Cochrane's Questions About Inequality
Just finished the forthcoming Inequality and Economic Policy: Essays in Honor of Gary Becker, edited by Tom Church, Chris Miller, and John Taylor. For me, the highlight was John Cochrane on inequality. Highlights from the highlight:
More puzzling, why are critics on the left so focused on the 1% in the
US, when by many measures we live in an era of great leveling?
Earnings inequality between men and women has narrowed drastically, as Kevin Murphy reminded us. Inequality across countries,
and thus across people around the globe, has also been shrinking
dramatically even as income inequality within advanced countries has
risen. One billion Chinese were rescued from totalitarian misery, and a
billion Indians sort-of-rescued from British-style license-Raj
socialism. These are wonderful events for human progress as well as,
incidentally, for global inequality. Sure, these countries have many
political and economic problems left, but the “its’ all getting worse”
story just aint’ so…
Look at Versailles. Nobody, not even Bill Gates, lives like Marie
Antoinette. And nobody in the US lives like her peasants. In 1960, Mao
Tse-Tung waved his hand and 20 millions died. In 1935, Joseph Stalin
did the same. Neither reported a lot of income to tax authorities for
economists to measure “inequality.” It is preposterous to claim that,
even the citizens of Ferguson Mo., with all their problems and
injustices, are less equal now than they were in 1950. Or 1850.
Why does it matter at all to a vegetable picker in Fresno, or an
unemployed teenager on the south side of Chicago, whether 10 or 100
hedge fund managers in Greenwich have private jets? How do they even know
how many hedge fund managers fly private? They have hard lives, and a
lot of problems. But just what problem does top 1% inequality really
represent to them?
A striking tension:
I’ve been reading Piketty, Saez, Krugman, Stiglitz, the New York Times
editorial pages to find the answers. They all recognize that inequality
per se is not a persuasive problem, so they must convince us that
inequality causes some other social or economic ill.
Here’s one. Standard and Poors economists wrote a recent summary report on inequality, (earlier post here) perhaps as penance for downgrading the US debt, and wrote
As income inequality increased before the crisis, less affluent
households took on more and more debt to keep up–or, in this case,
catch up–with the Joneses….
In Vanity Fair, Joe Stiglitz wrote similarly that inequality is a problem because it causes
a well-documented lifestyle effect–people outside the top 1 percent
increasingly live beyond their means….trickle-down behaviorism
Aha! Our vegetable picker in Fresno hears that the number of hedge fund
managers in Greenwich with private jets has doubled. So, he goes out and
buys a pickup truck he can’t afford. Therefore, Stiglitz is telling
us, we must quash inequality with confiscatory wealth taxation… in order
to encourage thrift in the lower classes?
If this argument held any water, wouldn’t banning “Keeping up with the
Kardashians” be far more effective? (Or, better, rap music videos!) If
the problem is truly overspending by low income Americans, can we not
think of more directed solutions? For example, might we not want to
remove the enormous taxation of savings that they face through social
Another example. The S&P report moved on to a new story: Inequality
is a problem because rich people save too much of their money, and poor
people don’t. So, by transferring money from rich to poor, we can
increase overall consumption and escape “secular stagnation.”
I see. Now the problem is too much saving, not too much consumption. We
need to forcibly transfer wealth from the rich to the poor in order to
overcome our deep problem of national thriftiness.
I may be bludgeoning the obvious, but let’s point out just a few ways
this is incoherent. If Keynesian “spending” and “aggregate demand” are
the problems behind low long-run growth rates – and that’s a big if –
standard Keynesian answers are a lot easier solutions than confiscatory
wealth taxation and redistribution. Which is why standard Keynesians
argued for monetary and fiscal policies, not confiscatory
anti-inequality taxation, until the latter became politically popular.
In a series of recent blog posts, (see coverage here)
Paul Krugman offers evidence that people vastly underestimate how
wealthy the rich are, bemoans how they live separate lives — my fry
cook has, in fact, no idea of their lifestyle — and argues for
confiscatory taxation to eliminate the “externality” of their excessive consumption. Well, I’m glad logical consistency isn’t holding back these arguments.
Some wise cynicism in the spirit of Gordon Tullock:
The most common argument is that we have to reduce income inequality to
avoid political instability. If we don’t redistribute the wealth, the
poor will rise up and take it. As a cause-and effect claim about human
affairs, this is dubious amateur political science, one that would look
especially amateurish to the political scientists and historians at this
Hoover Institution on War, Revolution and Peace. Maybe the poor should
rise up and overthrow the rich, but they never have. Inequality was
pretty bad on Thomas Jefferson’s farm. But he started a revolution, not
P.S. When I die, I hope the conference volume in my honor is half as good as this one!