Thursday, November 3, 2011

Some Thoughts on Two Types of Inequality

[I realized re-reading this post that it could be summarized quickly.  Brooks adds something to the debate by pointing out the degree vs. no degree discrepancy because income mobility has declined in the bottom half of the US income distribution but if anything has increased for the top 50%.  In Europe, income mobility has increased at all levels of society.  This is linked to the arguments regarding the 1% because this change is linked to a socio-cultural complex of ideas that are most politically influential in the anglo-saxon countries, with the US being most strongly influenced by these ideas.  These ideas have led to some particularly poor policy outcomes, particularly regarding health care but in some other areas.

Comparative data seems to indicate that policy efforts to expand opportunity directly have failed, while policies aimed at reducing inequality have increased opportunity and income mobility.  This means that the anti-tax policy measures advocated by the 1% has mostly come out of the discretionary spending that does most to reduce inequality.  This is leading to lower mobility for the lower 50%, meaning that the problems pointing out by Krugman are having the effects Brooks is writing about.  This argument for this view is strengthened by social and psychological research which indicates that behavior is largely determined by situation.  This explains why US opportunity focused social interventions have failed to create opportunity while class based policies pursued in Europe rather inadvertently created income mobility and social opportunity.  Trying to focus on changing behavior will necessarily fail because behavior is largely determined by situation, focusing on changing situation through income supports inadvertently succeeds at creating income mobility by creating situations that lead to risk taking, personal responsibility, and economic growth.

This isn't meant to advocate copying European policies which are associated with a number of destructive labor market policies and social attitudes that tend towards discouraging entrepreneurship.  Rather, we should pursue income supports and public health care with the explicit goal of changing social situations so that people are more prone to taking risk, responsibility, and investing in themselves. ]

This seems to be a hot topic and I've been spending some time putting my thoughts in order on it.  I initially reacted very negatively to David Brooks' column on red vs. blue inequality.  I still don't think it's a good column, but after some thought it did make me realize that an important detail seems to have dropped out of the debate.  This detail is that while income mobility has declined in America, and Europe's has increased beyond ours, this decline in mobility is largely confined to the bottom 50%.  By some measures, income mobility in the top 50% is actually slightly higher in the US than Europe.

Where I disagree with Brooks is this, "If your ultimate goal is to reduce inequality, then you should be furious at the doctors, bankers and C.E.O.’s. If your goal is to expand opportunity, then you have a much bigger and different agenda."

Unsurprisingly, columnists have piled on for and against (notably Krugman) this idea.  There is a real difference, the explanation arguing for opportunity is basically sociological and Krugman's story is basically political.

Here's the thing though, there's no particularly good reason to believe these effects are distinct.  The more plausible story is that the two are feeding each other.

The scenario I have in mind is basically this, the primary driver is ultimately socio-cultural, specifically a set of beliefs that filtered through the anglo-saxon political world and became influential in the 1980s.  Across all these countries we see income inequality go up.  There is undoubtedly a political component but politics alone can't explain things like why CEO compensation is so much higher in the English speaking world than it is in the rest of the world.

Both the political and socio-cultural pieces are likely impacting income mobility.  While a simplification, it is possible to describe what has happened to social policy in America since 1980 as an experiment to do more with less by focusing on opportunity while Europe, and other developed nations (while inequality has increased in other anglo-saxon states to my knowledge there has not been a similar reduction in bottom half income mobility, though I believe Britain's remains high but this is unchanged whereas the US used to have a high income mobility in the lower half of our income distribution) stuck to the traditional mission of trying to deal with equality more generally.

The results are in, and it seems our experiment has failed.  Our attempt to increase incentives by increasing the punishments and rewards of higher income doesn't seem to have led to greater efforts by those losing out, they've only fallen further behind.  Focusing our resources on creating opportunities for these groups seems to have led to them having less opportunity and to them doing less to get themselves out of poverty than they had before (given changes in opinion poll data, they may be feeling greater responsibility for their poverty rather than blaming it on society, but if anything this is leading to discouragement rather than motivation).  It seems that the traditional approach worked, by addressing inequality largely in terms of income and providing people with security we create an environment where individuals are willing to take greater risks without fear of failure.  By increasing the rewards to success and the penalties for failure we simply made people risk adverse, if they don't have the assets to pay for housing, food, shelter, and healthcare on their own, they don't try harder, they simply freeze in place.

This perspective makes the changes in income mobility between the US and Europe easily explainable, the poor are risk adverse, they respond only weakly to incentives.  If red inequality is what we're worried about, then we need to focus on broad based income security measures; only then will we see school attendance rise, college graduation rates rise, and family breakdown slow.*  All of which has happened in Europe.**  Focusing on opportunity, as we have done in the US, likely does create greater mobility among the top half, that certainly seems to be what is going on in the comparative data.  I don't think this is where Brooks was tying to go though.

So what does this have to do with the top 1%?  The big thing is that the programs that create income security for the poor are largely discretionary spending programs, which have been under a great deal of pressure for the last 30 years.  A large part of the political story of rising wealth inequality has to do with tax changes that have resulted in less revenue, and particularly, the top 1% having their share of the tax burden increase more slowly than their share of income.***  Since non-discretionary spending has grown pretty inexorably, this means that it is discretionary spending that is getting cut.  This necessarily means less income security for the bottom half of the income distribution, as they get less resources they will become less risk taking and thus progressively less able to compete in an economy and society that privileges risk taking.

Only by restoring the proportionate taxation on the wealthiest one percent can we have much hope of building the security that people need for income mobility to be a reality.  Without that security they won't take risks, it would be irrational for them to do so.  We can see this from the comparative data, our focus on opportunity just hasn't shown any real successes, those societies that focused instead on equality ended up delivering opportunity while still retaining great, unequal rewards for their best and brightest.

And this is what I think is behind a lot of our political dysfunction.  Here in America we very much want certain things to be distinct, even if there is growing evidence that they are not.  We want to be able to create opportunity without having to also focus on inequality.  We want harsh punishments and lavish rewards and we want people to respond to those.  We are frustrated and angry that this doesn't seem to be working, that increased incentives seem to be impacting only a few people (I'll do another post on this, but I think a lot of our merit based rewards do more to reward people that react strongly to incentives then they do to reward people with great merit.  I believe that responsiveness to incentives varies separately from the qualities we wish to encourage, making most incentive systems poor at fulfilling their purpose).  The problem is that equality of opportunity seems to be something that can be logically distinguished by reason but doesn't seem to be something that can be acted on discretely by policy.  This shouldn't be surprising, a great deal of psychological and sociological work shows that people react very strongly to their environment and social situation, they're acting how they are based on the situation they are in, not on the opportunities available to them.  Change the situation they are in, and they're create the opportunities for themselves.  Change the opportunities and not the situation and nothing happens.

But we're still refusing to learn from the repeated failures of our opportunity focused interventions and trying to come up with new ways to leave people's situations as they are while cajoling them to act differently in those situations, despite increasing evidence that situation is the largest determinant of behavior.  We can change someone's situation and thus behavior, what our policy interventions have shown is that we can't change their behavior in order for them to change their situation for themselves.  But we keep trying anyway.
To be complete, out of wedlock births have actually increased even faster in much of Europe than in the US.  However, this has been compensated for by changing socio-cultural habits that have prevented the social problems associated with out of wedlock births in the US.  This reveals that the important thing is that there are socio-cultural norms in place to insure loving and nurturing relationships, whether or not this is a traditional marriage is completely irrelevant.  In the US we have attempted to retain Victorian era norms regarding marriage and children, it is unsurprising that this hasn't stood up to the modern world.  It is very difficult to balance education and two careers, yet we persist with an idealization of marrying your high school sweetheart and other norms that date back to a narrow slice of history.  This is probably worthy of a few blog posts, but it is notable that the lower half of the income distribution seems to attempt to meet these cultural norms while the upper half has largely reinvented their norms, focusing on long term cohabitation and late marriage and that the adaptiveness of this pattern seems to be reflected in much lower divorce and separation rates than among those that try to hold to older patterns.

**I often hear comparisons with Europe dismissed by those that don't like the data as being the result of either size or greater diversity in the US.  Both of these are spurious.  There is a great deal of diversity in the size of states, there doesn't seem to be any meaningful correlation among states by size among the sample excluding the US so why does it all of a sudden become significant when the US is included?  There's no theoretical or practical reason to believe this would be so, it's simply a tactic use to dismiss inconvenient data with no support.  Regarding diversity, many studies do show that heterogeneity is significantly correlated with a number of negative indicators.  However, where this is significant factors such as linguistic, religious, and ethnic fractionalization is used.  On these measures, the US is less diverse than many other countries, it is only more diverse when solely visible ethnic heterogeneity is analyzed.  This can be legitimate for certain questions of interest, such as support for social spending which is pretty consistently correlated with the proportion of visible minorities.  However, on questions like income mobility or economic growth broader measures of fractionalization work better, correlations within Europe or other areas tend to be significant.  The US remains an outlier, but there is no valid theoretical or practical reason to think that ethnic fractionalization is especially meaningful solely in the context of the US when it does not stand out in other cross country comparisons.  This is another deceptive tactic used by those trying to avoid data that disconfirms their beliefs, they look for any difference at all that stands out and ignore the fact that it's not a significant variable in other cross country comparisons.

*** This may have something more directly to do with reduced income mobility.  If the relative tax burden for the wealthiest is falling this means that the rest of the income distribution has a relatively greater share of taxation.  Since entrepreneurship is most strongly correlated with existing assets this means a decline in realizable assets of the bottom 99% compared to the top 1% that is available for entrepreneurial activity.  All else equal, we should expect this will reduce income mobility as well as lead to a growing wealth and income divergence.  Also, likely, less growth overall as it should be reducing entrepreneurship as less potential entrepreneurs have access to the necessary start up capital.

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