Brink Lindsey's explanation for rising differences in incomes is very different from Paul Krugman's explanation. (I rank this Lindsey essay as a must-read.)
Why Greater Differences in Incomes?
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Why Greater Differences in Incomes? For one thing, Federal employee compensation has risen faster than private sector compensation for decades.
Like the incredible growth of sales of entitlement to tax revenue masquerading as "capitalism", this growth in Federal employee compensation signals a vast expansion of authoritarian corporatism in the United States, even greater than the growth of industrial cartels and unionism in the forties and fifties.
But Reason can't find space for one word about it in this article, because the article diverts attention from state nurtured corporatism by focusing with blinders on some caricature of Krugmanism, to parade its fashionable opposition to forcible egalitarianism.
Never mind that states rarely if ever force equality but routinely force greater inequality instead.
Nixon's float of the dollar in 1971 should get a large amount of blame for any amount of income disparity that actually takes place. The uncertainty caused by the current Fed controlled monetary regime adds a major factor of income discrimination (those who can and those who cannot adapt and adjust to the floating unit of account).
A couple of years ago we were told the masters of Wall Street deserved their huge incomes because they were the best and brightest and smartest and were creating a new economy and gosh we were breathless with hero worship and….
They drilled a $6 trillion dollar hole in the world's economy.
As long as a small number of rich white guys own both political parties, expect the nonsense to continue.
The United States of Citigroup.
See Figure 1.1 for the drop in real median income in the seventies, largely during a period of economic growth. Another stagflation at this time could do even greater damage.
"Caricature of Krugman" is on target, Martin. Not that he DOESN'T hold the views that Lindsey attributes to him with respect to unionization and social protection – but to suggest those are "the explanation" according to him is lazy at best and disingenuous at worst. Is Lindsey even aware of the multiple equilibrium work that Krugman got the Nobel Prize for? He cites these as reasons for inequality as well… not in the pages of the NY Times, but in his articles and books. The other thing that's worth pointing out is that Krugman always seems to recognize that these regulations provide a drag on growth – and recognizes that it's a tradeoff, rather than a free lunch.
Nostalgianomics is an excellent piece of analysis and also excellently written. Hats off to Mr Lindsey.
Excellent article. The only part I disagree with is the statement at the end about increasing inequality being a legitimate issue for public policy makers. If increasing individualism mean increasing inequality, then so be it.
Increasing individualism does not explain the increasing inequality we discuss here. The typical, mammalian state of nature is the most individualistic organization possible, with individual creatures relying entirely on their individual strengths and a few, highly local associations based largely on kinship. No egalitarian principle governs this organization, and outcomes are not remotely equal, but that's beside the point.
We're discussing inequalities in statutory entitlements, and nominal "libertarians" cheer for them mindlessly, based on a laughably ideological assumption that the inequality we're discussing somehow resists the state. In reality, the state sector is larger and more powerful today than it was in the fifties for which Krugman is nostalgic.
Martin,
Maybe the political sector is larger and more powerful, and maybe its not. My take from the article is that the political sector may be unable to exert the kind of control it would like. Bigger, yes. Stronger, maybe not.
RE: "In reality, the state sector is larger and more powerful today than it was in the fifties for which Krugman is nostalgic."
Yes… put the pieces together now… maybe, jsut maybe it's not just "big government" that Krugman is getting at here.
The political sector never exerts the kind of control it says it would like.
Inequality rises in lockstep with the growth of the state, but many nominal "libertarians" apologize for rising inequality reflexively regardless. We're stuck in this dualistic, 20th century paradigm in which nominal "socialists" pursuing nominally "egalitarian" agendas through state planning oppose … some counter-thesis that is presumably "anti-egalitarian".
But this counter-thesis is not classical liberalism. Classical liberalism did not oppose forcible equality primarily. It opposed forcible inequality. It didn't seek to impose equality, but it did resist imposed inequality. Modern "libertarians" allied with "conservatives" simply defend inequality regardless of its source or turn a blind eye to its source.
So we have Krugman lauding the greater income equality of his youth, while ignoring the social conditions that supported that. Typical Krugman.
"First came the “Treaty of Detroit,” characterized by heavy unionization of industry, steeply progressive taxation, and a high minimum wage. Under that system, median wages kept pace with the economy’s overall productivity growth, and incomes at the lower end of the scale grew faster than those at the top."
In my mind's eye I still see the UAW worker, circa 1984 (give or take a year) who was interviewed by one of the big three TV news networks at the time of a UAW strike against Chrysler and GM. He looked the camera in the lens and said, "I can't live on $58,000 a year."
That told me that the UAW members were living in a self created bubble, because the average household at that time was earning far less than $58,000 a year, much less. Without looking it up, I believe that the average household income was barely into the 30 grand range at that time.
Being me, I suspect that if the TV interviewer had asked, we would have found that the UAW worker's wife also worked as a UAW member and drew a hefty salary as well, making his household income in the stratosphere as compared to say a couple who worked as a secretary and a grocery store manager.
My point is that the paragraph I quoted seems to me to be applying to a highly localized and isolated arena of the economy as a whole. Which means it is a distortion in favor of the select few, so where would the income equality be? If a A&P grocery store manager, in 1984, could be considered lower middle class at an annual salary of 22 thousand, is the UAW worker at 58 thousand really middle class?
If the UAW worker, floor sweeper, had an hourly salary of $18 or more in 1960, and the A&P grocery store manager only $3 an hour, how equal were the incomes of Krugman's youth?
What do I know about it? Not a whole hell of a lot and that's obvious, just street observations and opinions; yet I go back to a recent post by Don that concerned a gentleman who sought employment from Walmart in order to know and understand it better. He concluded his piece with this quote, a quote that says more than Krugman can say in a year or more:
"In my mind, the real scandal is not that a large corporation doesn't pay people more. The scandal is that so many people have so little economic value. Despite (or because of) a free public school system, millions of teenagers enter the work force without marketable skill. So why would anyone expect them to be well paid."
Forced income equality without productivity equality is a road to disaster.
Outside of a maybe a brief trial period for bonafides establishment,no intelligent businessman pays a worker what he hopes the worker is worth, he pays the worker for what he is actually worth. Nothing else is reasonable for the employer.
vidyohs -
I agree completely with your huge skepticism about unions, and with union nostalgia, but regarding:
"So we have Krugman lauding the greater income equality of his youth, while ignoring the social conditions that supported that. Typical Krugman."
Is this a reference to the racism and sexism that Lindsey brings up? If it is, then I think you're referencing probably his least convincing point. Yes, a lot of racism and sexism existed at the same time as these regulations… but it existed BEFORE these regulations as well, AND institutional racism and sexism started being deliberately dismantled during the regulatory/reformist period that Krugman yearns for AND that dismantling continued after the regulatory/reformist period went into retreat. So to tie racism and sexism to any particular institutional framework under discussion here is hugely unconvincing on Lindsey's part, I think.
I make no distinction between "big government" and corporatists in the "private sector" that Krugman is getting at. This "private sector" is "private" in name only.
The CEO of Bank of America is not "outside of the state" in any meaningful sense. Expecting the state to check this CEO's authority is laughably naive. When I hear Krugman advocate reforms that limit authority of "the rich" and the authority of "big government" at the same time, I'll take him seriously.
As it is, Krugman's only a professional apologist for one party vying for control of the state, and his pouting about "inequality" is incredible nonsense. He doesn't want more equality. He only wants to tilt the balance more in the direction of his partisans.
30% due to increased immigration
15% due to increased employment of women
20% due to decrease in union membership
Okay article, but a big component was not even discussed–the effect of age distribution and growing wealth transfers from young to old.
It would also be interesting to quantify the effect of progressive income tax rates on disparity. Increased progressivity can be expected to increase inequality, but what that effect has been, and how it was affected by the decline in progressivity since WWII would be interesting to assess.
DK,
Actually Lindsey mentioned a other social conditions as well.
The rest of my comment should have made it clear that I believe that Krugman is being Krugman in that he whines for something that was never there.
There is a huge range of inequality between $18 an hour for sweeping factory floors and $3 an hour for running a large grocery store, not just in salary but in capabilities required.
People like Krugman strike me as intentionally blind to the fact that equality does not exist, not in nature, nor in human constructs. They also strike me as destructive to peace and harmony because of the envy and resentment they stir up with their ignorant and misguided statements.
Is Lindsey even aware of the multiple equilibrium work that Krugman got the Nobel Prize for? He cites these as reasons for inequality as well… not in the pages of the NY Times, but in his articles and books.
The question is whether Krugman is aware of his academic work or not. There are two Krugmans – the political ideologue and the economist. Nobody reading his NYT column is expected to be familiar with his academic research….and that's what he's banking on.
Methinks -
There are two Krugmans in the sense that he's not going to rehash his academic work in his columns. But there are not two Krugmans in the sense that there's nothing inconsistent about his academic and his column work. He's not "banking on" anything. He's a big time liberal and it shows in his columns. He's not hiding anything about that.
People who are involved in the economic debate, though, can't just read his columns and assume that's the totality of Krugman's contributions or thoughts on the issue, that's all.
That's what average blockheads who read his columns daily actually assume this. It is not the job of those who critique his colums to be doing so based on his academic work.
This is a great article by Brink Lindsey.
S Andrews -
RE: "That's what average blockheads who read his columns daily actually assume this. It is not the job of those who critique his colums to be doing so based on his academic work. "
I guess I just work off the assumption that the commenters on this blog aren't "average blockheads", and that Lindsey isn't either. What Krugman distills for his columns is one thing. He actually has tried to bring ideas like the "paradox of thrift", etc., to the average reader. But you don't take what he writes in his columns and assume that that's the totality of his opinion on questions like this!
Don does a great job summing up his thoughts in his letters to the editor. But usually he writes them for general consumption, and they're concise and to the point – just like Krugman. But you wouldn't take the collection of his letters to the editor and use them as the basis for understanding his opinion on a subject!
there is no "paradox of thrift".
Suppose you exchange a dollar's worth of your labor for a dollar today, but you want to defer your entitlement to consume a dollar's worth of produce for a few years.
You could purchase some real means of production and hold the title to this asset for a few years, while you seek to maintain the asset's real productivity and thus its value, but you don't purchase a real asset, because you expect the price of available assets to fall and you either cannot or prefer not to labor to avoid this fall.
So you instead hand your dollar to a statesman, and this statesman promises to return a dollar and change a few years hence. The statesman then spends your dollar, along with some other dollars, on a nice meal for himself.
That's the paradox of thrift.
S Andrews -
You might want to elaborate. The extent that the paradox of thrift actually matters is clearly up for debate, but are you arguing that the actual mechanics of the paradox of thrift don't exist? Regardless, that was just an example – hardly central to this thread.
Martin Brock -
That bears no resemblance to the paradox of thrift. And as I said above, it was just an example of Krugman bringing economics into his column in a more reader-friendly war. My choice of example is hardly central to this thread.
Something just occurred to me.
Taking from the rich to give to the poor does not reduce but increases inequality.
dg lesvic -
RE: "Something just occurred to me."
I was waiting for it!
I'll just assume that you wanted us to duke it out before you wowed us all with your theory!
Oh, and P.S. – still not true
So you just write these words and your authority settles the question?
I'm nostalgic for the "duck and cover" drills of the 50's. I think that bomb shelters should be the focus of the remaining stimulus funds. Then we can prove once and for all if paying someone to dig a hole, stimulates the economy.
The coming nuclear wars with Kim Junk-ill and the mullah rag tops in Iran will just be the beginning. So, I seriously believe that mirror underground cities should be built on a crash program to save civilization after the great cities of the world are pulverized by nuclear-tipped missiles in a few minutes. The great equalizing effect of WWIII will dwarf anything that has come before. When there is nothing left to buy, Gates' and Buffets' billions will mean nothing. Like Mr. Beaudreaux said in another strange post, the billionaires will be indistinguishable from the rest of us. That goes for their corpses or ashes as well.
Don't you just love my morbid posts? Sorry, but I think the end it inevitable and not long off.
Martin Brock -
RE: "So you just write these words and your authority settles the question?"
Not in the slightest. I have next to zero authority, although I'm flattered that you think I might have more. What settles it is that what you describe has nothing to do with the paradox of thrift:
http://en.wikipedia.org/wiki/Paradox_of_thrift
Martin Brock -
To start with, you describe the consumption behavior of one person only – so clearly you're not talking about the paradox of thrift at all. Then you start talking about government spending. While some conclusions about government spending may be drawn from the paradox, it has nothing to do with the paradox itself. I don't know what you're trying to describe, but it's not the paradox of thrift.
If one person expects the price of productive means to fall, he considers the interests of more than one person, so I don't describe only one person.
The government spending isn't necessary. I only tossed that in for a laugh. The point is that the statesman needn't do anything with the "savings" to increase future output, so he likely makes matters worse.
If I thriftily invest my labor and other valuable resources in the maintenance of productive means, to secure my future consumption, then the thrift doesn't have the effect presumed by the "paradox of thrift", unless many thrifty people try simultaneously to push so much consumption into the future, by accumulating productive means presently, that current demand falls below the current productivity of the productive means.
But this "unless" scenario is equivalent to "expects the price of productive means to fall".
Ten fat people of the same age (who are the only people on Earth) expect to produce less ten years from now, so they all cut their caloric intake by 20% in order to buy farmland, from which they hope to continue eating when their productivity falls. Obviously, the demand for food declines, and the current value of farmland (used as farmland) declines with it.
But I'm not sure why anyone loses his job in this scenario, so I'm not sure why a "paradox of thrift" increases unemployment.
Daniel,
Something else just occurred to me, but I don't think you'd want to hear it.
Daniel,
I know Krugman is your hero, but the man persistently commits the lump of wealth fallacy in his column. Just as one example. If that's not inconsistent with his academic work, then he should be stripped of his Ph.D. And his academic and column "work" is completely inconsistent.
Further, in his column, he isn't an economist but a politico and ideologue. This trash is sold to the public as the reasoned opinions of a Princeton economist regarding economics. In fact, it's drivel.
Two posters who have made the most sense to me so far are: vidyohs (*cough* *gasp* *wheeze*) and Trumpit (*snicker*)
For some reason people are falling for dg lesvic's 'masterstroke. Vidyohs rightly points out that natural inequality occurs therefore to bring about equality require an external force that destroy wealth. Trumpit tongue-in-cheek post also show a hypothetical scenario whereby everyone is equal but in a totally bad way.
At the end of the day, if some poor guy is living just above the poverty whilst CEOs and movie stars are making millions then there's huge inequality but is it necessarily 'wrong'? If something goes wrong and the CEOs and movie stars lose it all and having to work for a pittance whilst the poor guy is still working for a pittance then greater equality has been achieved (and the poor guy is probably feeling pretty good about himself because his income is now 'average) but is it necessarily something to strive for?
I've got Gil and Daniel against me, so there's still hope.
True. But states rarely destroy wealth for this reason, not deliberately anyway, and this egalitarian force is not primarily the force that classical liberals opposed. Various egalitarian principles always inspired classical liberals, like equal protection of the law and equality of opportunity. Even an equal measure of authority at some level inspires the zeal for a universal franchise.
I'll leave "right" and "not right" to Moses and the other politicians, but the inequality you discuss here certainly is not natural. It is an artifact of statecraft. CEOs, movie stars, lords and ladies don't exist in the state of nature. The Queen Bee is not a privileged ruler of her hive. On the contrary, her role is far more burdensome in some respects than the role of more common bees, and she is not any sort of ruler at all.
Methinks -
RE: "I know Krugman is your hero, but the man"
I read him fairly regularly, but he's actually not. And I've disagreed with a lot of what he's been saying about nationalization, etc., recently.
But when things like this get said about someone who isn't my hero but who I do respect:
"If that's not inconsistent with his academic work, then he should be stripped of his Ph.D. And his academic and column "work" is completely inconsistent."
I think it's worth the effort of putting in a good word for him!
And again – as anybody who actually reads me knows, I have zero problem with inequality. In fact, I've compared inequality in the economy to Bernouli's law with airplane wings. It provides lift. It's necessary. It's good. But when people get savaged for some concern about inequality, I think that's a legitimate position to take – so it's worth the effort of defending them a little!
I suppose that I'm supposed to respond to all this, but I'm just too stupid to make any sense out of it. All I can see is that the Left depends entirely upon the assumption that taking from the rich to give to the poor reduces inequality, it doesn't reduce but increases it, and you would rather pee in your pants all day long than say so.
Daniel,
My problem with Krugman isn't his socialist views. I can disagree with those just fine and still respect him in the morning. It's the fact that he's disingenuous and unethical that bothers me. If you respect that, then what more is there to say? I can't respect that. I respect Karl Marx more because at least he was consistently sloppy.
Lindsey's critique is not only of Krugman, but, from the context of his article, also Levy and Temin: "But the caricature of postwar history put forward by Krugman and other purveyors of nostalgianomics won’t lead us anywhere." Lindsey's understanding and insights into history dwarfs the three of theirs combined.