Poverty, Inequality, and the “Conventional” Cluelessness

The well-being of society and the problems of poverty and inequality were among the principal concerns of the “political economy” of Adam Smith and most of the classical economists. With the development of “neoclassical” economics at the end of the 19th Century, however, these concerns became marginalized by mainstream economics, and they have been ignored by the economics profession for the last 30-40 years, the same period in which inequality and stagnation have grown in the U.S. and other developed nations. That ignorance is slowly starting to evaporate: The extent of poverty has always been greatest in times of stagnation and depression, and growing poverty in the U.S. has recently begun to gain more attention, along with the continuing growth of inequality, as the decline of the middle class and of the welfare of the entire bottom 99% have become more obvious. There has been a tendency to equate poverty and inequality, even though they are distinct phenomena: The amount of poverty is related to inequality, because it is a consequence of low incomes and high unemployment, but inequality, or the upward redistribution of income and wealth, is a much broader problem with much broader consequences.

Conventional “neoclassical” economics has, since the 1970s, become the dominant, mainstream economics in the U.S. In my last two posts of 2013, I presented a summary of the major fallacies of neoclassical ideology, and identified its rejection of the demand-side wisdom of John Maynard Keynes and its misrepresentation of important perspectives of the classical economists, in particular Adam Smith.  Recent coverage of the issues of “inequality” and “poverty” by major newspapers, notably the New York Times, indicates the media remain in the firm grip of neoclassical ideology. In fact, since President Obama announced last year that he intends to make alleviating inequality, poverty, and unemployment the top priorities of the rest of his administration, the push back from the political and ideological right has intensified. That push back has gotten prime exposure in the New York Times, and other more right-leaning publications.         

The conventional neoclassical perspective on the inequality growth of the last 3-4 decades, and on the distribution of income and wealth in general, is that they are merely narrow social and political problems, lacking macroeconomic significance. As a matter of economic theory, that perspective can be traced to a false belief that market economies are inherently stable, and a mythological faith in “general equilibrium” theory. As we enter 2014, the dominant print media has marginalized the inequality issue along these lines and, in the process, deceptively conflated the problems of growing poverty and inequality. The concentration of income and wealth is demonstrably the cause of decline, recessions, and depressions, and these discussions have harmfully obscured the enormous adverse consequences of income and wealth redistribution. This post reviews one of the most recent discussions of the increasingly conflated poverty and inequality issues, and the arguments offered in rebuttal. In the follow-up post, I offer a more expansive explanation of the neoclassical obfuscation, and a more comprehensive perspective on inequality economics.     

“The Inequality Problem,” by David Brooks

“Suddenly the whole world is talking about income inequality,” New York Times columnists David Brooks declared in a recent Op-ed column (1/16/14, here): “But, as this debate goes on, it is beginning to look as though the thing is being misconceived. The income inequality debate is confusing matters more than clarifying them, and it is leading us off in unhelpful directions.” Reading on, however, we find that rather than clearing up confusion, he provides his version of the standard neoclassical contention that has caused most of the confusion, namely, that income and wealth inequality are not economic problems. He advances three arguments:   

First, he says, “to frame the issue as income inequality is to lump together different issues that are not especially related.” (his emphasis) He sees two categories of such issues: (1) “At the top end” there is the growing wealth of the top 5 percent of “workers” (more accurately, income recipients), where the most successful benefit from perverse financial compensation schemes, and from good fortune (the “superstar” effect), and; (2) “At the bottom end there is a growing class of people stuck on the margins, generation after generation,” Which he attributes to “high dropout rates, the disappearance of low-skill jobs, breakdown in family structures and so on.” Then he makes this sweeping assertion:

If you have a primitive zero-sum mentality then you assume growing affluence for the rich must somehow be causing the immobility of the poor, but, in reality, the two sets of problems are different, and it does no good to lump them together and call them “inequality.” (my emphasis)

Secondhe continues, “it leads to ineffective policy responses” (his emphasis). Here, he shifts gears, arguing that raising the minimum wage may not be an effective solution to the inequality problem, because studies show there is “no evidence that such raises had any effect on the poverty rates.” Thus, after already suggesting the “bottom end” problem has to do with much more, he reduces it to the matter of “poverty rates,” then suggests only that raising the minimum wage cannot help because it does not reduce poverty levels. He then argues, without support, that the minimum wage is a poor policy tool, because:

The primary problem for the poor is not that they are getting paid too little for the hours they work. It is that they are not working full-time or at all. Raising the minimum wage is popular politics; it is not effective policy.

Thus, after raising the concept of “poverty rates,” he offers no discussion of the poverty threshold in terms of real dollars, or any comparison with median incomes or any other measure of bottom end incomes. 

Third, according to Brooks, “the income inequality frame contributes to our tendency to simplify complex cultural, social, behavioral and economic problems into strictly economic problems.” (his emphasis) We must resist the impulse to think there may be any “strictly” economic forces at work, he asserts, for to do so, somehow, oversimplifies the entire matter. In particular, the one inequality problem he perceives is low economic mobility, which he attributes to a fraying “social fabric,” rather than to economic factors. 

Fourth, Brooks boldly asserts, the income inequality frame needlessly polarizes the debate. (his emphasis) There should be broad agreement on inequality, he implies, because: “There is a growing consensus that government should be doing more to help increase social mobility for the less affluent. Even conservative Republicans are signing on to this.” Simply introducing “the income inequality language,” he avers, counter-productively “introduces a class conflict element” to the discussion. This he blames on Democrats:

Democrats often see low wages as both a human capital problem and a problem caused by unequal economic power. Republicans are more likely to see them just as a human capital problem. * * * Some on the left have always tried to introduce a more class-conscious style of politics. These efforts never pan out. America has always done better, liberals have always done better, when we are all focused on opportunity and mobility, not inequality, on individual and family aspiration, not class-consciousness.

This approach closely tracks the tactics of the Steve Forbes playbook (How Capitalism Will Save Us, by Steve Forbes and Elizabeth Ames, 2009, 2011) which simply denies that income concentration poses any problem at all, moral or economic, and claims that suggesting otherwise wrongfully foments class warfare.    

Rebuttals

Two or three years ago, such a discussion of “inequality” might not have generated much attention. As people awaken to the true economic nature of the inequality problem, however, articles like this are increasingly challenged. I have found three responses to the Brooks article, and all three took a combative tone (Matt Bruenig said that Brooks “is wrong as usual” and “has no idea what he is talking about;” Josh Barro said that “conservatives have no idea how to talk about inequality;” and Robert Reich said Brooks “displays profound ignorance”). I will argue that, however inadequate Brooks’ assessment may or may not be, the economic aspects of the Brooks thesis reflect the dominant mainstream, neoclassical ideology; his errors and misconceptions are, in large measure, those of the economics profession itself.

Matt Bruenig

Matt Bruenig at Policyshop (1/17/14, here) responded in some detail on the next day, in a post entitled “David Brooks’ Problem Understanding Inequality.” Bruenig focused on Brooks’ treatment of the “bottom end” issues, in particular his narrow identification of the inequality problem with social mobility. He objected that Brooks “mixes up social mobility and inequality as if the two are the same.” However, Bruenig argued, they are not: “Social mobility, at least as it is popularly measured, has nothing to do with overall inequality. We could have perfect social mobility and still have extreme inequality in theory.” However, he noted, they are related: “[I]t is also true, despite what Brooks suggests, that more unequal societies (in terms of outcomes) are also societies that feature less social mobility,” he argued, citing the “Great Gatsby Curve” of Miles Corak (here):     

gatsby curve

He argued further that, contrary to Brooks’ assertion, studies show that increasing the minimum wage does actually tend to reduce poverty.

More broadly, Bruenig rejected Brooks’ inference that income inequality is caused mainly by social factors, not economic factors:

High school drop out rates, the disappearance of low-skill jobs, the “superstar” effect, and anything else you might talk about is never sufficient to bring about the kind of rise in inequality we’ve seen in this country. Why? Because, if you are committed to avoiding such disequalization, you can always recalibrate your distributive institutions to do so, e.g. by increasing taxes and increasing transfers. For any of these phenomena to generate a specific distributive outcome, our complete set of distributive institutions have to be accommodating.

It is true “by definition,” Bruenig continued, that “gains flowing only to the rich is causing disequalization.” His fundamental point: “For any of these phenomena to generate a specific distributive outcome, our complete set of distributive institutions have to be accommodating.” Put another way: Inequality has macroeconomic consequences.

Josh Barro

In another following-day response in Business Insider (1/17/14,  here), “David Brooks Is Wrong About Inequality,” Josh Barro addressed Brooks’ claims about “top end” inequality:  

Brooks offers two theories of what sort of problem inequality might be: That people at the top are accruing too much money, and that people at the bottom are getting left behind. Like most conservatives, he wants to focus on the second problem. Regarding the first, he attacks the “primitive zero-sum mentality” that holds “growing affluence for the rich must somehow be causing the immobility of the poor.”

Barro then, at least for the most part, contested this argument:   

The thing is, while growing affluence for the rich isn’t causing low and moderate incomes to stagnate, they are to a large extent results of the same forces. There is a zero-sum tradeoff between the two, so a zero-sum mentality (primitive or otherwise) is called for.

He expressed his point in terms of relative returns to capital and labor:

Productive economic activity produces returns to both labor and capital. Over the last few decades, returns to labor have fallen relative to returns to capital. This has promoted sharp rises in wealth at the top and stagnating wage income for most of the public.

He then challenged the idea that increasing returns to capital has become necessary for economic growth, and argued that inflated profits resulting from intellectual property (IP) protections have actually inflated profits unnecessarily, contributing to inequality:

Governments could react to this by weakening protections for IP, since IP protections are supposed to be just strong enough to encourage the generation of good ideas. This would be a desirable and more or less zero-sum policy to combat inequality. Instead, industry lobbies have been pushing for strengthening of IP, which will tend to concentrate wealth in the hands of superstars, at the expense of everybody else (stronger IP means higher prices, and therefore lower real incomes.)

Finally, Barro argued that government policies to promote full employment and increase wages would reduce inequality, and promote overall growth.

Robert Reich

Robert Reich posted “David Brook’s Utter Ignorance About Inequality – OpEd” in the Albany Tribune, an independent on-line news magazine of Albany, Oregon (1/20/14, here). Reich said Brooks’ thesis — that the primary concern should be the “interrelated social problems of the poor,” and that these problems are fundamentally unrelated to inequality —  is “baloney”:

First, when almost all the gains from growth go to the top, as they have for the last thirty years, the middle class doesn’t have the purchasing power necessary for buoyant growth.    

Once the middle class has exhausted all its coping mechanisms – wives and mothers surging into paid work (as they did in the 1970s and 1980s), longer working hours (which characterized the 1990s), and deep indebtedness (2002 to 2008) – the inevitable result is fewer jobs and slow growth, as we continue to experience.

Few jobs and slow growth hit the poor especially hard because they’re the first to be fired, last to be hired, and most likely to bear the brunt of declining wages and benefits.

Reich added that the shrinking of the middle class has contributed to poverty and inequality. The middle class has an increasingly harder time being generous to those in need. Moreover:

America’s shrinking middle class also hobbles upward mobility. Not only is there less money for good schools, job training, and social services, but the poor face a more difficult challenge moving upward because the income ladder is far longer than it used to be, and its middle rungs have disappeared.  

Lastly, Reich vehemently rejected the idea that complaining about inequality is unreasonably provoking class warfare:

[A]s wealth has accumulated at the top, Washington has reduced taxes on the wealthy, expanded tax loopholes that disproportionately benefit the rich, deregulated Wall Street, and provided ever larger subsidies, bailouts, and tax breaks for large corporations. The only things that have trickled down to the middle and poor besides fewer jobs and smaller paychecks are public services that are increasingly inadequate because they’re starved for money. * * * 

Big money has now all but engulfed Washington and many state capitals — drowning out the voices of average Americans, filling the campaign chests of candidates who will do their bidding, financing attacks on organized labor, and bankrolling a vast empire of right-wing think-tanks and publicists that fill the airwaves with half-truths and distortions.

Discussion

Brooks specifically

In reading the Brooks article, or my summary, it rapidly becomes clear that Brooks has failed to eliminate any of the confusion about the inequality problem. In his framing of the inequality question, Brooks ignored core issues: At the top, the issue isn’t just about how the top 5% distribute their growing wealth among themselves; at the bottom, it isn’t just about how “a growing class of people” can’t get ahead because they dropped out of school, and low-skill jobs are disappearing; and he ignores the redistribution of income and wealth in the middle. Brooks doesn’t think or talk in terms of flows of money, and that is how he is able to conceive of inequality as nothing more than a collection of social issues.  

Bruenig properly points out that income inequality is about much more than specific social problems, and has real macroeconomic significance: As Bruenig puts it “distributive outcomes” are determined by “distributive institutions.” Importantly, he identifies increased taxes and increasing transfers as mechanisms for avoiding inequality growth, topics Brooks avoided entirely.

What’s more, research has shown that income and wealth inequality breeds social problems, so inequality necessarily consists of much more than the mere existence of such social problems. In fact, research has surprisingly shown that many social problems are typically worsened by the growing level of inequality itself, regardless and independent of a country’s levels of prosperity, industrial development, or poverty. (See a summary of the “The Spirit Level: Why Equality Is Better for Everyone,” by Richard Wilkinson and Kate Pickett,  2009, here).

The greatest flaw in Brooks’ thesis is his denial that income levels at the top are related to income levels at the bottom. Brooks implies that the very idea of such a relationship is incredulous, a dubious product of “a primitive zero-sum mentality.” Barro explicitly, and Reich implicitly, reject that perspective, and they are right. In reality, the growth of real income at the top is intimately related to the decline of real income at the bottom, and both are related to the rapidly growing concentration of wealth in the hands of the top 1% (especially the top 0.1% and 0.01%) of households. To deny that reality is to adopt a “cookie-cutter mentality” (if I may call it that) that tends to treat any set of economic issues as if they originate independently, in a vacuum.

Both wealth and income concentration require sources of money, and given a fixed money supply, increasing income and wealth at the top could only come from below — from the middle and the bottom. The money supply is not fixed, of course — it is growing — but since 2009 new money has ended up almost entirely in the hands of the top 1%, as economists Thomas Piketty and Emmanuel Saez have documented (and as reported frequently in this blog). But distribution remains a zero-sum game, even as the “sum” keeps changing. 

As Reich’s comments explain, to ignore the incomes in the middle, and not consider what is happening to the middle class, is a glaring oversight. The neoclassical ideology must do that, however, for isolating the top from the bottom as “different issues that are not especially related” is a required component of the argument that inequality is nothing more than a collection of social issues. 

Two related points: (1) Raising the minimum wage is not merely intended to alleviate the poverty that inequality exacerbates — more importantly it would stimulate the economy, contributing to growth, and; (2) Once it is understood that the “inequality” problem is one of wealth and income concentration causing decline and stagnation throughout the entire bottom 99%, it becomes clear that the national response to inequality cannot be limited to addressing poverty, and that raising the minimum raise is an appropriate, albeit clearly inadequate, response.

The “neoclassical” paradigm

It is important, actually crucial, to appreciate why Brooks and other economic “conservatives” advance this unfounded perspective: Ever since class warfare began with the industrial revolution, the extremely wealthy have needed to suppress the true economics of inequality; hence the evolution of “neoclassical” supply-side theory, with its aggregation of “microeconomic” ideas, from Leon Walrus (1832-1910), Alfred Marshall (1842-1924), Arthur Cecil Pigou (1877-1959), among others, on down to Milton Friedman (1912-2006) and Paul Samuelson (1915-2009). Only by evading the implications of Keynesian dynamic, demand-side macroeconomics could they convince everyone (including themselves) that they could get very rich without harming anyone else. That meant that the issue must be framed as one of social problems, and the macroeconomic implications of redistribution must be overlooked.

Brooks is simply following this neoclassical playbook. As I have reported, outgoing Fed Chairman Ben Bernanke has similarly argued that income inequality is mainly the difference in the earning ability between people who have college and post-graduate degrees and those who do not (here); not surprisingly, indications are that the new Fed Chairman Janet Yellen has the same or a similar neoclassical mindset (here).

Inequality must not be regarded as an economic problem, or as Brooks put it, a simplification of “complex cultural, social, behavioral and economic problems into strictly economic problems.” A notable recent effort to marginalize income concentration on the basis of economic theory was recently made by Harvard economist Martin Feldstein, when he argued that public policy should be directed solely at treating poverty, not controlling inequality (here).  

Above all, people must not be allowed to suspect that when the rich get richer, the poor necessarily get poorer. This explains the subtitle to a year-end Wall Street Journal article by Bret Stephens entitled “Obama’s Envy Problem” (12/30/13, here) :

Inequality is a problem when the rich get richer at the expense of the poor. That’s not happening in America.

But it is happening in America, at a staggering pace and to an almost unimaginable degree, with the growth of income inequality over the past 30-40 years. This is why inequality growth leads market economies into depression, and how if it is not prevented from doing so capitalism will ultimately destroy itself.

In my follow-up post, I’ll discuss the bankruptcy of Feldstein’s arguments, Stephens’ inflamatory article, and Paul Krugman’s response to it. Then I’ll summarize the basics and the implications of the real macroeconomics of inequality.

JMH – 1/12/14  

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