Troubleshooting Inequality

In the past quarter-year or so, the economic news for the United States has been unpredictable. The end of 2011 and the very beginning of 2012 brought reports of sustained if not extraordinary growth, but it was the jobs numbers that inspired so many to once again adopt the cautious optimism that was so premature during 2010’s “recovery summer.” For the first time in a long time, the end of last year and the start of this one featured Americans getting hired at a rate that, if not robust, would nevertheless have been deemed acceptable in the years before the Great Recession.

Then came March’s tepid results; and we seem once again to be merely treading water.

I believe that part of what’s made this endless wait for jobs to return so exasperating is the knowledge most of us have, barely hidden under the surface, that we’re waiting in vain. It reminds me of the troubleshooting routines we all slog through when a computer or iPod won’t work, before admitting that it’s beyond our saving and pulling out our wallets. Ever since the White House’s 2009 stimulus bill proved unable to nurse our economy back to health, we’ve been running one time-consuming and patently inadequate troubleshooting test after another.

What the hell’s keeping us from facing up to reality? It’s not as if no one knows what to do; until the latest downturn, there was a broad consensus in favor of stimulative policy in response to economic strife. And it’s not as if the public’s indifferent to the wan job market; the economy and/or jobs has been the number one issue on the public’s mind for years. So why does Washington continue to stand pat? What explains this protracted lurch towards stagnation and mediocrity?

To my mind, this has been the most vexing and important question of the Obama Presidency. The vexation is obvious, but the true importance of discovering its source may not be so clear. There’s always the idea that politicians have always been useless, Washington always a sour swamp of fecklessness and corruption. In countless particulars, that’s no doubt true. But the extent to which today’s US appears incapable of addressing its largest, most widespread concern — this is, while not quite unprecedented, most certainly not the same as it ever was.

Produced for the upcoming The Occupy Handbook, Paul Krugman and Robin Wells have written a pamphlet-sized brief on what they think is the best explanation for America’s current level of dysfunction. Their answer can be reduced to 2 words: inequality and polarization. My emphasis:

So how did we end up in this state? How did America become a nation that could not rise to the biggest economic challenge in three generations, a nation in which scorched-earth politics and politicized economics created policy paralysis?

We suggest it was the inequality that did it. Soaring inequality is at the root of our polarized politics, which made us unable to act together in the face of crisis. And because rising incomes at the top have also brought rising power to the wealthiest, our nation’s intellectual life has been warped, with too many economists co-opted into defending economic doctrines that were convenient for the wealthy despite being indefensible on logical and empirical grounds.…

The most likely explanation of the relationship between inequality and polarization is that the increased income and wealth of a small minority has, in effect, bought the allegiance of a major political party. Republicans are encouraged and empowered to take positions far to the right of where they were a generation ago, because the financial power of the beneficiaries of their positions both provides an electoral advantage in terms of campaign funding and provides a sort of safety net for individual politicians, who can count on being supported in various ways even if they lose an election.…

In sum, extreme income inequality led to extreme political polarization, and this greatly hampered the policy response to the crisis. Even if we had entered the crisis in a state of intellectual clarity — with major political players at least grasping the nature of the crisis and the real policy options — the intensity of political conflict would have made it hard to mount an effective response.

They’re going too easy on Democrats, who are and have always been fundamentally in favor of the status quo concerning capitalism and power; but the theory does not otherwise strike me as seriously in error. In its general thrust, it’s not dissimilar from Hacker and Pierson’s Winner Take All Politics. In both cases, the crucial role of politics is not downplayed or disregarded, but, at the same time, neither duo ignores how economic processes can establish a logic and equilibrium of their own. Inequality is self-perpetuating.

Please do be so kind as to share this post.
Share

47 thoughts on “Troubleshooting Inequality

    • Also, it seems like the republicans were in favour of a tax cut as fiscal stimulus, not deficit spending. While cutting taxes in a deficit may be equivalent vis a vis budgetary issues, there is a difference in terms of efficacy. Tax cuts happen quickly and can expire when the economy requires. It takes time to martial resources to build infrastructure. The business cycle may have already turned around by the time the shovels get ready.

        Quote  Link

      Report

    • Do you understand why, though, James? I find the behaviour of the economics profession quite mysterious. Prior to the great recession it genuinely seemed there was an overall consensus that central banks had the tools and the mandate to create as much money as was required should there be a sudden drop in liquidity. Ben Bernanke did not get to be called Helicopter Ben for nothing. Somehow on September the 15th 2008 that consensus collapsed or was proved never to have existed and liquidity remained suppressed for 2 years, and is still dragged down by the lower-than-previously-expected growth path of the economy. Somehow Scott Sumner and his pals are the only people supporting what used to look like an orthodoxy, everyone else has plumped for one of the following options:

      1. Mysterious conversion to old-school Keynesianism, accompanied by sudden forgetfulness about the vast amount of literature on how monetary policy can still work when interest rates are zero.

      2. Naive monetarism of a kind that has slightly dislodged the earth from its path around that sun thanks to Milton Friedman spinning in his grave, leading to a belief that either inflation is already happening or will happen very soon in spite of all evidence being to the contrary.

      3. Resorting to hard line neo-classical theories of the business cycle as if they were actually gospel truth, in which case neither fiscal or monetary stimulus can do anything. Which raises the question of why anyone would waste so much ink opposing it

      4. Renewed interest in Austrain business cycle theory, ignoring the fact that it can’t explain business cycles as actually observed.

      To my tiny brain, none of these sets of ideas is remotely helpful in explaining or helping with the recessions, so its  a complete mystery why they have suddenly become so influential, just when the opportunity to put the prior orthodoxy to the test arose.

        Quote  Link

      Report

      • Simon,

        I’m afraid I’m in the same boat as you, but my tentative answer is that the consensus was never as solid as it appeared on the surface, and the recession/Great Contraction/whatever-it-should-be-called was just the supersized event necessary to reveal the cracks.

        My gut goes with Arnold Kling’s patterns of sustainable specialization and trade argument. That is, I think we’re in a major restructuring and it just takes time, and too much government intervention is likely to ease the pain now, but at the cost of slowing the ultimate restructuring.  I don’t think he’s intellectually proven the case, though.  Compelling arguments, but not dispositive. And I think he wasn’t part of the consensus to begin with, his theory just required a major event to get people to look at it.

        And Krugman’s been quite clear that he’s still with the monetarist consensus for most recessions, but that he never abandoned the Keynesian line of thought for the rare unusual great contractions. So in “normal” recessions he wouldn’t need to bother making much noise, because he believed the Fed could handle those–only with an event of this scale did he need to emphasize that now was the time to go beyond monetarism.

        And Sumner…well, when monetary policy hit the zero interest rate level most of the less-committed monetarists quailed at their approach’s seeming failure (a seeming failure vigorously pointed out by Krugman, DeLong, et. al., and for which they didn’t seem to have ready answers).  But Sumner held on with a cheeky confidence that suggested he’s either got that much better understanding or he’s a bit of a single-solution-to-all-problems nutcase.  But as time went on and the stimulus had less effect than (politically) predicted (it’s only fair to point out that Krugman always said it was too small to have big effect, but the size he wanted was truly shocking), Sumner seemed to be winning more and more people back to the monetarist fold.  I have to admit that I’ve found Sumner to be most persuasive–of course I’ve long been something of a monetarist, but like I said, my gut wants to believe it’s just restructuring, but on a damned big scale.

        I don’t think that actually answers your question, but maybe it digs into it just a little bit.

          Quote  Link

        Report

        • My takeaway on DeLong is that in terms of actual policy potential, he doesn’t seriously differ with Sumner on whether modern central banks have the tools at their disposal to handle basically any recession. The problem is institutional & political: getting them to take the extraordinary steps past the ZLB that the theorists say it would take to deal with a demand shortfall monetarily.  And Scott Sumner implicitly agrees: he’s very unhappy with Bernanke’s performance despite the fact the he tripled the the monetary base, etc. etc.  So then the question becomes, in a situation where monetary policy in the event is going to be significantly short of the theoretical ideal, can any of the shortfall be made up with fiscal policy?  This is Sumner’s point of fundamental resistance to any variety of Keynesianism: he says that in the absence of sufficiently accommodative monetary policy, fiscal policy can’t work, and if you can get it sufficiently accommodative monetary policy, fiscal policy is unnecessary.  DeLong apparently doesn’t agree.

          In my view, it’s important information that central banks in this crisis haven’t in the event performed in the way they’ve needed to, despite having the tools and mandate to do so, in order for the prescriptions of those who say monetary policy alone can address basically any crisis, including by using extraordinary tools past the ZLB, to have actually led to a strong recovery.  I think that shifts the burden onto those against fiscal stimulus to show that it can have little or no positive impact and/or significant negative potential.  Facing severe downturn or prolonged sluggishness and in the absence of effective central bank policy, the political/representative branches of government, or factions within them, are inevitably going to seek to use their spending and taxing authority to try to ameliorate conditions.

            Quote  Link

          Report

        • I’m going to go a different direction.

          Simply put: macroeconomics as a field isn’t designed for the level of policy diffusion that can occur with the federal/state splits in terms of responsible for fiscal responsibility.

          I don’t think PSST theory actually accounts for the economic performance of non-American economies which have substantially more centralized direction of their fiscal and monetary policy. For example, there are reasons beyond comparative advantage that so much capital flows to China on a variety of manufacturing sectors, despite the fact that a multitude of actors in SE Asia have a comparable or perhaps even superior advantage in certain areas where China is still dominant. (Electronics assembly is one area, textiles another)

          Arguably Malaysia, Indonesia, Vietnam and the Philippines have certain structural advantages that under a purely Ricardian model should see them taking a good share of certain industries away from China. Yet the recent spate of trade restriction removals we’ve seen (for example for textile import quotas in the US) have seen China actually EXTEND their lead in those same areas.

          Legacy structural weaknesses for the latter states (a carry-over from the Asian financial crisis) plus substantial foreign asset reserves in the reserve currency (for China) I think are providing a substantial monetary differences that account for a lot of the economic performance.

          Also, I think most macro theories simply don’t take into sufficient account carry-trades, the ease of investment changes and the fact that even the Federal Reserve has substantial limits on how it impacts the money supply because of capital controls in other countries.

          I’m prone to liking macro level thought processes for policy, but the truth is implementation of said policy (and economic analysis of such) is actually a lot more difficult than the theoretical justifications would permit.  In short:: this shit is complicated.

            Quote  Link

          Report

          • I don’t know if anyone has actually tried to work it out, but presumably a chartalist theory of foreign exchange would focus on the impact of tax, spending and borrowing policy. It might have interesting things to say about the relative strength of the dollar and yen relative to the euro, which quantity theory has trouble with.

              Quote  Link

            Report

        • Yes, I nearly did, but in respect to business cycle policy, it doesn’t really differ from old-school Keynesianism. In terms of economic history, and the actual behaviour of government debt, I think the chartalists are right and have important insights. But in terms of business cycles and business cycle policy, they don’t have anything new to add unless the government were actually to start trying to run monetary policy through the tax system.

            Quote  Link

          Report

  1. “What the hell’s keeping us from facing up to reality? ”

    Because maybe “reality” isn’t as bad as everyone thought.  Few people, I think, realise just how cheap living has actually gotten.  Sure, it’s bad that lower income is associated with obesity–but then, which is worse, dying of diabetes at age seventy or dying of starvation at age seven?  And we have heard from every corner of the Left that having an iPhone and a new car and a college education doesn’t mean you’re rich.  Which means, therefore, that even poor Americans can have iPhones and new cars and college educations.  Hooray!  We won!  It’s wine and lotuses from here on out. 

    “What explains this protracted lurch towards stagnation and mediocrity?”

    Ask a travel agent.  (ha ha! you can’t, travel agents don’t exist anymore, thanks to the Internet making it possible for us to do all that work ourselves.)

    The big lesson of the past ten years was that most white-collar service jobs were basically this guy. And you don’t actually need that guy. Oh hey, a recession! How convenient. Cut half the staff, “times are tough and we have to tighten our belts”, buy an inventory-management setup from SAP, then roll onward into the brave new world of tomorrow.

    “Paul Krugman and Robin Wells have written a pamphlet-sized brief on what they think is the best explanation for America’s current level of dysfunction. Their answer can be reduced to 2 words: inequality and polarization.”

    Holy shit! It’s all rich Republicans’ fault! Thanks, Krugman and Wells, for ripping away the veil of ignorance that dimmed the lights of our eyes. Er, wait, isn’t everything always rich Republicans’ fault? How is it different this time around?

      Quote  Link

    Report

    • The big lesson of the past ten years was that most white-collar service jobs were basically this guy. And you don’t actually need that guy. Oh hey, a recession! How convenient. Cut half the staff, “times are tough and we have to tighten our belts”, buy an inventory-management setup from SAP, then roll onward into the brave new world of tomorrow.

      If not for the fact that unemployment is concentrated among what we’d consider working class industries, this would be a good point.

        Quote  Link

      Report

    • Thank God for SAP.   Their idiocy keeps me in business constantly.   SAP is like buying a suit of armour off the shelf.   No sooner does the proud owner don his shiny new metal outfit and ride a few miles down the road than it begins to pinch in places where a man ought not to be pinched.   As he comes around the corner, groaning and shifting in his saddle aboard his trusty steed, what should hove into view but the SAP blacksmith, ready to retrofit his armour for the lowlow rate of $300 USD / hour.

      Which is generally where I enter the picture, about the time the CIO decides he’s had enough of wasting his budget on SAP consultants.

        Quote  Link

      Report

      • From last night’s Game of Thrones:

        He’s a knight!

        No he’s not.

        Of course he’s a knight.  He’s wearing armor.

        That doesn’t prove anything.  Any idiot can buy a suit of armor.

        How do you know?

        I used to sell armor.

          Quote  Link

        Report

    • (ha ha! you can’t, travel agents don’t exist anymore, thanks to the Internet making it possible for us to do all that work ourselves.)

      No, they do exist. Got my tickets to Hong Kong last year from a travel agency in Chinatown. I don’t know how, but they manage to get better deals.

       

        Quote  Link

      Report

  2. This seems so disconnected from reality it’s not even funny.
    Let me pick at your highlighted points.

    Soaring inequality is at the root of our polarized politics, which made us unable to act together in the face of crisis.

    No, I would say that targeting all the RINOs and DINOs has a lot to do with it.
    The parties are more polarized because they want it that way.

    the increased income and wealth of a small minority has, in effect, bought the allegiance of a major political party.

    You mean the Goldman-Sachs crowd that runs the Democratic Party and Paul Krugman?
    The whole idea of: political parties = cash flow is waaaaaay too simplistic.
    The cash follows the idea; not vice versa.
    I don’t see how anyone could rationally posit that the one and only distinction between the two major parties lies solely in their preferred school of economics.

    In sum, extreme income inequality led to extreme political polarization, and this greatly hampered the policy response to the crisis.

    It’s one excuse after another.
    Just last week when I brought it up, I was told that Obama gets excused from underestimating the financial crisis because no one knew how bad it was at the time.
    Now, it’s actually polarization and income inequality to blame.
    I don’t even see that as a serious argument.
    I can’t even bring myself to refute something so child-like in its basic assumptions.

    And note: I kinda like Obama, even though I disagree with some of his decisions. Two months ago, I would have thought it a foregone conclusion that I would vote for him this cycle. Now, I’m giving Romney a closer look.
    I don’t care for the Democratic House leadership, though I think the D. Senate leadership is ok. I like Boehner, dislike Cantor and McConnell.
    At this point, I’m inclined to believe that one of the worst things about Obama is the Obama supporters.

      Quote  Link

    Report

    • Problem is, when we look at the worst aspects of how we got to 9/15/2008, many of the same idiot actors are in place.   Look at that little weasel Robert Rubin:  back in the Clinton Era, when the CFTC tried to regulate the OTC derivatives market, even after the collapse of Long Term Financial Capital, he resolutely opposed any regulation.   Same with that pinhead Geithner, ever the butt-boy for that old Libertarian fraud Alan Greenspan, who was finally obliged to own up to his manifest failures to understand the need for market regulation.   There wasn’t one crook on Wall Street who Tim Geithner hasn’t ridden in to rescue:   That non-tax-paying son of a bitch still has everyone on both ends of Pennsylvania Avenue completely gobstopped.

      How very right you are:  the Ghost of Goldman Sachs is out there on the battlements and there’s Obama/Hamlet, hanging on his every word.    Worse than the Obama Supporters are the Obama Staffers.

        Quote  Link

      Report

      • You bring up a good point, and that’s worth going over.
        I voted for McCain in ’08. I felt that both candidates would make good presidents. I thought Obama would do a better job at staffing the cabinet.
        But I looked at it as more of a vote for the leadership of the party. Which would be more meaningful to me: to have McCain as the head of the Republican Party, or to have Obama as the head of the Democratic Party?
        I thought it through, and determined that the Republicans were the least likely to be trusted with a leadership vacuum– too many bad things could happen (and as it turns out, we got the Tea Party from that).
        The Democrats, I felt, could sort through a leadership vacuum, and come out in a better way at the end.
        Instead, we had Obama acting like he was still the junior Senator for a good part of his first two years in office, and Pelosi elected to House minority leader, even though she’s wildly unpopular nationally.
        All the reaching out to “serious people,” such as Rubin, Geithner, et al, looked more like a move to show the “serious face” of Obama; but now it looks more like a maneuver to cover up his inexperience.
        But what I was worried about happening with a McCain administration– that he would give some of the worst Bush43 staffers continued employment– turns out to be Obama’s move instead, dredging up some numbskulls best forgotten.
        I must have read it wrong. What can I say?

          Quote  Link

        Report

  3. It’s state governments, stupid.

    All policy responses at the national level are meaningless when you have states cutting in the region of $4-5 billion dollars out of education budgets while sitting on $6.4 billion in rainy day funds.

    The 2010 wave of state house flips and the subsequent axes taken to state budgets explains a substantial amount of the tepid growth and no amount of federal bullying can make that budge.

      Quote  Link

    Report

    • And this. Indeed.  In retrospect, the ‘shovel-ready’ issue was a joke given the availability of the option of simply increasing and sustaining state government aid longer in the ARRA.  Failing to act in this way on the evidence of the insufficiency of the 2009 stimulus was probably the biggest mistake of the 111th Congress, and the second biggest of the Obama administration’s first term, after being slack in nominating Fed appointees and renominating Bernanke (though in terms of confirmation I think they had no choice on Bernanke – he was the man who saved the world economy, after all).

        Quote  Link

      Report

  4. Elias,

    I find it humourous that you reference a book on Winner Takes All Politics. The title says it all, politics is a zero sum game and special interests will capture the spoils. You do realize that this is what the libertarians have been warning all along, right?

    If you enter the arena of political solutions you will emerge with zero sum, win lose outcomes dominated by special interests. Free markets, properly set up with minimal interference and proper incentives (unlike the cluster fished incentives of high finance) are positive sum systems that generate wins for all voluntary participants.

    If you want positive sum outcomes, you need to play a positive sum game.

      Quote  Link

    Report

Leave a Reply

Your email address will not be published. Required fields are marked *