Arnold Kling  

A Different Mr. Negative

Discontinuity and the Real Wor... An Empirical Disagreement...

Mark Thoma writes,

I hate to be Mr. Negative today, but I'm less than fully convinced that we are anywhere near embarking on a path that places the welfare of the middle class at the forefront of economic decisions.

One version of Mr. Negative is "We know exactly what sort of social engineering would produce a larger, richer middle class, but the Big Bad Meanies won't let us."

Instead, my version of Mr. Negative is, "We have many hypotheses about the causes of relative and absolute poverty, but we have few certainties. We are even less certain about what sort of social engineering, if any, would address these causes."

Tyler Cowen, sounding uncharacteristically self-assured, writes,

I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top...If we could fix these problems, that would mean a smaller financial sector, less moral hazard, better allocation of capital, and for most/all income classes rates of income growth comparable to the 1948-1972 period, chop it up as you wish. Imagine that everyone's income went up three percent a year, every year, and every generation was about twice as rich as the parents.

I would say that this is true with only p = .15 or less. My recent narrative I would give a probability closer to .4. Charles Murray's analysis I might assign a similar probability (next week, his book will come out, so I can actually read it. At that point, p might move.)

I admit that my views on this have not changed much since Nick and I wrote this article. The only additional point I would make is that if you lift your perspective from the U.S. to the world, then what you see is a middle class that is increasing in size and wealth. Factor-price equalization may not be good for some Americans, but it is great for many Indians, Brazilians, etc.

I do agree with Tyler that this topic does not have to be as ideologically loaded as some people want to make it.

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CATEGORIES: Income Distribution

COMMENTS (6 to date)
Tyler Cowen writes:

Note that I'm not very self-assured as to how we might fix these problems, quite the contrary.

fundamentalist writes:

The problem with the “inequality causes immobility” argument is that they lump western, democratic nations in with corrupt dictators. They commit the mistakes of misspecification and spurious correlation. Different things can cause greater inequality, some good and some bad. It is likely that increased immigration of poor people into the US has caused a major part of growing inequality.

That said, Cowen’s complaint about the growth of the financial sector is a legit gripe, but easily solved by Austrian economics: money doesn’t enter the economy by helicopter drop. New money enters at specific places and times, mostly through banks during periods of credit expansion. Those who receive the new money first will profit because the get the money before prices, including asset prices, rise. The working poor get the money last, after prices have risen.

Financial services profit the most from credit expansion. Manufacturing suffers. Manufacturing also suffers from high levels of regulation and taxation.

Becky Hargrove writes:

People want more than one kind of middle class, but it is presently structured in one way: where everyone is expected to live in low technology housing better suited for the rich, and in which the use of knowledge is only a side factor of economic activity. Because everything has been structured through a lens where money factors are primary, love of knowledge becomes a ZMP in which only quick acquisition of the right knowledge counts, for many. Now, we have debt that is really the lack of participation in knowledge wealth creation.

Keith writes:

Perhaps the economy is capital constrained. That is the primary constraint on economic growth is capital (physical plant and equipment). Put another way, there is too little capital to fully employ the labor force.

This puts downward pressure on wages and gives capital owners a higher than normal share of income.

The fix: increase capital investment (private). Over time push the economy toward being labor constrained instead of capital constrained. This will drive growth and shift a higher share of income toward labor.

Of course, this would require savings be invested in capital plant and equipment (private) and not US Treasuries.

My opinion: the private sector cannot support current government and grow at the same time. The burden of government is simply too great.

Glen Smith writes:

Actually, most of the "social engineering" projects engaged in during my lifetime can only logically be for the benefit of the upper class.

fundamentalist writes:


Perhaps the economy is capital constrained.

Exactly! That is the Austrian position. A lot of capital gets wasted during the boom. In the latest it was housing and auto factories.

Jobs today require some kind of capital, if nothing more than a shovel. When capital is wasted through bad investments the jobs that capital supported disappear. It takes a long time to save and rebuild lost capital.

Unemployed workers could offer to work for free and still not get a job because companies don't have the funds to expand capital so that additional employees will be productive.

The idea that all you have to do is reduce your wage demand and you can get a job is just too simplistic. It's like Krugman's silly baby sitting co-op model.

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