That is a new post from the excellent Interfluidity.  I read it as a version of Keynes’s chapter seventeen, where the demand to buy insurance (in various indirect forms) is the bottomless pit preventing full employment, rather than the demand to hold money.  One question I have is why the funds spent on insurance are not in some useful manner recycled.

Here is one provocative paragraph:

Why did World War II, one of the most destructive events in the history of world, engender an era of near-full employment and broad-based prosperity, both in the US where capital and infrastructure were mostly preserved, and in Europe where resources were obliterated? People have lots of explanations, and I’m sure there’s truth in many of them. But I think an underrated factor is the degree to which the war “reset” the inequalities that had developed over prior decades. Suddenly nearly everyone was poor in much of Europe. In the US, income inequality declined during the war. Military pay and the GI Bill and rationing and war bonds helped shore up the broad public’s balance sheet, reducing indebtedness and overall wealth dispersion. World War II was so large an event, organized and motivated by concerns so far from economic calculation, that squabbles between rich and poor, creditor and debtor, were put aside. The financial effect of the war, in terms of the distribution of claims in the US, was not very different from what would occur under Keen’s jubilee.

Interesting throughout, as they say.

Paul Krugman and Brad DeLong have criticized Tyler (original and reply) on income mobility. In an effort to clarify, let us consider some simple societies. In each society there are three families, A,B,and C, each with two generations.

In society one there is no generational mobility, each generation has the same income as the previous generation. Let’s call this society Stasis.

In the second society, some generations rise and some generations fall but there is no growth, let’s call this society Churn.

Brad DeLong thinks that Churn is “unambiguously” better than Stasis but he doesn’t tell us how he arrived at this conclusion. Paul Krugman also seems (it is a bit unclear) to think that Churn is better than Stasis and he adds that anyone who thinks otherwise is anti-American.

If someone likes the idea of riches going to rags almost as much as they like the idea of rags going to riches then I can see why they would think that Churn is unambiguously better than Stasis. In economics, however, we try to evaluate outcomes with more than our aesthetic preferences or moods and when we look more carefully at the preferences of the people in these societies I see ambiguity or, to be more precise, not much to choose between Stasis and Churn.

The most obvious metric is total aggregate utility and in a static sense total aggregate utility is identical in each society and in each generation. So not much to choose between Stasis and Churn on aggregate utility grounds. What about an individual choosing which society to join from behind a veil of ignorance? Again, no go, there is no difference in expected utility between Stasis and Churn from behind the veil of ignorance.

Tyler moves beyond static utility to consider some dynamic issues which could make Churn worse than Stasis, namely “habit formation and frame of reference effects.” I can see those possibilities but in my view they don’t resolve the tie.

We might resolve the tie by adding more considerations to the model; for example, perhaps society Churn has more liberty (desert/justice etc.) and that is why it churns. In this case, I personally would break the tie in favor of Churn but then the deciding factor would have been liberty not mobility. Thus, let’s keep the focus on mobility and look at one more society.

Let us consider a third society, Growth.

Here at last we have some non-ambiguity. Growth is better than Stasis or Churn; aggregate utility is increasing over time and indeed every family is better off in Growth than in Stasis or Churn. Notice, however, that Growth has relative stasis, that is, there is no relative generational mobility. So now we come to the crux of the issue. Suppose that you agree with me that there isn’t much to choose between Stasis and Churn and that Growth is better than either Stasis or Churn. Do you want to add some Churn to Growth? Why? If there isn’t much difference between Stasis and Churn then how can adding Churn to Growth make it better? It doesn’t and that is why economic mobility measures are overrated. What we should care about is growth.