Sharing the economic growth

Thanks to a recommendation from Martin Wolf, I’ve just read

by J de V Graaff, a 1971 reprint of a 1957 primer on this subject – Martin told me it had been his university text. While in my undergraduate course we certainly covered welfare economics, it was as a settled body of knowledge, and I don’t recall reading anything like this on the earlier debates.

[amazon_image id=”0521094461″ link=”true” target=”_blank” size=”medium” ]Theoretical Welfare Economics[/amazon_image]

It’s a very clear and interesting discussion – succinct too, at about 150 pages. One of the most interesting aspects is how comprehensively the author demolishes the idea that questions about the size of the economic pie and its distribution can be separated. He lost the argument in later economics of course – economists assume, and often state, that these are separable. However, the strength of Graaff’s counter-argument is evident. At the formal level, he covers the inconsistency of the Kaldor/Hicks notion that losers from a change in allocation can (potentially) be compensated – Skitovsky originally showed that the (potential) Pareto optimality of any change depended on the initial distribution. (Here is a good Interfluidity explanation.) But the book also explains it far more intuitively:

“In a one commodity world some definite meaning could be attached to a phrase like ‘the size of national income’; and we could legitimately  say that welfare depended on the size and the distribution of this one commodity. But as soon as we leave a one-commodity world this ceases to be true. There is no unambiguous meaning we can attach to ‘the size of national income’ when we have a heterogeneous collection of goods and services. How can we combine the various goods into a single quantity that can be said to have a ‘size’? By weighting them and striking an average? This is certainly a possibility. But we can only get the relevant weights from a welfare function; and if we have the usual Paretian one … it will only tell us what weights to use when the distribution of goods among members of the community is given. Only in a very limited sense can welfare be said to depend on ‘size’ and ‘distribution’ – for the two elements are no longer independent and cannot be separated out.” [my italics]

He adds that the index numbers usd in constructing national income cannot be an indicator of change in welfare – they simply provide information relevant to a balanced judgement. “Index numbers of aggregate output or consumption should always be supplemented with information about the distribution of income and wealth – and also with separate indexes of investment, personal and collective savings, and expenditure on collective goods like defence. The more informatio made available, the more likely it is that a balanced judgement will be obtained.”

So here I think we have one of the earliest arguments for the ‘dashboard’ approach to measuring economic progress. But also an irrefutable case – with as many singing and dancing cross-partial derivatives as you like – for never leaving income distribution out of an assessment of how the economy is doing.

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American exceptionalism, inequality version

Yesterday on my travels I read a short book,

, by Matthew Drennan. Professor Drennan is an urban planning expert, so having read the book’s blurb, I expected it to be a critique of the economics profession, and braced myself.

[amazon_image id=”0300209584″ link=”true” target=”_blank” size=”medium” ]Income Inequality: Why it Matters and Why Most Economists Didn’t Notice[/amazon_image]

It ended up not being what I expected. In fact, the book repeats Raghuram Rajan’s argument in

– that low-income Americans went into debt to increase their consumption levels as well as buy homes, keeping up somewhat with the rich thanks to easy credit. One of the central chapters has a long appendix reporting some econometric work claiming to establish causality between higher income inequality and higher debt. However, it is not sufficiently detailed to be able to assess the empirical work, while too technical to be of interest to the general reader. So the central section of the book is a bit odd.

It’s a fair cop to say the generality of the economics profession did not pay enough attention to rising income inequality. The biggest lasting impact of Piketty’s

, and the work with Atkinson and Saez on which it was based, will turn out to have been consciousness raising. Nobody is ignoring it now. However, there are now several important books on this subject: as well as
and
, Mian and Sufi’s
, Atkinson’s
, Francois Bourguignon’s
and Branko Milanovic’s forthcoming
. I didn’t find much novelty in Drennan’s
, although it is at least a short introduction.

Above all, though, my reaction to the book wasn’t that it was about economics, more that it was about America. We do tend to forget that inequality is greater in the US than most other OECD countries, and has risen more. Perhaps it can act as the canary in the cage for the rest of us, but a good part of the story lies in US politics and institutions. After all, just look at the Republican primary contenders.

OECD income inequality

OECD income inequality

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Inequality in 90 pages?

A small book has just arrived,

, by Harry G Frankfurt of On Bullshit fame. On first glance it looks like a provocative argument that inequality shouldn’t bother us, the moral challenge is the reduction of poverty. On a closer read, the essay argues: “Our basic focus should be on reducing both poverty and excessive affluence. But the reduction of inequality cannot itself be our most essential ambition.”

[amazon_image id=”0691167141″ link=”true” target=”_blank” size=”medium” ]On Inequality[/amazon_image]

Well, I agree, but think this takes the argument for “reducing inequality” too literally – surely most people use it as a short-hand for addressing the extremes of the distribution, poverty because a civilized society cares about its weakest members, wealth because its excess has anti-democratic political consequences and undermines cohesion. I think arguing for a stronger version of equalising than this is not so often advocated.

Meanwhile, the best arguments about why strong version equality of incomes is unattainable and undesirable remain Milton Friedman’s in chapter 10 of

.

Frankfurt concludes: “The pursuit of egalitarian goals often has very substantial utility in promoting a variety of compelling political and social ideals. But the widespread conviction that equality itself and as such has some basic value as an independently important moral ideal is not only mistaken; it is an impediment to the identification of what is truly of fundamental moral and social worth.” That thing being respect. Well yes, but the argument underplays our strong fairness instinct, perhaps.

I like the essay format, so although

isn’t really as provocative a book as it seems, it’s a lively – and a short – read.

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Heatwave

There are terrible stories emerging from India, suffering an intense heatwave – such as this one from Vice News: Poor people are most affected as hundreds die in Indian heatwave. The story links to a study reporting an increase in the number of urban heatwaves over the period 1970-2012; and now more than half of us live in cities.

Reading these reminded me of Eric Klinenberg’s amazing 2002 book

. The first warning of impending heatwave was broadcast on Wednesday 12 July 1995; the next day the temperature soared to 106F and the ‘heat index’ to 126F. Roads buckled, trains derailed, city workers sprayed the bridges with water to maintain the structures. People opened fire hydrants and water pressure around the city fell. “The body’s  defenses can only take about 48 hours of uninterrupted exposure to such heat before they break down,” Klinenberg writes in the opening chapter. So from the Friday many people started falling ill. The heatwave lasted until 20 July. There were so many deaths (over 700) that the city had to store bodies in refrigerated trucks in the parking lot of the morgue.

[amazon_image id=”0226443221″ link=”true” target=”_blank” size=”medium” ]Heat Wave: A Social Autopsy of Disaster in Chicago (Illinois)[/amazon_image]

Of course, extreme weather is a natural disaster, but its incidence is uneven because of social, economic and cultural structures. Klinenberg studied the ‘excess’ (i.e. above normal for the place and season) mortality rate in different parts of the city. Not surprisingly, poor people suffered the highest ‘excess death’ rate. The eye-opening thing about the research, though, is that some low income groups had a far worse experience than others. Matching districts for employment rates and average incomes, there was a higher death rate among African-American than among Hispanic people. Because the city authorities responded too slowly, because public services were poorly equipped, vulnerable people such as the elderly and those living alone had only their families and neighbours to rely on, and those social structures were at the time more intact among the recent Hispanic immigrants. Of the 700 who died over those few days, 41 ended up unclaimed by any relatives.

“This book has shown that extreme exogenous forces such as climate have become so disastrous partly because the emerging isolation and privatization, the extreme social and economic inequalities, and the concentrated zones of affluence and poverty in contemporary cities create hazards for vulnerable residents in all seasons,” he writes. None of which has changed anywhere in the 12 years since the book was published. He identifies as causes for concern the increase in the number of people living alone, growing spatial inequality separating social groups, the huge social distance between city governments and the people they serve, and the fact that we have government by PR with few mechanisms for holding the authorities to account on results.

The book ends with a plea to understand the consequences of natural disasters as societal events. That lesson is hardly ever put into practice, unfortunately.

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Hope amid the gloom?

Anybody in the UK who is feeling gloomy about the General Election result could deepen their gloom by reading the new edition of Danny Dorling’s

. The book has quite an upbeat conclusion: “Slowly, collectively, with one step back for every two taken forward, we inch onwards to progress; we gradually undo the mistakes of the past, and recognise new forms of injustice arising out of what we once thought were solutions. … Everything it takes to defeat injustice lies in the mind. What matters most is how we think. And how we think is metamorphosing because – everywhere – there are signs of hope.”

[amazon_image id=”1447320751″ link=”true” target=”_blank” size=”medium” ]Injustice: Why Social Inequality Still Persists[/amazon_image]

Clearly this new and greatly revised edition of the book was written before the election. What’s more, everything that is new in it ought to make a campaigner for social justice even gloomier. The indicators collected in the book have at best improved only a little since the financial crisis – household indebtedness, income inequality, for instance. Perhaps even more noteworthy is the apparent absence of any change in the zeitgeist, or public philosophy. When the first edition was published in 2010, many commentators thought the scale of the crisis would lead to a significant swing in public opinion away from Big Finance, markets and greed. With the exception of popular disapproval of unseemly bonuses in the socially destructive banking industry, that doesn’t seem to have happened.

Or has it? Dorling presents some evidence – Janet Yellen calling extreme inequality ‘un-American’, international efforts to collect unpaid taxes from rich globocrats, popular dislike of elites. It’s not much, perhaps. One could add a few more examples, like today’s call from the OECD for tech companies to stop their “aggressive tax planning”. Is this enough to justify a belief that the social and economic order will change. Dorling writes, optimistically in the circumstances: “No-one can truly know what will be sufficient to change deeply held and institutionally transmitted beliefs.”

In a terrific book,

, Daniel Stedman Jones described the long process of organising, campaigning, debating by many people that paved the way for the triumph of the individualist ‘free market’ philosophy from 1980 and is still our official public philosophy. Who knows how long it will take how many people who dislike this to pave the way for an alternative – but when a system change of this kind happens, it happens relatively quickly (over a decade at most) and is then dramatic.

[amazon_image id=”0691151571″ link=”true” target=”_blank” size=”medium” ]Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics[/amazon_image]

replaces Beveridge’s original Five Giants with new ones: elitism, social exclusion, prejudice, greed and despair. The book links these in a vicious circle of social and economic inequality – exactly why single policy measures are drops in the ocean and a broader change is needed, Dorling argues, collecting all the evidence one could need to conclude this. I wouldn’t want to predict whether we’ll get it or not; that will depend on what we all do, and think, next.

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