On Monday, I saw a debate between John Early and David Leonhardt. I personally think from the discussion that Leonhardt had the upper hand, and would have liked to explore deeper ramifications of each side’s perspective.
From my understanding, Leonhardt argued that a wide variety of sources show that economic growth for lower class Americans has not increased significantly, while upper level salaries have ballooned. In some senses, he argues that his data is understated, since it looks at quartile, and isn’t more skewed upward.
By contrast, Early argued that these statistics were misleading, and when you accounted for taxation and wealth transfers, there was actually very little inequality. Additionally, economic growth is real, even though it’s slowed down since 1970 or so.
I agree that there are two main propositions that defined the debate, whether growth was happening, and whether inequality is rising. I’m convinced by David’s claims that in general, across a wide array of outcomes, inequality is growing more and it’s become more expensive to buy things like houses, education, and medicine.
I don’t think Leonhardt hitched his wagon to whether or not this stagnation is a result of government spending, while Early gave some reasons to think it is. Because I think most of Leonhardt’s claims went unchallenged, I think he was a much more compelling advocate, he won the debate, regardless of who won the tootsie roll.
In general, I think Leonhardt is right about inequality, if not understating his case, but is wrong about growth.
Here’s a few reasons why I think David is right about inequality. Increasingly, high performers are able to opt-out of large groups, creating situations where they can get paid a lot closer to their marginal value. The internet has made it so that people can produce a lot more, and not everyone is talented. A while ago, I published a discussion on Econlib about economic superstars, and the effects on the distribution of wealth, mainly that we’re seeing a situation where the best can win it all. I think looking at how this effect works provides a broader challenge to Leonhardt’s claims about growth. Things like having a nice work environment, great healthcare, fun colleagues, and remote options seem to be good things, and should be viewed as benefits that richer employees get more access to.
By that same token, growth is also probably understated. Some easy things that come to mind, being able to get tons of free information, directions, and entertainment from your cell-phone, overall decreases in violence, alternatives to traditional education (WGU for instance), mapping the human genome, decreasing human poverty outside the US, cheaper natural goods, lower prices of food relative to income, more land to nature, decreasing wars, and other goodies. While these numbers may struggle to show up on GDP, they are signs of an enriched population, relative to other things.
Here’s a few things that I think could go either way on a resolution like this. Are hardworking immigrants who can get to the top more important than comparatively lazier native-born Americans? How do we think about the global person? How important are institutions in general? What degree of inter-generational wealth transfer is acceptable? Are there decreasing benefits to wealth? How much should we care about revealed preferences (people who decide to shop at Amazon increase income inequality, should this matter)? What non-economic goods should we care about?
I think these questions make a topic like this virtually impossible to answer, but I think there can be common ground about what a better world would look like. I think if growth increases significantly, most people will probably benefit, and I think it would be interesting to discuss how much we should care about it compared to other government goals.
Isadore Johnson's Website 