Sunday, January 19, 2014

Talents, intelligence, work ethic, and sweet economic syrup.

It’s been so long since I wrote in this space, or any space, that I can’t remember how to string words together.  But I want to respond to something in the Washington Post last week, a letter to the editor that struck me, from a gentleman named Mark Swierczek, which was itself responding to a previous letter from Robert Sutton.  Both letters were expounding on the value and inevitability of income and wealth inequality in any free society.  And both seem to me to suffer from a special form of self-inflicted ideological blindness that appears, if looked at with gauzy, vacant eyes, like clean and simple logic.  

Here’s what they said, in their words.  From Robert Sutton:

“Income inequality is the natural, expected and welcome consequence of an economically free society. Absent the shackles of an overreaching government and social engineers, income will flow to those with greater talents, greater intelligence and the strong work ethic to use their God-given blessings. Governments that try to reverse that flow will be forever tilting at windmills, since nature never will stop working against them.”

And from Mark Swierczek:

“Income inequality is, in fact, the force that drives our economy. By rewarding achievement, income inequality provides the motivation for people to work hard and be successful, much as winner-take-all prizes in sporting events lead to the most-contested, best-played games.

In a free market, income inequality is also self-correcting since, as people work their way to the upper end of the income range, inequality is naturally reduced. Programs intended to reduce inequality via artificial means, on the other hand, tend to reduce economic incentive and therefore perpetuate the very inequality they are intended to address.”

These two letter writers believe that inequality is acceptable, even virtuous, because it is the combination of an unequal distribution of virtue combined with virtue-dependent economic mobility.   And there is a morsel of simple truth, of common experience, in that, which makes it appealing.  People who work harder, with better attitudes, and who have better educations, do seem to get ahead faster, on average, than those who are lazy, or ignorant, or sullen.  But why are they telling us this obvious thing?   I think they’re arguing against a proposition that no prominent economist, politician or columnist has ever made: no one wants to impose absolute income or wealth equality, and no columnist I have read has proposed that we eliminate differential rewards for hard work, intelligence or creativity.  We’ve always had income differences, and for large periods of our history that has been unremarked, because it was unremarkable.  The alarm, when it has been sounded at all, is about the rapid increase in income inequality in the last thirty-five years; it is that all of the benefits of growth, and of increased labor productivity, over those thirty-five years have flowed to the very top of the income scale, and not to the labor whose production has increased.  It’s about the rapid cultural change that has been highlighted in the work of Thomas Piketty from the Paris School of Economics and Emmanuel Saez at the University of California at Berkely, which showed in graphs that after a long period of relatively egalitarian economic growth we have now returned to the kind of income inequality that characterized the gilded age.  A graph like this, using data from Piketty and Saez, was posted in the very first post in Paul Krugman’s  NYT blog.

There’s a great deal to say about the potential negative economic impacts of income inequality that balance the positive impacts the letter writers describe. But I don’t want to dwell on that in this post, or on the Piketty-Saez data, because I think the letters above from Mr. Sutton and Mr. Swierczek make a more basic mistake.  They may not find the change in income inequality relevant, because their subtext is that inequality itself matters much less than the income mobility that creates it.  The subtext is if we diligently apply our “greater talents, greater intelligence and the strong work ethic”, we will be rewarded with a higher place on the income scale, so the station we hold in life is the station we have fairly earned.  All of which sounds simple and compelling---and all of which is flatly contradicted by the evidence of the real world.  The vision described by these two letter writers, which is a syrup of classical economic theories so distilled and simplified that few classical economists would swallow it straight, may describe some forces that are at work in the economy, but there are clearly other forces at work at the same time.   If this vision alone described the world then differences in income inequality from one period of history to another, or from one country to another, could be explained by changes in the degree to which economic virtue is rewarded at different times and places.  Hard work and talent would propel us farther, and create larger income inequalities, when economic mobility was high than when it was low, just as an object slides farther on ice than on asphalt.

But the by now well-known Great Gatsby curve shows that exactly the opposite is true.  Higher income mobility between generations is associated with less income inequality, not more.

Here’s one version of the curve, from this study by the Center for American Progress, written by economist Miles Corak:

This curve plots the level of inequality in developed countries against the intergenerational income mobility in those countries.  Countries farther out along the horizontal axis have more unequal household income; in this chart, the United States has---or had, in 1985, when the workers now reaching their peak earning years entered the workplace; this data describes the income inequality of their parents---the highest level of income inequality of all the countries shown.  And income inequality in the United States has exploded since 1985!

Countries higher on the vertical axis have a less income mobility between generations (or, put differently, a higher impact of parent’s income in 1985 on current income of their children reaching their peak earning years).   A quick glance shows that the correlation is just the reverse of that implied by Mr. Sutton and Mr. Swierczek .    If they were right, then countries in which your success depended only on your own worth and your own work rather than on the advantages your parents could provide, countries in which income could “flow to those with greater talents, greater intelligence and the strong work ethic to use their God-given blessings” would have high income inequality, since the economy would unequally reward hard work and effort.   The upward slope of the fitted line shows exactly the opposite.

The United States is among the most unequal and least mobile societies in this group; only Italy and Great Britain have less economic mobility between generations.  The American dream of rising from humble origins to great success, or at least greater success than your parents experienced, is less likely in the United States than it is in Canada, or Australia, or Sweden---and far less likely than in Finland, Norway or Denmark.

(To be fair, Mr. Swierczek does claim that in a free market with nothing to restrict income mobility the striving of those lower on the income scale to rise will cause income inequality to “self-correct”---but this must mean that in his view Norway, Sweden and Denmark with their substantial welfare states financed by high taxes have much freer markets than the United States does, since their income inequality has “self corrected” while ours has not.)

Of course the existence of a correlation between income inequality and income immobility does not imply that one causes the other, but it’s easy to come up with arguments for causality in either direction.  For example, income inequality may provide incentive to succeed, but incentive alone is not enough: incentive must be combined with opportunity, and opportunity is neither free nor distributed equally across the population.  Those who begin with high family incomes can buy more of it, for themselves and for their children, than those who do not.   So income inequality may create less income mobility.

It’s also possible that income immobility contributes, after multiple generations, to increasing income inequality, simply by building inequality between families as a residue over time.  So less income mobility may create income inequality.

It’s possible to look outside this graph for causation, too; there are clear correlations of each of these two variables with some third characteristic (race, for example, or education) that continues across generations. The “greater talents, greater intelligence and the strong work ethic” will have a smaller reward for those held back by discrimination on the basis of race, or gender, or religion, or any other characteristic, than for those who are not.  Educated parents read to their children more, and instill respect for education in those children, so the children of educated parents do better and go farther in school.  And other differences between wealthy and poor contribute to income inequality for at least one generation, such as family structure: poor families are more often single-parent households than rich families, and that fact may create more resources on average---a greater variety of adults to turn to---for the children who live in wealthy households. 

So the path to a more equal distribution of income may through a more equal distribution of opportunity, and a more equal reward for the hard application of work, talent and intelligence.  I think Mr. Sutton might agree with that. He might support efforts to reduce the impact of racism, or sexism, on economic mobility.  

But it’s also true that the path to a more equal distribution of opportunity and more equal reward for work and talent may run through a more equal distribution of income, and that no amount of effort to provide opportunity can compensate for the disadvantage of being born into a poor family in a culture with extreme income inequality.  And that is the causal link that Mr. Sutton and Mr. Swierczek don't see, or don't want to see. 

The point here is not that I have the answer; I emphatically don’t have any single answer.  I suspect that every one of the elements I described above as contributing to immobility or inequality does contribute, and that there are many, many more that I didn’t mention.   And nothing I've said here, no causal link I've suggested, explains the rapid increase in inequality, or the restoration of an income divergence rivaling the gilded age.

The point instead is that, as ideologically or personally satisfying as it may be to reduce the world to a one-dimensional explanation of inequality, particularly one that regards it as natural or just, the real economic world isn’t as simple as that.  If either more equal economic rewards or more dependable rewards to talent, intelligence, creativity and strong work ethic matters to you, then you need to move beyond personal gratification, or self-justification, or ideological zeal, beyond the simplistic economic visions in the letters above.  If these things matter, we need to create them and preserve them, because they don’t, unfortunately, create or preserve themselves.