James Kwak takes on Will Wilkinson, who has a critique of Paul Krugman‘s articles about income inequality. I’m not sure I agree with any of them.
The third grade version of the debate so far:
Paul says that when he grew up in the 1950s, everything was perfect. We lived in cookie-cutter suburbs, drove one of three similar cars, worked in similar jobs, and had 2.4 kids. Unions were strong, single-earner families were the norm, and everyone gathered for backyard barbeques on the weekend. Unless you were black, in which case you lived in a dog-run shack in the South and weren’t a part of our story, or a single/divorced/fallen woman, in which case you could expect something between benign neglect and borderline assault from society and also weren’t a part of our story. Now, of course, a few financial engineers on Wall Street and a handful of other tycoons in the intellectual property industries (and big box retail) make an absurd amount of money and lord it over everyone else by reestablishing Gilded Age society – combining land parcels, building gated communities that do not host neighborhood barbeques, flying around in private jets while the rest of us take off our shoes at security.
Will writes for the Cato Institute and says Paul has it all wrong, our inequality isn’t that bad, income is just a funny measure, and most of that additional income is saved, and the part that is spent is wasted on oceanfront mansions and Hermes scarves, which really aren’t worth what rich people pay for them, because after all it’s drafty by the water and the waves will keep you up at night.
James says that Will is full of shit, because if people are buying oceanfront mansions it is probably because they like oceanfront mansions, and arguing that they do not derive utility from them is a weird pop-psychology false-consciousness argument.
As a starting point, I don’t see the argument in denying the rise in inequality. It exists by just about any measure, not least our own eyes. Krugman is right about this.
What I don’t understand, however, is why this is necessarily a bad thing.
Suppose you could be a seventeenth century Dutchman or a twenty-first century Dutchman. If you lived in Amsterdam in the 1600s, you could sleep soundly in the confidence that your population was the kings of the earth. The wealth of the world was unloaded on your docks. In your name, entire populations of southeast Asia were put to the lash. But you were also vulnerable to any manner of infectious diseases. If you did not like listening to the piano, you didn’t have much but the obvious to do at night. Your food was frequently rotten, your wines mediocre, your transport no quicker than a vigorous horse. People smelled. Bad.
Today the Netherlands is an afterthought, even for most Dutch, who if prosperous spend plenty of time flying off to more exiting destinations. When they get there they are thrifty northern Europeans; no customs officials bow before them. The ships that call at Rotterdam unload forty-foot steel boxes that are not opened before reaching their destinations deep within Germany. But are things so terrible? You can have a nice plate of jamon de jabugo with a glass of New Zealand wine before heading off to a glorious dinner of fresh fish and local asparagus cooked by a Senegalese chef who trained in Osaka. You can watch crappy American sitcoms and good American movies from the giant TV in your climate-controlled living room, and you can have some confidence that all members of your household bathed today. Should someone get sick, there is a functioning health care system with convenient locations that can solve most of the traumas that afflict the otherwise healthy.
The Americans of Paul Krugman’s idyllic years did not have a fraction of the conveniences even lower-middle-class Americans enjoy today. Mobile phones. Multichannel television. Cars that are not death traps in accidents. Viagra. No-fault divorce and enforceable child support. Is it so terrible that the head of their company now makes a thousand times what they make, instead of thirty? In the 1950s, they would have called him “sir” when they ran into each other on Main Street or in a department store. Now they don’t see each other because the CEO shops on the Faubourg St. Honore.
I can’t help but suspect that much of the complaint is the Bobos in Paradise problem that the non-financial professional class has fallen behind the financial engineers. As Krugman has pointed out, when he chose academia the pay differential between school and Wall Street was not enormous. It took time for the situation to develop where people far less intellectually gifted would make orders of magnitude more money. Isn’t this the galling phenomenon, not that any American’s quality of life is seriously worse today than during the Eisenhower administration?
“What I don’t understand, however, is why this is necessarily a bad thing.”
Why inequality is a bad thing? It has to do with behavior, which is masterfully explained and dissected in David Cay Johnston book “Free Lunch”.
I highly recommend it.
I think you have the issue turned on its head: it’s not that inequality is a bad thing, it’s that relative equality is a *good* thing.
Periods of technological growth and prosperity typically happen in the wake of periods of unusual equality. The early 19th century, a period of economic equality prior to the huge influx of poor European immigrants, laid the economic and infrastructural groundwork for the American Industrial Revolution. The post-WWII era was also a period of relative equality–some were left out, yes–that led to the rapidly revolutionizing electronics that define our modern existences.
I agree with you in theory, but I think there’s a reason why inequality has become such a hot topic.
Americans were less concerned with it when they thought vast fortunes were earned. In the 1990s, CEOs and financiers could say, “Look at all of the wealth we created” and sound relatively credible because the economy was booming.
Now, however, we have bankers being paid millions of dollars while running their firms into the ground. Consequently, there’s a growing feeling that the game is rigged, that insiders are feasting at the expense of everyone else. That makes wealth a zero-sum game (especially now, when taxpayers are involved). People are starting to ask, “What is it that these people, ‘the far less intellectually gifted’ (in your words), doing to earn their pay?”
Worse, there’s a sense that the huge pay packages actually result in socially destructive behavior. One aspect is the moral hazard problems we’ve seen on Wall Street, and another is the arms race of real estate, education, etc.–people getting priced out of these markets.
So I would rephrase the question, from “Is inequality good or bad for us” to “What benefits are we getting in return for this inequality?” Right now the answer seems, not much.