Monday, December 26, 2011

Krugman Revisited: Inequality

Paul Krugman [A]
A debate on inequality, which might offer some lessons to Australians, has been raging on and off in the US mainstream media since the early 1990s. One of its most conspicuous protagonists has been Paul Krugman.

The thesis I intend to argue here is that Krugman gradually moved from an initially technocratic position to a more politically engaged one. To achieve this I will study three larger essays published by Krugman over a 10-year period, which illustrate this intellectual evolution.

Clearly, in assessing Krugman as public intellectual, there are other subjects that would need to be considered, particularly foreign trade. Here I will limit myself to inequality.

A warning: I am largely sympathetic to Krugman, so I will try to keep editorializing at a minimum and I will warn the readers when I do. Readers, of course, are free to judge by themselves.

Act I: "The Rich, the Right and the Facts".
Writing in 1992, for the American Prospect, Krugman remarked on rising inequality in the US:
"The income gains of the 1980s did go overwhelmingly to the rich. The right could have argued that it didn't matter, or that policy was powerless to alter the outcome. Instead, conservatives cooked the books". [1]

Appearing in the lead up to the 1992 presidential elections, the essay generated some controversy and the debate soon turned acrimonious. The accusations that Krugman was politically motivated to criticise the Republicans were quick to flare and perhaps that was predictable.

In any case, employing an assortment of data for the period 1947-89, Krugman set to demonstrate that income inequality had in fact increased. Unlike Krugman, here I will illustrate this using the Pareto-Lorenz inverted coefficient series (currently available at the World Top Incomes Database) as it offers a simpler and less ambiguous picture:


A few comments are in order. First, the higher the curve, the more unequal the underlying income distribution. Second, the label next to the red dot at the left shows the level of inequality in 1929 (i.e. 2.61), immediately before the Great Depression; in 1992, when Krugman wrote the essay, inequality was still lower (2.42), but was approaching those levels. Third, after two decades of falling inequality (in the chart, the "valley between two mountain ranges"), the curve rose again, and it hasn't stopped ever since. Fourth, the "mountain ranges" are "rugged": inequality not only increases, but becomes more volatile as it increases.

In any case, using different data, Krugman did not perceive any of this and limited to make his case, after which Krugman does not appear concerned: "Rising inequality need not have any policy implications. Even if you would prefer to have a flatter distribution (...) what should we do about it?"

In other words, inequality would be a matter of preferences. Krugman did not go into causes and effects. In fact, to conclude that inequality was probably an inevitable development would not misrepresent Krugman at the time.

Act II: "The Spiral of Inequality".
In 1996, during Clinton's presidency, Krugman published "The Spiral of Inequality", in Mother Jones [2]. Instead of aiming to demonstrate the empirical reality of inequality, as in his 1992 essay, Krugman starts by stating that technological change and foreign trade "do not answer why it is harder today for most people to make a living but easier for a few to make a killing. Something else is going on".

Instead of these hypotheses, Krugman advances self-reinforcing and interrelated mechanisms causing inequality, while feeding on it:
  1. Changing ethical and cultural values that once limited disparity between top corporate levels and rank-and-file workers. Unable to stop this, unions lost credibility with its membership, increasing governmental acceptance of inequality.
  2. Unions themselves also lost membership due to a "shift from manufacturing to services and from blue-collar to white-collar work, growing international competition, and deregulation". Weaker unions lost the ability to support each other and influence bosses, becoming unimportant for politicians: "America's union movement just got too small, and it imploded".
  3. Wealthy people's growing ability to sway policy: "They are more likely to vote (...) and far more likely to provide the campaign contributions that are so essential in a TV age". The rich would prefer to pay directly for private services, instead of tax-funded publically provided; this had the side-effect of further weakening unions (whose last stronghold was in the public sector), and it also further disadvantaged the non-rich.

Krugman proposes increased taxes as a partial solution, although he does not place much faith in the political system, and (perhaps surprising his critics) is quite critical to the Democratic Party: "But of course neither party advanced such proposals during the electoral campaign. The Democrats sounded like Republicans".

Even if his views could be found wanting on other grounds, they certainly deserve further consideration: "Does this sound like America in the '90s? Of course it does. And it doesn't take much imagination to envision what our society will be like if this process continues for another 15 or 20 years".

It seems reasonable to conclude that Krugman's position changed substantially since 1992: whatever its causes, inequality is no longer simply an statistical fact.

The other side of the debate was divided during Clinton's period. At one hand, some denied any increase in inequality:

Jude Wanniski (perhaps fairly described as hardline conservative): 
"I maintain that the central problem of the last 30 years is that the poor are getting richer much, much faster than the rich are getting richer (...) We must convert all wealth into the measure employed by mankind for 6,000 years, i.e., ounces of gold. On this measure (...) in the last 30 years, the people who owned America have lost 40% of their wealth held in the form of equity." [3]
At the other hand, others acknowledged it:

Ken Arrow (more accurately described as a moderate conservative) preferred a more equal society on principle; like Krugman, Arrow considered that technological change and free foreign trade (to which he adds foreign migration) may explain some inequality, but not all; Arrow, again like Krugman, recommended some tax increases. [4].

Kenneth L. Judd acknowledged that inequality increased, but doubted it was bad per se, while trying to explain it as a matter of technological change and the increasing participation of women in the workforce.

Act III: "For Richer".
In 2002, ten years after The Rich, inequality kept increasing (reaching 2.48), as shown in the chart above. During the George W. Bush administration, Krugman writes "For Richer" (The New York Times):
"The concerted effort to deny that inequality is increasing is itself a symptom of the growing influence of our emerging plutocracy (...). So is the fierce defense of the backup position, that inequality doesn't matter - or maybe even that, to use Martha Stewart's signature phrase, it's a good thing."  [5]

At this stage, Krugman's views on causality subtly changed. In this essay Krugman refers mostly to soaring CEOs compensation, insisting they reflect social and cultural change [that is, point (1) above], instead of any real contributions to general wealth and wellbeing or even market forces. Reading this after the housing bubble burst in 2007, the last remark seems uncannily prescient.

Unlike 1992, Krugman is openly concerned with the consequences of increasing inequality, including health outcomes and labour insecurity. Additionally, writing after Enron, the Asian crisis and the Dotcom bubble collapse, he highlights the costs the new style of imperial management has in terms of "corporate malfeasance, whether or not it actually involves breaking the law". This topic should also be familiar to contemporary readers.

The core of the essay, however, transcends the merely economic and falls squarely into the political. Krugman draws on research by Nolan McCarty, Howard Rosenthal (both from Princeton University) and Keith T. Poole (University of Houston) to argue that political polarization is related to inequality.

Although Krugman did not illustrate this relationship, in a subsequent lecture (made publically available the 28-06-2010, through his NYT blog) he used the following chart:


Writing in 2002, Krugman again sounds quite prescient as he considers that both US main parties are becoming increasingly radicalized along ideological lines: Republicans proposing policies that increase inequality, Democrats opposing them.

Taking into account Krugman's 1996 remarks critical of both parties in "The Spiral", it would seem that he changed his tune. Not so: "The polarization of politics has occurred because the Republicans have moved to the right, not because the Democrats have moved to the left. And actual economic policy has moved steadily in favor of the wealthy".


Epilogue
Inequality became a topic of debate in the US nearly 20 years ago. At the time, as measured by the inverted Pareto Lorenz coefficient, it reached 2.61. Since then a huge amount of time has been spent in discussing it, although no real effort has been made to actually do something about it. In 2007, the measure reached 2.89, considerably higher than in 1992.

It seems reasonable to conclude that Krugman's stance on inequality has evolved over time, from being a purportedly "neutral observer" in 1992, to being politically engaged. I haste to clarify that this does not mean Krugman has followed partisan lines: it has not, as the text demonstrates.

In this sense, Krugman's case suggests that there is no possible technocratic neutrality on subjects like inequality and it is not simply a matter of personal preferences. Whichever stance one adopts, inequality clearly transcends the limits of abstract theory, because it reveals a lot about the political environment (and the economy, a topic that ironically Krugman neglected).

In Krugman's case, he justifies his position on rational grounds: experience, observation and theory. And this is evidenced in the rich level of nuance and content incorporated in the latter essays, when compared to "The Rich".

Although, for obvious reasons, I have abstained from including too many criticisms from Krugman's opponents, readers are invited to check them out. Some links provided below would allow some comparison. [6]

I mentioned that Krugman neglected the economic consequences of inequality. A topic Krugman neglected is underconsumption, and this is particularly puzzling and ironic, as he is a self-described Keynesian. As recently as 2008, Krugman was quick to dismiss without much thought any reference to underconsumptionist explanations to the crisis.

More recently, Krugman appears more open to that possibility, especially after becoming acquainted with data like the one in the first chart, although he still remains largely critical and, in my opinion, he misses the point altogether, which compounds the irony: this is another reason why inequality is not a matter of personal preferences. But I am editorializing here and a treatment of this matter falls outside the scope of this text.

Another related subject where Krugman's views appear oddly dated is MMT. As others, much better qualified than me, have commented on this, I will not treat this here. Instead, I will direct readers to some of the discussion:

Krugman's "What Are Taxes For?" (at Krugman's NYTimes blog, 21-04-2011) opens the debate, to which Bill Mitchell replies "Who the Cap Fits?" (at Mitchell's BillyBlog blog, 22-04-2011).

Finally, another related subject, and one where Krugman's views have changed (in my opinion, for the better) is foreign trade. This is another long debate, and one which I will not treat here, as this post is already too long.

References:
[1] "The Rich, the Right and the Facts: Deconstructing the Income Distribution Debate". The American Prospect, September 1992. Although the date in the link is 19-12-2001, this article was published in the September, 1992 issue of The American Prospect.

[2] "The Spiral of Inequality". Mother Jones, November 1996.

[3] "Jack and Jude". Email from Jude Wanniski to Mother Jones commenting on Paul Krugman's "The Spiral of Inequality". October 29, 1996.

Krugman's reply to Wanniski:
"Hey Jude". Email from Paul Krugman to Mother Jones replying to Jude Wanniski. November 1, 1996.

[4] "Rich Man, Poor Man", Hoover Digest, October 30, 1997, No 4. Ken Arrow and Kenneth Judd interviewed by Peter Robinson.

[5] "For Richer". The New York Times, October 20, 2002.

[6] "Income Inequality Archive". Contains a chronology and resources on inequality:


Photo Credit:
Paul Krugman. Wikipedia

2 comments:

  1. I liked this post a lot. It should be noted that i suspect Krugman may reject underconsumption theories because he accepts the cbo (and new keynesian) line that barring new shocks the economy will start recovering automatically. see Gailbraith's speech here for more: http://nakedkeynesianism.blogspot.com/2011/12/jamie-galbraith-on-current-crisis.html

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  2. Nice summary, it's interesting to see how one person's views have changed over decades.

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