Eric Crampton on the OECD inequality and growth report

Eric has an excellent post, here is one bit from it:

They find that net inequality (after tax-and-transfer) hurts economic growth, that gross inequality (pre tax-and-transfer) doesn’t hurt growth, that changes in human capital (education) do not affect growth one way or another – there’s a slightly negative effect of education on growth in the set of specifications, but it’s not significant; and, investment doesn’t affect growth one way or another.

The set of results is then a little surprising. We usually expect investment to matter a lot for growth – both in physical plant and equipment (investment) and in people (education). They find that neither does anything and that the only thing that matters is inequality.

Further, when they break things down a little, what seems to matter most is the difference between 4th decile income and average income rather than incomes at the top. Incomes in the 9th and 10th decile relative to average income do nothing; differences between the fourth decile and the average matter hugely.

And now we start getting into the plausibility checks. Does this set of results really make sense?

Do read the whole thing.

Comments

The results do make sense. And economists have found a positive and statistically significant correlation between the price of butter in Bangladesh and World GDP.

Growth spurs companies to pull in new employees and train them.

The newly created wealth fuels spending on education, much of which is unnecessary, status-seeking and often just a long winded indicator of IQ.

So growth leads to increase in targeted skills initiated by companies, but 'education' is a costly drag.

Free lunch economics says growth comes from wage cuts increasing profits making the incentive to produce more higher which creates GDP growth and wealth, and wealth creates demand by funding debt to the working poor who can't afford to repay the debt to buy all the production.

The leftist economics of the 50s and 60s says wage labor increases drives demand that drives production driving increases in jobs paying wages that drive demand and then production. Thus the higher growth in production occurs when the most people have incomes high enough to create significant demand, and that cutting the wages of half the population cuts demand and growth because the top 20% will not increase consumption by more than the bottom 50% must cut consumption.

And investment in productive capital is always investment in labor with a time shift. Buying only existing assets means buying old labor, often paying more for old labor than the laborers were worth in the past based on their market pay. That is logical only if the pay for current laborers is drastically higher than in the past - built capital does not increase in value because rust, breakage, wear, etc do not increase capital's value.

The lack of investment in built capital makes sense to someone like me who grew up in the 60s only if today there was a labor shortage greater than in the 60s.

Your attachment to the labor theory of value is cute, but also ridiculous. Having seen your other musings, it is clear you're out of your depth in economics. Maybe you should try arithmetic instead.

This guy has a problem. "Negative but not significant" means not significant.

But, the finding that education investment isn't as significant as initial conditions--poverty status, income inequality--is not surprising, nor is it that it could outweigh changes in educational status.

If you look at how you got your first job, or the network of your parents who may have helped you get your first job, or the help you give your kid to get their summer, first job, or internship, and come back and ask: does my parents income level affect my outcome, even if I have the same level of educational attainment as the next person. I can see where income inequality matters, and it may matter more as more people get educated. Initial conditions matter.

I think you have a problem. It's not "not as significant as initial conditions", it is not significant AT ALL, according to this study.

Cliff, I am talking about the OECD study. What are you talking about.

Cliff,

Go to oecd.org Go to report dated 12/9 and click on the report summary and read it and the tables and then come back.

Cliff, Since you haven't responded, I guess I will quote the OECD report for you to deal with your claim that initial conditions do not matter, and your claim that the report said it wasn't significant.

Here is the Report:

"Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth. In particular, what matters most is the gap between low income households and the rest of the population. In contrast, no evidence is found that those with high incomes pulling away from the rest of the population harms growth. The paper also evaluates the “human capital accumulation theory” finding evidence for human capital as a channel through which inequality may affect growth. Analysis based on micro data from the Adult Skills Survey (PIAAC) shows that increased income disparities depress skills development among individuals with poorer parental education background, both in terms of the quantity of education attained (e.g. years of schooling), and in terms of its quality (i.e. skill proficiency). Educational outcomes of individuals from richer backgrounds, however, are not affected by inequality."

Am still waiting for support for your claim to the contrary.

These things aren't contradictory, right? The OP says education investment doesn't change outcomes, and the OECD says inequality changes education attained but doesn't say anything about an effect on outcomes (it sounds like "skills" means grades or test scores rather than job performance).

Also, does anyone else find it weird that the observed growth effect stems from inequality between the average and the slightly below average, and has nothing to do with high earners? What's all the concern with the one percent? Apparently we ought to be concerned about the 40 percent... That's a little hard to understand. Maybe people who perceive themselves as dependent on government benefits (the lower half) are envious of the self sufficient (the upper half)? I'd suggest that their math is wrong - 80 or 90 percent of us are net recipients.

Dear Lord, The report says that education effects for the wealthy do not change their outcomes. It does find that education effects do change outcomes for poorer people, but it also says that if you are poor, you are less likely to have educational benefits.

When Crampton (or the OECD) writes "X hurts Y", a causal relationship is implied. How did the OECD team establish causality? This kind of analysis typically ignores the identification problem and mistakes correlation for causation.

You could just as easily conclude that "Growth reduces inequality".

"They find that net inequality (after tax-and-transfer) hurts economic growth…"

Did they find that net inequality "hurts", i.e. has a negative causative effect on, growth, or merely that it correlates with slower growth?

There is no way for data to demonstrate causality. Correlation only.

Solow had an interesting if a bit rambling take on the connection between investment and growth and the source of growth in general in a recent Econ Talk. He sort of draws out a distinction between investment in capital and innovation. In some regimes growth can be constrained by insufficient investment in captial to actualize innovative concepts, but in other regimes what is being constrained is the innovative incentive - competition perhaps, playfulness perhaps, reward for innovation perhaps.

http://www.econtalk.org/archives/2014/10/robert_solow_on.html

"Technological change itself, I think, comes from, at the beginning, Research and Development activity. In a capitalist economy, our economy, business firms are always looking for an advantage, or looking for a way to increase their profits to get ahead of the competition, if there is competition. And one of the ways they try to do that is to improve, is to reduce costs--put it that way. To find cheaper ways of producing what they now produce. And another path toward improving profits and gaining competitive advantage is by inventing, designing newer and better products. Now, here I want to digress for a minute. It occurred to me very early on, and I wrote about this, that new technology often needs ordinary plain vanilla capital investment in order to become real. If you design a new way to produce whatever you are producing, it may be the case that in order to actually make good, perform, on that new method, you need different machinery, different factory layout. You need ordinary capital investment. And I tried, and succeeded in a way, very early on, in working out a way of incorporating this fact in the theory. The interesting thing is that it still turned out, when you looked at the very long run, that it was still the rate of technological improvement that governed the long term, really long term, rate of growth. And the explanation for this turned out to be that what you can--if you are trying to conceptualize this, if you are trying to think about it--the fact that you need ordinary capital investment to embody, to really have--make good on--make a new technology effective, what you are really doing is making the age distribution of the stock of capital goods, you are shifting it toward the younger end. You can think of the population of machinery and capital goods like a human population, as having an age distribution. Young ones, then middle age ones, and eventually old enough to either be obsolete or physically useless. And what this connection between new technology and plain vanilla capital investment says that in order to move toward a newer technology you have to make the age distribution of the stock of capital goods shift in the younger direction. That can't go on forever. There are limits to the capacity of any economy to product young capital goods, just as there are limits to a human population's capacity to produce young kids. And in the long enough run, what this--when you incorporate this in the story, you don't change the story about the long-term, the permanent rate of growth. But you do change the mechanics of it. So, in the end, I think what you have to say, or as it seems to me, is that the source of technological change is research and development"

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