In particular, he shows that while there’s room for disagreement about exactly how large the magnitude has been, there’s been a substantial increase in the share of national income going to the top one percent. The growth in inequality in the United States is often—usually by centrist sorts—exclusively attributed to college preparation issues or graduation rates, but the concentration in the top one percent is hard to understand in those terms. My read of this data, which I think is a pretty conventional liberal understanding, is that increased taxes on high-income individuals can make most people better off by either paying for more and better public services or else reducing the need to cut Medicare benefits in the future.

At any rate, Winship is very good with numbers but always seems overwhelmingly more interested in annoying liberals than in rectifying social problems. But what he’s shown here is that even a pretty serious effort to debunk the Pittkey-Saez inequality data that liberals like to cite shows that their main conclusions are pretty unassailable. There’s a separate issue of should we care (Will Wilkinson makes the case that we shouldn’t here) or should we care as much as some liberal say we should. But the basic facts seem pretty clear.

Robert Frank is relatively optimistic that American medicine can be transformed away for our current fee-for-service model into something more like the Mayo Clinic:

Another factor militating against quick expansion of the Mayo model is that many current doctors chose their profession hoping to earn lucrative pay, which they might not be able to do in a nonprofit clinic. But across the economy, we see talented professionals whose career choices are driven by concerns far broader than pay. Many top graduates from elite law schools, for example, turn down lucrative positions in corporate law to work for public-interest groups paying a third as much.

Doctors who choose to work in nonprofit clinics seem to view their professions more as a calling than as a job. There is evidence that when medicine was less adversarial than it is now, American doctors were both happier and more respected, even though their incomes were much lower. Doctors elsewhere also remain satisfied and respected, though they are paid less than their American counterparts.

In time, medical schools will be able to attract plenty of talented people willing to accept positions under the Mayo model, where they would spend more time healing patients and less time fighting insurers. Any of the current health reform bills would help start this transition.

Maybe yes maybe no. But one salient fact about both other countries and the United States of the past is that there was much less inequality in general. A doctor in 1963 had a much lower income than a doctor in 2009, but he was closer to the top of the income distribution. Frank’s excellent Falling Behind is largely about the interplay of rising inequality and status competition, so he doesn’t need me to point this out, but I bet that relative income point is important. Which I think is less a reason to be pessimistic about health reform than it is yet another reason to think that higher taxes on the very rich are a good idea (a component of the House bill, I note).

Swedish dad in Södermalm (my photo available under cc license)

I don’t disagree with this. I just think it’s important to remember who’s who, what’s what, and where’s where in this argument. In the United States context you often hear it said that what we need to do to help kids is encourage their parents to be married. I think the experience of Denmark, Sweden, and Norway pretty clearly debunks that. On the other hand, Denmark, Sweden, and Norway don’t at all debunk the idea that having both of your biological parents heavily involved in your life is extremely helpful. But the issue isn’t marriage or non-marriage, it’s family dissolution. Non-married couples can stay together, and married couples can break up.

What’s more, it is worth looking at the cases of the UK and Iceland. Both of these countries really do have more one-parent households than the United States and still achieve substantially lower child poverty rates and more social mobility. I’m happy to dismiss Iceland as a bit of an odd case—and tiny anyway—but that doesn’t apply to the United Kingdom. The key thing there, frankly, is that the Blair and Brown governments decided that child poverty is a scandal and they were going to do something about it. And whatever other failings they had, they succeeded in reducing child poverty by a large margin. CAP’s Half in Ten project aimed at reducing child poverty by 50 percent in ten years is, in part, inspired by these Blair/Brown successes and shows you can do a great deal of good without reengineering people’s relationships. Unfortunately, what we’re seeing right now in the United States is a recession whose impact outpaces the anti-poverty efforts of the Obama administration.

That’s what we like to think, but a new book, Creating an Opportunity Society, by Ron Haskins and Belle Sawhill of the Brookings Institution proves otherwise. They took a close look at intergenerational mobility and found that 42% of American men with fathers in the bottom income quintile remain there as compared to: Denmark, 25%; Sweden, 26%; Finland, 28%; Norway, 28%; and the United Kingdom, 30%. They present a wealth of new and old research evidence to support the conclusion that if you’re born poor in America, you’re likely to remain poor.

This basic result has been known for quite some time, at least in liberal circles (conservatives like Greg Mankiw believe the U.S. is ruled by a genetic aristocracy). And the interpretation seems pretty clear. The high level of income inequality in the United States leads to highly unequal opportunities for American children, whereas the low levels of income inequality in Nordic countries lead to more equal outcomes.

Davis says the book “is not a liberal polemic,” but I’m not really sure where else any analysis of this issue would lead you. One of the co-authors, Ron Haskins, has definite conservative credentials so I’ll be interested to see what kind of conservative ideas are in here, but “make America more like Sweden” doesn’t strike me as a very promising foundation for bipartisanship.

But what would explain the link? Steve Randy Waldman speculates that it’s all about the difference between loose monetary policy creating consumer price inflation and loose monetary creating asset price inflation:

Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.

This is because richer people have a lower marginal propensity to consume. As Kevin Drum puts it:

So: as income inequality goes up, more money flows to the well-off, who use it to buy financial assets. Conversely, less money flows to the poor and middle class, who respond by increasing their debt level. Both of these mechanisms produce a higher demand for financial assets and therefore promote asset inflation.

This seems reasonably plausible to me.

(cc photo by Nesster)

One curious consequence of runaway income inequality in the United States is that it’s produced a bumper crop of research (not sure I’m remembering it right, but I think Marx talks about this in The German Ideology) aimed at explaining away runaway income inequality. At any rate, Reihan Salam tweeted out this paper from Enrico Moretti the other day:

A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications. The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers’ standard of living is offset by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.

You can think of the baseline dispute about inequality as being that on the left we think it would be a good idea to try to redistribute some wealth and income away from folks at the top and either give more money or more services to the rest of the population. On the other side are folks who think the reverse. And this housing issue, like the case of the expensive refrigerator, strikes me as something purporting to debunk concern about inequality that in fact is just offering an example of why the right is correct to think that redistribution would be a good idea.

The way I read this research result, if we take a bunch of money away from rich people it will cost them relatively little in welfare since almost half of the excess income of the rich is going to bidding up the price of housing in the kinds of places where rich people can find jobs. If they all had less money, they’d all live in equally good houses; the houses would just be cheaper. But the money acquired through taxation could be used to provide services—better transportation infrastructure, better teachers, healthier food, more medicine—that have real value to the middle class and the poor.

Needed: Higher taxes and better public services with a special focus on public services likely to facilitate increased college graduation rates.

It is, of course, possible that this effect is entirely caused by differences in parental IQ. That said, there’s no evidence that it’s entirely caused by differences in parental IQ. But such is Greg Mankiw’s zeal to defense social and economic inequality and injustice in the United States that he slams the NYT for failing to advance this evidence-free genetic determinist theory.

But for another look at the non-genetic heritability of socioeconomic status, consider this chart Peter Orszag brought to my attention some time ago:

You see that whether or not one goes to college turns out to be closely related to parental income even when you account for differential levels of student achievement. In particular, children of average intellectual ability are likely to go to college if their parents are in the top income quartile, but not otherwise. Personally, I have no doubt that some social stratification in the United States is due to genetics, but we would have to be living in a very different country before I started using that hypothesis to wave away every potential concern about inequality.

It’s probably true that universal health care systems have a tendency to lead in a two-tier direction, as people with the means necessary to purchase additional services above the publicly provided “floor” wind up with somewhat more lavish care, though not necessarily better basic treatment for illness. That said, from this complaint you’d think that we were currently living in some Communist utopia in which health care is provided “to each according to his needs.” Even among Medicare recipients we have a two-tiered system according to whether or not you’re prosperous enough to afford “Medigap” coverage. Then there’s the tier separating people with really generous health care plans from those stuck in lower tiers that severely constrain your choice of doctor and access to specialists. And of course there’s the tier for people with catastrophic-only coverage and the tier for poor people on Medicaid and the tier for people with no insurance whatsoever. Probably more tiers than that, too. Our current system is clearly, obviously, and by design less egalitarian than all the major alternatives. That’s the whole point.

One question is why, with income inequality reaching unprecedented levels, we shouldn’t act to redress that inequity in our health care system? Dworkin appears to concede that inequity is bad, describing the residual inequity of a universal health care system as a great evil. But surely it’s progress relative to where we are.

This trend has a variety of underlying causes, some of which are worth changing and others of which (better global communications leading to a bigger superstar effect) are basically good. Be that as it may, using the tax code to take some of this wealth and transform it into more and better public services for the broad mass of people would do a lot of good.

Internal Revenue Service headquarters, Washington DC (cc photo by cliff1066)

I don’t think it should come as a shock that the Obama administration’s efforts to reign-in or reform compensation policies at the big banks have run into some snags. For one thing, there’s are no real populist firebreathers on the administration economic team and that kind of shifts the balance of power in favor of the bankers. But most important of all, you don’t get to be an important person in the world of finance without being really, really, really good at figuring out ways to pay yourself a lot of money. That’s what the field is all about. And it’s extremely difficult for the government to catch up with the ingenuity that can be deployed when people’s livelihoods depend on it.

That said, we compensation reform aside, we actually have a well-established method of taking market distributions of income and trying to transmogrify it into a more just, useful, and welfare-enhancing deployment of social resources—taxes and public services. The world of finance has been the main driver behind the growth in inequality at the extreme high end, and establishing additional tax brackets with higher rates would help lean against that trend. So would something like the Obama administration’s proposal to curb the extent to which high-income individuals can shelter income from taxes through itemized deductions.

It strikes me as ultimately unlikely that the political process will be able to micromanage high finance in a way that strikes people as meeting the claims of justice. But the political process very much can collect tax revenues and use that revenue to finance things that we currently “can’t afford” like more widespread provision of health care services, better rail transportation, cleaner streets, more police officers, more and better pre-kindergarten, etc.

Stockmann department store in Helsinki, Finland (my photo, available under cc license)

I largely agree with the substance of Gregory Clark’s case for higher taxes on the right. One thing I would say, though, is that curbing growing inequality through more taxes and more spending isn’t just a matter of giving poor people more cash payments. If you walk around the streets of any major American city you’ll swiftly see that they’re a lot dirtier than the streets of, say, Helsinki. But they’re not as dirty as they might be—people clean them.

People clean them, not robots. Rich people hire low-skilled workers to clean their privately owned spaces to a very high standard. We could, in addition, increases taxes on the wealthy and hire more low-skilled workers to clean our streets to a higher standard. That would mean cleaner streets for everyone, which would benefit everyone, but especially those without the means to afford lavish private spaces. And it would also be jobs and meaningful employment.

“High-frequency trading,” as practiced at Goldman Sachs, where you use super-fast computers to get a jump on deals, has come in for a lot of criticism lately reaching all the way up to Paul Krugman. I think these critiques are a bit off base. For one thing, no edge that Goldman has acquired based on using fast computers is going to stay in place for very long. For another thing, the “victims” here are just going to be other Wall Street types. Normal people have no business making investment decisions that depend on to-the-minute timing.

I think Krugman gets to the real crux of the matter when he just shifts to broader issues:

What should be done? Last week the House passed a bill setting rules for pay packages at a wide range of financial institutions. That would be a step in the right direction. But it really should be accompanied by much broader regulation of financial practices — and, I would argue, by higher tax rates on supersized incomes.

I have been honestly astounded by the extent to which there hasn’t been more discussion on this point. There’s no good reason that an income of $250,000 should be taxed at the same rate as an income of $2.5 million or $25 million or $250 million. And taxing super-rich people and using the money to build schools and hospitals and transportation infrastructure is, if slightly crude, a more workable method of trying to align the interests of the hyper-wealthy with those of the rest of us than is having various economists debate exactly which money-making activities out there are really socially valuable.

I’ve tried to emphasize the fact that to finance a really expansive welfare state you need a broader tax base than just “the top one percent.” But that’s no reason that the top 0.1 percent and 0.01 percent and 0.001 percent shouldn’t pay their share. There’s only so much money that can be raised from what is, at the end of the day, a very small number of people. But we should still be raising it!

According to the Gallup-Healthways Well-Being Index daily poll of the US population, taller people live better lives, at least on average. They evaluate their lives more favorably, and they are more likely to report a range of positive emotions such as enjoyment and happiness. They are also less likely to report a range of negative experiences, like sadness, and physical pain, though they are more likely to experience stress and anger, and if they are women, to worry. These findings cannot be attributed to different demographic or ethnic characteristics of taller people, but are almost entirely explained by the positive association between height and both income and education, both of which are positively linked to better lives.

Burkhard Bilger’s excellent 2004 New Yorker article persuasively argued that the growing stature gap between Americans and northern Europeans is largely explained by the United States’ high level of inequality and child poverty. Consider it another reason to belief that using a surtax on high earners to finance generous health care for the poor and lower-middle class would be welfare enhancing.

Wall Street hotshot won't be taking the subway (cc photo by epicharmus)

Reacting to the news that financial sector paychecks are set to regain their boom-era peaks after a single down year, Kevin Drum snarks “As long as bankers are paid obscene salaries and bonuses, all is right with the world. I’m sure we’ll all rest easier tonight knowing this.”

As I’ve said before it’s important to understand this as part of a deliberate strategy. The Obama administration didn’t want large financial institutions to fail. They also didn’t want to try to get congress to appropriate funds on the scale that would be needed to take the banks over, clean house, and recapitalize them publicly. What they came up with was a strategy of implicit and explicit guarantees designed to allow financial institutions to recapitalize themselves through profits. And big profits mean big paychecks. This is an ugly solution to the problem, but for whatever it’s worth it’s working.

But obviously this creates a massive problem of social justice. A problem that, I think, is part of the case for why there should be more tax brackets and higher taxes on rich people.

You often hear the question of compensation for ordinary workers counterposed with the idea of profits. The reality, however, is that the total share of GDP that goes to workforce compensation remains eerily steady in the 56-59 percent range year after year.

What does change is what Kevin Drum points to, the share of compensation going to executives. In particular, pay is becoming more concentrated in the hands of the top managers. The rich, in other words, are getting richer. Exactly why this is happening is a matter of some dispute. The general timing of the explosion in CEO pay is, somewhat paradoxically, coincident with a revolution in corporate governance (”shareholder value”) that on paper should have reduced the ability of managers to self-deal.

But whatever the reason, that’s the trend. And it means that additional taxes on rich people, whether in the form of a surtax, in the form of curbing itemized deductions, or in the form of modifying the tax exempt status of employer-provided health benefits would be an appropriate countermove. That’s where the lion’s share of the wealth generated recently has wound up, so it’s a reasonable place to go hunting for revenue.

The good life

Will Wilkinson advances a number of argument in his recent Cato paper “Thinking Clearly About Inequality” including one that’s pretty question-begging. This point, however, seems valid:

You can see leveling in quality across the price scale in almost every kind of consumer good. At the turn of the 20th century, only the mega-rich had refrigerators or cars. But refrigerators are now all but universal in the United States, even while refrigerator inequality continues to grow. The Sub-Zero PRO 48, which the manufacturer calls “a monument to food preservation,” costs about $11,000, compared with a paltry $350 for the IKEA Energisk B18 W. The lived difference, however, is rather smaller than that between having fresh meat and milk and having none.

The upshot is that tracking the growth in inequality of wealth and income may be overstating the growth in actual inequality of human welfare.

At the same time, the point here is that the marginal utility of money income declines as it grows. This is also a strong argument for believing that redistributing money from wealthy or high-income individuals to the poor or to public services will be welfare-enhancing. The difference, in welfare terms, between a Sub-Zero refrigerator and an Ikea refrigerator is much smaller than the difference in welfare terms between having health insurance and not having health insurance. So a surtax on high earners that goes to finance expansion of health coverage to the working poor is making people better off. In that case, when we look at statistics indicating skyrocketing income inequality we’re seeing evidence of inefficiency that can be rectified through the policy process.

The reasons behind this trend are complicated. But one natural response to it would be to raise taxes on the very rich and use the tax revenue to finance public services. Under that scenario, everyone winds up better off than they were 25 years ago. Absent stepped-up taxation on the rich, changes in the structure of pre-tax income in the United States ensure that many—if not most—Americans see little actual gain from economic growth.

This is worth noting because outside the health care context, many morally admirable policies such as liberal immigration laws and openness to trade have the impact of both boosting overall economic growth and also exacerbating domestic income inequality. They’re also very good for poor people in the third world who want to have jobs in which they do stuff in exchange for money. Responding to growing inequality with ramped-up taxation and ramped-up social services makes these kind of policies more sustainable and serves the general interests of mankind.

Trilingual apartheid beach sign from back in the day (wikimedia)

I’m not in agreement with the overall thrust of Will Wilkinson’s paper on inequality for the Cato Institute, but one point that I think is in the spirit of what he’s saying was brought to mind by a question at last night’s event. The way I would put the point is that it’s a mistake to think of the world as composed of, on the one hand, “economic issues” in which we worry about wealth or income inequality and then on the other hand, “social issues” in which we worry about racism or sexism. Progressives ought to be concerned with a general issue of justice and social inequality, of which gaps in money income or wealth may be part.

And you really don’t want to find yourself suggesting, as I think people sometimes do, that we ought to be monomaniacally focused on the income gap question. After all, consider an African-American woman working as a nurse in North Carolina in the late 1950s relative to a white male executive at North Carolina’s largest bank. There would have been a substantial gap in their incomes. But if you flash forward to today and compare an African-American woman working as a nurse in North Carolina to a top executive at Charlotte-based Bank of America you’ll find a much larger gap.

Thinking about the issue more comprehensively, though, it’s of course clear that the overall gap in social equality between two such people is smaller today than it was in the days when the African-American woman would be explicitly excluded from a wide range of social practices and opportunities open to the banker. I don’t think there’s any reason to believe that the decline of Jim Crow caused income inequality to grow thus forcing us to make an explicit tradeoff, but it’s still worth understanding which aggregate sets of social changes have and haven’t been for the better. What’s more, I have heard credible arguments that the successes of feminism in the late 60s and 1970s did play a role in increasing income inequality. I’m not sure whether or not that’s right, but if it is right you’d still want to say that feminism was an egalitarian force.

That last statistic is a crucial one. Palin’s popularity has as much to do with class as it does with ideology. In this sense, she really is the perfect foil for Barack Obama. Our president represents the meritocratic ideal — that anyone, from any background, can grow up to attend Columbia and Harvard Law School and become a great American success story. But Sarah Palin represents the democratic ideal — that anyone can grow up to be a great success story without graduating from Columbia and Harvard.

I think the implicit idea here that the real class struggle in the United States is between graduates of fancy colleges and graduates of less-fancy colleges is pretty blinkered. Consider the Census Department’s information on educational attainment in the United States of America:

As you can see, less than a third of the population has a bachelor’s degree. But both of Sarah Palin’s parents belong to that educational upper class. And so does Palin herself. Meanwhile, I think it’s telling that Douthat’s idea of a counterpoint to Obama’s Ivy pedigree is Palin rather than, say, Joe Biden of the University of Delaware and the Syracuse University College of Law. Biden strikes me as an excellent example of the fact that a person can attend some not-so-fancy universities and yet be both enormously successful and widely acknowledged to be a smart person with a command of the issues. Palin, by contrast, is someone who Douthat acknowledges needs more time “to bone up on the issues.”

And that is the key to people’s complaint with Palin; not that she attended North Idaho College but that she ran for Vice President and spoke out on a range of issues without seeming to understand any of them. That’s a big deal, and it’s not mere snobbery to point out that it’s a big deal.

Meanwhile, John Sides points out that educational attainment has relatively little impact on public approval of Palin:

When you consider that college graduates and people without bachelor’s degrees typically disagree on political issues, there’s nothing noteworthy about this rather small gap. College graduates are somewhat less conservative on culture war issues than non-graduates, so you would expect them to be less friendly to cultural conservative politicians irrespective of their personal qualities.