Sunday, August 19, 2012

Flinging spaghetti at inequality

Via John Cochrane, I see that Kip Hagopian and Lee Ohanian have written a lengthy article about inequality. It's hard - no, impossible - for me to summarize the thesis of the piece, because it's basically a huge smorgasbord of loosely related, unrelated, and even contradictory reasons why the United States government should not redistribute income. Basically, the arguments of Hagopian and Ohanian can be broken down into the following list:

1. Income inequality isn't important.
  1a. What's really important is equality of opportunity.
  1b. What's really important is consumption inequality.
  1c. What's really important is the level of consumption enjoyed by the poor.
  1d. There's no good measurement of "fairness" when it comes to income.

2. Inequality is mismeasured.
  2a. Prices paid by the poor are mismeasured.
  2b. Government benefits to the poor are not included in inequality statistics.

3. Consumption inequality has decreased, not increased.

4. Increases in income inequality were unavoidable.
  4a. Inequality increased because of globalization.
  4b. Inequality increased because of technology.
  4c. Inequality increased because of low-skilled immigration.

5. America's inequality hasn't increased as much as that of other rich countries.

6. Attempts to reduce inequality by redistribution will lower GDP.

7. Inequality is a good thing.
  7a. Inequality is a result of economic freedom.
  7b. Inequality is a result of an entrepreneurial culture.

(The article goes on to talk about taxes, how the rich pay more than their fair share, how the rich are "job creators" and taxing them will hurt the poor, and how what we really need to do is fix the K-12 education system.)

It seems to me that Hagopian and Ohanian have flung a bunch of spaghetti at the wall to see what sticks. Anyone looking for a reason to oppose redistributive taxation will probably find something to like within this multitude. Indeed, I myself agree with about half of these points (if you're interested, I basically agree with 1a, 1b, 1c, 2b, and 4a).

But that doesn't make the article a coherent argument. Think about these questions:

* If inequality has been mismeasured and/or has gone down, why do we need to say it's irrelevant and/or a good thing?

* If inequality has been mismeasured and/or has gone down, why do we need to explain why it was inevitable that apparent inequality went up?

* If inequality is irrelevant and/or a good thing, why do we need to argue that its rise was unavoidable?

There's no thesis here, other than the idea that "income redistribution is bad." I think this reduces the credibility of the authors. Hagopian and Ohanian clearly started from a policy conclusion  ("income redistribution is bad") and went in search of reasons why this might be true, then went in search of data that supported those reasons. That's exactly the reverse of how I think scientists ought to do things. First you look at the data, then you make sense of it, and then you decide which policy makes the best sense. The fact that Hagopian and Ohanian seem to have done the reverse of this makes me think "Oh, here are another couple of guys who want lower taxes on the rich, and will grab hold of any theory or statistic that seems like it supports lower taxes on the rich."

So even though, for me, some of the arguments were convincing - i.e., some of the spaghetti landed in my mouth, and the rest on my shirt - the scattershot nature of the argumentation makes me less likely to buy into the overall policy conclusion. I don't think this is how economic policy advice should be done.


  1. noah, if only Obama would promise to have you replace Tim Baby . .

  2. As these hacks and charlatans always say, incentives matter. So where is the Public Choice Theory of Economists? As many observers have noted, there is no risk to practicing 'science' in this manner, and the potential reward is sky-high. I'd love to imagine there were more effective weapons against this snake-oil salesmanship than public shaming, but I'm constrained by my own creativity.

  3. Larry Headlund11:38 AM

    Founder of the Prussian School of Economics. Austrians beware.

    I think the Hungarian or Pan-Slavic Schools of Economics would worry Austrians more. However, once you grasp Dual Monarchy efficient markets should be no problem.

  4. I wonder if you are familiar with the modeling and resulting argument that redistribution is necessary presented in this article. I'm not an economist, so I'm not qualified to judge the correctness of this article, but I get the general point. I never see this kind of argument made, that because of uninsurable risk and the natural advantages that accelerate accumulation of wealth the wealthier you get, even with perfectly equal opportunity and virtue, unacceptable levels of inequality will naturally arise and thus redistribution seems necessary. Here is the link in case the article seems of interest.

  5. Kip Hagopian and Lee Ohanian are a pair of hacks and symptomatic of why the discipline of economics is a joke and a laughing stock within the academy, at least amongst serious scientists.

    If anyone wants to actually read a serious piece of work on income inequality they should look to James K Galbraith and especially his book 'inequality and instability'.

    1. Anonymous12:48 PM

      Great argument, you blew me away with that.

    2. Anonymous12:52 PM

      It's funny how the only people who make this claim about laughing stocks are the ones who are most willing to make insanely gigantic sweeping generalisations that would make any philosopher of science squeam. It's also ALWAYS in response to something that just so happens to be against their ideology, but of course that's all just a coincidence.

    3. Anonymous12:57 PM

      Oh and isn't James K Galbraith almost universally considered amongst 'serious' people to be a hack, whose work is ideologically driven and emotionally charged with extremely sloppy empirical work?

  6. Very good post!

    To your questions I have the following response.

    1. Where do they say it is irrelevant or good ? I think nearly everyone would agree it is an unwelcome outcome of an economic system as much as it is about fundamental inequality between human beings.

    2. Apparent inequality can be dealt with in a better way if we can measure it more carefully.

    How can you not agree with 6 and 7a and 7b of your summary discounting whether it is good or bad ?

    If we had to do a statistical study the evidence in most of the countries could nearly prove beyond doubt that redistribution has a negative effect on GDP. The real question about inequality is about the overall trade off. If we were trying central plan this thing then how much would be optimal is the eternal question. That is why first its accurate measurement and everyone agreeing on this measurement system becomes more important.

  7. This comment has been removed by the author.

  8. The article felt like a type of argument that I've seen creationists use, too. They hold a policy position which isn't really up for argument, and they use various arguments in favor of it as "weapons" to throw as opponents. The actual validity of any particular argument doesn't mean much to them, so long as they "win" the debate.

    1. I see the same with global warming deniers. The sun/oceans are causing warming, and it's actually cooling, and warming would be a wonderful thing. CO2 is a trace gas and its effect is saturated. The climate's always changing, and changes in cloud cover will have a stabilizing effect.

  9. Ankur2:50 PM

    Noah, I was the founder of the Prussian School of Economics.

    But I don't have the empirical data to prove it.

    1. It's OK, we can mud-wrestle to see who gets to be the Kaiser.

    2. Ankur The First10:20 AM

      But first we have to figure out what we believe in.

      Principle 1: Every new born child must be backed by the gold standard.

    3. Hjalmar Schacht might have a reasonable claim to founding the Prussian school of economics. He was Prussian at birth and seems to have been a very clever pragmatist.

    4. Ankur The First4:00 PM

      But did he say controversial shit?

      That's the real litmus test for our fraternity.

  10. Alan Goldhammer3:51 PM

    LOL, a co-author who founded a VC and Leveraged Buyout (I like this term better than private equity) firm. Of course one can see where their conclusions are coming from. Consider for a moment our wonderful financial services industry. I can recall a short number of years ago when manufacturing began to move off shore and the argument was being made that the US would seamlessly move towards a service economy. Well anyone who has a couple of neurons that are still functioning knows the result of this "seamless" transition. What have these masters of Wall Street created that has any lasting value? The history of the post-1970 growth and collapse (several times over) of financial service companies has been amply documented.

    Globalization is a fact of life and I guess inevitable. That being said anyone who believes #7 (and for that matter a lot of the rest of this stuff) is smoking too much funny weed. If inequality is so good why did Marie Antoinette lose her head (and one can point to many other great examples here)?

    As a final comment, why do CEOs of equivalent European multinational companies make on average much less than their American counterparts (adjusting the companies for equal ROI)?

  11. "... and how what we really need to do is fix the K-12 education system."

    Given the catastrophic failures of Wall Street it appears to me that education reform should start by firing every finance professor at every University in the country, starting with Cochrane and everyone else at University of Chicago. Those guys have a lot more personal responsibility for what has happened than, for example, any kindergarten teacher in Mississippi.

  12. Alan Goldhammer5:21 PM

    @Absalon, I hope you don't include aspiring finance professors such as our very own Noahpnion in this category!

    1. No. I think those who taught finance anytime in the period 1995 through 2007 should be fired and barred from academic positions. Noah should of course be warned that he has an obligation to teach his students the lessons that an earlier generation of finance profs missed: like that it is wrong to lie and steal. The failings of Wall Street were not just intellectual, they were also moral. The finance professors have responsibility for both failures. (The bankers themselves have even greater responsibility but then I think they should all go to prison.)

  13. Zlati Petrov6:14 PM

    Noah, out of curiosity, how do you feel about the research on the importance of relative consumption and consumption habituation on welfare.

    I ask this with respect to your agreement with the authors that what really matters are consumption levels, rather than (or more so than) relative consumption and consumption growth.

    I am not familiar with the research, but I recall seeing a few articles in various journals that purported to show that people care at least a little bit about how their consumption compares to that of others and to their own consumption in the past.

    Do you think these have any relevance here?

  14. What do you expect from the libertarian, plutocrat crowd? What do you expect from Cochrane or Mankiw? I mean, I read their books as an undergrad and PhD student, and then this? But what do you expect -- I'll write honestly and unbiasedly and in a non-misleading way so you know that my libertarian philosophy will by horrific for the vast majority, and result in horrifyingly lower GDP and scientific and medical advancement over the long run?

    They have to ridiculously mislead or outright lie, otherwise they have zero chance to get anywhere close to their libertarian desires in a democracy.

    1. You have the luxury of writing in a smart, non-misleading, truthful way. They have no such luxury. It's lie and mislead your ass off, or libertarianism has no chance of getting anywhere close in a democracy (of course they also fight against democratic majority rules).

  15. Noah, I think you are being unfair here when you say

    "There's no thesis here, other than the idea that 'income redistribution is bad.'"

    The authors do mention, admittedly only in a sentence or two, the distortions and disincentives that marginal tax rates create. So I see a clear argument. If inequality in lifestyles has not risen as much as we think, if the poor are doing fairly well in absolute standards, if rich people do pay more than we think in taxes, and if inequality does act as a motivational force, then given the economic costs of taxation maybe we should rethink whether more redistribution is desirable. One does not have to agree with the ifs. But I fail to see the lack of a thesis.

    My problem is that the authors fail to address the equality of opportunities, which they feel is important. Do they believe opportunities are similar regardless of who one's parents are? If not, would expenditures directed towards creating more opportunities for the underprivileged justify higher taxes? Of course, this would have been a tougher question to ponder, so they chose the easy route.

    1. Really? I read through looking for their case for that claim specifically and didn't find much beyond Steve Jobs is super-rich and if we taxed the rich more we might not have him. And that many studies say that capital gains taxes should be zero but they couldn't be bothered to name them.

      I'd really like to find a well fleshed out argument preferably backed up by data about why higher top marginal tax rates are bad for everyone; talk about "taxing job creators" doesn't do it for me.

    2. Eric,

      here is the line from their piece:

      "Policies designed to reduce income inequality inevitably involve redistribution of income through increases in transfer payments and marginal tax rates. But these policies discourage hiring and investment, which depresses economic growth and opportunity."

      Now disagreeing with this claim is different than accusing them for lack of a thesis. Especially since there is research supporting this claim. Now whether it applies to the richest among us is a different question. Here are two papers, one by Prescott (Noah's favorite economist, lol), and one that addresses the welfare cost of taxation in greater detail by Hausman. Of course, there are many more.

    3. Oh, and here is a paper on the capital gains tax

  16. For point 3, I found it interesting that all the studies they cite end in 2008 or earlier, before the credit crunch. I believe it to be broadly correct for that time period, and for that reason I believe you and them to be incorrect on point 1.

    The key issue for me is that it seems periods of sustained economic growth have happened during times of low, stable income inequality (WWII-1970s), and during times of rising income inequality (1920s, 1980-2008), but they have only happened during times with low, stable levels of consumption inequality. If it is a prerequisite for a strong economy that middle class consumption be a significant share of that economy, then consumption inequality may be as important as equality of opportunity.

    But the only way we have managed to keep the distribution of consumption stable while the distribution income has become increasingly skewed is that those who've seen large gains have been loaning the money back to the middle class. You can't just allow income inequality to grow arbitrarily large and expect to be able to keep consumption inequality low and stable through easier credit; eventually it stops making sense to loan with any expectation of seeing your money back. We aren't going to be able to keep consumption inequality in check going forward if we don't get income inequality in check. But having a consumption inequality that looks more like our income inequality means having an economy that does not resemble any good economy we've had in the past century.

    So I'd say income inequality is very important, because consumption inequality is very important and the former will constrain the latter when debt gets too high.

  17. I think the reason for income inequality is the crux of the matter. If income is unequal because a CEO is 500 times as productive as a line worker then that could be a good thing. But the Roman empire was very unequal, and we do not see the inequality (due to slaves, for example) as being a positive feature of the empire nor did being wealthy prove much about merit under these conditions.

  18. Gibbon16:59 AM

    This is easy: Kip Hagopian and Lee Ohanian are arguing like lawyers trying to get their client off.