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Brink Lindsey Baits Paul Krugman

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Brink Lindsey has written a paper criticizing Paul Krugman's view that the period from 1950-1970 was a sort of golden era for economic policy, because it involved high economic growth with relatively little inequality. Lindsey instead sees the immediate postwar era as one of lazy cartels, in which firms faced too little in the way of competition or creative destruction to warrant bidding up the price of executive talent.

I'm tempted to joke that we will know that Lindsey has succeeded if Krugman issues a bitter, personal attack on Lindsey. My own thoughts are as follows.

In my view, Lindsey only focuses on two of the four causes of inequality that Nick Schulz and I presented. We talk about technology, immigration, winners-take-most markets, and family structure. Lindsey puts a lot of weight on the first two. He alludes to winners-take-most markets in entertainment, but my view is that such markets have emerged in other areas as well--look at Microsoft or Google. Finally, I think that the family structure issue is more than just smaller household sizes. I think that Betsey Stevenson/Justin Wolfers marriages are another big factor. That is, when highly-educated men start looking for wives who are stimulating companions as opposed to kitchen floor-moppers, this reduces cross-class marriages and thereby raises inequality.

The big puzzle here is that of executive pay. Krugman has a simple story--executives will take as much pay as social norms will allow, and until the Reagan era social norms would not allow them to take very much. Lindsey's story is that a more competitive, dynamic business environment caused executive pay to rise.

Both of these sound to me like just-so stories. Either one may be right (or both--they are not mutually exclusive), but I don't think we have anything like smoking-gun evidence. My gut instinct actually leans more in the direction of Krugman. I look at the salaries of college presidents, for example, and I see them affected more by norms than by a tough competitive environment.

I think that there are plenty of people, mostly men, who have extreme cravings for status. In academics, this shows up as professional jealousy of all sorts. In politics, it shows up in the insatiable desire to expand authority. And in business, it shows up as a desire for ridiculously high pay. Maybe in a perfect world, these status cravings would be better reined in.

I would side with Krugman in the sense that I think that if norms were changed to reduce the size of executive pay, there would be little or no loss of economic efficiency. But I would not side with Krugman in jumping to the conclusion that we really ought to put a lot of effort into changing norms. Even assuming that executives are paid way above their marginal products, the fact that executives get a large share of the pie does not reduce my share of the pie by enough for me to care.


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CATEGORIES: Income Distribution



COMMENTS (16 to date)
Joe Calhoun writes:

While I don't discount the causes of inequality that you mention, I wonder if you might address something that I've been thinking about for some time. There is research (see here for example: http://econpapers.repec.org/paper/cprceprdp/3470.htm) that shows a correlation between inequality and inflation. Other research (which I can't seem to find right now) also indicates a correlation between government corruption and inequality.

I find it interesting that the period from 1950-1970 also corresponds to a period of currency stability via Bretton Woods. If you define inflation as an expansion of the money supply (or money and credit) as I do the increase in inequality since 1970 makes perfect sense. One could argue, persuasively I believe, that we've also had a rise in government corruption during that time. Indeed, the corruption may also be a result of monetary inflation since a fiat currency makes it a lot easier for governments to spend and run deficits.

Any thoughts?

Rick Blaine writes:

"Even assuming that executives are paid way above their marginal products, the fact that executives get a large share of the pie does not reduce my share of the pie by enough for me to care."

Wouldn't U.S. sugar producers make this same argument in favor of sugar tariffs (substitute sugar producers for executives)? This argument is a very slippery slope.

Mike Moore writes:

"http://econpapers.repec.org/paper/cprceprdp/3470.htm) that shows a correlation between inequality and inflation. Other research (which I can't seem to find right now) also indicates a correlation between government corruption and inequality."

Probably because nations with the highest inequality are also the ones who are in the third world; nations that are notorious for struggling with inequality.

Corruption breeds inequality, not the other way around.

As for inflation, the abstract suggests that politicians will be pressured into expansionary fiscal policy, and that leads to inflation.

Rick:
Sugar producers should make that argument to nations with a comparative advantage in sugar producing (I have a feeling their reaction will be very different from Arnold's). They don't need to make the case to the American consumer, this is why nothing has been done.

ed writes:

Rick Blaine, good point, but:

(1) Sugar tarriffs cause a deadweight loss. High executive salaries are probably mostly a transfer.

(2) High sugar tarrifs represent the government taking an action to limit economic freedom. High salaries are the result of economic freedom. All else equal, we should have a bias towards freedom and against regulation.

Joe Calhoun writes:

Mike,

"Corruption breeds inequality, not the other way around.

As for inflation, the abstract suggests that politicians will be pressured into expansionary fiscal policy, and that leads to inflation."

Sorry if I didn't word that clearly enough. Of course, corruption breeds inequality. And of course politicians will be pressured into expansionary fiscal policy. Isn't that exactly what we're seeing right now, right here?

My point is that these factors may be better explanations of the rise in inequality since 1970 than the other explanations. That period Krugman references as a golden age was a time of currency stability. The good times since then are associated with times when the dollar was rising (early to mid 80s and mid to late 90s). The bad times are associated with times when the dollar was falling (70s, crash of '87 and now). Maybe if we had some semblance of currency stability we wouldn't have these big ups and downs. Without the inflationary periods we wouldn't have as much inequality or corruption.

Mike Moore writes:

Joe,

I COMPLETELY missed your point. Thank you for clearing that up for me.

Upon further reflection on this topic, my narrative would be the U.S.'s taste for cheap oil that contributed to the downfall in manufacturing (car companies in Detroit specialized in gas guzzlers while market exposed Japan and Europe specialized in fuel efficiency).

Once unfavorable regimes were in power in the middle east, and the U.S. was forced to lift price controls, than the United States manufacturing sector was made to painfully adapt to international competition. Add onto this the ever expanding force of technology to drop demand for unskilled labor.

If I had to talk about family structure, I would mention that women entering the workforce is putting more downward pressure on wages (increased supply), while also adding an income earner to most modern day households (I know Krugman mentions median-household income quite often, but the Minneapolis fed debunked that statistic a while ago).

Mike

Bill D writes:

To me this is a really interesting question...

We have a society that has decided to pay a very high proportion of income to a small number of people. At the same time, those elites pay a very high proportion of the income taxes.

Further there is a very high portion of the country that pays no income taxes at all.

Leading to the impression of "free lunches" from politicians and trillion dollar deficits.

Is there any research that shows the impacts (economic or social) from this kind of relationship (or the opposite where there is a more even distribution of income/taxation)?

Don the libertarian Democrat writes:

"view that the period from 1950-1970 was a sort of golden era for economic policy, because it involved high economic growth with relatively little inequality. Lindsey instead sees the immediate postwar era as one of lazy cartels, in which firms faced too little in the way of competition or creative destruction to warrant bidding up the price of executive talent."

1) If high economic growth and relatively little inequality aren't good, what are they?
2) It sounds like we should be in favor of lazy cartels.

At best, Lindsey says that the times weren't as great as Krugman believes. But, given the last thirty years, many people might conclude that these have been even worse economically, although not socially. My own belief is that small government advocates need to focus on income inequality and income growth for the entire population. I think that this is an essential problem to work on if we want less government.

Only under conditions where the middle class believes that it is a middle class, and not one tiny step over serious problems, and the lower class believes that it is not being ignored, will less government ever be truly possible. Without addressing those concerns, I believe that Krugman's arguments will prove very popular.

Jim Glass writes:

Krugman demonstratred how amazingly far he is willing to rewrite history when he told Kevin Drum...

Is this the same country that we had in 1970? I think we have a much more polarized political system, a much more polarized social climate today ... we're probably not the country of Richard Nixon"
Ah, don't we all long for the Nixon Era of Good Feeling? Spiro Agnew smoothing troubles waters ... the SDS and Weather underground blowing up buildings as domestic terrorists ... regular summer race riots in the cities ... National Guardsmen shooting students dead on campus...

Things are so much more polarized today!

The guy could've had a job at the Ministry of Truth.

Floccina writes:

I am pro freedom but I also believe that CEOs, musicians, great actors and athletes are less important than we think and that if we could figure a way to compensate them less we would all be better off. (This is not to say that great athletes do not lead to wins, they do, but they do not increase the entertainment value of much. I think the same of actors and musicians. Of the highly paid people CEOs probably contribute the most but to me it seems much less than people think. IMO great engineers, scientists and entrepreneurs contribute hugely and they do not often capture much of the benefit that they give. An example that shows how CEOs often do not contribute enough over cheaper candidates what we pay them. An example is Apple computer, Steve Jobs and others at apple became convinced that they needed an experienced “professional” CEO and so they brought in Scully. Scully contributed little later Steve Jobs stepped in and did a better job. IMO there is little management knowledge and thinking that makes a big difference, management is mostly about simple principles and leadership. Any number of CEO candidates could do the job. One thing that I think makes CEOs look more effective than they really are is that when a company changes its CEO it often at a point where it is ready to change and accept new ideas and that is what makes for the bug improvement not the new CEO. Carl Icon brings in lower paid CEOs and he does fine.

Actors draw because they are famous, IMO if all actor profiles were lower profile I think we would still enjoy the movies as much.

BUT I see no way that to cap pay without big negatives. I would never support a national pay CAP. IMO we have to work this out some non-governmental way.

floccina writes:

@Joe Calhoun

It seems to me that accelerating inflation would help net debtors and the decelerating inflation would help creditors or those with money.

Joe Calhoun writes:

Floccina,

When a new dollar is created the first to receive it benefits the most. In order, that would be the banking system, wealthy individuals, corporations and politicians (who pass it on to the politically well connected). By the time that new dollar gets to say, a sub prime borrower, prices of goods and assets have already risen. Furthermore, inflation affects real assets such as real estate first, so those who already own benefit the most. The poor don't own assets that benefit from inflation.

In the long run, you are right that inflation benefits debtors as the debt is paid back with devalued money. All credit bubbles eventually burst though as we're seeing now. Those enticed into debt during the inflation get crushed during the ensuing deflation. The wealthy who aren't in debt will be first in line to use the dollars newly printed to end the deflation. They win again.

I have come to believe that our biggest problems are caused by bad monetary policy. It's not the only problem, but it is more intertwined with the others, such as inequality, than most believe.

spencer writes:

I never though I would see you joining the
John Kenneth Galbraith school of economics.

Mike Moore writes:

Don,

"My own belief is that small government advocates need to focus on income inequality and income growth for the entire population. I think that this is an essential problem to work on if we want less government."

What about the negative income tax? This seems a preferable alternative to a welfare state in that it still provides for people but does not reduce their incentive to work.

It seems a token response, but more manageable and simple than the indirect payments we currently make.

Floccina writes:

@Joe Calhoun I think our above statements can be reconciled as I was talking about CPI increases which come later and you are thinking about real inflating of money supply. The banks do get the money first and workers who keep their jobs through a deflation do see real wage increases even while profits are reduced. I still have questions about how this theory does as an explanation of the income gap in history.

Don the libertarian Democrat writes:

Mike,

I'm glad you asked. That is my ultimate hope. Read Charles Murray's In Our Hands for a version of what I believe. My view also comes from Capitalism and Freedom and Moynihan's The Politics of a Guaranteed Income. My goal is to get the Democratic Party to see this as a more decent, just, and cost effective social safety net.

The odd thing is that liberals I know are much more likely to accept this than conservatives I know. One big problem is health care. Like Murray, you're going to simply have to find a way to address it. I'm fine with that, but I imagine many people wouldn't be.

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