A certain laxity in word choice
Matt Yglesias is normally my favorite progressive blogger, but today I have two bones to pick. The first is perhaps a bit picky, as I object to a single word:
On the other hand, one can make the case that an overall culture of laxity on the part of regulators and impunity on the part of bankers was a major contributing factor to the crisis. In that sense, any tough prosecution for anything helps.
‘Laxity’ is a very strange term to use to describe the mistakes made by regulators. Let’s review what actually happened. Regulators (which includes everyone from low level bureaucrats to Congressional leaders to the President), mostly favored more homeownership. They pushed banks to make more loans, particularly to low-income borrowers. By the way, every time I make this claim I get readers who seem to have forgotten the elementary rules of logic, insisting that it was a myth that regulators caused banks to make lots of bad loans. “Krugman proved that.” Umm, I never claimed they did. Read it again.
So let’s give the Barney Frank’s of the world the benefit of the doubt. None of this pressure from regulators and Congress caused banks to make a single extra subprime loan. What then? Then Yglesias’s comment is still equally misleading, for reasons I was trying to explain before being interrupted by commenters that I was already anticipating in my mind. Here’s the problem. The regulators were clearly favoring stupid policies. They were clearly advocating stupid policies. If the regulators were stupid, one would not ordinarily describe their failure as “laxity.” If they had tried even harder to enact these foolish policies would we have avoided the crisis? Clearly not. But of course if Yglesias had replaced the word ‘laxity’ with ‘stupidity’ then it would have been harder to claim that more regulation in the future is the solution. It sort of goes against common sense to give more power to the people whose views (in retrospect) were the most stupid of all.
Yglesias also has a post criticizing Scott Winship, whose research always seems very sensible and high quality to me:
And then something enormously predictable happened. Any time a depiction of growing inequality in the United States becomes popular, people who believe that increased inequality isn’t bad, even if it’s real, start arguing that it isn’t real either. Scott Winship is one of the brightest lights of that school of thought, so he presented a long series of quibbles with both the Saez/Piketty data and Tcherneva’s presentation of it which he framed as a debunking of their claims.
But look past the framing and you’ll see that even Winship himself agrees that “income inequality is at staggering levels in the US, and that income concentration at the top has probably risen.”
Yglesias also seems to recognize Winship’s expertise—Paul Krugman would never put “brightest lights” in the same sentence with a conservative economist. Maybe “dim bulb.” But the rest of the comment is perplexing. Who are these mysterious economists who deny that inequality is increasing? Fortunately Yglesias provides a link. Here is the first paragraph of the post he links to:
While income inequality has been a growing subject of public discussion and most authorities take it for granted at this point that incomes in the United States have grown very unequal, there is some dispute about this. Richard Burkhauser, a Cornell University economist, and Scott Winship, a policy analyst at the Manhattan Institute, have been the leading proponents of the view that the new conventional wisdom overstates the increase in inequality.
Now I feel dizzy. Yglesias has told us that Winship is not one of those stupid right-wingers (like me) who deny that “inequality” is increasing. And the link confirms that. But the link was supposed to tell us about the people who do deny the increase in inequality.
Here’s what I believe about “inequality.” Income inequality has increased greatly since the 1960s. But income inequality doesn’t matter, consumption inequality matters. The consumption of the poor has risen faster than the consumption of the middle class. The consumption of the rich has risen faster than the consumption of the middle class. Overall, not much change in “inequality.” And I care more about the poor than the rich.
Yglesias once understood the importance of consumption; indeed he used to favor a tax regime that would replace taxes on capital income with a progressive consumption tax. He later seemed to move away from this view for slightly defensible reasons that I disagree with. But he surely must understand that an “income” aggregate that lumps together wage and capital income is nonsense, like adding watermelons and blueberries and calling it “number of fruits.” A dollar of capital income is in no way comparable to a dollar of wage income. Add them together and you get meaningless (income) numbers. Thus I can’t help thinking that the following paragraph (criticizing Winship for looking at wage and salary inequality) is pandering to the prejudices of ignorant progressives who read Vox. That’s not what Vox was supposed to be about. (And in fairness they often do a good job.)
Winship suggests that the above chart would undermine the story of growing inequality, while also offering a more accurate picture. This chart excludes capital gains income entirely, and also only examines tax units with taxable income — i.e. the jobless don’t count. And it is true that if you ignore the economy’s tilt in favor of owners and against workers, and also ignore 15 years of persistent labor market weakness, then the overall economic picture looks a lot brighter. Other than that, Mrs. Lincoln, how was the play?
Yes, and other than those posts where Yglesias abandons his neoliberal progressivism and engages in populist progressivism, I always enjoy his posts!
Oct 9 2014 at 1:58am
Have you looked into Winship’s debate with Tcherneva about the chart?
There are a lot of issues, but one that should be fairly straightforward deals with whether Winship’s charts are “double reporting” some years at the beginning/end of business cycles. As far as I can understand, Winship seems to be right, but Tcherneva (who is apparently an Econ professor at Bard) seems very sure of herself. It’s pretty acrimonious at this point.
Oct 9 2014 at 4:00am
Strictly speaking, there is at least one in that dollars are fungible, a well from which many related comparisons spring.
Oct 9 2014 at 7:09am
Scott: Nice post. One (non-rhetorical) question: why do you believe that the consumption of the rich has risen faster than that of the middle class? You might be correct, but it seems to me that the very same sort of logic, observations, and data that suggest to you (and to me) that the consumption of the poor has risen faster than that of the middle class also suggest that the consumption of the middle class has risen faster than that of the rich.
You and I both remember the mid-1970s well. Here are my impressions of that era compared to today: Back then, flying was not common for middle-class people. Middle-class people were far less likely than they are today to vacation in Europe or Latin America. Middle-class-people’s cars broke down much more frequently than they do today. Many more middle-class families had only “the” family car rather than multiple cars. Middle-class people changed the oil in their cars more frequently than they do today (with the likes of Jiffy-Lube performing that dirty job now).
Making long-distance telephone calls was so costly that middle-class people monitored the number of minutes they spent on such calls. Almost no middle-class person had a telephone in his or her car. Middle-class people had access to a less-varied selection of foods – both in supermarkets and in restaurants – than they have access to today. A smaller proportion (than today) of middle-class homes were equipped with automatic dishwashers, central air-conditioning, attached garages, push-button-garage-door controls, and garbage disposals. (I’m pretty sure, too, that the size of the typical middle-class home back then – measured in both square- and cubic-feet – was smaller than it is today. And while the size of the homes of the rich might have increased even more [I don’t know], a, say, 10% increase in living space starting from a relatively small space means a greater improvement in living standards than does a 10% increase in living space starting from a larger space.)
While rich people in the 1970s could afford home theaters, middle-class people could watch at home only those movies (and other programs) that the three t.v. networks (and perhaps also a local independent channel) were airing.
Again, your claim might well be correct. I don’t have any firm-enough evidence against it. But it strikes me as being as doubtful as is the claim of others that the consumption of the middle-classes over the past several decades has grown faster than has the consumption of the poor.
Oct 9 2014 at 7:10am
Scott, thanks for the kind words. ed, I’ve come to the conclusion that Tcherneva on some level knows she’s wrong but can’t admit it because she has slimed me for doing it “wrong” to mislead people. I’d be eternally grateful if some third party would just say the obvious and expose this “debate” as the non-debate it is. If you want to measure trends in the share of gains over business cycles, you go peak to peak or trough to trough. That is, you “double report” in her words. You don’t, as she ridiculously claims, shave off the first year of income decline and call it a business cycle.
It really is a non-issue, but non-experts are left not knowing what to think. And of course, progressives who don’t care about the truth or just don’t like me can take satisfaction that no one has confirmed my assertion that she’s not only unfair but badly wrong.
Oct 9 2014 at 7:43am
I’m not sure what Yglesias meant by “laxity” but it probably was not the policy of trying to make it easier for low income people to take out home loan mortgages. (I see no evidence for your interpretation.)
It’s more likely he meant things like policies of not checking the income of borrowers but even more so the very high levels of leverage in the financial system and more fundamentally, the still uncorrected “too big to fail” principle as evidenced by the fact that the equity holders of bailed out institutions did not loose all their equity and many top managers remained in place. To be clear, I do not object to saving banks, just saving bankers. The bailouts even wrongly done were among the best things that the Bush Administration did.
Nor do I agree that these regulatory failures were the cause of the recession. On that, I agree with Scott; the Fed failed to maintain steady NGDP growth.
Oct 9 2014 at 8:08am
Scott, you can hardly be classified as a “right winger” whatever you think about income v consumption inequality.
Quibbles about your views consumption non-inequality:
If consumption of the poor has risen faster than consumption of the rich because of difference in savings behavior, might not that also be cause for concern? And is calling it concern about “income inequality” far from the mark?
Ditto if it is because of transfers. I’m all in favor of SNAP, Medicaid, EITC, etc. but isn’t it OK to worry that so many people qualify for these programs because their market incomes are too low? This is another dimension of “income inequality” that does not seem mis-labeled or of no concern.
I would agree with your consumption v income distinction if the differential growth in consumption of rich and poor were due to different for their consumption baskets even if that too might be considered a problem of mis-measuring “income.”
And of course I also agree in spades with your point about the reduction in income disparities worldwide.
Oct 9 2014 at 9:24am
It seems to me that distinguishing consumption inequality from wealth inequality and income inequality is a very constructive move in this debate.
I was not at all convinced by the relevance of the argument in the “blueberries and watermelons” link though. Maybe I am misunderstanding it. That argument rests on a comparison between the different actions of two brothers with identical original incomes and the logic that flows from that comparison is reasonable enough.
The problem is that is a very poor analogy to a society where different people are likely to have very different original incomes and advantages. Those brothers are indeed equally “free to choose” whether to consume or invest. People living in poverty and people living with wealth are not even remotely equal in their ability to “choose” whether to consume or invest.
Oct 9 2014 at 9:38am
Ed, The instant I saw the chart I thought “DATA MINING!!” Why would anyone even care about recovery years, as compared to overall changes? It would be like looking at what happened to income inequality in non-leap years.
And that’s ignoring the fact that income inequality is an almost meaningless statistic, even if done right.
My mom has a relatively low income, and is doing fine. It’s all about consumption.
Rich, Yes, and the little pieces of paper all have pictures on George Washington on them, so they have that similarity as well.
Don, Yes, you make a good argument. I was sort of giving the other side the benefit of the doubt. Thus there is no reasonable case for arguing that living standards of the poor have grown more slowly than the middle class, but there is a case for the rich gaining more than the consumption than the middle class, depending on how you measure things. But as you say, there’s also a strong argument in the other direction.
Scott, I never said anything on that because I couldn’t even imagine how anyone would take you graph seriously. Perhaps I should (and see my reply to Ed above.)
Thomas, You said:
“It’s more likely he meant things like policies of not checking the income of borrowers”
That’s also what I meant. The government was encouraging this sort of behavior. But yes, Matt and I don’t see exactly eye to eye on where the problems were, although I also oppose TBTF.
“If consumption of the poor has risen faster than consumption of the rich because of difference in savings behavior, might not that also be cause for concern? And is calling it concern about “income inequality” far from the mark?”
That would be a completely different issue. If two brothers with identical incomes saved different amounts, it might be an issue from a behavioral economics perspective, and you might want to “nudge” one to save more, or the other to save less. (I doubt it, but I concede it’s possible.) But that’s very different from the problem of one brother having much more wage income.
“Ditto if it is because of transfers. I’m all in favor of SNAP, Medicaid, EITC, etc. but isn’t it OK to worry that so many people qualify for these programs because their market incomes are too low? This is another dimension of “income inequality” that does not seem mis-labeled or of no concern.”
Yes, it’s possible that transfer programs are depressing the (reported) market income of the poor, and making the (reported) income inequality greater.
But that’s why we need to replace welfare and food stamps with a wage subsidy plan. A wage subsidy encourages people to work more, and thus increases the reported market income of the poor. (I’m agnostic as to whether the poor are working off the books in the underground economy. That might help explain the consumption data. But if they are, that’s another problem with income data. So either way there is a problem.)
On the third point, I do think the cost of living has risen far faster for the rich than the poor. The rich bid up prices of everything from choice real estate to art, whereas the poor benefit from the falling prices in the China/Walmart economy. I recently visited a “million dollar house” in San Mateo county that was a mediocre 2 bedroom ranch with a 1950s kitchen. No better that the ranch houses that lower middle class Hispanics live in in Tucson (where my mom lives.)
Oct 9 2014 at 9:41am
Greg, You missed my point. Differences due to different initial wage income (of you or your ancestors) are what matters, not differences in what you did with that wage income. For that reason I actually favor some redistribution of wage income (unlike many other libertarians.)
Oct 9 2014 at 10:22am
Scott, do you know much about financial regulation? This isn’t snark, it’s a genuine question.
To state what should be obvious, financial regulation and homeownership policy are not the same thing.
Oct 9 2014 at 10:39am
There seems to be confusion in distinguishing between wealth inequality (stock), income inequality (flow), and consumption inequality (flow after taxes and transfers).
This is unfortunate, because if a policy writer cannot (or does not) make that distinction, debating is of no use because we cannot we don’t know precisely what we’re debating.
Oct 9 2014 at 11:20am
If stores around the world all sold their goods for specified numbers of fruits, didn’t care which kind of fruits you gave them, and were in fact incapable of distinguishing between the fruits, the “number of fruits” metric would make at least a little intuitive sense, don’t you think?
If we must separate forms of income, into which category do we put “human capital income”? The majority of my present salary was achievable due to a lot of financial investment into education, years of opportunity cost, and underpaid jobs and internships taken for work experience. I see the logic of “anyone can choose to defer consumption to build wealth, so it’s unfair to tax the wealth again”, but I don’t see the logic behind appending “unless the wealth is inside their skull”.
Taxes are all unfair in senses like this. If I build a deck and my neighbor builds a home theater, for example, that’s only implicitly subject to an eventual capital gains tax. But if I’m better with electronics and he’s better at carpentry we can’t legally do the obvious without an additional bartering income tax potentially overwhelming the gains from trade. To advocate against a particular tax, it’s not enough to show that it’s unfair too; it’s got to be more unfair than the alternative taxes and/or more unfair than cutting the spending it pays for.
Oct 9 2014 at 12:26pm
Very good point. Whatever regulators were doing leading up to the housing bubble, stopping banks from making bad loans wasn’t amoung those things.
Nobody was focused on that because nobody anticipated that easy credit would lead to a systemic financial crisis in the near future.
The focus on regulation since the crisis also commits the fallacy of hindsight, as if there were significant voices arguing for stricter banking regulations prior to the crisis. There weren’t.
Similarly, regulators of the present aren’t any more omniscient than those in the past, and whatever regulations are adopted are going to fail to anticipate the next crisis. Especially since there are all sorts of political incentives to believe that the next bubble isn’t really a bubble, that it’s really the magical effect of the president’s brilliant economic policies, and full steam ahead. Even if regulators *could* anticipate future financial crises, the politics would make it impossible for them to do anything about it.
Oct 9 2014 at 12:38pm
Home ownership policy drove financial regulation. Financial regulators have their goals and bureaucratic incentives set by those who have a favored home ownership policy.
That’s why, even today, you can still get a 0-down mortgage guaranteed by the government, but only if you have a below-average income for your geographic area. Financial regulators work within the policy guidelines. If the policy guidelines say that we need to ensure X% of home buyers are minority, then they twist the regulations and communications to mortgage lenders to ensure that goal is met, over and above any priority for some future disaster that no one really believes is going to happen anyway. At best, the data gets cooked to show they are being responsible.
There’s no incentive for anyone in the system to buck the policy desires. Which specific individuals who worked as government regulators were fired after the financial crisis and how was their reputation ruined so they couldn’t get another decent job doing the same type of work?
BTW, I work in a large and heavily financially regulated company. I mostly see the results peripherally, though.
Oct 9 2014 at 2:55pm
@ Scott and Sewel,
I’d still like to see some evidence, not hand waving, that regulators encouraged practices like not looking at borrowers’ incomes. I don’t think that’s the area of “laxity” that got firms in trouble.
I still think that if we are talking about trends in income v consumption inequality we should not take rising consumption supported by a declining savings share of income as showing that it is the “consumption” rather than the “income” inequality we should focus on. Agree however that anyone concerned about income inequality should be prepared to say what aspects are his concern. I don’t presume that just because the concern could be unjustified, it is and, as laid out in Boudreaux’s post. differences in inflation in the goods purchased by rich, poor, and middle is the best grounds, if true, are the best grounds for non-concern about apparently growing income inequality.
Question: What is the difference between a “wage subsidy” and the EITC?
Oct 9 2014 at 3:14pm
Walter, Yes, I know they aren’t the same thing.
roystgnr, Yes, all taxes are flawed, but VATs, property taxes and payroll taxes are far less flawed than personal and corporate income taxes.
“If stores around the world all sold their goods for specified numbers of fruits, didn’t care which kind of fruits you gave them, and were in fact incapable of distinguishing between the fruits, the “number of fruits” metric would make at least a little intuitive sense, don’t you think?”
As far as human capital, yes that’s a problem for inequality data, as I’ve pointed out in other posts. Fortunately human capital acquisition is subsidized, so the distortion is smaller than for physical capital.
Hazel, Good point.
Thomas, Yes, in other posts I’ve pointed out that the federal government is STILL encouraging subprime lending, and that they’ve done nothing to break up Fannie and Freddie. The “reform” ignored all the biggest and most obvious problems.
ThomasH, Anyone paying attention in 2006 knows that government was strongly encouraging banks to lower lending standards. I don’t think anyone even disputes that fact. The only dispute is over whether it was government pressure that caused banks to lower their lending standards.
“I still think that if we are talking about trends in income v consumption inequality we should not take rising consumption supported by a declining savings share of income as showing that it is the “consumption” rather than the “income” inequality we should focus on.”
I totally agree. We should focus on consumption because basic economic theory says income is a meaningless concept and that consumption is what matters.
The wage subsidy is X dollars per hour, not year as with EITC.
Oct 10 2014 at 12:08pm
If you know they aren’t the same thing, then you understand the flaw in your post.
(Hint: financial regulation may have been lax in ways having nothing to do with homeownership policy.)
Oct 10 2014 at 12:14pm
Walter, Sure it was lax in other areas, such as loans to businesses. And that’s because they wanted it to be lax in those other areas. And that’s the problem, regulators wanted the wrong things. They were not lazy, indeed they were quite active promoting many of the very things that caused the crisis.
Oct 10 2014 at 12:41pm
There is nothing wrong with risky loans as long as the risk is managed properly. This is obviously where the breakdown occurred. The holders of loan-backed securities were gaming the system and defrauding buyers of those securities as to their quality, and the buyers themselves were already more highly leveraged than was prudent. To suggest that the government actively promoted this fraudulent and imprudent behavior in any way other than lax regulation is absurd.
“The consumption of the poor has risen faster than the consumption of the middle class. The consumption of the rich has risen faster than the consumption of the middle class.”
Author should at least state whether these rates are per-capita or total.
Oct 10 2014 at 2:03pm
“Walter, Sure it was lax in other areas … that’s because they wanted it to be lax in those other areas.”
Now I’m confused, I thought you were criticizing the laxity thesis.
R Richard Schweitzer
Oct 10 2014 at 3:05pm
Consider the proportional impacts of regulations and “hidden” (indirect) taxation on that spectrum of goods and services of MC consumption compared to that on the spectrum of goods and services consumed at the other levels.
The regs are designed to fall where they have the broadest impacts (often through pricing or goods restriction effects); revenues (even if collected in the pricing mechanisms) “where the money is” that would otherwise be spent.
Oct 20 2014 at 12:09am
Whoa, that link saying the incomes are unequal seems to involve a massive nest of unlikely assumptions.
1) People’s utility depends in a roughly linear way on consumption (appropriately discounted). This seems deeply deeply false. Usually, pushing consumption below a floor (probably set partially by social expectations and the socioeconomic class your job requires you pretend as if you belonged to) creates a more than linear decrease in utility. Conversely, increases in consumption over a certain mark that you psychologically associate with being comfortable produces a sub-linear increase in utility.
In other words believe the behavior economics that says we really really do have a psychological endowment effect and seeing ourselves lose things we had come to expect is much more harmful than gaining things we didn’t have.
I mean are you more likely to use your credit card to maintain your current standard of living during a temporary job loss or to splurge on a fancy new toy. If the former you agree with me.
This isn’t pure rationality. Getting a certain quality job, pursuing romantic attachments and a panoply of other concerns that effect your long term welfare depend on maintaining the illusion of a certain level of consumption but it is no more costly to do this in many contexts at a time than it is to do it in one.
Getting jobs of a certain caliber requires that you have appropriate social habits, clothes and benefits from friends in those circles. So to does dating etc.. etc..
Hell even blueberrys quickly stop being a delicacy and stop providing additional utility if you get too many at once while eating the same unflavored crap every day without any spice for years is way less pleasant than mixing with the occasional blueberry.
Let me call this hypothesis the permanent consumption hypothesis (because essentially that is what I’m alleging is true). Namely, people’s utility is maximized when they achieve a (well not constant maybe slightly increasing) constant level of consumption. This suggests that there are no brothers who differ as you suggest because behaving in this fashion would be deeply irrational.
Actually non-liniearity in your utility function will probably do to force those with identical initial endowment to have the same consumption per unit time. Thus, any return to investment for one individual rather than another is either luck (most stock market returns accrue to those who are most lucky at the start) or different initial endowment.
2) The suggestion that investment offsets against initial endowment but that wage income does not is so absurd as to be laughable. I mean could you have been a professor of economics if you hadn’t pad the cost (and opportunity cost) of college and graduate school? Education, professional training, even time spent looking for a job all represent investments in your future wage.
3) There is no justification for thinking the stock market rate of return has anything to do with the true discount rate.
Doesn’t matter that you can show it reflects people’s willingness to trade off current consumption for future but why should the psychologically desierable discount rate match the TRUE discount rate for aggregating utility.
Our psychological discount rate is set by evolutionary constraints that maximized our reproductive success. However, as the correct discount rate for utility must be the same for all experiencing beings (us and the aliens) it can’t have any connection to the specifics of our evolutionary environment that favored our particular discounting rate.
Indeed, what I would really like to say is that the true discounting rate for utility is 0 and the total expected utility of the universe is finite.
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