Cochrane's Questions About Inequality

Via Bryan Caplan of EconLog.

"Just finished the forthcoming Inequality and Economic Policy: Essays in Honor of Gary Becker, edited by Tom Church, Chris Miller, and John Taylor.  For me, the highlight was John Cochrane on inequality.  Highlights from the highlight:

More puzzling, why are critics on the left so focused on the 1% in the US, when by many measures we live in an era of great leveling?

Earnings inequality between men and women has narrowed drastically, as Kevin Murphy reminded us. Inequality across countries, and thus across people around the globe, has also been shrinking dramatically even as income inequality within advanced countries has risen. One billion Chinese were rescued from totalitarian misery, and a billion Indians sort-of-rescued from British-style license-Raj socialism. These are wonderful events for human progress as well as, incidentally, for global inequality. Sure, these countries have many political and economic problems left, but the "its' all getting worse" story just aint' so...

Look at Versailles. Nobody, not even Bill Gates, lives like Marie Antoinette. And nobody in the US lives like her peasants. In 1960, Mao Tse-Tung waved his hand and 20 millions died. In 1935, Joseph Stalin did the same. Neither reported a lot of income to tax authorities for economists to measure "inequality." It is preposterous to claim that, even the citizens of Ferguson Mo., with all their problems and injustices, are less equal now than they were in 1950. Or 1850.

Why does it matter at all to a vegetable picker in Fresno, or an unemployed teenager on the south side of Chicago, whether 10 or 100 hedge fund managers in Greenwich have private jets? How do they even know how many hedge fund managers fly private? They have hard lives, and a lot of problems. But just what problem does top 1% inequality really represent to them?

A striking tension:

I've been reading Piketty, Saez, Krugman, Stiglitz, the New York Times editorial pages to find the answers. They all recognize that inequality per se is not a persuasive problem, so they must convince us that inequality causes some other social or economic ill.

Here's one. Standard and Poors economists wrote a recent summary report on inequality, (earlier post here) perhaps as penance for downgrading the US debt, and wrote

As income inequality increased before the crisis, less affluent households took on more and more debt to keep up--or, in this case, catch up--with the Joneses....

In Vanity Fair, Joe Stiglitz wrote similarly that inequality is a problem because it causes

a well-documented lifestyle effect--people outside the top 1 percent increasingly live beyond their means....trickle-down behaviorism

Aha! Our vegetable picker in Fresno hears that the number of hedge fund managers in Greenwich with private jets has doubled. So, he goes out and buys a pickup truck he can't afford. Therefore, Stiglitz is telling us, we must quash inequality with confiscatory wealth taxation... in order to encourage thrift in the lower classes?

If this argument held any water, wouldn't banning "Keeping up with the Kardashians" be far more effective? (Or, better, rap music videos!) If the problem is truly overspending by low income Americans, can we not think of more directed solutions? For example, might we not want to remove the enormous taxation of savings that they face through social programs?

Another example. The S&P report moved on to a new story: Inequality is a problem because rich people save too much of their money, and poor people don't. So, by transferring money from rich to poor, we can increase overall consumption and escape "secular stagnation."

I see. Now the problem is too much saving, not too much consumption. We need to forcibly transfer wealth from the rich to the poor in order to overcome our deep problem of national thriftiness.

I may be bludgeoning the obvious, but let's point out just a few ways this is incoherent. If Keynesian "spending" and "aggregate demand" are the problems behind low long-run growth rates - and that's a big if - standard Keynesian answers are a lot easier solutions than confiscatory wealth taxation and redistribution. Which is why standard Keynesians argued for monetary and fiscal policies, not confiscatory anti-inequality taxation, until the latter became politically popular.

In a series of recent blog posts, (see coverage here) Paul Krugman offers evidence that people vastly underestimate how wealthy the rich are, bemoans how they live separate lives -- my fry cook has, in fact, no idea of their lifestyle -- and argues for confiscatory taxation to eliminate the "externality" of their excessive consumption.  Well, I'm glad logical consistency isn't holding back these arguments.

Some wise cynicism in the spirit of Gordon Tullock:

The most common argument is that we have to reduce income inequality to avoid political instability. If we don't redistribute the wealth, the poor will rise up and take it. As a cause-and effect claim about human affairs, this is dubious amateur political science, one that would look especially amateurish to the political scientists and historians at this Hoover Institution on War, Revolution and Peace. Maybe the poor should rise up and overthrow the rich, but they never have. Inequality was pretty bad on Thomas Jefferson's farm. But he started a revolution, not his slaves.

P.S. When I die, I hope the conference volume in my honor is half as good as this one!"