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Inequality – What is to be done?

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I finished [amazon_link id=”0674504763″ target=”_blank” ]Inequality: What Can Be Done?[/amazon_link] by Tony Atkinson, and think it’s great. If you’re only going to read one book on the subject, this is more useful than [amazon_link id=”067443000X” target=”_blank” ]Piketty[/amazon_link] – although I have Francois Bourguignon’s forthcoming (May) [amazon_link id=”069116052X” target=”_blank” ]The Globalization of Inequality[/amazon_link] in my in-pile and have high hopes for that one too, as a companion work.

[amazon_image id=”0674504763″ link=”true” target=”_blank” size=”medium” ]Inequality[/amazon_image]  [amazon_image id=”069116052X” link=”true” target=”_blank” size=”medium” ]The Globalization of Inequality[/amazon_image]

As noted in my previous posts, Atkinson’s [amazon_link id=”0674504763″ target=”_blank” ]Inequality[/amazon_link] starts out very carefully and clearly with the data, highlighting the fundamental point that although there are some common underlying trends tending to drive greater inequality in market incomes, different countries have had different outcomes in terms of post-tax, post-transfer incomes (and in access to public goods and services too, but this is too hard to measure). Even when it comes to the skill bias of technological change, on which many economists (me included) have placed a lot of emphasis as an explanatory factor, Atkinson argues that this is not a given of the universe. The direction of investment spending and substitution is shaped by the menu of opportunities firms face, and that is not exogenous.

His main focus is how firms make these choices and exercise their market power. What constraints do they face? This depends on the state, and on corporate governance, and on finance. All of these offer paths to influencing income distribution.

The second part of the book offers s series (15) of policy interventions to reverse the increased income inequality – there is a UK focus in the recommendations. I don’t agree with all of them, or at least not without further thought. For instance, he recommends implementing competition policy with explicit distributional considerations. However, I love the fact that there are 15 suggestions – enough of books that pretend there are simple solutions! When it comes to inequality, there’s a generation’s worth of institutional and political change behind the current situation so narrowing the income distribution will take work.

One of Atkinson’s key proposals is a vehicle for assessing and co-ordinating what will be needed is a new Social and Economic Council, with members drawn from the old tripartite of unions, business and government but adding also non-governmental organisations and consumer groups. He includes also property taxation – a proportional tax on regularly uprated property values. Every economist I know in the UK (many) recommends reforming property taxation – I was much struck by John Muellbauer’s FT column today calling for an updated and progressive council tax, with an equity transfer instead of cash payment option. Kate Barker’s excellent [amazon_link id=”1907994114″ target=”_blank” ]Housing: Where’s the plan?[/amazon_link] included a look at capital gains tax on the main dwelling.

[amazon_image id=”1907994114″ link=”true” target=”_blank” size=”medium” ]Housing: Where’s the Plan? (Perspectives)[/amazon_image]

There are many other suggestions in the book – capital endowments for all young people; a job guarantee for those out of work for more then 12 months; and more. The length of the list could be depressing (you mean we can’t just tax plutocrats?) but I found it ended up cheering me because there are so many good policy ideas here that perhaps a government could make a start with just a few and take it from there.

Anyway, UK folks, read this book and then for comparison read your favourite party manifesto. Now, onto [amazon_link id=”069116052X” target=”_blank” ]the global picture[/amazon_link].

The Beatles and class struggle

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[amazon_link id=”0674504763″ target=”_blank” ]Inequality[/amazon_link] by Anthony Atkinson is terrific. I’ll review it properly when I’ve finished. Meanwhile, one thing I really like about it is that he is heading toward policy proposals rooted in a reasonably detailed structural analysis of how the economy works, rather than in abstract macro theory. You get a sense of this in the ‘Setting the Scene’ section from his references to Michal Kalecki’s Class Struggle and the Distribution of National Income and J.K.Galbraith’s [amazon_link id=”1614273251″ target=”_blank” ]American Capitalism[/amazon_link]. Yes, we are talking about market power and the political power to change the rules of the game that flows from it. If the way markets work is flawed, the macro outcomes will be flawed too.

[amazon_image id=”0674504763″ link=”true” target=”_blank” size=”medium” ]Inequality[/amazon_image]  [amazon_image id=”B0010JYWD6″ link=”true” target=”_blank” size=”medium” ]American Capitalism[/amazon_image]  [amazon_image id=”0198285388″ link=”true” target=”_blank” size=”medium” ]Collected Works of Michal Kalecki: Volume 1: Capitalism: Business Cycles and Full Employment: Capitalism – Business Cycles and Full Employment Vol 1 (Collected Works of Micha Kalecki)[/amazon_image]

There are some terrific nuggets of information along the way. To get the UK’s Gini coefficient back to where it was in the 1960s when the Beatles were playing just using taxes and transfers – a 10 point reduction from its current level – income tax would have to rise by 16 percentage points. The political impossibility of post hoc redistribution using only taxation is clear. “This is why many of the policy measures proposed in this book are directed at making the distribution of market incomes less unequal,” writes Atkinson.

Not all numbers are equal

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I’ve started reading Tony Atkinson’s new book, I[amazon_link id=”0674504763″ target=”_blank” ]nequality: What can be done?[/amazon_link] and already think it a much better book than the famous [amazon_link id=”067443000X” target=”_blank” ]Capital in the 21st Century[/amazon_link] (which for me was marred by the half-baked r and g business – see for example the Jaume Ventura slides here – as well as the lack of any practical policy suggestions).

[amazon_image id=”0674504763″ link=”true” target=”_blank” size=”medium” ]Inequality[/amazon_image]

Although not far into [amazon_link id=”0674504763″ target=”_blank” ]Inequality[/amazon_link], I completely and utterly agree with the following, in a chapter describing carefully the sources and character of the data (something else on which Piketty is actually rather weak – hence the challenge much reported this week from a graduate student at MIT):

“In seeking to draw lessons from the statistics on inequality, we have to be confident in the quality of the data we are using. This is why I begin this chapter by describing and evaluation the sources of evidence on which scholars of inequality can draw. Such scrutiny is essential. All too often economists race ahead, drawing conclusions from figures that happen to be there, without asking why the data are suitable.”

Serendipitously, while reading this I’ve also been thinking about a keynote I’m giving soon at an OECD conference on [amazon_link id=”0691156794″ target=”_blank” ]GDP[/amazon_link] and the national accounts statistics in a couple of weeks’ time. All the thousands of studies and political claims resting on GDP growth figures are based on shifting sands, and we economists need to think far more carefully about what they take to be evidence for strong claims. There are some powerful examples in a paper presented by Samuel Williamson and Enrico Berkes recently at the Economic History Society conference.

After neoliberalism?

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My journey back yesterday from the Royal Economic Society annual conference in Manchester was delayed for ages because some poor soul had thrown themselves under a train along the line. At least I managed to finish [amazon_link id=”0674725654″ target=”_blank” ]The Rise and Fall of Neoliberal Capitalism[/amazon_link] by David Kotz.

[amazon_image id=”B00SR5FNSY” link=”true” target=”_blank” size=”medium” ]The Rise and Fall of Neoliberal Capitalism[/amazon_image]

I’m a bit allergic to the word ‘neoliberal’, probably because it’s so often used as generic and blanket abuse of (among other things) all of economics. I’ve been accused of neoliberalism myself (to which the only sensible response is that the accuser needs to get out more if they think I’m an ideologue…..)

Certainly Kotz signals his own ideological views by using the term as his descriptor of American capitalism, but he does have a far more precise and meaningful definition than is the norm. He defines it as a specific “social structure of accumulation”, a “particular configuration of economic and political institutions, as well as dominant economic theories and ideas.” This is interesting, and I buy the general approach – it’s similar to (for example) Michael Best’s use of the concept of “production systems” in [amazon_link id=”0198297459″ target=”_blank” ]The New Competitive Advantage[/amazon_link], but ranging wider beyond the economic institutions of production.

Kotz sees the 1950s and 60s as a golden age of ‘regulated capitalism’ with strong unions and well-paid jobs for (male) breadwinners. He accepts that it had its own crisis, with sustained declines in profitability through the 1970s. Hence the scope for the arrival of ‘neoliberal capitalism’ from 1979/81 with Thatcher and Reagan.

Much of the book describes the development of the ‘neoliberal’ system after that turning point in terms of the broad outlines of the US economy – profit rates and shares, declining union membership, stagnant median real wages, the rise in household indebtedness etc. It does not cover globalisation to any great extent, which seems an important omission, nor does it mention technology or environmental sustainability at all, so the prism is quite narrow. Deindustrialisation is described more in terms of an attack on organised labour than the consequence of several deeper economic trends. However, the book’s analysis of the 2008 crisis in terms of the preceding financial bubble, and the way consumption was supported by debt, is surely not controversial.

Kotz does mention the role of ideas in economic theory and – more important in the long term – political received wisdom (the theory has moved on, but the policy world view far less so). He describes neoliberal ideology as “very strong” – clear, simple, apparently logical. Daniel Stedman-Jones’s [amazon_link id=”B00RWOZWD2″ target=”_blank” ]Masters of the Universe[/amazon_link] gives a much fuller account of the effort it took to cement the ideology over a number of decades prior to 1979, and highlights how much organisation it will take to change the prevailing world view. For I think this is a question of political and social organisation more than one of economic or political theorising.

Kotz argues here that the US and by extension the western economic system is in a state of crisis that will give way to a new “social structure of accumulation” whose shape is yet to be determined – it could be a revived neoliberal system. It will not be his preferred socialist system without a broad social movement, as at moments of crisis in the past such as 1945.

I would agree with Kotz that the prevailing production system or social structure is in crisis, but would emphasise more the fundamental role of technology and globalization. Not that a class-based perspective isn’t important. He concludes: “The path that will be followed in the years ahead cannot be predicted …. The economic changes – or lack of changes – that lie ahead will be the outcome of struggles among various groups and classes in the coming years, which will occur in the realm of ideas, politics and culture.” And surely the realm of the work place, public space and policy corridors too?

So all in all, I agreed with quite a lot of the analysis here while thinking it an incomplete picture. Still, the book irked me, no doubt because of my allergy to ‘neoliberalism’, along with its slightly plodding style. Reading it did feel a bit like being in a political meeting where you are washed over by a wave of abstract nouns. I know economists are on average pretty clunky writers so one should be used to it, but I did nod off over the book as my train trundled veeeery slowly through the countryside.

I wonder what Professor Kotz would have thought of the arrangement at dinner at the Royal Economic Society conference. There were two options for each course, and staff served each one to alternating places at the table. If you preferred the other, you had to exchange. Perfectly efficient and logical – surely only an economist could have thought of it? I’m tempted to do this every time I invite people round for a meal in future, unless that would be a bit neoliberal.

Instructions at the bottom - side payments not ruled out.

Instructions at the bottom – side payments not ruled out.

Economists? Hubris? Surely not?

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The title of Meghnad Desai’s new book, Hubris, had led me to expect a jeremiad about the failings of economics, with a faint feeling of resignation. Not that the charges are (all) undeserved, just that it’s become rather familiar. However, my expectations were confounded. The book is a very accessible and clear history of macroeconomic thought, seen from the perspective of what economists have done over the decades – what ideas, what models they have used. It makes an excellent follow-on companion to Tim Harford’s [amazon_link id=”B00ABLJ6OE” target=”_blank” ]The Undercover Economist Strikes Back[/amazon_link], being a bit less general, and introducing more economic terminology and verbal (largely) descriptions of models.

[amazon_image id=”0300213549″ link=”true” target=”_blank” size=”medium” ]Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One[/amazon_image]

A lot of the material covers territory that will be familiar to professional economists, but it is set in the context of how macroeconomics got itself into the position of being not only unsuccessful at predicting the financial crisis but literally unable to do so. Macro models excluded the logical possibility of sustained and serious disequilibrium. Desai also includes some economists who are not part of the usual story, for reasons that become apparent in the final section of the book. Marx and Hayek of course, but also Kondratiev, Wicksell, Richard Goodwin. (I’d never heard of Goodwin – he provided a mathematical, ecology-inspired model of the wage share.)The book explains how alternative views came to be not even attacked, simply ignored, in modern macro. It includes a section on Keynes and the reinterpretation and reinvention and finally co-opting of ‘Keynes’ over the years

The final section sets out briefly Lord Desai’s own framework for macroeconomics. He sees the evolution of the economy in the aggregate as the outcome of a disequilibrium process, with Kondratiev cycles driven by demography and technology and shorter “class struggle” cycles of changing labour and profit shares superimposed, in the context of a globalised economy. This is clearly more realistic than some of the DSGE macro models that are clinging on to life, albeit less useful for forecasting.

The long wave perspective is quite interesting and plausible. One other point that I wholly agree with is the narrowness of traditional macro models in their nation by nation focus: “National income data began to be estimated and published in a small way in the 1930s. After the war and thanks to the Keynesian revolution, national income measurement became a pivotal tool of policy making … This has shaped the themes and strategies of research in macroeconomics. New classical macroeconomics has been very much concerned with analyzing US time series. … The older tradition had less accurate data but it’s vision was systematically global rather than inter-country.”

The book also, rather gloomily, sees the world as being at the start of a long wave downturn, in for a structural version of secular stagnation, with decades of falling prices ahead. “Could the global economy  repeat the 19th century’s experience of the Great Depression of 1873-96.”

I’m not so gloomy but this might be possible. It would anyway make enormous sense for macroeconomists to link their work with growth theory and thinking about innovation, including work on long cycles such as [amazon_link id=”1843763311″ target=”_blank” ]Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages[/amazon_link] by Carlotta Perez. Mind you there are lots of things it would be sensible for macroeconomists to do, but the hubris lingers on.