Jared Bernstein has his speech up on TPM Cafe. Very much worth a read. It's a quick sum-up of his views on inequality and the way towards greater equality. A good passage:

I'd like to offer three principles against which we can judge the nature and scope of the economic problems we face; three concepts that I suspect most of us would agree must be present in a viable social contract (and I'm borrowing here in part from the work of Fred Block): reciprocity, fair competition, and fair opportunities.

I've talked about reciprocity, and, in the context of our discussion today, I consider it the most important of the three. The best statistical shorthand for demonstrating its absence in today's economy is the split between strong productivity growth and the stagnant real wages and incomes of the typical or median family.

Equally important in this regard is the share of income accruing to those at the top of the scale, and the fact that poverty rates, by any measure, have not responded at all to growth in the current recovery.

Indeed- but reciprocity can be stated more emphatically as exploitation or, on the extreme end, as wage slavery. It may turn some heads to use more provocative terminology, and I have no idea which is more politically useful, but I do think that provocative language better describes what's actually happening. People are contributing, but not getting back what they deserve. Their efforts are being exploited for the benefit of an exclusive few. They're being restrained from bargaining for the wages they've earned.

Bernstein refers to the work of political scientist Fred Block. Here's an article of his The Nation last year. Pretty good stuff, too, and I think he gets closer to a fuller explaination.

These kindergarten rules, in fact, translate directly into the four key principles that would be an integral part of a moral economy. "Don't hit" and "take turns" are about the principle of reciprocity; we need to behave toward others as we want them to act toward us. We should avoid force and coercion in our economic relations, including the quiet violence that occurs when we exploit someone's vulnerability or ignorance. Reciprocity is the foundation upon which trust is built, and high levels of trust are indispensable for economic prosperity.

But why do we need more reciprocity? Bernstein supplies the data on productivity and wage growth- Block's got the visuals. Could we link these thoughts up?

I don't want to seem too critical here- it's my hunch that Bernstein, Block and other people (like the folks at inclusionist.org) are articulating the most vibrant, progressive way of thinking about equality, the mother of all issues. I just think it might be useful to unpack things a bit more.

Rising income inequality, creeping AMT brackets, a deteriorating debt picture -- none of these seems to rise to the level of significance sufficient to galvanize the White House into action. But when life gets tough for the nation's investors -- and a five percent drop in the capital markets this week is making life tough for investors -- the White House gets going.

But Stocks Continue Slide Despite GDP Report, according to this afternoon's New York Times.

Perspective before panic, however. When was the last time the Dow lost over 650 points in the space of a week? A mere five months ago.

Just came back from an event sponsored by Democracy: Journal of Ideas (so pretentious- uggh) and the Brooking's Hamilton Project, which I'm not really a huge fan of either, but whatever. They're ok.

Anyway, Jared Bernstein of Economic Policy Institute gave a terrific presentation and raised an interesting point about the benefits of market interventions as opposed to tax and budget decisions. If I got him right, he believes that market interventions that get to the root of inequality are probably the only ones powerful enough to address the scale of the problem. Fiscal redistribution may not be (though I bet they're both complimentary and necessary). Plus, there's no need to constantly recalibrate policy, since the fundamentals of the economy will no longer be so conducive to inequality.

I'd add two more: first, market interventions may be more precise and responsive to local markets. For instance, unions can work out a deal that suits the interests of their industry and conforms to the conditions of a local market. It might be too much to ask of government to know what's right for every industry, everywhere. Otherwise, to be consistent, we'd have to achieve an arbitrary level of equality- which might be good for establishing a minimum past which nobody should fall, but is that appropriate for everyone else?

Market interventions also demonstrate more respect for human dignity. Redistribution programs, like wage subsidies, are paternalistic. Maybe I'm off here, but the rationale for creating them is to compensate the "losers" of trade and to ensure that they don't revolt against the market system. That sounds a whole lot like good old fashioned Bismarkian paternalism, the idea being that the people who get the checks don't really deserve them, but the upper class needs to bribe them so they keep quiet. Plus, redistribution programs disempower the recipient, who receives a check in the mail through no direct action of his or her own. It's like getting a check from Grandma because it's your birthday. Nice, and I'd spend it, but kinda humiliating when you're a bit older. That's how I'd feel, anyway.

Bargaining and wage policy instill the worker with a sense of responsibility for their earnings. You get paid what you deserve- you don't get a check from Uncle Sam, and it isn't a rather arbitrary decision based on a formula. And in the case of unions, you take part in the negotiations process, hopefully. This feeling of empowerment, while good in and of itself, could give people the confidence to participate in politics and community life. Plus, you're laying the groundwork for the organizations that foster participatory politics.

Clearly this isn't an either/or decision, but it just seems to me that all things being equal, Mr. Bernstein is right that you should go with labor market interventions.

Economist Mark Thoma, over at Economist's View, locks in on an essential point in the inequality debate that often gets overlooked.

One thing that bothers me about the whole inequality debate is the presumption that the winners deserve their incomes because it reflects their contribution to the firm, i.e. it is the wage that would be earned in well-functioning competitive markets, with the reward is equal to the person's marginal contribution to the firm. Thus, the analysis often begins with the idea that any tax takes away someone's hard-earned income and redistributes it elsewhere.

But for the incomes where inequality is rising most - those at the very top of the income distribution - this is a questionable claim. The idea that the salary of a CEO or hedge fund manager is set by competitive markets, or even approximately so, seems unlikely, or at least open to serious question. It should not just be assumed in these debates.

If the incomes of the winners are higher than they would be in a competitive market, then many of the arguments against taxing their "hard-earned money" melt away. For example, if a person would earn $1,000,000 in a competitive market, but because of market imperfections earns $1,200,000 instead, is it unfair to tax away the extra $200,000?

At a 33% tax rate in a competitive market, after-tax income would be $667,000, i.e. the competitive income of $1,000,000 minus 33%. At the non-competitive income of $1,200,000, it would take a tax rate of around 44% to leave the person equally well off (i.e. $1,200,000 - 44% of $1,200,000 = approx. $667,000).

For this reason, I would argue that tax rates such as the 44% rate in this example are not as high as they might seem. Part of the tax simply levels the playing field, i.e. taxes away the income in excess of the competitive level, and the tax rate is then 33%, not 44%, on the part of income that would be earned in a competitive market.

The issue isn't only whether CEOs need this money, or if someone else needs it more, though those are perfectly legitimate questions. It's whether their salaries are earned; that is, are they set by competitive markets? Is the compensation proportional to their contribution to their firm or the economy?

If the answer is no, those of us who aren't CEOs, hedge fund managers, or corporate lawyers are being taken for a ride. Whoever earned that money isn't getting it.

This argument, to my mind, aims for the heart of capitalism, which is the supposition that the market is virtuous, that it rewards work, talent, and enterprise. I don't think the high priests of capitalism ever claim that it offers equality of opportunity- that's the government's job. But they do, often tacitly, believe that it provides just desserts. However, this just isn't happening in the labor market at large, where productivity and earnings have diverged to such a great extent. It's here that government is obligated to intervene, rather than just influence inputs and outputs, because market mechanisms are performing unjustly. A similar argument could be made about labor market inefficiencies.

The key question is, where is all this happening? Which labor markets are inefficient? There's plenty of anecdotal evidence and macro-data on inefficient labor markets. But it'd be nice if we knew where and to whom this was happening before moving forward on policy discussions.

Ezra Klein, a writer for the American Prospect, has an interesting post on uncompetitive and exploitative labor markets- a significant cause of inequality.

Sadly, the best thing written on the blog today didn't come from me. Rather, it's a comment from Kathy G. arguing that labor markets don't look much like classical assumptions would suggest, and that the data -- and some emergent theory -- offers evidence that they're closer to a monopsony than the more traditional competitive-market-in-equilibrium model. Full comment below the fold:

Anyone who thinks mandated leave would inevitably lead to a decrease in employment or wages most likely has not taken any econ beyond Econ 101. Because if you believe that such results would inevitably follow, you clearly are not familiar with the empirical research on paid leave, nor do you understand economic theory beyond a very superficial and incomplete level.

The minimum wage will go up to $5.85 today- the first of three raises scheduled under the law enacted by this Congress.

In a earlier blog post, I wrote that the increase happened on July 1st, which was wrong. It was also wrong to blast the media for not covering that, well, the minimum wage wasn't increased. In my defense, I had gotten that information from this Wall Street Journal op-ed piece. I should have known better.

People who downplay inequality are like the cranks who don't believe in global warming. They find evidence on the margin that is supposed to cast doubt on the macrophenomenon. They bob and weave, admit this exists, but say we can't do anything about it, etc. etc.

David Brooks is inequality's equivalent of the American Petroleum Institute. His column ($) today provides a fine example of the type of sophistry he peddles. Let's examine:

First, pile on the studies that downplay inequality, so you seem like you know what you're talking about and overwhelm your audience.

The first complicating fact is that after a lag, average wages are rising sharply. Real average wages rose by 2 percent in 2006, the second fastest rise in 30 years.

Read More...

Posted by Matt Lewis, 09:53:12 AM

Friday, July 20, 2007

The New Politics of Poverty

E.J. Dionne on the new consensus on poverty:

Quietly, a new anti-poverty consensus -- reflected in the dueling speeches Edwards and Obama gave this week -- is being born.

It stresses personal and parental responsibility while also addressing economic changes that are promoting inequality. It seeks to deal with the growing isolation of the poor, the need for early intervention in the lives of poor children and the importance of increasing the economic rewards for what is now low-wage work. Mostly out of public view, anti-poverty scholars and activists have used their time in the political wilderness to figure out what actually works.

The whole column is worth a read, but E.J. is being modest. His book Why Americans Hate Politics was of the first to make the argument that policies addressing the behavioral and structural causes of poverty were compatible and necessary. It's encouraging that such high-profile politicians have identified themselves with this message.

Posted by Matt Lewis, 09:53:36 AM

Wednesday, July 18, 2007

Will Union Growth Require More Than the Employee Free Choice Act?

An interesting article on unions, via the great blog Economist's View. Its thesis is that the decline in unionization is a product of a wide array of legislative and regulatory changes. The upshot is that much more than laws like the Employee Free Choice Act may be necessary to substantially increase union membership.

Even more interesting, the article finishes with the dreaded "e" word (exploitation) as the basis of promoting unionization.

Unions may be able to prosper as a niche movement in the government sector, which is the sole remaining noncompetitive sector, and in sectors where individual firms or industries take advantage of either uninformed or immobile workers to enforce below-competitive pay packages. Neil Chamberlain, one of the great figures in industrial relations, wrote in 1959 that "unions' chief contribution to their members' welfare has been to free them from the tyranny of arbitrary decision or discriminatory action in the work place." In those cases where individual firms exercise exploitative power to set wages below competitive levels, the same beneficial results emerge -- unions can and should improve the functioning of labor markets.

Exactly! The key question is, then, how many industries are like this? The divergence of the median wage and productivity gains seems to indicate that this type of workplace environment is much more pervasive than commonly believed. Let's face it- too many American workers are being exploited, and these workplaces will still be around even if everyone gets a chance to go to college. Labor market reform is a necessary condition of a more equal nation.

Posted by Matt Lewis, 12:27:20 PM

Tuesday, July 17, 2007

A Virtuous Free Market? Lending Edition

The free-marketeers say that not only is the market more efficient than government in almost every way, it makes everyone virtuous. People become dependent on the state when it intervenes; the market promotes self-reliance and rewards hard work and discipline.

Well, maybe the free-marketeers ought to pay attention to recent developments in the lending industry. Bloomberg reports that Democrats are pressuring Federal Reserve Chairman Ben Bernanke to use his authority to crack down on predatory lending. His predecessor, Alan Greenspan, deliberately held back on regulating the subprime mortgage industry, payday loans, credit card companies, and other usurious lenders.

Federal Reserve Chairman Ben S. Bernanke is mobilizing to placate Democrats in Congress who claim he isn't doing enough to crack down on predatory lending.

Bernanke, who begins two days of testimony to Congress tomorrow, has ordered Fed staff to determine whether he has authority to probe mortgage units of financial institutions the Fed supervises. The central bank, which House Financial Services Committee Chairman Barney Frank has threatened to strip of some regulatory powers, also plans an overhaul of lenders' disclosure standards.

The steps that Bernanke, 53, is being pushed into amount to rolling back at least part of the free-market legacy bequeathed to him by predecessor Alan Greenspan. During Greenspan's 18-year reign, the central bank was loath to meddle with banks' business practices, relying on guidelines instead of enforceable public rules.

As you probably know, many of these industries are either embroiled in scandal or melting down. Letting the free-market rip turned everyone into paragons of virture, ya think?

Posted by Matt Lewis, 10:12:43 AM

Monday, July 16, 2007

The Absurdly Wealthy Tell It Like It Is

An interesting article from this weekend's New York Times that let's the wealthy share their views on why they're so rich.

Other very wealthy men in the new Gilded Age talk of themselves as having a flair for business not unlike Derek Jeter's "unique talent" for baseball, as Leo J. Hindery Jr. put it. "I think there are people, including myself at certain times in my career," Mr. Hindery said, "who because of their uniqueness warrant whatever the market will bear."

He counts himself as a talented entrepreneur, having assembled from scratch a cable television sports network, the YES Network, that he sold in 1999 for $200 million. "Jeter makes an unbelievable amount of money," said Mr. Hindery, who now manages a private equity fund, "but you look at him and you say, 'Wow, I cannot find another ballplayer with that same set of skills.' "

Economists might justify the outsized takings of the wealthy and proclaim it the best of all possible worlds. But when the wealthy get to speak for themselves, we're reminded of how egotistical and greedy these people really are.

So economists, you might think you understand the wealthy, but you don't. Don't claim to represent them- let them voice their own concerns! Let the wealthy speak truth to power!

Posted by Matt Lewis, 07:39:12 PM

Friday, July 13, 2007

Tax Cuts Are Not "Pro-Market"

Blogging at Tapped, Scott Lemieux comments on Paul Krugman's column($) in the New York Times today:

Targeted capital gains tax cuts also provide an opportunity to see a conflict between "free market" and "pro-business" principles. A "free-marketer" would presume that the market would produce the most efficient allocation of resources between wages, capital investment, etc., and hence taxes should distort this allocation as little as possible. People who support capital gains tax cuts, conversely, are implicitly arguing that the market gives too little incentive to invest (and the solution -- how about that! -- is a tax cut that overwhelmingly benefits rich people.)

Exactly. Lowering tax rates for one group of payers is not pro-market. It's pro-whatever-group-gets-the-cut.

Posted by Craig Jennings, 03:48:48 PM

Thursday, July 12, 2007

A Real Minimum Wage

With absolutely zero media attention, minimum wage workers finally got a raise on July 1st. To $5.85 an hour. So before you pop the champagne, give this paper a read- it's by University of Massachusetss-Amherst economist Robert Pollin. It's on how high the minimum wage should be, and what real-world experience shows are the unintended consequences of labor market interventions.

My favorite passage:

The unfairness of the $7.25 minimum in mid-2009 becomes clearer still when we consider the combined effects of price increases (inflation) and rise in labor productivity—i.e. the total basket of goods and services that the average worker produces in a year. The rate of inflation between 1997 and 2009 is likely to be about 3 percent per year. This means that the buying power of a $5.15 minimum wage will have fallen by about 40 percent over these years. Meanwhile, average labor productivity will have grown by well over 30 percent between 1997-2009. This allows businesses to pay their lowwage workers 30 percent more (in real, inflation-adjusted dollars) and have enough money left over for their profits to also rise by at least 30 percent. The fact that the minimum wage has been falling in inflation-adjusted dollars while productivity has been rising means that profit opportunities have soared while lowwage workers have gotten nothing from the country's productivity bounty.

Inflation and productivity gains seems like a strong moral grounding for a minimum wage increase. In this framework, all the minimum wage does is ensure that people are paid in accordance with what they produce. That may not be the only reason for having a minimum wage, but it's one that deserves greater emphasis.

Posted by Matt Lewis, 12:37:21 PM

Thursday, July 05, 2007

Critiquing the Critic

There was a time when I thought Louis Menand, an academic who writes for the New Yorker, was the smartest guy around. But I've changed my mind, because his review of Bryan Caplan's really ridiculous book is abysmal and totally misses the point.

To recap Caplan's argument: Irrational voters support economic policy that makes people worse off. And government mostly messes everything up (See here for more).

Menand's conclusion:

Read More...

Posted by Matt Lewis, 09:26:22 AM

Monday, July 02, 2007

EPI Papers Challenge The Macroeconomic Mainstream

EPI just put out two very interesting papers (on full employment and demand-led growth) that challenge the wisdom of low-impact macroeconomic policy. Two general points:

• There doesn't have to be a trade-off between efficiency and fairness. Indeed, policies could generate demand-led growth partly by ensuring that work was fairly rewarded.
• Government can play a constructive role in the economy- guaranteeing fair wages, promoting growth, ensuring full employment. The best it can do isn't just to "get out of the way."

Posted by Matt Lewis, 03:11:16 PM