Inequality vs. the productivity slowdown

Greg Mankiw writes:

The Economic Report of the President was released today.  A friend draws my attention to Table 1-3 on page 34, which presents several historical counterfactuals.  It finds:

1. If productivity growth had not slowed after 1973, the median household would have $30,000 of additional income today.
2. If income inequality had not increased after 1973, the median household would have $9,000 of additional income today.

So, which is the bigger problem?

Comments

And if household size was still the same?

More kids = lower income per capita (assuming the entire population is used as the denominator for that calculation)

Two single people living separately earning 30,000 per year: Average household income 30,000
Two married people earning 30,000 per year: Average household income 60,000

The number of kids doesn't matter when considering household income stats.

Which is a bigger problem - A) inequality, or B) the fact that we're all going to die, the sun is going to burn out, and even while we were alive we never had consistent desires or personalities anyway, so that we can never really even know if we were happy or accomplished anything?

Noah play dogeball sort of...

That's true, the fact that we're all going to die is a bigger problem. We should probably invest more in ambitious projects that could possibly change that. Of the two alternatives posed, it seems like raising productivity is more likely to help us not die than inequality. If you had already overcome the challenge of creating technology that prevented some people from ever dying it would be probably be less of a chalenge to bring that to the masses. So this is another point in favor of worrying less about inequality.

"the fact that we’re all going to die is a bigger problem. We should probably invest more in ambitious projects that could possibly change that."

For God's sake, why?

"Death is the Single Best Invention of Life"

http://www.theguardian.com/technology/2011/oct/06/steve-jobs-pancreas-cancer

Memo to Kevin: Its not how long you have. Its how much you do in the time you have.

"Death takes time for what it kills to grow it." William S. Burroughs

http://www.nickbostrom.com/fable/dragon.html

Jobs seems like an odd example. If you think he contributed much in his life, it was in his later years, and his death was unfortunate. If not, what do you care what he thought?

So a single post-human that accomplishes more than any historical human proves Kevin right, correct?

I agree that not-dying so soon would be a great idea. The problem seems to be one of collective action - basically no-one person can make a material difference to the chance of not-dying, so no-one actually tries. Actually decreasing inequality could make this worse - a super-rich multi-billionaire might actually want to invest some of his billions in longevity research since his resources are actually material compared to the problem. If we capped everyone's wealth at, say 1 million, there issue can only be resolved by Government action, which has all the issues around agency risks.

By the way, my solution to resolve the collective action issue would be to set up a prize fund based on people's retirement savings. If no cure for old age is found during someone's lifetime, then they get their retirement savings as normal. But if a cure is found, then their retirement fund is paid to the discover of the cure. So the downside if old age is cured is that you have to go back to work, but of course the upside is that you are now immortal. It is similar to the way that the Lloyds insurance market works, wealthy individuals pledge their wealth in the case of a disaster and receive an annual premium for doing so. Only if the disaster actually happens do they have to pay anything. If we had a prize fund of literally trillions of dollars, don't you think that would encourage investment in research in this topic?

Yeah, but this assumes that inequality results in more capital being in the hands of wealthy people who know how to and really want to develop technology. It's not clear that this is at all the case. Wealthy people tend to be very socially adept rent-seekers, not technologists, and they tend to be primarily motivated to maintain or increase their social status, rather than long term technological problems, and deploy their capital accordingly. They'd rather have pauperized labor build literal and metaphorical pyramids for them, than develop technology that would increase standards of living of other people and threaten their social status.

Furthermore, concentration of capital, even via private market mechanisms, can result in the same information and calculation problems that socialist concentrations of capital develop.

Depends on what the wealthy do with their wealth.

If they drop it in the bank, they drive up the supply of loanable funds, making it easier for other people to borrow money.

If they buy yachts and fancy meals, they provide employment for boat builders and waiters.

However, if they just bid up the price of artwork or existing real estate, there isn't much net gain to the rest of society. The speculative bubbles don't really help anyone but financiers.

The financial system itself is concentrated. The wealthy handing over their money to hedge fund managers doesn't address the problems Jerry raises.

Whether yachts and fancy meals, or art and real estate, none of that is at the technological frontier.

Their motivation doesn't really matter. The free market system rewards people who produce value.

As far as people spending money on the "wrong" things... what does LeBron James produce? If we took all the money spent on professional sports (which, remember, barely existed 100 years ago) and spent it on technology, would we be better off? The answer is "it depends on what you mean by better off." People like sports, and fast cars, and Monet paintings, for various reasons.

One sure sign of the Fatal Conceit is forgetting that value is subjective. Mandarins seem especially susceptible.

Impressive angst Noah.

But sometimes you know...

http://www.nytimes.com/2015/02/19/opinion/oliver-sacks-on-learning-he-has-terminal-cancer.html?smprod=nytcore-iphone&smid=nytcore-iphone-share&_r=0

Noah, you seemed to have missed the point.
Noticing that inequality might belong lower on a list of ranked priorities shouldn't activate such mood affiliation.

Of course he noticed the point. He is a hyper partisan. He noted that somewhere on the Internet there was an argument again one of his tribes sacred pillars. His relax to attack was activated! Noah must smash!

However, clearly he could not think of a logical response to Mankiw's argument during the span of his intellectual spasm. So he just spewed inanity. Don't worry, Noah will rally his troops to attack Mankiw. It is what his tribe does best.

I'm no expert on him, but the stuff off his that I have read didn't lead me to conclude that he is a hyper partisan. That is why I was a bit disappointed by his response.

Noah has already proven himself incapable of reasoning through a process of ranking evils. See:

http://www.bloombergview.com/articles/2014-11-21/economics-is-a-dismal-science-for-women

I think what Noah is getting at is this: which of these can be directly addressed with policy? Anti-Inequality policies have been deployed and they have worked, but productivity and immortality are not as amenable to policy. Thus the *discussion* about inequality is more important.

My god, Noah Smith was "Hopefully Anonymous" all this time. I've been wondering where he went.

And which problem is easier to address?

And let's note that some say inequality is actually the solution to low productivity (i.e. increasing the incentive for the Steve Jobs type innovator). If that was the case we should not have seen productivity growth slow while inequality rose.

Who says the two problems are unrelated? Among other things, I'd expect more concentrated wealth would make it easier to reach a point of diminishing returns to increased production for a wide variety of goods.

... or, you could say that higher inequality stimulates higher effort levels across the workforce, this increasing productivity (in an extreme case, if everyone in the US suddenly became entitled to 1 300 millionth of US GDP, how many people would show up for work tomorrow?).

Hard to say, if everyone today got 1300 millionth of US GDP in the form of cash no doubt tomorrow there would be plenty of demand for different goods and services. While many might want to stay home and spend, others who've been looking for something productive to do would suddenly find many more opportunities available.

Aren't they the same problem from different angles? As I see it we currently have a problem of labor being too cheap for low skill workers. There is no incentive for companies that utilize low skill labor to invest as substantially in labor saving technologies when labor is so cheap people are desperate enough for work to stand on a street corner and hold a sign for a few hours.

"when labor is so cheap people are desperate enough for work to stand on a street corner and hold a sign for a few hours."

That seems backwards. Cheap labor leads to large amounts of laborers and few people standing around a street corner holding a sign, whereas expensive labor leads to few laborers and thus more people standing around a street corner.

Yes, it's completely backwards. The bare minimum hourly expense of a worker is, by law, north of $10. There are many, many forms of employment which do not justify that cost. The progressive position is to oscillate between claims that economic laws (see: price floor) don't apply to labor and that low-skilled labor is better off unemployed. It's alternately idiotic and elitist.

"The bare minimum hourly expense of a worker is, by law, north of $10..."

No it's not. Federal minimum wage is $7.25 per hour. Not one state has a minimum wage of $10 dollars or more, and many abide by the $7.25 federal rule.

Mike,

You are looking only at the wage. Depending on locale, it costs an additional $3-5 in minimally required expense per hour to employ someone. Think of payroll taxes and unemployment insurance for starters. This is before you consider the ACA employer mandate (if that ever kicks in). Thomas is correct - it costs $10+ to employ someone at minwage.

The fact that these two trends broke at the same time raises the obvious question: are the two issues related? I think it's fair to say that it's very plausible they are.

Anyway, this is a classic Mankiwesque manoeuvre: find a quote, use it to divert attention from the issue and evade with the rents. Very clever, but also less self-centred. Not sure the best way to conduct policy is by following the advice of a self-centred person.

It does seem obvious that both hitting at the same time (along with numerous other economic changes) that they are inter-related. Also, it might wise to assume the 1948 - 1973 economic boom wasn't simply created by massive creative destruction of WW2? There was all kinds of investment by everybody to win the war and these innovations would accelerate the post-war boom. (Also remember the post-war labor market was extremely tight from the Depression baby bust, the unfortunate war dead and a labor market with significant sex discrimination.) By 1973, we hit diminishing returns on investment and had to create numerous jobs from the Baby Boom. (Realize the 1970s job creation numbers were really good compared to today.)

"Anyway, this is a classic Mankiwesque manoeuvre: find a quote, use it to divert attention from the issue and evade with the rents. Very clever, but also less self-centred. Not sure the best way to conduct policy is by following the advice of a self-centred person."

This seems more about mood affiliation on your part than any characteristic of Greg Mankiw. He makes a good point. I suspect it's a point you don't like and thus you are engaging in an ad hominem attack.

"Not sure the best way to conduct policy is by following the advice of a self-centred person." - See more at: http://krugman.blogs.nytimes.com/

Isn't the early 70's when a lot of bad economic juju went down ie . Newly empowered regulatory burdens, opec monopoly/ cartel, nixon going off the gold standard etc

You mean the elimination of wage controls, price controls, and deregulation of huge swaths of the economy? I think that is what you meant.

Is this Ron or Rand?

They're both old enough to remember the early 70s.

These thought experiements are beyond pointless. All of the different measures involved are interrelated. There is no scenario in which only one would change, and everything else stayed the same. Nor is there any proposed mechanism by which these scenarios could have happened. Also, the idea that we should assume a linear growth trend forever has been debunked on this site before.

None of this is any more relevant to a policy discussion than insights like "If everyone discovered gold in their backyard, we'd all be rich".

“If everyone discovered gold in their backyard, we’d all be rich”

"When everyone is super, no one is." — Syndrome, The Incredibles

“If everyone discovered gold in their backyard, we’d all be rich”.

Is that because we'd have lot's of gold bricks to throw through windows?

so Mankiw is proposing redistribution in hope of raising growth rates, in line with the empirical evidence?

thought not.

I'm sure the causation runs in the direction you think it does

C) Both?

But seriously, screw PIketty.

The counterfactuals mix mean and median, mean for productivity and median for inequality, and assumes that "an increase in productivity is associated with an equal increase in the Census Bureau's mean household income" (i.e., it "assume[s] that income gains [from productivity] are distributed proportionally such that mean and median incomes grow at the same rate"). That''s not to diminish the significance of the counterfactuals; indeed, it's noteworthy that the President's advisers would put the counterfactuals in the report. The counterfactuals also include this qualification: "They do not consider second-order effects or interactive effects." If the actual increase in incomes since 1973 has actually been going mostly to the top 1%, why wouldn't the increase based on the counterfactuals also go to the top 1%?

Last week Mankiw posted a graph on his blog showing the large increase in job openings beginning in 2010 (now back up to the pre-crisis level) and he concluded that secular stagnation must be over. Cowen, on the other hand, cited a recent study in which the authors concluded that ending unemployment compensation at the end of 2013 caused the increase in employment in 2014 (the study included no data on job openings). Who do you believe: Mankiw or the authors of the study cited by Cowen?

Both? Do you think those things are mutually exclusive for some reason?

More than a few pious Christians have seen the image of Jesus in their mashed potatoes and our Kenyan socialist Muslim President in the Book of Revelation. Fortunately, God gave us mathematics so we wouldn't be fooled by such subjective and biased insights. It's called theomatics.

"So, which is the bigger problem?"

Really? You think the two are not intertwined?

The big problem is that some dimwit thought those two points worth making.

In roughly the first third-to-half of the 19th century, it is reported that the "Indust. Rev." revved up, while labor wage relatively stagnated. It could be that we are in another such period of Engels Wage Stagnation, wherein a new disruptive "techno-sociological complex" suddenly disemploys people in many sectors, while the capitalists take the resulting larger portion of income, in a temporary period of class rents which are not competed away.

This would appear to us as: 1. productivity growth diverging higher than wage growth (no matter how small the absolute level of productivity growth, when compared to Robert Gordon's period 1870-1970) and thus 2. inequality. It might be nearly wage stagnation. In addition, in our new current version, capitalists have turned that extra money around, to offer credit to consumers (and homeowners). Thus financialization, and a further inequality.

If so, then we have arrived back into a kind of era when the most far-sighted critics were Mills and Marx, now adding Minsky.

And it could all turn around, again. In the future, as the new technology spreads in application, and many other people come to employ it in start-ups, there could be something like positive "network effects" resulting in further productivity. If so, higher productivity growth levels might return, and bring along wage gains, too.

Note however that there is a new wrinkle, or perhaps it's a big new wrench. Most forms of work improvement, going back to the dawn of time, appear to have always been brute force and/or algorithmic in nature. Now, our new intellectual machines can do ANYTHING that is algorithmic, including mass calculation and stochastic choice.

Therefore, it seems to us as if almost any new, future form of product or good which might create jobs, will automatically be subject to takeover by intellectual machine + brute-physical-force machine automation. It's not merely computers; they're just the crowning touch.

So we head toward one of two possible global asymptotes of socially-just disposition:

Either: A) we are tending toward the ultimate winner-take-all economy involving everybody, in which each person on the planet provides a good or service that you as an individual need -- and she or he owns it completely, to sell to you. This seems unlikely, because you yourself would need 7 billion to 11 billion different items in your life, plus the time to purchase them. Here we are up against the physical and cognitive limits of you as a consuming individual, and the old economics' canard that "Needs and wants are infinite" should have been discarded, some time ago.

Or else: B) we are tending toward an ultimate hands-on service economy in which bodily skills and intuitive skills are rewarded at a more local level, but the work does not admit of much (or any) productivity growth. Thus baristas, personal trainers, etc. -- hands-on services which have income-ceilings imposed by your local market conditions, with "economic rents" rather easily competed away.

Now, we could have a mixture of these two tendencies for a while, of course. Some sectors such as medicine are seeing rapid, even explosive, growth at the moment.

And we will see new emergences in pop arts such as film and music which combine the tendencies for a longer time.

(Another and rather unusual intermediate stage, for example -- and we are starting to sense this already -- could be that creative and entrepreneurial types will tend to create personalized network-niche-agglomerations that provide their attendee (or "customers") with subsidized basic material goods, paid for out of the succession of advertising linkages all the way back to bricks-and-mortar production firms. Not merely entrepreneurial nodes such as commercial endorsers, company spokespeople, evangelists (either for Apple or for God), etc, but also performers, artists, theaters, peripatetics and indeed Socratics, local community organizers, etc. In other words, the arising of a sort of intermediate "entrepreneurial networker" function, each one monetizing a whole mini-network between attendant households and physical resources. And in the process perhaps, turning money into an ever-less salient necessity, or perhaps with local blockchaining.)

On the whole though, the problem remains, that productivity increases are susceptible to algorithmic solutions, and this puts them in the realm of computerized takeover, which tends toward costlessness. At the asymptote, this would transform physical-resource ownership into the only remaining source of larger personal income-growth (not to mention rents), except for the fact that individual consumers won't have the money to sustain that old system of ownership, and they won't be goaded into taking more credit to do so.

So to keeping everyone inside the game, what is outside of algorithms? Kurt Gödel showed that there is something that exists outside algorithmic computation. What exists outside it are, at the very least, the question of whether the algorithmic system can prove all truths expressible in it, and the question of whether the algorithmic system can generate contradictory results.

That questioning is outside the algorithm. From what source do these questions come? Gödel called it "intuition", and suggested several possibilities, including that, if the brain is the source of mathematics, then part of the brain's process is non-algorithmic. We could express Gödel's philosophical strategy as "intuitive vs. algorithmic". (In some ways, this strategy was explicit for him, and he employed it again in his addition to the theory of general relativity, a story told in Yourgrau's book, A World Without Time.)

Warren McCullogh put it this way: "To the theoretical question, can you design a machine to do whatever a brain can do? the answer is this: If you will specify in a finite and unambiguous way what you think a brain does do with information, then we can design a machine to do it... but can you say what you think brains do?"

It could be that the brain is a set of differing algorithmic machines, in competition with each other and producing intuition, but the hypothesis of ontologically different kinds of machines would appear to violate Church-Turing.

That puts us in a sort of Gödel Economy: To extend the problem question: If intuitions lead to innovations where productivity growth is algorithmic and therefore costless by automation, yet individual wants are not infinite, what will be the justified market-income basis to determine property ownership? Will we have only "personal" property? What does it mean for intellectual property rights, when longer terms are simply licenses to winner-take-all rents? What does it mean for the shape of education, when intuition becomes the main "skill"? Does this means that capitalism evolves into a state of pure communism, aand we start naturally to reject the so-called "eternal" tenets of human self-interest psychology (which only became socially dominant in the late 18th century)? Etc. etc.

"Capital appropriates $9,000 extra a year from each worker's household relative to 1973, but if productivity growth hadn't slowed after 1973, capital would be appropriating $39,000 extra a year from each worker's household. Productivity slowdown is a huge problem (for the rentier class)!"

Fixed that for him.

Prof. Cowen asks the wrong question. The question is not which is the bigger problem. The question is whether one causes the other.

I would propose that income inequality has led to less productivity growth. My hypothesis is that there are not two problems. There is a problem, income inequality. And there is a symptom, lower productivity.

If we had policies that systematically strengthened the middle class (perhaps at some expense to the upper income earners), this would lead to higher productivity. The corallary to this is that higher income inequality leads to lower productivity growth. I do not believe that higher productivity growth will do anything, unless there is some means for the growth to be consumed. And it cannot be consumed unless there are consumers. Those consumers need resources, i.e., income, to buy the products.

Prof. Cowen seems to approach the issue as there is no correlation. I believe this is a mistake.

Didn't Europe already try swingeing high taxes in the 70's?

Did that lead to a boom in European productivity?

Didn't wage growth decouple from productivity growth in the late 70's? Who's to say that increasing productivity even more would result in increased wages for the working class?

Higher productivity raises living standards through prices not wages.

Company X has 100 employees making a product that for which the labor costs are $10. They invest in a machine that replaces them at a total equivalent cost of $5. To capture market share, they lower prices by $2, and keep $3 as profit.

It's funny, in many ways economics still hasn't moved much past the time of Adam Smith, when e.g. patents for power looms were not granted because they'd put weavers out of work.

Yes, considering wages without considering price levels is akin to quoting nominal figures. Not enough information to decide.

Ummmm, an ironic point by Mankiw, considering his Defense of the 1% was based on enhanced productivity?

So i suppose he thinks the productivity problem would be very much worse if not for the inequality problem.

In which case he should have asked NOT which is the bigger problem, but rather why such a small ($9,000) contribution to the solution?

Assuming we use Kuznets' approach as to what to measure as "income" for "inequality," the conditions are chiefly determined by factors of distribution.

What changes in the factors of distribution, how the changes are made (by choices or dirigisme, e.g.), social and political impediments and incentives - and not least, costs of implementing changes would require study and understanding before any attempt at an answer or comparison.

The factors determining "production" (not confined to the definition of "GDP") *have* been studied and analyzed. Whether any of those are factors implicated in distribution, and to what degree, may not be so clear as to offer a basis for comparison.

Unless we return to Kuznets' concerns expressed back in 1995, this may be a "strawman" diversion.

My mistake. It was Prof. Mankiw who asked the wrong question.

I always wonder what advocates imagine "income equality" would look like. Certainly some very ugly outcomes have been created by political movements in pursuit of the goal.

Cynic.
This time, it will be glorious.

Once we smash the kulaks and the wreckers a workers paradise will emerge spontaneously.

Canada maybe, except warmer?

Canada does not have income equality.

Neither did the Stalinists or Maoists. Let's try some of the things Canada does and see if it helps.

Nice straw man. No widely followed economist or policy wonk is advocating that everyone make exactly the same amount regardless of what their job is.

What piffle. First off, I have no knowledge of Mankiw as an academic or professor but as a public pundit he is demonstrably a right wing hack as revealed by his embarrassing and contemptible (and easily proven false) attempt to defend the Romney 2012 tax reform "proposal".

Second, raising productivity is difficult to say the least. While I'm sure Mankiw and TC have a raft of ideas that they are sure will improve things, nearly all of them are controversial or unsupported by actual economic research. If however you wish to improve income inequality, the solutions are obvious - end tax breaks like carried interest, fix whatever allowed Mitt to amass a 100mil$ IRA, raise the top marginal and capital gains tax rates slightly, and spend the proceeds on things the poor need like food stamps and head start. These could quickly be implemented if the right agreed that income inequality was a problem. They don't, and hacks like Mankiw should not pretend they do.

Yet your champions of income inequality think welfare transfers don't count as income. It's almost like income inequality is a stalking horse for class warfare proposals that aren't supported by actual economic research.

http://www.cbo.gov/sites/default/files/10-25-HouseholdIncome_0.pdf page XIII

I'll admit that many on the left quote numbers without taxes and transfers to make the statistics pop better, however even counting T&T the problem is large and growing.

Or adjust for changes in household size when talking II... and deny that using real dollars still doesn't account for the massive improvements in quality of goods over time, or acknowledge a large portion of the stagnancy of lower incomes in the US is due to improvements in the development of the rest of the world, and not just wealthy americans, and on and on...

(The last one they might acknowledge obliquely, but only as a negative aspect of globalization.)
It's just hard for me to buy it when the arguments are so absolutely shoddy.
And don't get me started on the magical thinking about how II causes all kinds of social ills without even demonstrating correlation, let alone causation.

I'm interested in your "household size" argument and would like to see it expanded, with charts from a reputable source. I don't understand it but I would like to. The "improvement in quality of goods" argument I dismiss with prejudice. The fact that my LCD and DVR are better then a VCR and CRT doesn't help me sleep at night. People are concerned with their ability to afford housing, transportation, education, health care, and retirement. With the possible exception of transportation, all of those are worse off then they were 25 years ago.

Progressive Captain-General Gruber has even been recorded celebrating his hackery.

As for eric's policy suggestions: there is far more proof that increased capital increases worker productivity than there is that administering a program like Head Start will decrease inequality. Public education increases inequality as it segments rich and poor students while creating a unionized class of mandarins earning multiples of per capita income.

Is there even a comparable logic behind capital not increasing productivity per worker?

I love the honesty of the second sentence, that you "have no knowledge of Mankiw as an academic or a professor".

Women are less productive than men, the more women in the workforce the lower productivity will be.

Health care and education are both female-dominated and growing faster than the overall economy.

Manufacturing, agriculture and heavy industry are male-dominated and in a long term relative decline.

Your sexist intent aside, there is some supporting evidence here. Productivity growth in the male-dominated industrial sector is generally greater than productivity growth in the female-dominated service sector.

A great nurse can still only change one set of bandages at a time. A great industrialist can double the output of widgets by mixing a little more technology and a little more capital. As more of the economy looks like a hospital and less like a factory, we should expect to see productivity growth to slow...

Thank you for an intelligent comment.

What makes Coopers comment, a priori, more intelligent than Jim's? I'd hope you could at least acknowledge that in the absence of capital, men are considerably more productive than women (see: upper body strength, see: male domination of females throughout history). So Jim's point is at least possible, unless your first principles include something like: "all people are equal in all things", in which case, what use would your opinions be in discovering truth?

Health care and education are the two sectors of the economy most sheltered from the free market and both are massively inefficient.

As goes the government, so goes it's industries.

I notice that posting a quote from Mankiw generates much the same kind of comments as posting a quote by Krugman.

Excellent observation!

is it not obvious to anyone else that growing inequality is directly tied to decreasing productivity?

note that the causal link is NOT that inequality +low productivity (i have no clue if there is a causal link to be made there, even if i "feel" like there should be).

but decreasing equality (or increasing inequality) is definitely tied to decreasing human productivity, even though technological improvements effectively mask that deficiency.

the perceived decrease in ones equality has but two possible outcomes, revolt or disengagement. both + less productivity. thus a state that witnesses growing inequality is destined to experience diminishing productivity, lest it be saved by tech advances that mitigate the descent.

since tech advances are yied to human ingenuity, over time, even the tech advances dry up if inequality is not addressed, because wealth/privilege do not trump volume when it comes to exponential advancements in tech.

in short, it means nothing to point out that productivity has a greater correlation to base wealth standards than inequality… because inequality has a powerful effect on productivity.

You have made no logical argument and all the data says that you are wrong, but Party of Science away, friend.

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