What does the inequality-immobility link mean?

by on January 26, 2012 at 4:49 am in Economics | Permalink

Justin Wolfers writes:

Predictably enough, I spent yesterday reading lefty blogs trumpeting Corak’s analysis, and right-leaning blogs who didn’t want to believe the inequality-mobility link, endorsing Winship. But both missed the bigger picture implications. Either you’re convinced by Corak that the data can be trusted, and that they show there’s a strong link between actual inequality and actual mobility.  Or you believe Winship that the data are a pretty poor proxy for what’s really happening, and so there’s actually a very strong link that’s being disguised by imperfect data.

Here is Scott’s latest response, with links to various critics.

As for my take, Justin is painting himself into a corner here of his own making.  Let’s step back for a moment.  I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top.  (As an aside, both of these problems contain elements of both “left-wing concerns” and “right-wing concerns,” and both problems are deeper than any particular ideology can solve and they should make virtually everyone rethink their views).

Those are the problems and we should try to fix them.

If we could fix these problems, that would mean a smaller financial sector, less moral hazard, better allocation of capital, and for most/all income classes rates of income growth comparable to the 1948-1972 period, chop it up as you wish.  Imagine that everyone’s income went up three percent a year, every year, and every generation was about twice as rich as the parents.  Whether there then would be more or less marginal “churn” in the relative income rankings is not a matter of irrelevance but having somewhat more churn should not be viewed as a major social goal per se.  It would depend on the reason for the immobility, and the real focus of our concern would be the reason (e.g., bad schools? some kind of unfairness?), and not the marginal change in the numerical churn per se.

Given that background, and those two very real problems, you can in fact create other “problems” by creating and manipulating more complicated statistics, based on the initial problems, and that can lead you to various measures of inequality and immobility.  But not all inequalities are bad, or avoidable, and the same is true for immobilities.  The valid problems, as embedded in the new complicated measures, still will boil down to the two simpler problems mentioned above.  In the meantime, toying around with misleading and less transparent aggregate measures of inequality and immobility will bring confusion as to what is really at stake.

Focus on the two very real and fairly simple (as distinct from simple to fix) problems.

Addendum: If you are looking for Turing test fail, mood affiliation, unwillingness to recognize comparisons on the margin (as if I am defending hereditary aristocracy), and us vs. them thinking, here are John Quiggin, Brad DeLong, and Paul Krugman, as if I had staged a satirical interchange to illustrate and make fun of their occasional proclivities.  The commentary of Matt Yglesias, also on the left, does not commit any of these fallacies and in fact deftly sidesteps them; perhaps they should drink from his water, or from that of his father, who apparently did not finish high school.

Brent January 26, 2012 at 7:53 am

I had to unsubscribe to Justin Wolfers’ twitter feed b/c his smug tendentiousness was irritating. He also writes about a lot more topics than he actually knows about.

Lynne January 26, 2012 at 8:10 am

Well, I’m not an economist (I don’t even play one on TV), but after looking over all the links in this post, the most illuminating thing I read was a comment left beneath Mr. Salam’s post:

Gatsby is not an example of social mobility. When he dies, there is effectively nothing left. Knowing Gatsby was not a useful social connection, as is evident by the refusal of nearly all who knew him to attend his funeral. The seemingly wealthy people who frequented his place, while he was in his prime, were largely parasites.

For me, this remark connects with something I read in a news story about Mitt Romney the other day. The story said that voters were not put off by Romney’s wealth so much as the perception that he got paid for doing nothing. In other words, voters who reported being uncomfortable with Romney’s wealth imagined him simply sitting at home all day collecting cash instead of getting up early and going off to work all day, like they did.

And if you ask me (and yes, I realize no one did), this is the one important factor being left out of the wealth discussion: How much of the income/mobility disparity is the result of parasitic/exploitative economic activity rather than creative activity (creating new jobs, creating new products, etc.)? Or, more importantly: how widespread and powerful is the perception of parasitism (however unjustified) among the non-wealthy?

It just strikes me that if any sparks are thrown in the future, that perception will be the reason. I don’t think most people really mind a person working hard for years and building up a fortune. But if society/the media/whatever succeeds in creating the belief that extreme wealth can only result from exploitation, we’re in for “interesting times.”

Rich Berger January 26, 2012 at 9:49 am

I am amazed by your comment. If I work, and generate more income than I consume, I eventually build up savings which may be invested to provide me with an income stream. That stream would allow me to retire, or work without the expectation of an income (e.g., volunteer work). Even if I do nothing, and sit home, I will collect an income. I am not a parasite, taking money from anyone else, but have simply provided for my future support out of my past efforts. I think Mitt has done the same thing, being somewhat more sucessful at it than I have been. But he also took greater risks and made a greater effort. He did not take it from me, and I do not begrudge him his sucess.

Rahul January 26, 2012 at 10:13 am

I wouldn’t be surprised. Historically, interest-seeking has never been a fashionable vocation. For most of history there hasn’t been an equivalence between a dollar earned by, say, growing corn and lending money.

Aneesh January 26, 2012 at 3:39 pm

A lot of Republicans begrudge union and governement retirees collecting pension checks as parasites getting something for doing nothing. In fact they say it in much ahrsher tones than anyone has said about Romney. Just saying.

bobzchemist February 3, 2012 at 5:22 pm

But his comment is more about the majority’s perception than it is about reality. Most people don’t believe that Bill Gates, or Steve Jobs, or Paul Allen, didn’t work for their money, no matter how large it’s grown. But Romney didn’t create anything, not a product, not a service, not an idea for a product or service – the public’s perception is that he just bought companies, fired employees, and then sold those companies for a profit. Most people don’t consider that work, especially when you make obscene amounts of money doing it, and even more so when you are STILL making obscene amounts of money from it, 12 years after you stopped working there. This is pretty much everyone’s definition of a parasite, and it’s pretty far from your description of someone who manages to make a living from good investments bought from honestly earned income.

Anon. January 26, 2012 at 10:24 am

But sitting at home and collecting returns on investment can take two forms:

1) Temporal shifting of wealth. Lend $100 to the government today and get $101 back in a while. It’s basically the same money, just moved forward through time.

2) Investments. I don’t even have to comment here…

The Original D January 26, 2012 at 10:44 am

I suspect there’s a strong suspicion among many that Romney’s investments are not the same as the typical person. Rightly or wrongly, there’s a perception that big whales like him get access to better investments than the average E-Trade customer. Certainly he gets VIP treatment, though I don’t know what that means in terms of actual returns.

msgkings January 26, 2012 at 12:15 pm

I think it’s even less nuanced. It’s not that the 99% want in on private equity deals, it’s that they feel they can never get on the ladder to earning enough to save some and eventually retire with an income, whereas in their minds most if not all of the 1% got there by luck: having been born into pretty good circumstances to start with.

To a wide and growing swath of people, playing by the rules, going to school, working hard, and so on no longer leads to a comfortable middle-class life. Meanwhile a guy like Romney is born wealthy and gets wealthier…it’s hard not to look at him at least with a little envy and anger.

The feelings are about “hey it’s fine if you have money, but it’s not fine that I can’t make my own life at least reasonably comfortable”. No one who doesn’t need a straitjacket is suggesting Romney and the other 1%ers give away all their funds, but they are hoping that the 1% will show some class and humility and gratitude for their luck, and do a little something to help everyone else, instead of calling a return to Clinton-era boomtime tax rates “class warfare”.

Cliff January 26, 2012 at 2:54 pm

More people than ever before lead a comfortable middle-class life.

Your last paragraph makes me wonder: how much does Romney give to charity? I haven’t heard that come up. Don’t Mormons donate a lot of money to their church? I don’t know if that counts.

The Original D January 26, 2012 at 3:31 pm

They mentioned it in the news reports. Something like $7 million over the last 2-3 years.

JWatts January 27, 2012 at 10:21 am

“Your last paragraph makes me wonder: how much does Romney give to charity?”
A tremendous amount.

Steven Kopits January 26, 2012 at 8:24 am

“Scott’s latest response…” To me “Scott” defaults to “Scott Sumner”.

Brandon Berg January 26, 2012 at 8:32 am

Did anyone else notice that within the Scandinavian cluster there’s a pretty strong correlation in the opposite direction?

Rahul January 26, 2012 at 8:41 am

Telltale signs of Simpson’s paradox perhaps?

Brandon Berg January 26, 2012 at 9:38 am

Perhaps. Even if you throw out Scandinavia, there’s still a correlation. But it is interesting that the correlation is reversed when considering only the four countries most similar to one another. On the other hand, it’s only four data points.

Russell L. Carter January 26, 2012 at 8:47 am

Do note that Tyler’s last paragraph is a feint for those who won’t read or can’t grok Yglesias. Yglesias AGREES with Krugman, et. al.

And I wonder how much eliding “corporate CEOs” from this sentence:

“I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top. ”

I’m guessing it’s worth 3 months funding for the Mercatus Center.

Thomas January 26, 2012 at 9:08 am

No, he doesn’t.

JWatts January 27, 2012 at 10:25 am

“Do note that Tyler’s last paragraph is a feint for those who won’t read or can’t grok Yglesias. Yglesias AGREES with Krugman, et. al.”

No, Yglesias agrees with Tyler Cowen and explicitly says so.

From the article
“It’s Paul Ryan and Mitt Romney who brought social mobility and equal opportunity up as an alleged alternative to welfare-enhancing redistribution of income. I [b]agree[/b] with Cowen—and for that matter F. Scott Fitzgerald—that this is a somewhat confused idea that doesn’t withstand much practical scrutiny.”

Sean Mulholland January 26, 2012 at 8:51 am

I agree with Tyler that there are two distinct issues driving this inequality-lack of relative mobility observation. The first is the rate of increase in income of those with incomes in the top .1%.

But, more important is the lack of income growth for those in the bottom 20 percent. There are many possible explanations. One is offered by Thies (see here:http://mises.org/daily/3822) who shows that government benefits are often structured so that families attempting to increase their income often face effective tax rates over 100 percent. With these perverse incentives, I am not that surprised to see stagnation of incomes at the the lower percentiles.

Cliff January 26, 2012 at 11:29 am

Also, non-wage benefits make up a higher portion of their compensation. I think if you include health care, compensation growth has been the same for bottom 20% and top 20%?

mark January 26, 2012 at 9:01 am

Nope. The plurality of the top 1% whose incomes have skyrocketed are *non-financial* executives, people you’ve already claimed are probably not being unfairly compensated. Are you now saying their compensation is a problem?

CBBB January 26, 2012 at 9:15 am

Matt Yglesias is a sellout to the right. You ARE defending hereditary aristocracy and Krugman and Quiggin are totally right.

Hoover January 26, 2012 at 9:40 am

Can you elaborate on that?

Laserlight January 26, 2012 at 9:59 am

“Matt Yglesias is a sellout to the right”

ROFL!

Zach January 26, 2012 at 9:40 am

The number of families classified as “low income” (2x poverty level) decreased for about 40 years before reversing course in 2000. Make a similar threshold at any multiple of the poverty level and you get the same result; no need to peer deeply into population surveys to do it. The debates about inequality and mobility will never make sense because there are so many ways to dice up the statistics. But if you look at it in terms of the number of people with some basic level of food/healthcare/housing/education security, which seems like a good definition of where one enters the middle class, trends aren’t so controversial.

Rahul January 26, 2012 at 9:49 am

What we really need is a measure of “inter-generational mobility at constant child IQ”.
Or
“intra-generational mobility at constant kindergarten IQ”.

Or something like “Partial derivative of income with respect to parental wealth at constant child IQ”

I suspect there aren’t data-sets rich enough to compute that metric?

What would be interesting to know is among young children of similar IQ (or some other ability metric) how much of a drag on subsequent income does poverty provide?

byomtov January 26, 2012 at 9:59 am

Tyler,

Imagine that everyone’s income went up three percent a year, every year, and every generation was about twice as rich as the parents.

What do you mean by “everyone’s income?” Mean income, median income, everyone’s individual income? IOW, what is the distribution of this increase that you ask us to imagine?

The Original D January 26, 2012 at 10:46 am

I think he just means everyone. It’s a thought experiment.

byomtov January 26, 2012 at 11:07 am

OK, but then there would be no churn at all. Relative rankings would stay the same, and the income gaps, measured in dolllars and not ratios, would widen.

eccdogg January 26, 2012 at 2:17 pm

I think that is the point. Mobility would look awful and so would inequality yet everyone would be much better off.

Bender Bending Rodriguez January 26, 2012 at 5:15 pm

Not really, since people’s happiness appears to be driven more by how they compare themselves with their peers rather than an objective level of wealth.

doctorpat January 26, 2012 at 7:50 pm

Hence the tenth commandment.

Ken B January 27, 2012 at 10:34 am

“Not really, since people’s happiness appears to be driven more by how they compare themselves with their peers rather than an objective level of wealth.”

Nonsense. It is demonstrably nonsense because lots of people emigrate to America (or other rich country) and enter at the bottom of the ladder, and prefer it to the situation they were in before. True now, true in the past. This ‘oh it’s all about your relative ranking’ is persuasive only to those who cannot imagine real penury. It confuses what people use politics to achieve with what they really want.

Claudia January 26, 2012 at 10:04 am

I am used to following an issue debate around various blogs (nice that MR even provides links today), but what constantly surprises me is this blog’s own internal debate style. Why not save us and all the bloggers who get inspired by the debates here some time … say what you think to start with. (I see some possible negative externalities from the MR style.)

Ok now to the substance…finally today’s post has some “I thinks” in it. In particular above: “I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top…Those are the problems and we should try to fix them.” I agree. But guess what? I think Alan Krueger and the administration probably does too.

So if inequality is the main issue—which it IS in Alan Krueger’s speech ( http://www.whitehouse.gov/sites/default/files/krueger_cap_speech_final_remarks.pdf ) then exactly why was it so important to first promo Scott Winship’s work debunking the mobility part speech: http://marginalrevolution.com/marginalrevolution/2012/01/is-the-middle-class-shrinking.html? Why not first tell us all the points you agree with in Alan’s speech. Then tell us why you think economic mobility is a sideshow to income inequality? That’s interesting and debatable ( http://marginalrevolution.com/marginalrevolution/2012/01/why-economic-mobility-measures-are-overrated.html ), but the order of all this information can be confusing.

When I do current economic analysis, I am supposed to start with a a few summary sentences. And then dig into the details that back up the argument. I feel like sometimes we get the footnotes here first and then the summary paragraph a week later. Maybe that’s what makes MR fun to read, but it has the danger of making it marginal too.

Dan January 26, 2012 at 10:55 am

Tyler’s writing style is deliberate. He does not like to say “I believe A because XYZ…” He prefers to raise an issue for examination and ponder it, and he invites (forces) his readers to ponder with him.

He criticizes Quiggin, et al, in this post for being all about “winning” the debate. He praises Matt Yglesias for thinking about the debate.

Claudia January 26, 2012 at 12:10 pm

Dan, he raised the “side issue” … here mobility (rather than the in his opinion “main issue” inequality) and then criticizes Justin in this post for getting thrown “off track” for weighing in on the inequality-mobility debate. (BTW Justin’s broader point was don’t beat up on data to push your actual intellectual agenda.) I like to ponder and not just be told the answers, but I prefer to ponder the “big stuff” first and then time permitting ponder the “details.” Different way of processing information…to each his own.

Claudia January 26, 2012 at 12:36 pm

One correction in my response… “big stuff” should have been “main problem” and the “details” should have been “secondary problems.” I have a high tolerance for details (micro data person), but even I fatigue of economic debates that go in circles, so it’s got to be an important one for me to keep at it. Sometimes we only know (at first) how to solve the secondary problem, so that’s where we start. (See Polya’s *How to Solve It* book for such tips.) But that does not seem so applicable here.

Hoover January 26, 2012 at 4:37 pm

I appreciate the style. To quote Tyler from a few weeks ago “It’s the people that realize, “I don’t know anything at all,” that end up doing pretty well.”

I don’t know is a liberation – one of the ingredients of free thinking.

Claudia January 27, 2012 at 5:39 am

As a thinking style yes, but not as policy informing style not sure… I appreciate intellectual humility (there’s a lot we don’t really know), but not intellectual nihilsm (we’ll never know a lot). I take the tag line of MR too literally, but if you spending all your time thinking in circles how do you make the world better? Especially when other people in policy are more than happy to plow ahead with their ideas.

Hoover January 27, 2012 at 9:13 am

Fair questions, to which I don’t have an immediate response.

People used to get infuriated by Socrates for always asking questions and never stating his opinion. And yet, he’s had a decent influence on policy over the years.

Mark January 27, 2012 at 4:26 pm

Claudia,
I can’t agree more. In the end, we must act. For some reason, in the blogosphere, these debates seem to be more about the “debate” rather than the underlying issue/policy ideas.

And YES – there is an increasing tone of “intellectual nihilism” as in “we can’t know anything, which means that all viewpoints are equal” in these debates. This perspective lets them debate endlessly without saying “this is the policy”.

This is another argument for *treating blogs as recreation instead of thinking*. I’ve never felt so sure that journals and books will continue to survive and thrive. I didn’t believe this two years ago.

Slugger January 26, 2012 at 10:17 am

I honestly thought that your initial remarks were anti-capitalistic. Does not capitalism imply open markets with opportunities for success and failure that lead to substantial social mobility where your starting point at birth does not predetermine your outcome? The comments about low benefits from mobility seem to recapitulate the views of what were traditionally called conservatives such as Burke or Bismarck that defended aristocracy as a better system than capitalism which is considered an uncouth system of roiling social status.

Floccina January 26, 2012 at 10:44 am

Wouldn’t one expect the correlation to run that way and would it not give you much evidence of he direction of causation.

BTW maybe some people work hard to make their children not need to work hard. Are we sure that is bad.

Also one would expect a society with a tighter ability bell curve to produce more mobility and perhaps more effort to signal ability. Consider the amount of studying that people do in Korea but do they have better lives in Korea? I am not sure. I had a friend who said he came here from Korea to get his daughters out of that race for a few years. He claimed they would leave for school at 7:30 am and go to after school tutoring and get home at 10:00 pm. (I do not know why he did not have them opt out of after school tutoring there. I would guess social pressure.)

Urstoff January 26, 2012 at 10:52 am

It still seems to me that general concerns with inequality are based on some dubious (or at least ungrounded) counterfactuals: If the top whatever percent were not so wealthy, the bottom whatever percent would be wealthier. This simply seems to be assumed rather than actually argued for. If this counterfactual is not true, then I’m not sure what the concerns are with inequality per se (rather than, say, the effect of inequality on the political marketplace). After all, shouldn’t we be concerned with absolute welfare rather than relative welfare? If the welfare of the bottom whatever percent is increasing, then let’s focus on the causal mechanisms for that, and none of these arguments about inequality seem to support that inequality is a cause of welfare growth stagnation (cue references to The Spirit Level).

GiT January 26, 2012 at 2:43 pm

As opposed to the dubious or at least ungrounded counter factual that if the top whatever percent was not so wealthy, society as a whole would be worse off? (The Pangloss defense, as I like to think of it. This is truly the best of all possible worlds.)

Cliff January 26, 2012 at 2:56 pm

Well that is generally the way it works, one person being productive is good for other people.

GiT January 26, 2012 at 3:20 pm

That isn’t relevant to the question.

It is not necessarily the case that changing one individual’s incentives will change their productivity, and it is not necessarily the case that reallocating incentives and capacities will not increase someone else’s productivity more than it diminishes the productivity of another.

GiT January 26, 2012 at 3:22 pm

Or, to put it another way, it is not the case that the given arrangement of inequalities is the most productive or best arrangement of inequalities.

Urstoff January 26, 2012 at 3:43 pm

I didn’t defend that counterfactual; questioning one doesn’t entail acceptance of the other. My general point: if we’re concerned about absolute welfare, why all the concentration on relative welfare?

GiT January 26, 2012 at 9:12 pm

Because changing relative welfare can change absolute welfare.

Urstoff January 26, 2012 at 10:58 pm

I think you mean changing absolute welfare can change relative welfare. Unless you think taking money from the top 10% and burning it suddenly makes the bottom 90% better off. Plus, I really doubt there’s some sort of sophisticated causal hypothesis behind the motives of most that focus on relative welfare.

GiT January 27, 2012 at 12:09 am

No, I mean what I say, though perhaps I should have said changing relative wealth can change absolute welfare so as to be more specific. Changing absolute welfare can change relative welfare. Changing relative welfare can change absolute welfare.

As to taking money from the top 10% and burning it, well, if it significantly decreased status anxiety, then sure, burning the top 10%’s money could make the bottom 90% better off. But that’s a red herring construal of my argument, anyways.

Redistributing a fixed amount of goods and resources changes value. Sometimes it changes it for the better, sometimes it changes it for the worst. As long as allocative inefficiency exists, for any given distribution there are a set of redistributions that are more allocatively efficient, or, at the least, a set of redistributions to which everyone involved is indifferent.

Sometimes we will be in the seemingly paradoxical situation wherein destroying resources is one way of increasing allocative efficiency. Other times we will just be in the more typical situation where redistributing resources increases allocative efficiency (that is after all how trade and barter work).

The ‘knowledge problem’ argument that one cannot know how to conduct such a (pareto-maximizing) redistribution begs the question.

One must establish that it is inappropriate to assume that the redistribution in question will not be welfare maximizing. ‘If it was better the market would have done it’ is not a compelling answer.

JWatts January 27, 2012 at 10:57 am

“I think you mean changing absolute welfare can change relative welfare. Unless you think taking money from the top 10% and burning it suddenly makes the bottom 90% better off.”

I think a lot of people who tend to quote Gini coefficients do tend to believe exactly that. They probably wouldn’t agree with the concept if you phrased it as you did, but if the phrasing were something like:

1) Would the US be better off if the top 10% gained no additional wealth for a 10 year period to allow the lower 90% to catch up with them and thus reduce the US’s inequality (gini coefficient) even if it resulted in lower growth over the period?

I’m sure you’d get a substantial amount of yes’s.

GiT January 27, 2012 at 3:59 pm

Yes, and it’s a somewhat striking/shocking position at first glance, but really it is quite plausible in a number of situations.

Here’s a nice little intuition pumping ethical example I came across.

There is a small town in the middle of nowhere in Texas.
It has one public pool.
It cannot build another pool.
The population of the town is 50% white, 50% black and latino.
Texas passes a law requiring all public pools to either be ‘whites only’ pools or ‘colored’ pools.
Which is the ‘right’ decision? To keep the pool open for only one group in the town or to not open the pool to anyone?
Is it better to let the pool lie fallow or to enact a racist, discriminatory policy?

Obviously, one could go either way. But there is an ambivalence.

And these things aren’t really so rarefied.

You carry out a drug bust and confiscate 5 million dollars worth of crack-cocaine, angel dust, and heroin.
Do you A. destroy the drugs or B. resell it on the market because, hey, if it has a market price it must be valuable?

Sometimes we destroy things with economic value… because we have more values than our economic values.

Justin Wolfers January 26, 2012 at 11:06 am

I’m confused what corner I’ve painted myself into. My claim is a simple and purely statistical one: When two variables are both measured with (independent) error, then the measured correlation between them will typically be smaller than the true correlation.

Implication: Claims that the data in a plot are “faulty” strengthen rather than undermine the claim that the two series are related.

Seriously, that’s it.

Rahul January 26, 2012 at 12:16 pm

That’s a very elegant argument. I hadn’t grasped it fully until you commented. Thanks.

The only criticism I can think of is if the y and x are not really independent. If there is some sort of systematic bias.

return January 26, 2012 at 1:36 pm

The next obvious question: why are the errors for these correlated variables independent?

Willitts January 27, 2012 at 3:05 am

I don’t follow how the measured correlation between them is smaller. The estimated covariance will be larger as will the product of their estimated variances. I’m not sure that we can say whether the effect of the numerator is smaller or larger than the effect on the denominator.

You sound sure of yourself, so maybe my brain is tired.

Rahul January 27, 2012 at 8:49 am

My statistics is basic but let’s say y and x had some precise underlying relationship; say y=2*x. Now select some random x values and compute y. Correlation is perfect.

Now add independent random Gaussian measurement noise to both x and y. Say the jitter function in R. Measure correlation again. Bound to be less than one. That’s how I see it. Maybe I am wrong.

David McKenzie January 26, 2012 at 11:07 am

Chico Ferreira has a nice post on lessons from the developing world’s experience and on “inequality of opportunity” versus mobility as concepts on today’s Development Impact blog.
http://blogs.worldbank.org/impactevaluations/rising-inequality-in-the-united-states-lessons-from-developing-countries

jdm January 26, 2012 at 11:16 am

It would be very interesting, but alas, it is impossible, to know how people would have responded to Corak’s study had his conclusions been the opposite of what they were. Had Corak found that there is more mobility in the US than in other countries, my weak prior is that it is unlikely that Tyler have written a post entitled “Why economic mobility measures are overrated”. Indeed, I would almost go far as to think that he might have, in this counterfactual world, at some place or other, used the greater mobility of people in the US as an example of US superiority. But this is idle speculation…

Jared January 26, 2012 at 11:23 am

In the previous round of this knife fight between MR and Krugman et al., I thought Tyler was fair, but ultimately came off as defending some unsavory behavior of the Chicago thinkers Krugman was attacking. But in this round, Quiggan, with Krugman cheering him on, has has just gotten down right nonsensical.

Anti-competition is basically what parenting is all about. Your job as a parent is to protect your child from all its competitive inadequacies. You try and teach the child to fend for itself, but you never let it starve. Similarly, in a highly complex socioeconomic environment, you want a child to succeed in a profession on its own accord, but every parental fiber arrays itself against allowing the child to actually fail. If you’re ideal for mobility in society includes middle class parents having to accept that there is a one in five chance their child will end up in poverty, and you don’t think that will cause serious unhappiness, you may not be thinking things through that well.

GiT January 26, 2012 at 2:45 pm

Indeed, much better to let the lower class accept a 4/5 chance that their child will end up in poverty. After all, the little buggers are used to it.

doctorpat January 26, 2012 at 9:41 pm

The actual argument is that parents who are prepared to put a lot of effort into their children will not have to accept a high chance of child failure, and parents who are not prepared to put a lot of effort into their children will have to accept a high chance of child failure.

It’s a self justifying system. Anyone who is going to rebel against it, doesn’t have to.

derrida derider January 26, 2012 at 7:17 pm

Jared, you’re seriously confusing “is” and “ought” here. Of course there is no point in being rich if you can’t use it to raise your scions above the hoi-polloi. Of course the real Golden Rule is “he who has the gold makes the rules”.

These are the root explanations of why you would EXPECT inequality of outcomes to lead to inequality of opportunity. But an explanation is not an excuse, and it doesn’t mean we should like either inequality. GiT’s sarcastic comment is spot on.

J Storrs Hall January 26, 2012 at 11:36 am

The math of this is quite counterintuitive. I tried modelling equilibration with a range of Gini coefficients and wealth heritabilities, using a lognormal with the given Gini for a population wealth model. (I got the same results with a Zipf.)

I modelled opportunity with a lognormal as well — there will always be a few Steve Jobses, Bill Gateses, etc, and so forth who are good AND lucky AND in the right place at the right time and build vast fortunes from modest beginnings.

The Gini goes DOWN across succeeding generations with increasing heritability up to a heritability of about 0.9. Above 0.9 it goes up.

(The intuitive account is that if you can’t inherit advantages, you only have the raw chance of being in that top 0.01% on your own hook; if you can inherit, you get that chance plus the chance your parents were, doubling the high tail of the distribution (and thus flattening it) every generation.)

On this account the correlation can’t be causal from inheritance to inequality. Either they are both caused by some other factor(s) or inequality tends to damp mobility. Note for example that the countries in the graph are much more multicultural on the high end than the low. That could be a common factor in a shape resembling Murray’s Coming Apart thesis. On the other hand, if wealth is correlated with political power, it could be responsible for legal and regulatory restraints on mobility.

Rahul January 26, 2012 at 12:04 pm

I’m curious; what kind of model is this that you mention? Details?

J Storrs Hall January 26, 2012 at 12:51 pm

I used a lognormal distribution to model the distribution of wealth in the first generation and opportunity for succeeding ones. That is, each member of a new generation gets an income randomly picked from that distribution plus some percentage of what his parents had. Then run for ten generations and measure the Gini coefficient of the resulting distribution.

I was quite surprised by the result, btw.

Rahul January 26, 2012 at 3:04 pm

I find them surprising too. You have two sources of “spread” (the original lognormal wealth distribution and the lognormal opportunity). How is the Gini reducing (more equality)? I don’t get it.

In the absence of any equalizing transfer function shouldn’t inequality continue to increase in each generation?

J Storrs Hall January 26, 2012 at 5:47 pm

If I hold 2 one-million-dollar lotteries, I’ll get a lower Gini result than if I hold one 2-million-dollar one.

Rahul January 27, 2012 at 9:15 am

I see what you mean. OTOH if you had a population with all making exactly equal income; and now successively applied a lognormal opportunity; the Gini inequality would increase,right?

It seems the scenario you model is some combination of those two scenarios.

J Storrs Hall January 26, 2012 at 12:57 pm

ps — minor fix: the trough in Gini x heritability is at 1, not 0.9.

Billare January 26, 2012 at 11:37 am

I want to see intergenerational mobility stats within ethnic groups for 3rd+ generation families for me to take the standard leftist critique seriously. Alot of hand-wringing over American “problems” is inappropriately jumbling different groups together; for example in education, Greg Cochran notes that children of foreign immigrants score just as high or higher than their home countries on standard assessment tests.

happyjuggler0 January 26, 2012 at 11:51 am

Anyone who simultaneously favors diversity while bemoaning inequality of results is suffering from cognitive dissonance. The more diversity in terms of natural skill, work ethic, etc. that there is, the more inequality of results one should expect.

You can favor diversity, or you can favor equality of results, but it is contradictory to favor both; those who do indeed favor both are doomed to be very unhappy and likely to be perennially angry at the bogeymen who are deemed responsible for this state of affairs.

Jared January 26, 2012 at 12:29 pm

I agree with that whole-heartedly.

Most people hear “middle class parents are better able to train kids suited for the modern world” and cynically assume it’s white-upperclass-evil-overlord doublespeak for nepotism. As someone who was raised in a quite impoverished environment (central Appalachia) I can tell you that parenting is an uphill struggle for working class people in the bottom income quintiles.

Most of the OWS/more mobility crowd’s analysis of heredity when it comes to income stops at “smart people can have dumb kids and dumb people can have smart kids, therefore the distribution should be random.” That’s obviously pretty intellectually bankrupt.

My father grew up pretty hardscrabble in an old, poor company town after the company left. His father was gone most of the time, and when he wasn’t gone, well it’s not something to discuss in public what went on then. Through a lot of hard work, however, my father was able to start his own trucking business after years of working multiple shifts as a mechanic. Wow! Awesome story about hard work and mobility and the American dream, right?

Well not really. You see my father had absolutely no business acumen. He didn’t really have anyone in his network who had ever run one and had never graduated from an institution of higher learning. Hard times hit, and he reacted poorly. He had taken on a lot of debt in his business, and any person who had grown up in the middle class and above with the attendant familiarity with alchemy that is wealth creation and preservation would have known that bankruptcy was the proper route to take. Well my father didn’t believe such a thing was prudent. He liquidated the business and took all of his company’s debts on personally, and nearly impoverished my family.

A story of hard work and mobility undone not by low tax rates for the rich or corrupt financiers, but rather by the banal misfortune that having grown up poor, my father had never had the opportunity to learn good business sense.

The OWS/mobility crowd understate the importance of understanding how to make oneself prosperous and keep oneself out of poverty and just how difficult it can be to attain, not in the face of oppressive over classes bosses, but rather just normal everyday circumstances.

Another case in point: The NBA. The NBA is staffed by millionaires. It is also staffed by people who, predominant race aside, had similar hardscrabble upbringings as my father did. NBA players are notoriously profligate and a lot have generally poor business skills, like my father. This empirically true, evidenced by the fact a portion of each paycheck is withheld from every player and kept in escrow and paid out during the off-season so players can get by. This is for a set of workers whose average salary is north of $5 million mind you. In fact this was a major bargaining chip on the owners side during the recent labor dispute. The owners knew the players were such poor managers of their own finances that they literally could not survive not having a season.

The point is, being able to accumulate wealth is not the same as being able to manage wealth and keep yourself out of financial distress for really banal, unavoidable, non-evil reasons. For that fact alone, inequality is unavoidable.

GiT January 26, 2012 at 2:53 pm

“The OWS/mobility crowd understate the importance of understanding how to make oneself prosperous and keep oneself out of poverty and just how difficult it can be to attain, not in the face of oppressive over classes bosses, but rather just normal everyday circumstances.”

That just seems wrong to me. The OWS/Left crowd have narratives about both the oppression of class bosses and the oppression of normal, everyday circumstances. Hence, perhaps, the focus on so-called ‘paternalistic’ policies which ‘control’ for socialization into bad financial planning practices (retirement, health insurance, unemployment insurance, child care assistance, etc.)

Rich Berger January 26, 2012 at 3:32 pm

The Infest Wall Street crowd is comprised mostly of ignorant malcontents. What a happy day when those imbeciles were flushed out of Zuccotti Park.

The IWS narratives are mostly nonsense.

GiT January 26, 2012 at 4:38 pm

How enlightening. (about you)

Claudia January 26, 2012 at 12:56 pm

I disagree. There are a multitude of skills (sorry STEM’ers you’re not the only special ones) needed to keep a modern economy humming. If the institutions (economic, educational, social) respected (and developed) the diversity of natural abilities, preferences, and initial conditions (which I would argue is not the case right now), then over some period of time (maybe even permanently) you could have the vast majority of people be increasingly productive…and able to earn higher incomes. Plus if everyone’s boat is rising at a good pace…people will not be so worked up about the outliers who get a lot more. I’m not saying this is easy. I’m just saying it’s not impossible.

return January 26, 2012 at 1:39 pm

Would you mind elaborating how you think this could be achieved?

JWatts January 27, 2012 at 11:10 am

“you could have the vast majority of people be increasingly productive…and able to earn higher incomes.”

Historical trends over the last 100 years indicate that the vast majority of people were increasingly productive and were able to earn higher incomes in the US. Indeed, it’s only the last 12 years that have not shown significant growth and it’s unclear if that a temporary aberration or is endemic. Certainly there was a similar stagnant period before WW2.

tkehler January 27, 2012 at 11:15 am

For all the … heartwarming-ness … of this, there’s something yet problematic here.

i) There is a difference between saying “you could have the vast majority of people be increasingly productive” and saying “you could have the vast majority of people be productive” — i.e., what you mean by increasingly is unclear.

ii) Do we not already have the vast majority of people productive? Can we legitimately expect more? I believe that some 20% of the population is damaged, in some psychological way. That is, either through their own efforts (at self harm, via substance abuse etc.) or through the genetic lottery, they are more or less incapable of productive “normal” lives. They simply can’t even turn up regularly at school or jobs, let alone concentrate long enough to get training or a degree. They need some form of help, but they won’t be productive, let alone increasingly so.

GiT January 26, 2012 at 2:58 pm

As with the equality, it’s not just diversity, but diversity of what. There is no necessary contradiction between increased equality of results and diversity in the relevant senses – diversity of things which, normatively, should be irrelevant to results (race, class, gender, whatever category it is assumed should have no determinative effect on capacity to earn money.)

MD January 26, 2012 at 9:11 pm

Why is diversity of talents and abilities not on your list? A society with a diversity of talents is benefitted by that diversity through division and specialization of labor. It does, however, necessarily entail a difference in the capacity to earn income. That is, happyjuggler’s point seems to be simply saying that diversity *is* the case, and people should accept its various implications, and not try to draw special categories as you suggest.

People are different from each other, in fact. There is no sensible way of separating one axis of difference from another. This is not just because the differences are inherent (though many are), but because the causal chain linking any characteristic to a specific outcome is the result of a complex interaction of the person’s own actions and the causes around them. Trying to undo inequality is like trying to undo causality. It’s not that the outcomes can’t be altered by some intervention (as you may object–they can), but that many differences among people are a constant source of inequality, by their nature.

GiT January 26, 2012 at 9:23 pm

I don’t think you understood what I wrote If you’re asking me why diversity of talents and abilities is not on my list. Talents and abilities and the division of labor necessarily entails a capacity to earn income. Skin color does not. So people care about skin color and not diversity of talents. So it is, in fact, pretty easy and sensible to separate one axis of difference from another.

MD January 26, 2012 at 9:31 pm

And I don’t think you got what I wrote: i.e. “diversity *is* the case”–you may be able to separate them mentally (no kidding), but that “in fact”, as I said, all the axes of diversity are together, and not separable. Again, as I said, the OP’s point seems pretty much just that we should accept the truth of that. So do you not agree?

GiT January 27, 2012 at 12:53 am

If that’s your point it’s one of the dumbest points I’ve ever heard.

Saying all axes of diversity are together and not separable is equivalent to saying everything that is, is by necessity – or, rather, that every conceivable quality associated with something is necessarily associated with that thing.

MD January 27, 2012 at 2:12 am

You said: “people care about skin color and not diversity of talents.”

The point is just that they should care about the diversity of talents. My saying that all a person’s characteristics are entwined is just to say that you can’t have one diversity without the other. Or, conversely, a necessary condition for equal incomes would be equal characteristics, i.e. no diversity among people.

This isn’t an argument against diversity, recall; it’s an argument that diversity entails inequality. The “cognitive dissonance” happyjuggler refers to doesn’t apply to someone wanting diversity alone, but only to those who wanting both diversity and equality. To clarify, once you grant the diversity of ethnicity for example, you have implicitly granted that the people are not the same as each other, and thus the necessary condition is broken, and this will lead to differences in outcomes, inequality, as a result.

There is no way to have diversity in ethnicity without inequality, and it’s not because ethnic groups are inherently unequal, but just, as I’ve already explained, because there is no diversity in reality that exists only on one axis when looking at different people.

GiT January 27, 2012 at 5:06 am

Diversity across one dimension does not entail diversity across every dimension.
Equality across one dimension does not entail equality across every dimension.

“a necessary condition for equal incomes would be equal characteristics, i.e. no diversity among people.”

This is simply false. It’s not even worth my time to explain why.

MD January 27, 2012 at 7:19 am

“Diversity across one dimension does not entail diversity across every dimension. Equality across one dimension does not entail equality across every dimension.”

Consider, I choose someone at random of ethnicity A, who has a height of 150cm. I then choose another person of ethnicity A. What is the probability his height will be equal to 150cm? For any specific value among a population of a certain size, the probability is extremely small. Now, what of those attributes that determine income? IQ, perseverence? Also, the likelihood is very small that any two individuals have identical attributes. That there are several attributes complicates matters, but the principle is the same. Now, if I choose someone at random from ethnicity B, does this change the situation in any meaningful way? The probability would remain small. That equality across one dimension does not entail equality across every dimension is what I’ve been getting at all along.

“a necessary condition for equal incomes would be equal characteristics, i.e. no diversity among people.”

My fault for being imprecise. I should rather have said outcomes than incomes, and thought the context made the necessary conditions clear enough, but could have been more specific. Anyway, what I mean is, for example, assume you have two individuals, whose circumstances are otherwise identical, and who set about some task. If they are to achieve the same outcome (if not binary) they should have the same attributes that are relevant for performance at the task. If their attributes relevant for the task differ, the outcome will differ (again, assuming other circumstances equal). Even accounting for the possibility that one’s deficiency in one attribute is made up for by a surplus in another attribute, we should expect them to differ. Now, if I don’t mistake your point, it’s something like “ethnicity and the like are precisely not relevant to the task, and therefore should have no bearing on outcome, and this is the diversity that people have been championing. QED.” I got that. However, happyjuggler’s original point is just that diversity in one attribute is not, in reality, separable from diversity in other attributes, the ones which lead to inequality of outcomes. I have further tried to explain that point, and have again, above. So, do you continue to disagree with that?

GiT January 27, 2012 at 3:30 pm

“Consider, I choose someone at random of ethnicity A, who has a height of 150cm. I then choose another person of ethnicity A. What is the probability his height will be equal to 150cm? ”

This shows that people of ethnicity A have a diversity of heights, so what?

“Also, the likelihood is very small that any two individuals have identical attributes.”

No one is interested in everyone having identical attributes. This is not a topic of conversation, except as a red herring.

“That equality across one dimension does not entail equality across every dimension is what I’ve been getting at all along.”

So then you agree with me. If you care about ‘height discrimination,’ and hence ‘height diversity,’ one will probably find that across all income strata the diversity of heights is relatively equal (obviously, as a matter of fact, tall people tend to earn more, and height correlates with gender and ethnicity, so in fact looking at height will reveal inequality associated with height and other bases of discrimination, but that can be easily fixed: sort the population into Group A (odd heights) and Group B (even heights). Across all income strata, you will almost certainly find a 50/50 split – perfect diversity of groups A and B.)

Therefore I can be for equality of incomes and for diversity of odd and even heights without somehow contradicting myself.
Therefore this whole argument is silly and rests upon a deliberate attempt to misconstrue what people mean when they talk about diversity and equality.

“My fault for being imprecise. I should rather have said outcomes than incomes”

Outcomes is so vague as to be meaningless. What outcomes? The outcome people are most interested in generally tends to be income, and, more specifically, it tends to be income, controlling for skill and effort. Equal pay for equal work, yes? So, clearly, diversity of skill and effort, for most people talking about equality of income, is irrelevant. Not irrelevant for radical egalitarian communists, sure, but they’re a minority. And to the extent that it is relevant, it is relevant because of a corrolary position: Equal human capital for equal races.

” If their attributes relevant for the task differ”

See, this does all the work. Attributes relevant for the task. What attributes are relevant for the task? What is *necessarily* correlated to the attributes relevant for the task, and what is *contingently* so correlated?

“However, happyjuggler’s original point is just that diversity in one attribute is not, in reality, separable from diversity in other attributes, the ones which lead to inequality of outcomes. I have further tried to explain that point, and have again, above. So, do you continue to disagree with that?”

Yes, I do. What one attribute? Diversity in odd or even heights is completely separable, and in fact completely separate, from diversity in other attributes. Other attributes which have been correlated with outcomes have, through public policy and social change, become less correlated with outcomes – cf. race, gender.

Are such correlations completely eliminable? Maybe, maybe not. Those who are concerned with diversity are typically concerned with diversity in areas of things which they believe are more separable from ‘outcomes’ than they presently happen to be.

That something is currently highly correlated with a certain type of outcome is no proof that it is necessarily so correlated.

MD January 27, 2012 at 7:15 pm

“What one attribute?”
I have explicitly not posited a single attribute.

“Those who are concerned with diversity are typically concerned with diversity in areas of things which they believe are more separable from ‘outcomes’ than they presently happen to be.”
Once again, that’s not under dispute, as I have already stated. I understand that–I do. Still doesn’t address whether diversity necessarily entails inequality, which was happyjuggler’s point.

happyjuggler’s point is not as complex as you’re making it out to be.

““That equality across one dimension does not entail equality across every dimension is what I’ve been getting at all along.”

So then you agree with me. If you care about ‘height discrimination,’ and hence ‘height diversity,’ ”

It’s more appropriate to say that you agree with me. The above statement implies that diversity implies inequality–very simply, individuals differ. If you spit a population into classes, each of which contains significant individual variance, the individuals will still differ. Choosing people of different ethnicities implies they are different *individuals*, and you can expect their other traits to differ accordingly. I think this is trivially obvious, and not as twisted as you’ve trying to make it out to be.

GiT January 27, 2012 at 8:37 pm

” I have explicitly not posited a single attribute.”

And that’s a problem, because it makes your argument inane.

“happyjuggler’s point is not as complex as you’re making it out to be.”

Happyjuggler doesn’t have a point to make.

“Still doesn’t address whether diversity necessarily entails inequality, which was happyjuggler’s point.”

If there is diversity there is inequality and if there is inequality there is diversity. The words are formally synonymous insofar as equality = identity/sameness and diversity = difference. That is obvious and irrelevant. The fact that they are synonyms has absolutely no impact on the possibility of someone being both pro-diversity and pro-equality. HJ was arguing for such an impact. His ‘point’ was, “You can favor diversity, or you can favor equality of results, but it is contradictory to favor both”

“The above statement implies that diversity implies inequality–very simply, individuals differ.”

If you think that inane fact means anything of import for discussions of diversity and equality, I don’t know what to say.

“Choosing people of different ethnicities implies they are different *individuals*, and you can expect their other traits to differ accordingly.”

According to what? The whole idea of racial equality is that ‘their other traits’ (should) differ randomly, i.e. according to nothing whatsoever. If their grouping is not determinative of ‘outcomes,’ (if it is statistically independent) members of a given class will be distributed across any other relevant distribution proportionately.

A call for diversity is a call for near zero diversity in representativity – for equal rates of representation (equal proportion) across some relevant distribution of an attribute (like income, or human capital) given a large enough n for a class defined by possession of some other attribute.

One could simply reformulate diversity as ‘equality of representation’ with respect to the attribute in question.

So, in fact, it is quite obvious that calling for diversity and calling for equality is completely compatible, as a call for diversity is, once specified, a call for equality (a 2nd order, meta-equality, but equality nonetheless.)

HJ is either saying something that is always untrue (calling for diversity and calling for equality is incompatible) or he is creating a strawman position (you cannot call for both diversity in the determinants of income and equality of incomes*) which no one of import holds (no one is calling for equal income for everyone irrespective of any of their attributes) that is also simply untrue (there can be a rich diversity of ‘baskets’ of income determinants that all produce the exact same income.)

*I do not use the words ‘outcomes’ or ‘results’ because they are essentially empty of any determinant content – everything is an outcome. Everything is a result Unspecified, equality of outcomes is equality of everything – it is meaningless. Outcome of what, given what? Income is an outcome which is clearly specified.

doctorpat January 26, 2012 at 9:49 pm

Shorter Happyjuggler: Diverse, equal, free. Choose any two.

GiT January 27, 2012 at 5:12 am

One would be hard pressed to find an emptier statement.

Diversity of what? Equality of what? Freedom to what?

Until you specify what you’re talking about this platitude is meaningless and most likely false.

Floccina January 26, 2012 at 12:26 pm

Would one expect more inequality of income the larger the country? Like you can only have so many dominate retailers, restaurant chains, beverages, Accounting firms, investment banks etc.

Andrew' January 26, 2012 at 12:35 pm

Can someone point to the actual charts? “Gatsby” graphs just sound sketchy.

Rahul January 26, 2012 at 12:40 pm
Andrew' January 26, 2012 at 1:16 pm

“Intergenerational earnings elasticity”? What is wrong with these people?

IntRAgenerational mobility versus IQ please.

GiT January 26, 2012 at 3:04 pm

What’s wrong with you?

Those imply completely different questions.

Their question: what effect doesn’t parental prosperity have an child prosperity (does inheritance determine outcomes)
Your question: what effect does IQ have on one’s prosperity (does IQ determine outcomes)

Now, we may certainly want to separate genetic inheritance (inheritance of ‘g’, or whatever) from other forms of inheritance in considering the first question, but so what?

Rahul January 26, 2012 at 3:47 pm

Which is why I think we really need a partial derivative measure here. The first metric needs to be evaluated “at constant IQ” and the second “at constant wealth” to give us more insight.

JWatts January 27, 2012 at 11:13 am

“Which is why I think we really need a partial derivative measure here. The first metric needs to be evaluated “at constant IQ” and the second “at constant wealth” to give us more insight.”

+1

Trevor H January 26, 2012 at 2:43 pm

I wonder if Tyler’s critics aren’t being deliberately obtuse.

Tyer’s point is simply that we are having the wrong debate. Or that it’s time to move on from the debate about whether there is inequality and immobility and on to what are the mechanisms that cause them and what to do about it. The inequality and immobility results have almost no practical value if you’re thinking about policy. The mechanisms behind inequality and immobility are clearly quite complex and not always welfare reducing. For instance, there’s unquestionably a factor of unwillingness to relocate away from family that causes some immobility. A talented person from rural Arkansas has no opportunity to build an income substantially different from the previous generation without a willingness to move to LIttle Rock, or even points further away. Maybe that person is content with the tradeoff of substantially lower lifetime earnings for staying near the family. How much immobility is caused by factors such as this? Maybe very little, we don’t know.

But I think that’s Tyler’s point. Our policy goal should be to identify specific sources of inequality and immobility and address those that are unfair (such as excessive returns to finance) rather than focus on broad statistical measures where movement in either direction has ambiguous meaning and value. At least that’s my interpretation of Tyler’s post.

Tyler Cowen January 26, 2012 at 3:44 pm

Well said…

derrida derider January 26, 2012 at 7:37 pm

“The inequality and immobility results have almost no practical value if you’re thinking about policy. The mechanisms behind inequality and immobility are clearly quite complex and not always welfare reducing …”

How very, very convenient. Clearly God has intended the wealthy to be privileged, and for their children to maintain that privilege.

“Every day and every morn
Some are born to sweet delight
Some are born to sweet delight
Some are born to endless night”

It seems that your god has directed more of his output of both sweet delight and endless night to the US in the last thirty years. Lucky US.

Personally I can think of lots of practical polices that would either reduce inequality or reduce the correlation between inequality and mobility. You no doubt think such policies would have intolerable side effects (loss of “liberty”, reduced growth in aggregate GDP, etc). But whether you are right or wrong in that it is nonsense – and dishonest nonsense – to just shrug your shoulders and say “it can’t be fixed so it must be a Good Thing”.

Ryan January 27, 2012 at 11:46 am

He didn’t shrug and you didn’t read his comment.

Publio January 26, 2012 at 8:03 pm

Obtuse, maybe but the clarity of writing could also use some work. If it is true that the debate should not be on the inequality-immobility link but on something more concrete policy-wise then why comments like:

“But not all inequalities are bad, or avoidable, and the same is true for immobilities.”

Does that not detract from his main points and at least steer the conversation back to inequality? I do believe that the cryptic wording and the overall indirect (and IMHO unclear) style makes it rather prone to unnecessary tangents and red herrings that could be avoided if like Claudia states one writes directly what one thinks. Things ultimately come to a head so being direct about it will save us all some time and more importantly keep us on point.

kebko January 26, 2012 at 8:34 pm

While there may be factors (which have been mentioned in these comments) that lead to excess profits in finance, I think we need to be careful about just tossing that idea around as an unrefutable truth, since there are ancient social biases that allow that to be an easy applause line, whether true or false.

Doug January 26, 2012 at 3:42 pm

I’m going to suggest something that’s not very PC here, but in the graph of inequality vs mobility I’d like to add a third variable: variance of population IQ (as well as possibly concaientousness, and other mostly genetic traits that have a strong influence on success).

The proposed hypothesis is that both low statistical mobility and high inequality have a common source. Specifically a high variance among the population of the skills needed for success. In contrast consider a nation with a very homogenous population with regards to those traits. Success has two components skill and luck. In that nation since skill will have less variance. Overall this will lower the variance of success outcomes (lowering inequality). In addition since skill makes up less of the total variance, luck will make up a higher proportion. Since skill is largely genetic, whereas luck is not, there will be more inter-generational mobility.

Hoover January 26, 2012 at 4:54 pm

So far, I’ve tended to think the slow income growth for many classes is down to China and automation/IT.

And the excessive returns to financial capital are down to government’s control of money production and the resulting cartelisation of the financial sector.

I don’t think either of them can be fixed in the real world. It’s true one could become highly protectionist and smash the machines, but that would be a different game altogether.

It may be that incomes are stagnant for the foreseeable future. Meanwhile, health and longevity will improve for all classes, phones will get smaller and computers faster, cars safer, food healthier, and so on.

It’s possible that there just isn’t enough work any more. In which case, a citizen’s income will be needed. The UK government is moving slowly towards that, and plans to introduce a universal credit before the next election. It’ll be interesting to see the effects…

JWatts January 27, 2012 at 11:20 am

“So far, I’ve tended to think the slow income growth for many classes is down to China and automation/IT.”

+0.5

The statement should probably not specifically say China, since the low wage high manufacturing countries have probably been putting downward pressure on US manufacturing wages since the 1960’s. In Asia alone, first it was Japan, then South Korean, now China and soon Vietnam, etc. However, positionally I think the US is in better shape than Japan and South Korea are.

Also, I think you need to consider factor in the large growth in the size of government (including drag from governmental regulations) and health care over the last 30 years.

Will January 26, 2012 at 6:47 pm

So after all that quasi concern trolling about the Krugman-DeLong axis not engaging with the best angels of the Chicago School, and berating them for failing to deliberately draw out some kind of depth or substance out of people like John Cocchrane’s pithy remarks, you turn around and do the same thing to Quiggin.

DeLong is arguably the most savage and snarky – which can be off-putting and even he did a line by line on Cocchrane’s comments. So much for the Humean dialogues. What a joke.

Liberty January 26, 2012 at 7:13 pm

… yeah, if Quiggin demolished me that easily I’d call him names, too.

Will January 26, 2012 at 8:08 pm

I don’t really care to say “demolished” because I respect Cowen and I think he’s entitled to use a posting style that emphasises contrarian differences at the margins — even if that often unduly amplifies dissent. But the point remains it’s deeply hypocritical to just hand-wave away Quiggin’s post away, when you’ve so recently rebuked Krugman et al for being too mean and failing to read down categorical statements and pithy rhetoric from the plain language of a post in favour of using a more charitable model-version that you can conceive when conjuring up the best angle’s of the Chicago school.

That standard required Krugman et al to ignore obvious defects in the actual wording of the post in question, and to bend over backwards to inject a layer of seriousness and rigour that arguably wasn’t warranted – all because Cowen believed it is a more optimal and helpful to be as granular as possible and place the primary locus of vocal disagreement on the strongest version of the oppoonent’s argument.

The problem is obviously failed to apply that standard in dismissing Quiggin’s point-by-point and conflating it that disagreement at the margins with a fallacious and absolute strawman attack.

Steven Kopits January 26, 2012 at 8:57 pm

I am a bit hard pressed to understand why high returns to finance are a “problem”.

In investment banking, the fees are paid by the corporation. So if they were not paid, they would be retained by the company as profit or dividends. So shareholders benefit rather than bankers. Is that a better world?

Trading profits can be a problem if they are achieved because the agent–the trader–captures returns while the risk is retained by the depositors/investors–the principals. OK, well solving that is a matter of structuring, not morality.

doctorpat January 26, 2012 at 9:59 pm

Perhaps the high returns to finance are the direct result of government policy restricting competition and new entrants into this field? Perhaps the high returns are due to direct government corruption? Perhaps the high returns are because they are vampires?

The point is that persistent high returns to one field are a warning signal, an indication that the normal process of new entrants and competition acting to reduce returns is not functioning as normal. The high returns aren’t the problem, they are warning of a problem.

Fire alarms aren’t a problem, but when one goes off the best reaction is “we may have a problem”.

Willitts January 27, 2012 at 3:32 am

I make a similar point (below) but there is such a thing as natural monopolies. I have no doubt that corruption, rent seeking, and regulatory capture account for a good share of economic profits in financial services and other industries.

On the other hand, financial services face a lot of risk and it’s difficult to measure risk-adjusted returns. On the third hand, they have that implicit “too big to fail” moral hazard problem.

Government is always my default bogeyman.

But these “alarm bells” you are talking about are often based on nominal profits, not earnings per share or ROE or ROA or any other relative measure of returns. Hoi polloi see profits in the headlines of billions and gazillions and their heads explode from an excess of Carl Sagan placeholding zeroes. It doesn’t occur to people unfamiliar with accounting, economics, or finance, that you have to look at the profits as a ratio of some input or some measure of profit distribution. Many industries have to plow profits back into the business to keep up their cash flows – these aren’t profits people take home with them. The alarms are false, and if we know they are false we shouldn’t react to them – we should disconnect them and get better alarms.

m January 26, 2012 at 10:33 pm

1) “If you are looking for Turing test fail, mood affiliation, unwillingness to recognize comparisons on the margin (as if I am defending hereditary aristocracy), and us vs. them thinking, here are John Quiggin…”

2) “The issue is that Krugman a) regularly demonizes his opponents, including those who hold Krugman’s old positions, and b) doesn’t work very hard to produce the strongest possible case against his arguments.”

2b seems missing in 1. John took you seriously and went through seven of your arguments, pretty effectively dismissing between 4 and 6 of them. Sorry Tyler, this post, and the original are two swings, two misses.

Al January 26, 2012 at 11:46 pm

How much of immobility is due to “inherited talent plus diminishing role for random circumstance”? Is not this cause of immobility very different — both practically and morally — from such factors as discrimination, bad schools, occupational licensing, etc.?

I don’t think so. Why would inherited talent be so very different from these other factors? Why would inherited talent be any different morally than inherited wealth? This is a point raised by none other than Milton Friedman in Capitalism and Freedom.

Willitts January 27, 2012 at 3:22 am

We’d all be a lot better off if we kept our eyes and our hands out of other people’s wallets.

In trade and charity, people voluntarily open their wallets. In redistribution, people are forced to do so. Let’s dispense with the ridiculous notion that the wealthy benefit more from our set of public goods. You cannot simultaneously hold that there is diminishing marginal utility of wealth (or income) and that they benefit more from public goods that permit them to accumulate or keep low-utility dollars.

If I get a five percent pay increase and inflation is two percent, I’m better off next year. If Bill Gates increases his income by 10 percent, it doesn’t interest me, it doesn’t hurt my feelings, and it doesn’t deprive me of a penny. The wealthy create wealth, and even if they pocket the majority of it, they MUST share it with the other owners of the factors of production. Consumers MUST benefit from the wealth creation for without consumer benefit there are no profits.

My income growth is not only measured by my nominal or real income from year to year, but by the abundance and quality of goods available for purchase. Must we really go over how much better goods are today than they were 20 years ago? If goods have declined in objective quality, don’t we realize that we are using fewer resources and are making them cheaper – a fair trade-off between quality and price?

In a society without private property rights and massive government intrusion, income inequality and immobility are genuine concerns. But in our society they are mostly irrelevant. If you consider income inequality a “problem,” we could solve a lot of the “problem” by eliminating government intrusions that cause rent-seeking behavior. The very government that offers redistribution creates an entire industry of people making claims on those appropriated funds. Redistribution doesn’t always filter downward.

gappy (@gappy3000) January 29, 2012 at 8:06 pm

I believe you (T.C.) are being a bit lazy. Instead of debating Quiggin on a case-by-case basis, you are just dismissing him and grouping with Krugman and DeLong, who have nothing original to say. I find much to disagree on with Quiggin, who doesn’t seem to take some of your arguments seriously; but I think he deserves an answer; and on the weak arguments, you might as well admit that the list was a brain dump. Nothing wrong with that.

GiT January 30, 2012 at 4:22 am

But TC only shits roses.

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