Tuesday, March 27, 2012

Pearlstein on inequality

Last year, two economists at the International Monetary Fund, Andrew Berg and Jonathan Ostry, published a paper showing that countries that experienced longer periods of strong economic growth were significantly more likely to be characterized by more equality than less. Inequality, they speculated, might amplify the risk of financial crises, which are often followed by long periods of slow or negative growth. It might bring about political instability, which can discourage investment. Inequality might make it harder for ordinary citizens to invest in entrepreneurial activity, or even invest in their own training and education. 
If that story sounds a bit familiar, it should. 
It is hardly coincidence that the past 20 years — a period in which inequality has risen noticeably in the United States and around the world — has also been characterized by repeated and severe financial crises. There was the junk bond sell-off of 1987, the continuing savings-and-loan crisis of the early ’90s, the Asian financial crisis and the tech-and-telecom bust of the late ’90s, and the near meltdown of financial markets in 2008. 
Surely one explanation for the most recent crisis is that too many households took on too much debt as they struggled to maintain their standard of living in the face of nearly three decades of stagnant wages and salaries. Another might be that with so much of the nation’s wealth accumulating in so few hands, it was inevitable that they would misallocate much of it by bidding up the price of “positional” goods such as houses in the Hamptons and seats at the best private schools. 
It is worthy of note that this period of rising inequality also coincided with a dramatic slowdown in college graduation rates, particularly among men. More recently, it has also coincided in a decline in business startups and other measures of entrepreneurial activity. 
And can anyone doubt the connection between rising inequality and the increasingly partisan and divisive nature of American politics, which has made it difficult, if not impossible, for government to respond quickly and intelligently to the major economic challenges facing the nation? Surely that can’t be good for growth.
Note the phraseology employed here: "might," "hardly coincidence," "coincided." For all of Pearlstein's rhetoric, what he plainly lacks is any actual proof of a causal relationship between inequality and the various economic ills listed. It brings to mind an episode of The Simpsons:
Judge: Mr. Hutz we've been in here for four hours. Do you have any evidence at all?

Lionel Hutz: Well, Your Honor. We've plenty of hearsay and conjecture. Those are kinds of evidence.
This is about par for the course with such anti-inequality diatribes; much sturm und drang with little in the way of actual evidence presented. Inequality appears to be one of those things that people viscerally know is bad, but yet somehow struggle to prove or even explain. 

The last three paragraphs in Pearstein's column are particularly cringe-inducing in this respect. Even if, purely for the sake of argument, one accepts Pearlstein's theory in the first paragraph that the recent financial crisis was due to people taking on debt in order to maintain their standard of living in the face of stagnating wages, this has absolutely nothing to do with income inequality. Take 50 percent of the wealth from every rich person in the country, sink it to the bottom of the ocean -- thus reducing inequality -- and the plight of these people would be improved not one bit. 

And are we really supposed to believe that the financial crisis had its roots in rich people -- by definition a small fraction of the population -- spending money on vacation homes and private school tuition? Especially when, as rich people, they can presumably afford most of those things they spend money on?

In the second paragraph, meanwhile, Pearlstein merely notes the correlation between inequality and college graduation rates and entrepreneurial activity, without any attempt whatsoever at hypothesizing a possible causal relationship. That's unsurprising, as the more logical relationship is that lower graduation rates and entrepreneurship lead to inequality rather than the reverse. 

Lastly, Pearlstein asks if anyone can doubt the connection between inequality and both partisanship and an inability by government to formulate good economic policy.  Well yes, one can.

Yet again, let us consider what would happen if the rich had half their wealth confiscated and destroyed. Would Republicans and Democrats suddenly come to terms on contentious economic policy such as taxes and entitlements? Would the philosophical divide suddenly be bridged if hedge fund managers were consigned to the middle class? Would political rhetoric sudden take a softer, less contentious tone if Hollywood multi-millionaires saw their earnings plummet? What is the connection here?

Again one wonders: why do those who insist that inequality is one of the most pressing problems facing society today struggle so mightily to make their case?

Related: Previous commentary on a Pearlstein column dealing with inequality here.

No comments: