyone, but a sinking ship is certainly bad for virtually everybody.
The role of government should be to create the environment within which people can maximize “good” while managing to incentivize appropriate behavior, and avoid and punish those who take matters to extremes.
Income inequality too often becomes largely an argument about the extremes. Modern history demonstrates the private sector does a better job of wealth creation in almost all fields than government. Government frequently characterizes its position as “how much should someone be allowed to make” vs “how much should government be allowed to take”. The unintended consequences of high marginal tax rates are more devastating to the middle class in the long run than more modest marginal tax rates.
Over time the truly wealthy will get richer. But the truly poor will always be at or near zero. Taking care of the truly needy is a societal obligation. Taking care of the lazy is not. Creating a prosperous and rising middle class with increasing wealth is the key. In most ways, focusing on income inequality is the wrong metric. Focus on increasing middle class wealth; and income inequality will take care of itself.
On income inequality he draws bogus analysis from UN Human Development Index to refute this statement — Paul Krugman has stated that “the United States doesn’t have Third World levels of economic inequality—yet.” on pg 32 and turn it on its head.
I looked at the footnote for this reference http://hdr.undp.org/en/media/HDR06-complete.pdf
32. United Nations Development Programme,
Human Development Report 2006 (New York: Palgrave
Macmillan, 2006), p. 335.
This is really a bogus argument and he is using it to obfuscate the real problem here. Inheritance + Wages = Housing + Health + Education + the “Good Life”. When you get into wage inequality my feeling is Krugman is talking about ability to have a living wage and how corporation have to fund the salaries of the top %5 wage earners. Whether or not the argument is that they deserve it has any merit. It seems to ring hollow with the current economic downturn on how much real value they are providing?
Wilkinson is a apologist attempting to say there is nothing wrong with the current status quo. All the while the whole economic system is unraveling before our eyes.
I’ve taken a quick look at the Cato “policy analysis”. Some quotes indicating ideological baseline:
“The evidence that the rich, as a class, are about to
gang up and rig the political system in their favor is thin.
“It is not very easy to convert economic resources into
political resources.
Wonder how many papers have been written or will be written on the economic value that credit default swaps add to the system. I guess since Larry Summers and Tim Geithner have done ABSOLUTELY NOTHING to prohibit or even inhibit CDS creation and trading we SHOULD have lots of papers on this in the future. Apparently 1 disaster hasn’t provided enough data. We need at least 2 more systemic nose dives into main street hell and mass housing foreclosures before Summers, Bernanke, and Geithner do anything about it.
If I might add- bad bets with other people’s money.
Cato is here mixing up something ridiculous with something of-course, i.e.
“gang up and rig the political system in their favor”
“they” do not have to do any ganging up, if there are rules and regulations that are favourable to their prosperity they will push all in the same direction without any prior ganging up – they are not like workers who need a union to make their impact felt. And if one of them hits on a useful wedge the others will help pushing. They may synchronize their world views while chatting in their clubs but I doubt that they work on any cabals because that would mean they would have to agree on a leader and that is not compatible with guys (and girls?) who all see themselves as leaders.
Social engineering from the right and left:
Here is the Cato Institute’s position on health care reform: Free market solutions needed.
From the Bill Moyer Show on Diagnosing Proposals for Health Reform.
“Our problem is that we spend two and a half times as much per person on health care as the average of other advanced countries … I think we have to go for a single payer system. — Dr Marcia Angell
“The single payer system would be the best of all… Unfortunately, we can’t get there from here because the political forces are just too strong against single payer.” — Robert Reich
Since when is inequality – as opposed to absolute poverty – an issue for the state. Unless, of course, it is unjust state policies that generate it. Obama’s daughters for example will get an education superior to mine or that which I was able to provide my children for the simple reason that I have no control over how my tax money is spent to educate my children. On top of that his children will benefit from racial preferences at the expense of my children. I have no beef with how rich Bill Gates is or with how he spends his money. The parasitical class that profits from big government is the issue. The Obamas are both examplars of these people and advocates of their interests.
Of course his focus on “consumption” misses the important point that our current level of consumption is unsustainable. Also, consumption doesn’t feed children or pay medical bills.
Social engineering from the left and right:
Here is the Cato Institute’s position on health care reform: Free markets are the solution.
From the Bill Moyer Show on Diagnosing Proposals for Health Reform.
“Our problem is that we spend two and a half times as much per person on health care as the average of other advanced countries … [Throwing more money into our current system is not the solution] … I think we have to go for a single payer system.” — Dr Marcia Angell
“The single payer system would be the best of all… Unfortunately, we can’t get there from here because the political forces are just too strong against single payer.” — Robert Reich
Sorry to post twice. Here is the video link to the Bill Moyer program referred to above.
“Modern history demonstrates the private sector does a better job of wealth creation in almost all fields than government.”
Straw dog argument. I have never heard anyone argue that the purpose of government is wealth creation.
Martin, I only learned about Michael Sandel recently. But I love what he has to say. Try here: BBC Reith Lectures.
“Since when is inequality – as opposed to absolute poverty – an issue for the state.”
In part because we purportedly live in a democracy, yet clearly unequal wealth equals unequal power.
Furthermore, Americans historically have taken great pride in living in a country based on moral values.
That’s precisely the side of Krugman’s argument that is the strongest: it’s pretty absurd to suggest that inequality has not risen, when its evidence is all around us. Private jets, recombined properties, domestic servants – it’s all there.
What seems unproven by Krugman is precisely whether this is a bad thing. He simply assumes it is, without giving any reason.
Surely if word had leaked out in the 1950s of Krugman’s idyllic youth that there was some faraway sheikdom of unimaginable wealth, it would not have mattered to Paul. So why does it matter if that sheikdom is located not in the sands along the Persian Gulf but hard by Long Island Sound?
http://tauntermedia.com/2009/07/26/inequality/
single payer – of course I do not really know what they mean by it – but just the words make me wonder why German authorities have been trying for decades and are still trying to get some competition into the system –
if it works and how much it works is hard to judge but they still have to cap costs and increase premiums in any way they can think of –
of course we patients are part of the problem by trying to get as much of our money back from the system as possible – it is not as easy and as generous as it used to be but still a little massage here a little yoga there …
As Holly Golightly would say, “Quel merde!”
Is wide income inequality a bad thing?
Take a look at the fate of civilizations that tolerated or encouraged it.
Not exactly a pretty sight.
However, if income inequality was taking place in a society where the electoral process was entirely financed by the community at large, my bet is the situation would be far less problematic than it is now. Let’s be clear: in our society, money buy you access to the politicians and lawmakers, while those without money are neglected because they’re never heard unless they protest loudly and in big numbers.
The refusal to tackle this problem has obvious implications, none of them helpful for the common good. Just read “Free Lunch” and Perfectly Legal” to be convinced of it.
If I might add- bad bets with other people’s money.
We will always have inequality – not everyone can be Michael Jordan. But Michael Jordan was paid the big bucks because of his outsize talent and his incredible work ethic.
In that the class profiting so greatly these days seems to have the business sense of a gambler, that’s when inequality becomes a bad thing. It is no longer an inequality derived from a difference in work or talent, but an inequality created when the wealthy have bought off the political leaders.
Honestly, I never cared at all about the bonuses Wall Street paid themselves until last fall – but I do today because their bonuses have been paid for and supported by taxpayers – not their own talent….
Why is one source of inequality “better” than another? Consider accidents of birth: your physical abilities (Jordan, Carl Lewis, Wayne Gretzky, etc.), your “IQ” intelligence, your physical attractiveness, congenital heart disease and other congenital disorders(schizophrenia, for example), your birth family and your extended family, your location, and others. All of these factors contribute to your life outcomes, yet, you are not responsible for any of them.
Also, why is “hard” work any “better” than “clever” work? Of course, we’ll have inequality and unhappiness and we already know why. Life isn’t fair; it can’t be.
I think the real issue is how much inequality a society can tolerate and what are the boundaries of tolerance?
You make a good point, although ad hominem. The Cato Institute is funded by the usual movement conservative families – Koch, Scaife, Olin, etc. Krugman makes this point in his book, “The Conscience of a Liberal.” The Wilkinson piece is self-serving, indeed.
and here on Fora.tv
Can these pathological liar measure the hopegap, because it is here that thehaves and thehavenots are dividing wildly and exponentially. Look at swindlers and thieves and Wall Street giddy and deliriously drunk on their illgotten gains raked off the back of taxpayers, and captured cronies in the socalled government – billions of dollars in false profits by simply refusing to account for those PONZI scheme enterprizes, or toxic assets, and feeding at the trough of the Fed and treasury to the tune of 13 TRILLION taxpayer dollars. It’s business as usual for these swindlers and thieves and back to the halcyon days of bubble/bust economy madness and thievery of September of 2008, knowing alltowell that when they screwup again on a catastrophic level – the Fed and the Treasury, and their bought and paid for CAPTURED cronies in the government will bail them out yet again and heap all the costs, debts, burdens and suffering on the backs of America’s poor and middle class children. Hope is alive and thriving for the predatorclass, for the superrich who can ghoulishly swoop in now and devour all those defaulted properties, and glean outrageous fortunes off the backs of America’s poor and middleclass and the unlimited largess of a government owned and controlled by the predatorclass. But hope is dead or dying for America’s poor and middle class. No hope for upward mobility. No hope for retirement. No hope for a debtfree existance. No hope for legal justice! No hope for real freedom. No hope for real democracy. No hope in hell for real honesty from our leadership (as Palins twisted and pathetic speech today proves). No hope for representatives in our socalled government truly giving voice to the voiceless. No hope for a college education for our children. No hope for adequate healthcare. No hope for bargaining power for our labor forces. No hope for decent wages, or job protection, or benefits from our ruthless corporatist employers. No hope for a green future. No hope for less guns or fewer weapons, or less warmaking. NO goddamn HOPE!!!! There is no hope for America’s poor and middleclass.
But out of this horrorshow reality can be found the one opportunity for righting these terrible wrongs, and leveling the playing field and forcing real change. America’s poor and middleclass are like abused children, and when we stand up and strike out at our abusers and refuse to allow the abuse, – then there will be real hope again. In a world where there are no laws, – there are no laws for anyone predatorclass biiaaatches.
A critical aspect of income and wealth level comparisons has been omitted from James’s rebuttal of Wilkinson as well as from Wilkinson’s own piece – the marginal utility of income and wealth. I recall research cited earlier this year in The Economist (Economics View) in which two U. of Chicago researchers make exactly the argument that James tries to refute (and Wilkinson probably cites) – since the price inflation of services exceeds that of goods and the rich spend disproportionately on services, the rich suffer disproportionally from inflation and the buying power of the poor has increased at a faster rate (or decreased at a slower). Therefore, the poor, despite lower relative incomes and wealth (even in real terms), are really better off than they were 20 years ago.
I think the strongest rebuttal this argument results from applying the concept of marginal utility of income (and wealth) to this finding. The dollars that the poor spend on goods are more valuable to them than the dollars that the rich spend on services. The real utility of those “poor-man’s-dollars” is so much greater to them than is the utility of those “rich-man’s dollars” to the rich that this differential exceeds the amount required to compensate for this supposed greater inflation in the price of services than in the price of goods.
So what if the prices of yoga, massage, gardening services, psychotherapy, season tickets to the Met, etc. (and you can add ocean front real estate, Ferrari’s, etc., if you fine-tune the research) are rising faster than the prices of cars, gasoline, food and refrigerators? The dollars used to buy services are worth significantly less to the people who spend them on those services, and the items, therefore, are worth less to the rich than the goods the poor buy are worth to the poor.
I can’t believe that the Cato Institute’s research is taken seriously by serious economists. Two years ago, Alan Reynolds disputed in the WSJ the growing income gap that the research of Piketty and Saenz demonstrated quite clearly, by questioning the appropriateness of their data sources. (Reynolds was writing in response to an op-ed piece by a U. S. Senator (whose name I can’t recall as I write this) who cited Piketty and Saenz in his call for some reform (which I also can’t recall…:(). Saenz then rebutted Reynolds who backed off and promised a conclusive argument in his forthcoming book. The disagreement ended there, as far as I know, except for these continuing attempts to reduce the population’s willingness to accept the reality of this gap and its implications.
What none of these apologists for the naive free market view seem to be willing to note is that the income and wealth profile of the U. S. has changed since 1980 from one which matched that of the European nations and Japan to that of the emerging market economies such as Brazil, Russia, Argentina and Mexico. Is this change progress? Is that where we want to go?
Certainly not.
But, our problem is that Geithner, Bernanke, Sommers, Obama, et al are too stupid to see that that’s where they’re sending us. They seem to think that they will continue to have a lot of money & power even when there’s no one left to produce anything for them to buy with all their money. Except Chinese pheasants. They could care less about American working people, the real producers in this economy. They only want to protect themselves & all the other parasites like them.
Kevin Casey: “If greater income equality is a good thing we should be able to look back at times of greater equality and recognize them as “better”. I don’t see it.”
The ’50s and ’60s had greater income equality than the ’90s and ’00s, and the economy was better. :) And more stable.
I have a problem with this statement:
“But this is the first time I’ve heard an economist try to justify economic inequality on the grounds that it is happiness that matters, not money.”
Wilkinson does not hold a doctorate and his publication record seems to have an allergy to peer review. His background seems to be in philosophy and he is an economist in only the etymological sense. Wilkinson has a precocious intellect and is an impressive autodidact, but he is not a real scholar and no amount of footnotes can hide the lack of economic rigor in his work.
We’ve built up a whole host of near oligopolies which have, as would be natural, built up a whole host of government supports for maintaining their oligopolies.
At some point, if we want to maintain a Democracy, we’ll have to push back. Obama is making an effort, but breaking down all these barriers and allowing any real competition back in is going to take time and a huge amount of coordination.
Someone earlier said that government can’t create wealth. I think that kind of absolute statement is probably, at best, seriously misleading.
Much of America’s great wealth was created as a result of the public’s investment in some area or other, whether it be the origination of rail lines, the exploitation of mineral resources, or the internet–which was a government invention.
The public has just made a couple trillion dollar investment in the financial industry in order to avoid Depression. Somewhere right about here is when the discussion of oligopolies gained a lot of traction. The Wall Street bailout and all its components certainly appear to be a clear sign that we’ve got an oligopoly problem where a few citizens, aided and protected by government plutocrats, are wielding very undemocratic power.
This is being done right in the face of a progressive President. It is an alarming display of power.
Charles: “I recall research cited earlier this year in The Economist (Economics View) in which two U. of Chicago researchers make exactly the argument that James tries to refute (and Wilkinson probably cites) – since the price inflation of services exceeds that of goods and the rich spend disproportionately on services, the rich suffer disproportionally from inflation and the buying power of the poor has increased at a faster rate (or decreased at a slower). Therefore, the poor, despite lower relative incomes and wealth (even in real terms), are really better off than they were 20 years ago.”
On that argument, the poor might be better off in those terms if their relative wealth had remained the same. Unfortunately, the wealth gap has widened over that time.
This is getting a bit off topic, but Armani is made in Italy. There’s a little bit of controversy that some clothing lines were being made in Eastern Europe and then having some finishing touches added in Italy so that they could claim the “made in Italy” label. Thomas talks about how during the 80’s Louis Vuitton brought all its manufacturing back under its own control changing a trend towards outsourcing that was lowering the quality of the goods. They had great success and other companies followed suit. Thomas also talks about more recent and limited outsourcing to China by some companies; she mentions Coach if I recall correctly. “Luxury goods” is a broad topic and generalizations are dangerous.
I don’t really agree with many of Thomas’ opinions, but this isn’t the place for that. One fact Wilkinson needs to prove his point is that there is a convergence of quality of the high end and low end goods. His main source for proof of the declining quality of high end goods is book that talks mainly about the vulgarization of the marketing of those goods.
Sorry, I have a strong interest in the subject from a business standpoint. I don’t care much for the goods themselves. I also don’t care much about loosing handicraft knowledge. If some poor souls don’t have to labor at repetitive tasks for poor wages to create beautiful things for wealthy people who see the workers as only half human because we now have machines, well then, good. I’ve labored as a handicraft worker, so I don’t romanticize it.
“Someone earlier said that government can’t create wealth.”
Sigh!
1) The National Institute of Health does a LOT of basic research into drug candidates. If I recall correctly, 25% of all the drugs that land on the US market were originally discovered at the NIH labs. If this is not wealth, I don’t know what qualifies.
2) When the Apollo missions were started, engineers had a particularly vexing problem: space navigation is very calculus intensive, hence, not really suited for abacus processing. They needed powerful machines to automate calculations in a very reduced space and very energy efficient. Let’s remember that at the time, the private sector was enjoying big profits for selling big mainframes. Where were the incentives to shrink those? Nowhere.
What did the solutions to these problems brought us? The personal computer industry. Remind me again how much wealth was created?
3) Nuclear explosions create a very powerful magnetic field that can fry any electronics. That’s a real bummer when the communication technology is point-to-point, You’re the military and you NEED to ensure basic communications in such a scenario. What to do? You talk about your problem with DARPA, and there you go: the Internet is born. Any wealth here?
I rest my case.
I also thought the inclusion of psychotherapy among luxuries was short sighted. People suffering from acute mental illness probably don’t think so.
And an alarming display of greed & stupidity.
Jackybird
of course handicraft is unromantic, but for example in the chemical industry a product goes from the lab through ever increasing quantities before it may reach production level. In the “good ol’ times” there was a glass blower who would on an equal basis together with the chemist design the upgrading equipment. In advanced times the glass blower works for a smallish outfit that sends its conference table suitable representative to talk to the chemist to get the order for equipment. Chemists bitterly complained about the new way but how to make credible that an uneducated handicraftler helped with development. The Zeitgeist would have none of it.
PS:
Armani may make his clothes in Italy the embroidering is done, last time I read, in India. I wonder how often the designer and the actual embroiderer will thus get together and brood over a design
no matter how internetted we are local closeness makes a difference
some more fodder for the Michael Sandel fans from his talks with this site http://www.philosophybites.com/
http://itunes.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?i=55286596&id=257042117
http://itunes.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?i=25974926&id=257042117
one more useful link for the philosophically minded
Nigel Warburton from the Open University publishes probably everything that is available for free on the net and American Philosophers seem to show up in Britain a lot and Warburton also informs of US-University podcasts if available (I remember one Berkeley-professor on Heidegger) – to date I know of no US-site matching this site’s info-value
http://www.nigelwarburton.typepad.com/
TonyForesta
as much as I like your rant and as much as it spoke to my heart and gut etc. and made me nod yes, yes, yes
I think it is a dream that the middle class ever will “march” for a common cause with the poor. “We” will not do that even after having been reduced to poverty ourselves. Class barriers exist, they are barriers of manners/habits just as much as of income and therefore they are human nature they may be softened but only in a society where there is a certain level of comfort for all. Once the substance is endangered or partly destroyed it is each group/class on it’s own unless of course a new kind of human being has evolved without my taking notice ;-)
and once leaders of groups will emerge out of the upheaval/chaos they will always tend to be lenient to other leaders because that is the only way they can get any kind of results/agreements/common grounds.
Thanks Silke for your interest in Michael Sandel. His words are music to my ears. He articulates a philosophy which provides an explanation for the current “mess” our world is in. But better still he is offering a way forward.
Sandel says the age of “market triumphalism” (which began with Reagan / Margaret and reached a culmination with Clinton / Blair) has failed. The way forward includes a genuine civic and political debate on where to set the — the limits — on the market place.
The challenge Sandel articulates is how does society create a new (economic?) paradigm where morality and spiritual values will help set limits on the market. And Sandel is nearly apologetic when he brings the subject of spiritual values into the discourse.
Margaret here of course referring to Thatcher.
Jackybird and Silke,
Silke has identified a very serious problem that “advanced” nations are dealing with. Manufacturing has been outsourced to Asia (China, India, Pakistan) and the trend is increasingly so. This means the traditional middle class (those who worked with their hands in manufacturing and in the trades) has lost ground with the majority of new jobs in the service sector.
It seems to me many new “middle-class” jobs are in the: video game industry, film industry, animation, web design and all the amazing widgets and software to service the internet. Anyone want to talk about this one?
sorry I am only a partial Michael Sandel fan – I liked him on the two philosophybites pieces but only listened to small parts of the Reith lecture, even got kind of angry at him, too much walking on the clouds as a Greek saying goes – as just everybody else he is strong on the analysis but when it comes to the solutions I still have to read somebody who is proposing more than a tweak here and a tweak there i.e. a grander picture it does seem unmanageable to me – maybe because it has been my job for so long to make legal prescriptions work in everyday life but I just tend to see the flaws
Silke,
I too was confused by the term — single payer — when I first came across it. It means a single payer for health care. In other words, a national health care program. We call it universal health care in Canada.
Well Silke, you are German I take it and I am Canadian. The Americans will need to find their solutions. And the EU. Here in Canada I am very grateful all this “cowboy” free-market financial innovation collapsed as it was only getting a foothold in Canada.
Tippy
we have in GErmany a system of universal health care the origin of which goes back to Bismarck http://en.wikipedia.org/wiki/Otto_von_Bismarck and has been patched up, amended, ameliorated etc etc ever since. The membership is compulsory for “wage slaves” up to a certain salary. Those earning more and the self-employed MAY chose private insurers but a lot of them choose to stay in the public system for probably good reasons (for example a single person pays the same as the father/mother in the next cubicle with any number of kids and a non-working spouse – the solidarity principle)
The actual providers of universal health care insurance (a lot of them) in the “public” system operate like private insurers but with some democratic elements added to it. It is very complicated and entangled but from the insured patient’s point of view quite comfortable.
But ever since costs and the premiums (paid half and half by employer and employee) started to explode while the labour market started to weaken “they” have fiddled with the system. One trend was to somehow introduce competition between the “public” insurers – since then there is a constant back and forth. Recently they have changed the age old even split of premiums between employer and employee so that further raises of premiums are supposed to be borne exclusively by the employee.
A lot of people have tried to organize the system anew in a sensible and understandable manner – nobody has succeeded and the costs keep coming and even though the official insurance premium is kept from rising alarmingly the costs to the patients get fiddled with in all kinds of clever and possibly reasonable ways but which come with the benefit of veiling the fact that they are an actual increase of health care cost.
So coming back to the Unequality topic I think this constant fiddling convinces “people” more and more that they are getting screwed while being told that they will be much happier with the new rules.
Tippy
I am happy for every country who hasn’t participated in the general madness and comes out of it mostly undamaged
Germany I get told has been running an austerity program with normal people not going into debt (which obviously didn’t keep some banks and cities going on the rampage) but as the economy is based heavily on exports it has suffered probably more than they are willing to publicly admit shortly before general election. For the time being people are kept on short working hours benefits (a part of the unemplayment insurance system) and everything seems to be on hold whether it will blow over or we will crash belatedly and how badly.
Precisely my point, but for different reasons.
I was responding to the idea that the wealth and income gaps hadn’t really grown because price increases on the stuff rich people buy increased quickly enough to offset this difference, the implication being that because the poor can buy better Honda Civics for the same money (in real terms) or equal Civics for less and the rich pay more (in real terms) for a Mercedes CL 550 or for the daily massage that the poor can’t buy at all, the poor are relatively better off despite their relatively greater income and wealth. I just wanted to point out that the dollar spent on the massage to a person who earns $250k/year is worth less to him than is the dollar spent on a massage to the person who earns $60,000/year. More important is that the poor can’t even buy the services that the rich can buy, so the relative greater cost of those services isn’t a basis for comparison at all. It’s a difference of kind rather than degree: “The rich are different from you and me.”
Don’t fall for the idea that anything costs less, least of all basics. This is a big lie: the cost to replicate the quality of food the average family enjoyed fifty or seventy years ago is vastly higher today as a percentage of average incomes, especially for the poor, who generally have even less access to quality grocers and live in neighborhoods where fresh produce and non-Mad Cow meat is incredibly expensive.
The same goes for shelter: the real estate market has not yet bottomed out – price:income ratios for housing stock is much higher, even for rentals, than several decades ago, and in urban areas, where large concentrations of the poor live, it is vastly more expensive than ever.
Clothing? Granted, a pair of generic rip-off 501s is cheaper than the genuine article was 30 years ago. But 30 years ago 501s were much higher quality than generic rip-offs; you once could tell the difference in the quality of textile and workmanship, probably because 30 years ago the textiles were made in North Carolina and the garment was manufactured in Tennessee. Expatriating that production to China and lowering quality standards has broadened the market, and led to an increasingly disposable product.
The same could be said for just about any consumer electronics. These are the big-ticket items of consumer spending today, and they really skew the data. Cheap handsets and crappy LCD TVs and monitors that have to be replaced every couple years (or less, even) drastically inflate the consumer spending numbers, and explain why cutbacks in these sectors by households that never should have been buying them in the first place is causing such heavy ripples in the downturn.
Durable, quality basics, such as brick walk-ups, 5-year old work pants, and non-GMO apples from your own hemisphere are very expensive habits today, and taking up a much larger portion of the budgets of the ever-growing lower classes. On top of this, the use of auto fuel by the poor has increased by several orders of magnitude in the past few decades, as the lower-middle-class are pushed out to the suburbs by the creative class’s Return to the City and by swindler developers offering cheap junk suburban homes for a few cents less than a smaller quality home closer in. Gas prices suck up a much larger share of the working poor’s income.
So the lot of the poor has not improved. They are poorer, and they feel poorer, and our ability to extend social programs to adjust this is coming to an end as we will soon be spending most of our national income servicing our military and corporate-bailout debts. So don’t be too pleased next time you hear some economics pundit pushing the case for more tax cuts for the rich: they are the benefiaries of our largesse, they ran up the debt, and they invented the disposable economy that is deteriorating our standards of living.
Um. You have just proven the point of the post to which you replied.
The big problem I have with the article is the way it completely ignores the issue of debt and/or savings.
Yes, consumption for the poor and or middle class may have held up much better than income in recent years, but how much of that is explained by the increase in debt and/or drop in savings. It is hard to take his article on consumption that avoids the issue of debt seriously.
I found Wilkinson’s paper quite persuasive, but Kwak’s rebuttal is good. I have only one correction. When Kwak writes that “this is the first time [he’s] heard an economist try to justify economic inequality on the grounds that it is happiness that matters, not money,” he spoke too soon. As fas as I know, Wilkinson is not an economist, or at the very least, he has no degree in economics.
They say that money can’t buy happiness — but it can sure take the sting out of being unhappy.
Shovelling $22 trillion to the banksters NOW NOW NOW is an “effort”? TARP was dead in the water until Obama whipped for it.
Sorry to hear about this in Germany. Normal people running an austerity program and not going getting into debt while the banks went on a rampage.
In the late 1990s there was a huge push by business to allow Canadian banks to merge with the large American banks. The free market mantra was Canadian banks were too small, less competitive, less profitable. But our finance minister Paul Martin and our prime minister Jean Chretien heard the public opposition and had the foresight to rule against foreign takeover.
All I can say is what a mess the Canadian banking system would be in if our banks had been taken over by American banking giants like Citi, Bear Sterns, or Merrill.
There are systemic problems in our economy. Here in British Columbia the forest sector is always having some kind of problem. Our fisheries are in trouble because of over fishing and global warming. The salmon returns are 50% below forecast this year. When the river temperatures rise the salmon don’t like to enter the rivers to return to their spawning grounds. Industrial fishing and forestry gone mad.
But still no Canadian banks went on a rampage. So we were lucky on this one.
Silke, we have the same problem in Canada. Rising costs because of medical technology, procedures, diagnostics and drugs of unproven usefulness.
The for-profit medical lobby has a relentless campaign to convince Canadians our health care system is failing. While the side which wants to preserve national health care says our health system does not need a huge infusion of private or public capital. Rather we can restructure and allocate resources better. I’m inclined to side with the latter.
now while everybody is busy regulating the loopholes of the last crisis out of existence it seems bankers have found a new one
Being not of the business I do not know how relevant it is but listening just to the podcast which explains it very well did nothing to make me dismiss it as just a media hype.
“It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.”
Tippy
Of course I go with the latter also but in my experience it is the time that a system has existed and consequently the number of adjustments and deviations from its original intentions that determine how much it is in danger of crashing
… and of course with how much disregard for small print the necessary patching up has been done (my lawyer bosses have always pointed out to me how long it took Germans around 1900 to word our Bürgerliches Gesetzbuch – Book of Laws for Citizens – and how well it has weathered the changing times and how fast they are through with wording amendments nowadays – because they are so much smarter than the old ones?;-) – it just is hubris wherever you look)
the pity is that those wanting to look really close at the dangers get maligned just as much as those advocating for throwing it all away and starting anew, so in the end no real discussion is taking place
– my only hope is that I am wrong about that and that there are some quiet rooms (Hinterzimmer-back rooms of pubs for clubby drinkers and gamblers) where people really are thinking and discussing with the sole ambition of coming up with workable solutions for our times.
As long as there are resources allocated initially by markets, entities will control the production/distribution where scalable, and so the freedom of that particular market will die. So we end up with a system of oligarchies, corporatism. This also leads to the inevitable purchase of the political system.
As long as this system is allowed, there will be inequality. There are and have been alternatives. A decent example (excellent given the sea it sails in) is the Mondragon coops in Spain.
As far as the economics of it goes, one has to keep in mind mainstream economics is more religion than science; Steve Keen has a good analysis of this.
The fact markets are so often defended and lauded makes me think they know they are on thin ice. When’s the last time someone defended gravity?
Having come via CR, I’ve been a long-time lurker here, too.
Definitely one of the better blogs, and less comments that make you want to rip your hair out than usual for many blogs about the economy…
A really nice rebuttal of a transparent attempt to justify the pernicious changes in wealth distribution that started with Reagan and Thatcher and fanned out to many other countries including my own, Germany.
Now I’m waiting for your thoughts about the remaining 15 pages.
We’re talking about an ideology that is prepared to sacrifice society (and economy in the longer term) in exchange for short-term profits.
One more symptom: Many people can’t get into regular employment like their parents, having to earn their livelihood on a series of time-limited contracts. Because of lack of reliable income/planning security, they often delay the decision to have children until it’s very late. Another well-known fact is that the number of children in a family has become a good predictor for poverty risk. Societal/health/economic effects left as an exercise to the reader.
BTW, like Silke, I fear that most Germans will only feel the unbuffered effects of the crisis after the general election. I hear a lot from self-employed people (like myself) and people in SMEs, their reality sure differs from what we hear through our media.
Finally, one question, please disregard it if you think it’s stupid or indiscreet. I happen to know two people with the family name “곽”, which is often romanized as “Kwak”. Wrong guess?
“Take organic fruits and vegetables, for example, which many parents would like to buy for their children, but are simply too expensive for tens of millions of households… These are not frivolous luxuries like Sub-Zero refrigerators.”
Not so fast, that’s exactly what they are:
Organic food is no healthier, study finds
“Researchers from the London School of Hygiene & Tropical Medicine said consumers were paying higher prices for organic food because of its perceived health benefits, creating a global organic market worth an estimated $48 billion in 2007. A systematic review of 162 scientific papers published in the scientific literature over the last 50 years, however, found there was no significant difference.”
(Hat tip: Glenn Reynolds)
I realize this is heresy in Professorville…
Lies, Damned Lies, Etc. Here is what they studied:
“Our review indicates that there is currently no evidence to support the selection of organically over conventionally produced foods on the basis of nutritional superiority.”
Nutritional superiority!??? Who thinks that organic food is nutritionally superior? It may be nutritionally superior to junk food, but that is not what they studied. Organic foods are vegetables grown without pesticides, or animals raised without hormones. The point of eating organic foods is not to get better nutrition, but to keep poisons and dreck out of your body. Ridiculous research!
Min
have you ever tried to imagine what the hungry of the world think of our habit of calling food that is perfectly capable of keeping people alive junk food?
I am sure that Twinkies can sustain life, for a while, anyway. Do you think we should ship them to starving children?
Min
as Marie Antoinette supposedly and famously said
“let them eat cake”
and calling food the Zeitgeist rightly or wrongly considers to be unhealthy garbage isn’t any closer to decent or considerate or polite behaviour just because a family living of a garbage heap is farther away from our window than it was from Marie Antoinette’s.
“We” cannot see and hear them and so we consider a language appropriate which I would find highly objectionable if I were one of them (to think of it I probably kind of was in a very very small way for a time after the WW2) and if I were I surely could sea and hear at lot more of “us” than “we” of “them”.
Bad example I know the garbage collector’s family is probably not going hungry, but they have the advantage of being closer to our food arrogance and I find their life easier to imagine than the one in a sub-saharan camp – but I doubt even there they do not have television which in all likelihood shows them a lot of “our” food arrogance
– the old Greeks tickled their throats to vomit so it is told but they did it only to be able to drink more.
“We” spew our verbal food vomit all over the media. I think it would be just good manners to change that. There must be a way of getting at stuff “we” do not want the industry to produce without that food in general denigrating language.
Orwell tells that his teacher used to ask his class first thing every morning:
“what is the most important thing in the world?”
and the class had to answer back in chorus “Food”
I think Orwell’s writing proves that this basic teaching stuck with him and helped him to become “St. George” as the Brits sometimes call him only half-mockingly.
kwack, you’re a socialist. a bimodal income distribution is no good for the long term. but it is very clear you want the government to step in and manipulate income rather than create a vibrant middle class the old fashioned way–to EARN IT.