Branko Milonavic is one of the most prominent writers on economic inequality. So when he wrote a recent article on why he cares about inequality, I looked forward to reading it so that I would understand better why he cares. Disclosure: As long as pretty much everyone is doing better economically, I don’t care about inequality.
Milonavic starts by correctly expressing the view of people like me that I stated directly above:
The argument why inequality should not matter is almost always couched in the following way: if everybody is getting better-off, why should we care if somebody is becoming extremely rich?
So then why does it matter to him? He goes on to say why, and I recommend that you read the whole thing. He sees a conflict between inequality and growth. But then he writes a paragraph that surprised me:
Why would inequality have [a] bad effect on the growth of the lower deciles of the distribution as Roy and I find? Because it leads to low educational (and even health) achievements among the poor who become excluded from meaningful jobs and from meaningful contributions they could make to their own and society’s improvement. Excluding a certain group of people from good education, be it because of their insufficient income or gender or race, can never be good for the economy, or at least it can never be preferable to their inclusion.
It’s not clear what he’s saying here. Is he saying that people in the lower deciles are doing worse? That would be bad, as he and I would agree. Or is he saying that growth of income for people in the lower deciles is positive but less than he and I might like? It’s not clear. Later in the paragraph, he says that they are not making “meaningful contributions they could make to their now and society’s improvement.” I’m not sure that’s true. But even if it is true, how does that have to do with inequality? What if a small group of people get really rich, a large group in the middle gets substantially richer, and the bottom one or two deciles get somewhat richer? And, even better, what if people in the bottom two deciles do so by working? He might say they don’t have meaningful jobs, but he doesn’t say what that means. I think all honest, non-coercive work is meaningful.
It’s possible that Milanovic is saying that the growth in income at the the top comes at the expense of the growth of income at the bottom. I can imagine scenarios in which this is true and the most likely ones are some version of cronyism in which the government grants monopolies and subsidies to favored recipients, a la Lyndon Johnson. But I’m not sure that’s what he’s saying. Is he saying that entrepreneurs who make money by innovating or bringing innovations to market are hurting people at the bottom or causing their incomes to grow less quickly? That’s a hard case to make. Bill Gates got rich but people at the bottom did a little better because of him. Recall recent Nobel prize winner William Nordhaus’s finding that entrepreneurs receive only about 2.2 percent of the producer and consumer surplus that they create.
Notice the title: his confusion about inequality. I’m not saying that there’s not a way of expressing his thoughts that could clear up the confusion. I’m saying that he hasn’t done so.
READER COMMENTS
Jon Murphy
Dec 8 2018 at 9:59am
Could he mean the jobs they have are not fulfilling? That is, they are stuck in dead-end jobs and that contributes to lower health (eg mental health, or increased reliance on substances) and thus more resources spent on just maintaining their current lifestyle rather than advancing?
Matthias Goergens
Dec 8 2018 at 11:05am
Could be. Minimum wage laws are notorious for draining all joy from low income jobs.
(Similar to how rent control / rent ceilings lead to really shoddy apartments.)
Dave Adsit
Dec 8 2018 at 10:44am
Could he be thinking that the increasing come of the upper and middle classes combined with their demand for inelastic goods and their ability to pay higher prices will make those goods unavailable to lower-income individuals even if those lower-income individuals have a greater income than they did before the inequality increased?
john hare
Dec 8 2018 at 12:39pm
It appears to me that this whole complaint about inequality falls apart as long as there are clear pathways for upward mobility. Half of all people will always be below average. That shouldn’t be a problem for honest people as long as the motivated can move up, and the unmotivated can move down.
E. Harding
Dec 8 2018 at 12:49pm
“Excluding a certain group of people from good education, be it because of their insufficient income or gender or race, can never be good for the economy, or at least it can never be preferable to their inclusion.”
Uh, yes, it can, both by lowering the signaling value of education and by wasting money “educating” people who are unlikely to care about the material or, if they do care, ever use it anyway.
David Henderson
Dec 8 2018 at 12:58pm
Jon Murphy, Matthias Goergens, and Dave Adsit,
Good thoughts.
john hare,
Good thought as long as you replace “average” with “median.”
MikeW
Dec 8 2018 at 5:25pm
I just want to note that Milanovic is misspelled the first three times…
Scott Sumner
Dec 8 2018 at 5:59pm
It seems to me he is saying that inequality leads to low educational and health outcomes, which then have other negative effects. But why would inequality lead to low educational and health outcomes? That’s not clear to me. I see why low incomes would do that, but not inequality. On the other hand, I’d certainly expect inequality to be correlated with poor educational outcomes, without any causal effect.
David Henderson
Dec 8 2018 at 6:25pm
Well said, Scott. That’s what I’m thinking too.
Mark Z
Dec 8 2018 at 10:16pm
I was thinking actually that poor educational outcomes would often lead to economic inequality, as a comparatively small number of people are well enough trained or educated earn high incomes. Poor education outcomes would also likely cause lower growth among the poorer classes; and might expect the latter effect to lag more than the former. That is, if you suddenly made the bottom 2/3 of the population less well educated, I think income inequality would increase first, then the growth rate in the lower quantiles would decline, inasmuch as a person’s income in any way reflects expected future productivity.
And he doesn’t really have a good explanation for the mechanism by which inequality eo ipso is supposed to be preventing people from obtaining education. There seems to be an unspoken clause, “if we assume inequality is caused by some pernicious factor (like rent-seeking)…” But that’s not self-evident. I don’t think there’s evidence that inequality caused by innocuous factors – like demographic changes – is inherently pernicious.
Kyle
Dec 22 2018 at 11:29pm
Could we not take his statement as something similar to Cowen’s “Stubborn Attachments” proposal that we should have strong bias for economic growth and that there is some level of inequality that maximizes growth such that levels higher than that will be slower than the alternative optimal? It seems to me that if that is not what he is saying (which I think it is), then it is at least a plausible argument as to when inequality is bad. Whenever it interferes with the fastest rate of growth possible, it’s getting in the way.
Mark Brady
Dec 9 2018 at 12:48am
Dave Adsit asks, “Could he be thinking that the increasing [in]come of the upper and middle classes combined with their demand for inelastic goods and their ability to pay higher prices will make those goods unavailable to lower-income individuals even if those lower-income individuals have a greater income than they did before the inequality increased?”
May we assume that “their demand for inelastic goods” should read “their demand for goods in inelastic supply”? And if so, is not land (site) the quintessential example?
Dave Adsit
Dec 9 2018 at 3:15am
Your corrections do make my question more precise.
I have a follow-up question. Is there evidence that increased inequality makes those with the lowest incomes worst off in absolute terms? I really don’t know. I can imagine scenarios where it might, but my prior is that it does not. My prior belief suggests that people may feel worse about their situation even when it is improving in absolute terms if they compare themselves to those with a significantly better (and improving) life circumstance.
Swami
Dec 9 2018 at 12:48pm
I really wish economists would put together a simple checklist on how to avoid mistaken assumptions on inequality (directed at fellow economists, who continue to make the same mistakes over and over and over again).
It would include reminders that people are not the same as classes, and that classes are point-in-time statistical breaks of populations of individuals or families who continuously move up and down the income scale. A country with a high Gini and massive movement between income classes (if memory serves, about two thirds of US families spend at least some years in the top quintile) would represent not longer-term inequality but longer-term payoffs to skill, education and experience.
I am not an economist, yet I am familiar with all the various studies which show that when families are tracked over time that those in the lowest starting classes gain the most on average (substantially more!) over the next decade (thus at a family level the poor get richer faster than the rich).
Another helpful reminder for economists would be to remember to take in the effects of immigration on inequality and income growth trends. When a country has thirty or forty million immigrants (such as the US), and an increasing percent of immigrants between eras (such as the US), then it is crucial to remember that comparisons involve different populations. The proper comparison would either adjust or exclude immigrants (who obviously gain the most in real terms even as they pull down trends and averages) or adjust the data backward to include the prior era income distribution of the preimmigrant population.
A significant portion of the lower two distribution quintiles are made up of immigrants who were not in the original mix, thus artificially reducing true family level growth and distorting reduced point in time gini (immigration lowers gini, it doesn’t raise it) and making it look like an increase in inequality even though it is the opposite.
No economist in this day and age should make the above two mistakes, yet they do, continuously. Other simple checklist reminders are to correct using the most accurate inflation rate (PCE), consider the effects of transfers and taxes, consider changes in family size and societal marital rates (this one is huge), changes in tax law (Piketty?), non monetary income (benefits and working conditions), and, in larger countries such as the US, different costs of living by geography (afjusted for cost of living incomes are comparable between MS and NY).
Milanovic — his studies and his articles and his recommendations — could really benefit from a checklist like the above.
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