How (not) to Defend Entrenched Inequality

The endless EU vs US debate rolls on, but now with an odd twist. Although the objective facts about economic inequality, immobility and so on are far worse in the US than the EU, the political situation seems more promising. (I’m not talking primarily about electoral politics but about the nature of public debate.)

In the EU, the right has succeeded in taking a crisis caused primarily by banks (including the central bank, and bank regulators) and blaming it on government profligacy, which is then being used to push through yet more of the neoliberal policies that caused the crisis. And, as we’ve just seen, formerly social democratic parties like New Labour in the UK, are pushing the same line.

By contrast the success of Occupy Wall Street have changed the US debate, in ways that I think will be hard to reverse. Once the Overton window shifted enough to allow inequality and social immobility to be mentioned, the weight of evidence has been overwhelming.

This post by Tyler Cowen is an indication of how far things have moved. Cowen feels the need, not merely to dispute some aspects of the data on inequality and social mobility in the US, but to make the case that a unequal society with a static social structure isn’t so bad after all.

Update Cowen offers a non-response response here. Apparently, disliking arguments for inherited inequality, such as his point 3 (because of habit formation, social mobility reduces welfare) is a “Turing test” for reflexive leftism.

Cowen makes seven arguments, ranging from weak to risible. He is an able economist, and no fool, so the weakness of the case he makes reflects the difficulty of making bricks without straw. I’ll reorder his arguments from weakest to strongest and respond to them in turn.

3. For a given level of income, if some are moving up others are moving down.  Do you take theories of wage rigidity seriously?  If so, you might favor less relative mobility, other things remaining equal.  More upward — and thus downward — relative mobility probably means less aggregate happiness, due to habit formation and frame of reference effects.

This is an ancient argument against income redistribution (Bentham had a version of it, IIRC) but it’s surprising to see it extended to the case of intergenerational mobility. Apparently, expensive tastes, once acquired in childhood, can’t be dispensed with without great suffering.

5. How much of immobility is due to “inherited talent plus diminishing role for random circumstance”?  Is not this cause of immobility very different — both practically and morally — from such factors as discrimination, bad schools, occupational licensing, etc.?  What are you supposed to get when you combine genetics with meritocracy?  I do not know how much of current American (or other) immobility is due to this factor, but I find it discomforting that complaints about mobility are so infrequently accompanied by an analysis of this topic.

A lot of handwaving here. The supposed genetic role is assumed, not supported by any evidence to produce a suggestion that declining mobility arises because the US has now become more meritocratic, and therefore more efficient at promoting people of high ability. There’s plenty of evidence going the other way, notably including the fact that class matters much more than it used to in getting admission to high-status colleges.

4. Why do many European nations have higher mobility?  Putting ethnic and demographic issues aside, here is one mechanism.  Lots of smart Europeans decide to be not so ambitious, to enjoy their public goods, to work for the government, to avoid high marginal tax rates, to travel a lot, and so on.  That approach makes more sense in a lot of Europe than here.  Some of the children of those families have comparable smarts but higher ambition and so they rise quite a bit in income relative to their peers.  (The opposite may occur as well, with the children choosing more leisure.)  That is a less likely scenario for the United States, where smart people realize this is a country geared toward higher earners and so fewer smart parents play the “tend the garden” strategy.  Maybe the U.S. doesn’t have a “first best” set-up in this regard, but the comparison between U.S. and Europe is less sinister than it seems at first.  “High intergenerational mobility” is sometimes a synonym for “lots of parental underachievers.”

Another version of the same argument.  The only notable point is the observation that “smart people realize this is a country geared toward higher earners”.

6. I am more than willing to hear arguments that a less mobile society is a less stable society, or otherwise a society which makes worse political decisions.  But I haven’t seen serious arguments here.  By “serious arguments” I mean those which take endogeneity into account and go beyond noting that Denmark is a better polity than Brazil, and so on.

Granted, there doesn’t appear to be a lot of hard statistical evidence here (commenters, please prove me wrong on this). But there is a ton of US political rhetoric from the past (right up to the last six months or so) that would suggest great social and political benefits from living in a ‘land of opportunity’.

2. Measured mobility in the United States does not seem to be falling, or at least not falling much, as shown by Scott Winship.

This is a general class of argument I find unimpressive. Although statistical evidence is hard to find after a point, it seems pretty clear that at some point in the past income mobility was greater in the US than in Europe. And the evidence is clear that the reverse is true now. So, arguments of this kind amount to picking particular subperiods where you get negative results. There’s a further problem in that Winship’s summary of the data is unreliable. For example, this study  shows that “transmission of high-income status significantly increased” but Winship only reports the finding that “he transmission of low-income status remained stable”.

1. If the general standard of living is rising (and I am more than willing to admit problems in this area for the United States), mobility takes care of itself over time.  I find it more useful to focus on slow growth, if indeed that is the case.  Just look at income growth for non-wealthy families and that is more useful than all the mobility measures put together.

Maybe so, but as Cowen admits, the evidence is in, and median household income has been falling for a decade. Lower down the scale, the poverty rate is rising. Over the last 40 years, income growth for non-wealthy families has been much weaker than for wealthy families, and much slower than in the postwar decades. As Cowen must surely remember, when this fact was pointed out, defenders of the US system used to claim that it didn’t matter because the US system allowed lots of economic mobility. Some, like Paul Ryan are still pushing this claim.,

7. I would like all measurements in this area to take into account the pre-migration incomes of incoming entrants.  Denmark, which doesn’t let many people in, is a much less upwardly mobile society once you take this into account.  Sweden deserves more praise, and in general this factor will make the Anglo countries look much, much more supportive of mobility.

This is about the only argument worth taking seriously. But, in previous debates of this kind, it’s turned out that taking migrants into account doesn’t change much. The US would be a particularly complicated case because of the large number of undocumented migrants, many (most?) of whom return home at some point.

To sum up, Cowen’s post is an exercise in defending the indefensible, and its weaknesses reflect that. As Mitt Romney’s tax returns show, wealthy Americans have the rules rigged in their favor from day one. And that’s assuming they obey the rules. Unlike the poor, they can mostly cheat with impunity. In these circumstances, it’s unsurprising that US inequality is so deeply entrenched. The only surprise is the suddenness with which the facts have become common knowledge.

It remains to be seen how this will play out electorally, but there are at least some promising signs. Eight months ago, the situation in the US, seemed if anything even worse than in Europe. Obama seemed determined to capitulate to the Repubs, with the support of the entire centrist establishment, still committed to the idea of bipartisanship. Political discussion was dominated by the claims of the Tea Party, essentially identical to those of the European Austerians. The debt-ceiling debacle, the success of Occupy Wall Street and the recent Romney revelations have changed that. First, the fact that the Repubs are extreme reactionaries, uninterested in any kind of bipartisan compromise, has finally sunk in to all but the most obtuse centrists.[1] Second, the point that the rich play by different rules from the rest of us has been made glaringly obvious.[2]

Given the weakness of the economy, and the absence of any real action from the Administration between the initial stimulus and last year’s Jobs Plan, Obama’s re-election can’t be taken for granted. But it’s looking increasingly likely.

fn1. I don’t buy the 11-dimensional chess version of this story, but the slapdown of Obama’s painfully sincere attempts to reach across the aisle was exactly what was needed

fn2. It would be great if we could see a similar transformation regarding civil liberties, the permanent War on Terror and so on, but I’m not holding my breath. SOPA and the TSA can provoke outrage, but NDAA not so much, at least for the moment.

This column was first published on John Quiggin’s Blog