Monday, December 16, 2013

The long and the short of income inequality

Ezra Klein made a splash a few days ago by arguing that Obama is wrong to call rising inequality the defining challenge of our time, asserting that jobs should take precedence: "Growth simply isn't producing enough jobs. This is a more severe and more urgent problem than inequality.

Today, Paul Krugman counters that inequality that the president was right -- first because stagnant incomes may have contributed to the debt crisis and are now depressing consumer demand, but more fundamentally, because the wealthiest have converted their disproportionate economic power into disproportionate political power, corrupting the country's ability to address its policy challenges.  The  the super-0rich, Krugman charges, triggered the financial meltdown by building a bipartisan consensus for financial regulation -- and have crippled the recovery by demanding austerity.

Klein's binary choice between addressing unemployment or austerity seems fundamentally mistaken to me, I would supplement Krugman's analysis with research by Peter Turchin (thanks, T. Greer), who has identified very long-term cycles of expanding and contracting inequality, and tied them chiefly to the supply of labor:
This connection between the oversupply of labour and plummeting living standards for the poor is one of the more robust generalisations in history. Consider the case of medieval England. The population of England doubled between 1150 and 1300. There was little possibility of overseas emigration, so the ‘surplus’ peasants flocked to the cities, causing the population of London to balloon from 20,000 to 80,000. Too many hungry mouths and too many idle hands resulted in a fourfold increase in food prices and a halving of real wages. Then, when a series of horrible epidemics, starting with the Black Death of 1348, carried away more than half of the population, the same dynamic ran in reverse. The catastrophe, paradoxically, introduced a Golden Age for common people. Real wages tripled and living standards went up, both quantitatively and qualitatively. Common people relied less on bread, gorging themselves instead on meat, fish, and dairy products.
Admittedly, in the U.S. since the late 70s, inequality has grown even during periods of high employment, that it did reverse briefly at the height of the Clinton boom. Perhaps that's because the types of job shifted, and the social compact designed to protect the interests of workers in manufacturing did not transfer sufficiently to service industries, in part because U.S. labor power was vitiated by the Taft-Hartley law, which opened the door to establishment of right-to-work states.

Short of a plague, once the wealthiest get the whip hand, what what sends a rising GINI quotient into reverse? According to Turchin, it's fear of revolution. He credits the U.S. with a relatively enlightened response to the last cycle of rising inequality:
The US, in short, was in a revolutionary situation, and many among the political and business elites realised it. They began to push through a remarkable series of reforms. In 1921 and 1924, Congress passed legislation that effectively shut down immigration into the US. Although much of the motivation behind these laws was to exclude ‘dangerous aliens’ such as Italian anarchists and Eastern European socialists, the broader effect was to reduce the labour surplus. Worker wages grew rapidly. At around the same time, federal income tax came in and the rate at which top incomes were taxed began to increase. Somewhat later, provoked by the Great Depression, other laws legalised collective bargaining through unions, introduced a minimum wage, and established Social Security.

The US elites entered into an unwritten compact with the working classes. This implicit contract included the promise that the fruits of economic growth would be distributed more equitably among both workers and owners. In return, the fundamentals of the political-economic system would not be challenged (no revolution). The deal allowed the lower and upper classes to co-operate in solving the challenges facing the American Republic — overcoming the Great Depression, winning the Second World War, and countering the Soviet threat during the Cold War.
Gradually that compact eroded, for a variety of reasons: technological advance, ideological hubris in the wake of communism's collapse, the high inflation of the 70s that made the wealthy feel beleaguered. We entered the so-called "great divergence," the rapid rise of inequality from the late 70s to the present. So what's next? Turchin foresees turbulence but holds out hope that the U.S. will once again avoid massive social upheaval:
Our society, like all previous complex societies, is on a rollercoaster. Impersonal social forces bring us to the top; then comes the inevitable plunge. But the descent is not inevitable. Ours is the first society that can perceive how those forces operate, even if dimly. This means that we can avoid the worst — perhaps by switching to a less harrowing track, perhaps by redesigning the rollercoaster altogether.

Three years ago I published a short article in the science journal Nature. I pointed out that several leading indicators of political instability look set to peak around 2020. In other words, we are rapidly approaching a historical cusp, at which the US will be particularly vulnerable to violent upheaval. This prediction is not a ‘prophecy’. I don’t believe that disaster is pre-ordained, no matter what we do. On the contrary, if we understand the causes, we have a chance to prevent it from happening. But the first thing we will have to do is reverse the trend of ever-growing inequality.
Perhaps the president putting inequality at the center of the national agenda is an essential first step.


  1. What we do know is that high levels of inequality result in financial collapse and economic crisis. How do we know this? History: twice in the past 100 years inequality reached the level it did in 2008, the other time in 1928, and both times the financial system collapsed. Why? I'm not certain. I do know that high levels of inequality and financialization of the economy go together, like peanut butter and jelly. Does one cause the other and, if so, which one causes the other? Krugman has staked his reputation on aggregate demand, more than once saying that the issue of inequality is a distraction, that aggregate demand is aggregate demand, whether for mansions in the Hamptons or for cheap goods at Walmart. I would argue that high levels of inequality are self-correcting, absent intervention. How do I know? History. Following the financial collapse in 1929, the level of inequality fell precipitously, and stayed low during the long period of shared prosperity. Then again following the financial collapse of 2008, inequality fell, but soon recovered and once again is approaching a historic high. Why? Intervention, as this time the government intervened and saved the banks and the inequality on which the bankers thrive. But this is short-lived, as inequality will once again take us over the precipice; and this time, don't expect government to intervene. Heaven help us all, including the rich.

  2. I do wish we could get rid of the word "inequality" in discussing this problem, because many of those on the right, who will need to understand what the problem is, will be distracted by the word. If we're against "inequality", they'll reason, we're arguing for "equality", hence not even socialism but communism. That isn't the argument the left is making, of course, but I fear that's what it sounds like to the right.