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.

Red over red: vessel not under command

So.  Much of the federal government is now closed, and the rest is on borrowed time.  A lot of people have been furloughed.  Again.  Others are working but may not get a paycheck on time.

Has it not occurred to the Tea Party caucus in the House that if the tactics they use today are successful those same or similar tactics will be used against them in some future conflict when they are in the majority?  Do you think that's impossible?  Remember that only a couple of decades back filibusters were extremely rare.  Now they are standard, and nearly every bill in the Senate needs 60 votes to pass.  What will the future look like when every budget bill, and every continuing resolution, and every debt ceiling increase, is seen as an opportunity for some disgruntled minority to overturn laws that a majority of Congress has already passed?

Oh...wait...that's what it's like now.

What Republicans should do…

Of course I have no standing whatever to advise anyone about how they should conduct their politics, or how they should pursue their political goals.  But the current course on which Ted Cruz and his acolytes---or maybe his victims---in the house are set seems to me, and to almost everyone, as dangerous to the country, to the economy of course, and drastically dangerous to themselves.  They disagree.  We’ll see, I guess.

But I really don’t want to write about the House Republicans or Obamacare; they will do what they will do, and no amount of warning will slow them down.  The Washington Post this morning quoted Michelle Bachmann saying that this threat to the Government of the United States (the budget issue), and later in the month to the economy of the world (the debt ceiling issue), is exactly what the Tea Party conservatives wanted to do, and that they have arrived exactly where they wanted to be. 

Ok.  Maybe.  And there is nothing I can do or say that will change the next month.  But in a longer sense, beyond the present turmoil, there is a nit I need to pick. 

I live in a blue state, and in a very blue district in that state.  We aren’t frozen in a fixed party devotion; our representative in Congress for many years---8 terms---was a Republican named Connie Morella, but she was a moderate, and in fact a charming moderate.   People here voted for her at the same time that they were voting for Democrats for every Senate seat, for Governor, for President.   She was a brand of Republican that is currently extinct.  That is not just my opinion.  That is Connie Morella’s opinion. 

So of course, at the last Labor Day parade through Kensington, the town where I live, dozens of Democratic politicians who hold office or want to hold office drove by, walked by, waved themselves by, threw candy to the children, and generally behaved like politicians in a safe town.  And there was also one Republican running for office who carried a sign that read, if I’m remembering it right:

“Fiscal Responsibility, Low Taxes”. 

Yes.  That seems to be the Republican stand on the issues.  But in this blue district in this cobalt blue state, where the majority of the people vote for Democrats most of the time, I doubt if I could find a single person who disagrees with that slogan.  I wanted to do a quick poll, asking each person I met whether they favored fiscal irresponsibility, or taxes that are high just for the sake of having high taxes. 

So my nit is this: the slogan above has no bearing on the distinction between Republican stands on issues and Democratic stands on issues.  No matter which side you ask, they will tell you that they are being as fiscally responsible as it is possible to be while still meeting the proper responsibilities of government.  And they will tell you that they are trying to keep taxes as low as they can keep them while still being fiscally responsible. 

Republicans need a much more substantive slogan if they want to get votes from people with even moderate views: they need a slogan that distinguishes them from Democrats.  They have to tell us what they mean by “fiscal responsibility”, and why the policies that Democrats are proposing don’t meet that test.   And they have to tell us how they plan to lower taxes and still maintain enough revenue to run the government, and meet all of the government’s responsibilities, without huge deficits.   

But much more is riding on this than the votes of moderates.  Because right now we are butting heads over issues on which I think we may all substantially, or at least partially, agree in principle.  For example, you don’t want people taking welfare, or food stamps, or unemployment insurance, from the government---meaning from those of us who still have jobs---if they are healthy, able, and simply choose not to work.  Guess what?  Neither do I.  If people are able to contribute and have that opportunity, they should contribute.  On that the difference between us is our belief about the facts, not our underlying principle:  my facts are that the great majority of people on foodstamps come from households in which at least one person is working (for a very low wage), and most recipients are off the program within a year.  You may have different facts you want to bring to bear: but if we can recognize an underlying agreement about framework, and make this a discussion about the facts, we may get somewhere. 

So, House Republicans: I get that this confrontation and its consequences are the product of the elections that took you into office, and that the wreckage of a government shutdown and a default on debt is something that right now it’s hard for you to avoid.  But let’s start talking about real ideas, real facts, and real underlying principles, starting right now.  Default is truly a catastrophic result: the dollar is the currency on which the world depends, and Treasury notes are the safe refuge to which international money turns when the world is uncertain.  If those two lose the world’s trust, the 2007-2008 financial panic will seem mild by comparison.

So let’s talk, not in silly slogans and fake distinctions, but in real fact and real principle.  Maybe, if we’re all still standing after we clear the rubble from this fall’s unavoidable confrontation, we can maintain a discussion that avoids the next nation-threatening, global-economy-threatening showdown, or the one after that, or after that.  We can’t keep doing this, we can’t keep governing by showdowns at high noon, even if we always find last-minute escapes, without courting true disaster.  Eventually this drama will wear the world’s credulity too thin to bear the weight of the vast structure of international finance.   

And when that snaps we come to a very painful place.  

What, again? Debt ceiling again?? Really?? Come on. I don't have the patience to stress out about this right now.

 

For a thousand reasons, it’s been far too long since I sat down here to write.  It’s true that my day job has interfered, which will happen from time to time---too many deadlines and not enough time to meet them---and it’s also true that a variety of health issues, mine and others, have distracted me.  But the big reason is just that the last time I wrote I had huge math formatting problems, and I got hung up trying to resolve them, and the truth is that when you are in the habit of writing you write, and when you aren’t you don’t. 

Example random health problem:  a number of weeks ago, while cleaning out a garage, I dropped myself on my head from a significant height.  I was standing on a table putting something on a high shelf when the table more or less disintegrated under me.  I know that because I found it scattered in pieces all around me; I don’t remember the fall at all.

This event had a number of immediate effects.  It caused a substantial delay in the task I was doing, for one thing.   And it provided a good opportunity to exercise an opulence of verbal expression that is usually beyond my means.  And it enabled me to examine the inside of the Sibley Hospital emergency room, and to experience a CAT scan, and to enjoy the benefit of numerous stitches in my scalp.  For a while I thought it had caused a loss of about 30 IQ points too, but I’m pretty sure those were all still in there, they were just temporarily resistant to vigorous use.  (Even so I hadn’t disabled enough IQ points to believe in Ricardian equivalence.  I know, I checked.  I thought about it in the emergency room just to be sure, and it still seemed the height of absurdity even after a whack on the head.  Although IQ doesn’t really seem to have anything to do with it; some very smart people do believe in it, God knows how or why.)

But I think I did discover what happened to the IQ points in question, about two days later.  They were jarred loose and tossed randomly about, and soon started skittering around inside my head like marbles in a sailboat cockpit, say, in the cockpit of Sea Frog exiting the mouth of the Choptank into the bay on a long, bright, windy, wavy day.  Every time I tilted my head they all rolled over to the low side, whacking into everything in the way and making me dizzy.  It was disturbing.   And it kept me from writing for a while.

So I want to get back to this blog to begin to recreate the habit, but current events in economics seem a little heavy for the moment.  There’s plenty to say.  The House Republicans are once again threatening to shut down the government and render the Treasury insolvent by refusing to raise the debt ceiling, which would mean that the Treasury would no longer be able to pay for the government functions that Congress has already legislated.  Sequester is still in effect, a circumstance that caused most government employees to be furloughed for a number of days earlier this summer.  At the start of the furloughs I said (here) that federal employees seemed to be taking it all with good grace, but wondered what would happen if it continued “next year”.  Well, October is the start of a new federal budget year.  I think the federal workforce is getting more than a little tired of job chaos, of pay freezes, furloughs, and constant budget brinksmanship that puts their bill payments at risk.  Still, we’ll put that topic off for another day.

Instead of delving into economics, I’ll talk about making boats.  Or daydream about it.  It’s a topic, for once, that many of my friends can comment on, some with real knowledge far beyond my own.   With any luck they can talk me out of trying it.  But I have a reason for thinking about it.  I have a few odd ideas about sailboat gadgets that I’d like to try out, and some of them would require serious surgery on any existing hull, so it seems more efficient (and possibly cheaper) to just build my own.   I’ll stick to something I can do in my backyard, some easy variety of stitch and glue.  Or maybe staple and glue.  Nothing fancy.

I need something that will float and sail, but for economy (there’s that damned word again!!) it can’t be too much bigger than a dinghy---but to make it all worthwhile I want something more than just a simple dinghy.  I’m actually thinking of building a kind of adventure.  I want a sailing dinghy that I can put in the water at the Washington Sailing Marina and sail to Galesville or Annapolis. It would be a two-day trip down the Potomac, and then it’s nearly 70 miles from the mouth of the Potomac up the bay to Annapolis, which, in a boat that size, will probably be another two to three days.  That means I’ll need a dinghy that I can sleep in comfortably, probably using a tent over the boom for shelter.  I also need to have a small stove of some kind to cook with.  And a head.  In other words, I’ll need to build a cruising dinghy, if that’s not too weird a concept. 

I’ll get back to economics in another post or two.  Maybe I actually will talk about Ricardian equivalence again.  The last time I posted about it Nick Rowe chastised me in the comments for claiming that the concept depended on full employment, so I might try to explain why I think that’s true.  Why Ricardian equivalence, which seems to me to be a minor and fairly silly idea in the vast universe of economic models?  Because it seems to me to be a perfect embodiment of what has gone wrong and sour in macroeconomics since I went through the graduate program at Georgetown.  It’s hard for me to believe that anyone can take it seriously for ten minutes at a time.  But people do.  People write long, difficult papers on it dense with mathematics.  I think there’s an affliction that I guess I’ll call TANSTAAFL-blindness that produces models like that.  Maybe.  The truth is that I don’t really understand how those who build and believe models like that think.  But maybe TANSTAAFL-blindness is part of it.

Maybe I’ll talk in another post about what I mean by that phrase…but not today. 

Furlough...

Today is the first day of the first week of furloughs for Defense Department employees. These federal employees will have to accept a 20% pay cut for the rest of this fiscal year (until October). This post is a quick personal sense of the morale of our federal workforce derived from what I’ve heard from those DoD employees I know: they are a little discouraged, but fairly resigned to it so far. I’ve heard some minor grumbling, some gallows humor, people are sighing and shaking their heads about the butt-headed head-butting dysfunction of Congress. But I’ve heard very little that I would call deeply felt grievance. Everyone understands that the wounds of the recession are not yet healed, and people everywhere are hurting.

But under all the mild grumpiness is recognition of a trend, and perhaps of a message from the country. The people I talk to here have started to internalize the idea that great parts of the country they work for doesn’t appreciate their efforts. They all know that the sequester doesn’t stop at the end of this fiscal year, and with this year’s furloughs coming on top of three years of pay freezes they are running low on patience. If furloughs continue next year, or if they are replaced with widespread reductions in force, I think that those who are eligible to retire will strongly consider it, and those who are presented with an opportunity to find employment outside the federal government will find little reason to stay where they are.

That’s particularly true of those employees the country should most want to keep, those with professional degrees or advanced degrees. Even the CBO study that is widely cited by the most vocal critics of federal workers shows that for those with a professional degrees and doctorates direct pay for those who work for the federal government is far below their counterparts in the private sector, and the benefits the study cites for federal workers don’t come close to making up the difference. Here’s the CBO study’s front-page graph:

The blue stacks are federal workers, the tan/mocha stacks are private sector workers. The lighter sections at the top of the bars are CBO’s estimates of the present value of future benefits (such as retirement benefits or continued enrollment in health insurance plans). In other words, the lighter sections are a good deal more speculative than the darker sections. In the CBO’s words, “measuring benefits was … uncertain.”

There’s a lot I don’t like about the study, but this graph shows pretty much what I’ve heard for decades: at the lower levels, employment with the federal government has better pay and benefits than the private sector, but above that the pay is higher in the private sector, and benefits are uncertain. And for those workers we most want, those that are hardest to get and keep, those shown in the last pair of columns in this graph, working for the private sector is far more lucrative even when all benefits are included.

So with pay freezes, furloughs, and a sense of national disdain for their efforts, why should those people---the people we most want and most need to make the government function---why should these people continue to work for the federal government if they are presented with an alternative? I think most of them will wearily endure this furlough episode. Most of them. But next year, if this happens again, it may be one furlough, one pay freeze, one RIF or retirement push too many for a lot of them.