Google, the Gender Pay Gap, and Markets

So you’ve probably seen this article making the rounds: Google Finds It’s Underpaying Many Men as It Addresses Wage Equity. It’s not hard to see why. The idea that a socially-aware megacorp tried to equalize women’s pay and ended up handing out raises is not only intrinsically funny, but offers a dose of schadenfreude for all the folks who still think James Damore was fundamentally right about the tech giants ideological echo chamber. Fair enough. But I want to talk about something different, and the real reason I’m deeply skeptical of the whole idea of a gender pay gap.

The first thing to realize is that the entire concept of a pay gap is actually philosophically tricky to define. From the NYT article:

When Google conducted a study recently to determine whether the company was underpaying women and members of minority groups, it found, to the surprise of just about everyone, that men were paid less money than women for doing similar work.

OK, but how does Google define “similar work”? Probably–I’m guessing, but a guess is good enough in this case–by looking at stuff like job title. Do you think everyone who works at your company with the same job title as you is working as hard / getting as much done as you do? No? Then this isn’t a very good basis for assessing “similar work” is it?

In fact, the problem is really bad because–even if a company paid men and women equally given that they had the same job title (in this case Google appears to have paid women more) they could still discriminate at an earlier stage in the process. Thus (another quote from the NYT article):

Critics said the results of the pay study could give a false impression. Company officials acknowledged that it did not address whether women were hired at a lower pay grade than men with similar qualifications.

In other words, maybe Google pays senior developers the same (or even pays female senior developers more), but at the same time it also stacks the deck against new hires so that female applicants are more likely to get hired as regular developers and then men are more likely to get hired as senior developers. In that case, it could be true that Google is biased towards paying women more within one job title, but also that it’s biased towards paying women less overall.

Not so simple, eh?

Now, I don’t actually know if Google used job title to define “similar work” and I made the bold claim that I didn’t really care if they did or not. The reason for that is that there is no good way to measure how much work a person does. If they used job title, then that’s a bad proxy. But if they used something else, then I am confident that they used another bad proxy. Because there’s absolutely no practical way that Google could have spent the time and resources required to actually assess all of their workers. There’s a name for this in economics, for the ides that it’s basically impossible to measure how much work an employee is doing. It’s called the principle-agent problem. And, believe it or not, that’s actually the easy part. Even if you could accurately, easily, and cheaply quantify how much work your employees do (you can’t), there’s still no accepted methodology for assessing how much value that work contributed to the company. If you’re the sales guy who closes a deal that earns your company $1,000,000 in revenue you might think the answer is simple: your effort just got the company a cool million. But you didn’t do that alone. You were selling a product that you didn’t make, for one thing. So the designers, the marketing guys, and the folks on the assembly line building the widgets all need a cut. How do you attribute the value you made–$1,000,000–among all the complex, networked, interconnected contributors? Good luck with that.

So far, all I’ve really said is that trying to detect a wage gap is going to be really, really hard because assessing “similar work” is basically impossible. But there’s good news! If you understand the way markets work, you will understand that you have very, very good reason to be skeptical that men and women are really being paid different amounts for similar work.

Now, before I explain this, let me just point out that there are a lot of people who will tell you that economic models of markets are over-simplified, flawed, and misleading. They’re right, but those criticisms don’t really apply. There’s this whole controversial literature over concepts like the efficient market hypothesis that, luckily, we don’t need to get into here and now. In a nutshell, economists like to pretend (for the sake of tractable theories) that humans are perfectly rational and statistical geniuses who take all possible information into account when making purchasing decisions. If that were true, then things like market bubbles would (probably) not be possible. (It depends on the specific of your model.) So let me just say: yeah, I concede all that. Precise, mathematical models of markets are basically all wrong. We can quibble about whether they are “perpetual motion machine”-wrong or just “spherical chicken”-wrong, but whatever.

Here’s the point: in a market (even a fairly messed-up, realistic one) you’ve got a lot of companies who are all competing. Although there’s a lot going on, one vital way that one of these companies can get a leg up over its competitors is if it finds a way to offer the same good or the same service for less cost. This isn’t rocket science, this is really, really obvious. If company A and company B are both selling more or less interchangeable widgets, but company A can make them for $1.00 / each and company B can make them for $0.90 / each, then company B has a huge advantage.

So here’s the thing: if there were any real indication that you could hire a woman, pay her 70% of what you pay a man, and get “similar work”, then what you’re saying is that there’s an easy, obvious way to go out there and make your widgets for $0.70 when everyone else has to pay $1.00 to make theirs.

We don’t need to take any derivatives here. We don’t need advanced theory. We don’t need to assume that human beings are perfectly rational, hyper-calculating machines. We just have to assume that companies generally want to find ways to reduce the cost of the goods and/or services they sell. If that humble, uncontroversial assumption is true, then any perceptible evidence of a real gender pay gap would immediately be identified and exploited by the market.

If anyone could find a real gender pay gap, it would be the mother of all arbitrage opportunities. And look, folks, if there’s one thing that every red-blooded capitalist wants to find, it’s an arbitrage opportunity. This isn’t hypothetical, by the way. You look at an industry like currency trading, and companies invest huge amounts of money hiring geniuses, buying them super-computers, and paying for access to network cables that give them millisecond advantages so that they can find and identify arbitrage opportunities before the market erases them.

Because that’s what markets do. They look for chances to make free money and then they exploit them until they disappear. If you find out that you can trade your dollars for yen, your yen for rubels, your rubels for pesos, and then your pesos back to dollars and end up with more than you started with: that’s arbitrage. And you will immediately pump as much money as you can into running through that cycle. As a result, the prices will go up and the arbitrage opportunity will close. This is what markets do.

And so if there is a way out there to hire women to do men’s work for 70% (or whatever) of their pay, companies would do that instantly. And the result? Well, the first company would offer women $0.70 on the dollar, but then a competitor would offer them $0.71, and then another competitor would offer them $0.72… and pretty soon no more arbitrage.

So what’s my point?

Trying to find out if there actually is an real wage-gap is very, very hard because measuring “similar work” is difficult. But, if there is ever a whiff of a reliable, objective, solid gender pay gap it will disappear as quickly as it is spotted as the market rushes to exploit the arbitrage opportunity.

Here’s what it all comes down to: if you believe in the gender pay gap, you believe that a bunch of cold-blooded, selfish capitalists are staring at a pile of money left on the table, and not one of them is trying to get their hands on it. This isn’t a completely open-and-shut case, but it’s a very, very strongly suggestive argument that capitalism and wage inequality–of any kind: gender-based, race-based, sexual orientation-based, etc–are fundamentally incompatible in the long run. It doesn’t mean that we shouldn’t have laws against discrimination, because individual business owners might make stupid, bigoted decisions and we might decide not to wait around to let the market fix them. But it does mean that the idea of a real, persistent, ongoing gender pay-gap is like UFOs or Bigfoot or–even rarer than anything else–a free lunch.

It’s just probably not there.

Should government food assistance programs have nutritional requirements?

Some of the foods you can purchase through WIC.


There’s good reason to believe that adding nutritional requirements to government food programs is a better use of money and leads to better health outcomes for the people in said programs.

WIC (Women, Infants, and Children) is a state-run program that helps low-income women and children purchase healthy food. WIC has specific guidelines for the quantities and types of food recipients can purchase, all of which have to meet certain health standards. In this program there is no way to purchase soda, candy, pizza, baked sweets, ice cream, etc. SNAP (Supplemental Nutrition Assistance Program, often referred to as “food stamps”) is a federally-funded program helping low-income people purchase almost any food.

The USDA explains that SNAP is for purchasing any food or food product for home consumption and that this definition includes “soft drinks, candy, cookies, snack crackers, and ice cream” and similar items. Data suggest these types of purchases make up at least 17% of SNAP spending .[ref]To get this number I added the percentages for the following categories: soft drinks, candy – packaged, frozen pizza, ice cream ice milk & sherberts, cookies, cakes, bacon, baked sweet goods, candy – checklane, sweet goods, ramen, frozen desserts, popcorn, dry mix desserts, pies, cookie/cracker multi packs, cocoa mixes, sweet goods & snacks, salty snacks, refrigerated desserts, single serve sweet goods, single serve cookie/cracker, and cake decor. There were many other categories that could arguably be categorized as unhealthy food or “junk food,” but if they were debatable I left them out.[/ref] In 2017, about 42 million people used SNAP at an average of $125.79 per person per month, meaning the government spent about $11.3 billion that year buying junk food for low-income people. What are the arguments for spending so much on junk rather than using those funds to ensure low-income people have high quality food?

Opponents of SNAP nutritional requirements give many reasons for why nutritional requirements are not feasible or effective: we can’t come up with clear standards for what is “healthy,” it would be too complicated and costly to implement such standards, restrictions wouldn’t stop people from buying unhealthy food with their own money, and people in higher income brackets purchase similar amounts of unhealthy food.[ref]Whether this last argument is true or not is a bit tangential. Research shows lower SES people have poorer nutrition and health outcomes than people with higher income. Improving nutrition is one (important) approach to bridging that gap.[/ref]

Yet WIC has managed to define what constitutes healthy food and implement a program based on those boundaries. In fact the USDA describes WIC as “one of the nation’s most successful and cost-effective nutrition intervention programs.” There is evidence to suggest people participating in WIC (especially children) have better nutrition and health outcomes than their peers. Conversely, there is evidence to suggest people who receive SNAP benefits have worse nutrition than income-eligible people who don’t participate in SNAP. For example:

Changing WIC changes what children eat – May 2013

Comparing July to December in 2008 and 2011, increases were observed in breastfeeding initiation (72.2-77.5%); delaying introduction of solid foods until after 4 months of age (90.1-93.8%); daily fruit (87.0-91.6%), vegetable (78.1-80.8%), and whole grain consumption (59.0-64.4%) by children aged 1-4 years; and switches from whole milk to low-/nonfat milk by children aged 2-4 years (66.4-69.4%). In 1-year-old children, the proportion ≥95th percentile weight-for-recumbent length decreased from 15.1 to 14.2%; the proportion of children 2- to 4-year-old with body mass index (BMI) ≥95th percentile decreased from 14.6 to 14.2%.

Trends in Obesity Among Participants Aged 2–4 Years in the Special Supplemental Nutrition Program for Women, Infants, and Children – November 2016

The prevalence of obesity among young children from low-income families participating in WIC in U.S. states and territories was 14.5% in 2014. This estimate was higher than the national estimate (8.9%) among all U.S. children in a slightly different age group (2–5 years) based on data from the 2011–2014 National Health and Nutrition Examination Survey (7). Since 2010, statistically significant downward trends in obesity prevalence among WIC young children have been observed overall, in all five racial/ethnic groups, and in 34 of the 56 WIC state agencies, suggesting that prevention initiatives are making progress, potentially by impacting the estimated excess of calories eaten versus energy expended for this vulnerable group (8).

The Supplemental Nutrition Assistance Program – September 2015

Child SNAP recipients consume more sugary beverages, processed meats, and high-fat dairy products, but fewer nuts, seeds, and legumes than income-eligible nonparticipants. Similarly, adult SNAP recipients consume more fruit juice, potatoes, red meat, and sugary beverages, but fewer whole grains than income-eligible nonparticipants. In another study, SNAP participants had lower dietary quality scores overall, and consumed significantly fewer fruits, vegetables, seafood, and plant proteins, but significantly more added sugar than income-eligible nonparticipants.

The study specifically compares SNAP nutrition to WIC nutrition:

In one study comparing the grocery store purchases of SNAP and WIC households in New England, SNAP households purchased more than double the amount of sugary beverages per month (399 ounces) than WIC households (169 ounces), 72% of which were paid for with SNAP dollars. In a 3-month study, new SNAP participants significantly increased their consumption of refined grains compared with low-income people who did not join. In a study of Hispanic Texan women, SNAP participants consumed 26% more sugary beverages and 38% more sweets and desserts than low-income nonparticipants.

Furthermore, most of the people who use SNAP believe the program should not allow recipients to purchase unhealthy food:

54% of SNAP participants supported removing sugary drinks from SNAP eligibility. In another survey of 522 SNAP stakeholders, 78% of respondents agreed that soda, and 74% agreed that “foods of low nutritional value” such as candy and sugar-sweetened fruit drinks should not be eligible for purchase with benefits. Seventy-seven percent of respondents believed that SNAP benefits should be consistent with the DGAs [Dietary Guidelines for Americans], and 54% thought that SNAP should be reformulated into a defined food package similar to WIC.

I want to live in a society where people are healthy and no one goes hungry. SNAP can and should serve both goals.

A Great Comic About Privilege

I’ve got serious misgivings with the way “privilege” is often used in political discourse these days, where the assumption is always that it’s racial, gender, or other forms of privilege that matter most. It’s not in any way that I deny that these forms of privilege exist, but the discussion is too simplistic and too myopic. Privilege is not absolute. It’s contextual. And race and gender and sexuality and other identity-based forms of privilege aren’t the only forms that exist. They aren’t even the most important. More important? The privilege of coming from a stable, two-parent, biological family, for one, and the privilege of a low ACE-score for another.

So, although most of the folks who share this comic (and possibly the author, too) would probably disagree vehemently with me over the topic, I share it because it’s actually a very, very good example of how privilege really works:

This is just the first few panels. Click the image to go to the site and read the entire thing. It's worth it.
This is just the first few panels. Click the image to go to the site and read the entire thing. It’s worth it.

What’s really good about the comic is that it actually illustrates specific examples of privilege and, in this case, the privilege of class. The two children both have strong families, are both white, and gender doesn’t focus prominently in the storyline. Instead, it’s all about who can afford to study while in college vs. who has to shoehorn studies and menial work into the same schedule.[ref]Been there, done that.[/ref] It’s also about who has family connections that can smooth the transition into a competitive job environment, and who has to figure things out on their own.

Class is a better framework for discussing privilege than race or gender (although race-based and gender-based privilege do exist) because it gets closer to the heart of the matter: power. The trouble is that Americans don’t really like class. We’re not sure what it means and we kind of like to pretend it doesn’t exist. No one is more keen to pretend that class is not an issue then the upper-class, of course. This is one reason for the fascinating relationship of brand prominence to price.

Today, anyone can own a purse, a watch, or a pair of shoes, but specific brands of purses, watches, and shoes are a distinguishing feature for certain classes of consumers. A woman who sports a Gucci “new britt” hobo bag ($695) signals something much different about her social standing than a woman carrying a Coach “ali signature” hobo ($268). The brand, displayed prominently on both, says it all. Coach, known for introducing “accessible luxury” to the masses, does not compare in most people’s minds in price and prestige with Italian fashion house Gucci. But what inferences are made regarding a woman seen carrying a Bottega Veneta hobo bag ($2,450)? Bottega Veneta’s explicit “no logo” strategy (bags have the brand badge on the inside) makes the purse unrecognizable to the casual observer and identifiable only to those “in the know.”

One function of this kind of invisible prestige (although not the only consideration) is that it allows the most privileged to avoid attracting attention from those who are less privileged. Only their fellow elites can recognize their subtle status cues. This is also the reason that identity-based privilege is so appealing to middle- and upper-class Americans: it obscures more privilege than it reveals by quietly taking class off the table. Identity-based privilege is loud and boisterous, but it poses a negligible threat to existing socio-economic power structures. It’s about as revolutionary as a Che Guevara t-shirt.

Warren Buffet: What’s Better Than Raising the Minimum Wage?

892 - Minimum Wage WSJ

If you read Difficult Run with any frequency, you know that we really, really don’t like the minimum wage. There are lots of reasons for this, but one of the biggest is that there’s a better solution to the problem that the minimum wage is supposed to tackle, which is helping the working poor. It’s better because it gets more money into the hands of those who need it without either (1) eradicating low-income jobs (which are better than no jobs) [ref]As Thomas Sowell likes to say, the real minimum wage is always $0.[/ref]or (2) uselessly funneling extra money into the hands of middle class teenagers working summer jobs (or whatever).

So, what is this superior alternative? Let’s ask Warren Buffet and the Wall Street Journal:

I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.

The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.

In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.

Given the existence of the EITC, it is inexcusable for anyone who genuinely cares about this issue to keep shouting for an increase in the minimum wage.

In a perfect world if I got to restructure our whole tax / welfare system from scratch I might make other choices than an EITC (like maybe an Universal Base Income), but in the world we live today the EITC is a smart, simple program that is already in place and just needs to be augmented in order to give targeted, sound support to the working power. In this case the smart thing and the right thing are the same: so let’s increase the EITC.

The Real Gap Between Worker and CEO Pay

You’ve probably heard a lot about the growing gap between average worker pay and CEO pay. This seems like a legitimate concern, but I’ve had some questions about the data and the assumptions ever since I first started hearing the statistics. I would kind of expect, for example, that CEOs of larger companies would probably get paid more. So if you had two companies with 1,000 employees each and they merged and you ended up with one CEO of a company that had 2,000 employees, do you think he’d get a raise? So consolidation (which might be a bad thing for other reasons) might inflate the average worker to CEO salary ratio in ways that aren’t necessarily that bad.

In any case, the American Enterprise Institute[ref]A “center-right think tank.“[/ref] has a related critique of those figures. It turns out that most of them are based on a very small sample size (the WSJ looked at only 300 CEOs, the AP looked at only 337, and the AFL-CIO looked at 350). Not only are these samples small, but they’re also heavily skewed towards the biggest companies. And so, as the AEI points out, “Although these samples of 300-350 CEOs are representative of large, publicly-traded, multinational US companies, they certainly aren’t very representative of the average US company or the average US CEO.” Turns out, there are more than a quarter million CEOs in the country. Comparing average worker salary to the 350 or so from the biggest companies is like comparing average worker salary to the top 0.1% of CEO salaries.

If you do compare average worker salary to average CEO salary (which can be done, the data is available), then the gap drops from 331:1 to 3.8:1 and the apparent growth over the last 13 years disappears.

897 - Average Worker to CEO Pay

I think a realistic assessment of the statistics is important, but I’m not willing to go quite so far as the AEI: “We should applaud the richest 300-350 CEOs as a group of the most successful American business professionals.” I think there are real questions about whether CEO pay is really an accurate reflection of their contribution to the economy, and there are also serious questions about how compensation structure can create perverse incentives where high-paid executives take risky strategies that end up rewarding them when they win and penalizing the rest of us (via bailouts and economic downturns) when they lose. And do the top 0.1% of CEOs really need our applause? Aren’t their salaries enough?



New Theory on Income Inequality

920 - Income Inequality and Housing

Income inequality is a big deal, and the biggest addition to the controversial discussion recently has Piketty’s tome Capital in the 21st Century.  In very simple terms, Piketty’s argument was that when you get a greater return on capital investments than the rate at which the economy as a whole grows, then wealth invariably piles up in the hands of an elite. If true, this dire prediction means the only way to preserve equality is to implement a very progressive income tax and do it globally. Which, short of an alien invasion uniting us into one, hegemonic world government, is unlikely.

“But,” as Greg Ferenstein writes, “a 26-year-old MIT graduate student, Matthew Rognlie, is making waves for an alternative theory of inequality: the problem is housing.” Rognlie’s reply is pretty simple, conceptually. He points out that cutting edge technology–whether its hardware or software–depreciates at a very great rate. Think of how fast the price of a brand new cell phone falls: within 4-5 years you can easily go from $1,000 to basically $0. So, since “technology doesn’t hold value like it used to, so it’s misleading to believe that investments in capital now will give rich folks a long-term advantage.”

So if technology doesn’t hold value, then what does? Land. Thus Ferenstein concludes: “If Rognlie is correct and we really care about inequality, it might be wiser to redirect anger towards those who get in the way of new housing [often local governments with austere zoning regulations to protect the home prices of rich owners in exclusive areas], rather than rely on taxes to solve our problems.”

Marriage, Parenthood, and Public Policy

Ron Haskins of the Brooking Institution has an excellent piece in the Spring 2014 issue of National Affairs. He begins by reviewing the current state of marriage and the rising rate of single parenthood in the United States. Furthermore, he looks at the impact single parenthood has on children, including the increased risk of poverty.

He then looks at the four major policies used to combat this social problem:

  • Reducing non-marital births
  • Boosting marriage
  • Helping young men become more marriageable
  • Helping single mothers improve their and their children’s lives

Haskins provides a balanced overview of the empirical outcomes of these policies, both successes and failures. He concludes,

If we want to address the challenges of income inequality and immobility, we must address one of their main causes — non-marital births and single parenting. Maybe stable, married-couple families will never again be the dominant norm, but if so the children who are raised by such traditional families will continue to have yet another advantage over their peers who have minimal contact with their fathers, live in chaotic households, and are exposed to instability at home as their mothers change partners.

Our society and culture will no doubt continue to change, but our children will continue to pay the price for adult decisions about family composition. Public policies cannot ultimately solve this problem, but those that prove themselves capable of ameliorating some of the damage are surely worth pursuing.

Worth the read.

Care About Income Inequality At All? Read This Now.

2014-04-23 CapitalOne of the most useful things I learned about economics when getting my master’s was simply who to pay attention to. When I read an article and it references someone whose research was brought up not just once, but again and again in my classes, I know I’m reading about a serious economist. Well, this article[ref]Note: I left out the link in the original version of this post.[/ref] is written by Bob Solow about a book by Thomas Piketty based on research he conducted with Emmanuel Saez and Anthony B. Atkinson. That’s the most big-name economists I’ve ever seen in a contemporary piece, so even though I had a busy day today I took the time out to read this article.[ref]Solow invented the Solow model, which comprised about the first half of my macroeconomics coursework. I studied papers by the other three in my public finance courses.[/ref]

I was not disappointed. This is a really important article if you want to understand income inequality. Unfortunately, it’s also rather technical (although it tries not to be). So I’m going to attempt to give the plain English version of the simplified review of a French book on income inequality. Believe it or not, I think some really important core concepts will translate all the way through.[ref]Obviously I’m basing this just on my reading of the article, ’cause I haven’t read the book. I don’t even speak French.[/ref] So here are the take-aways:

  1. The question of rising income inequality cannot be fully explained by nation-specific laws or circumstances. It’s a broad-based problem, so we ought to be looking for a broad, comprehensive, long-range explanation. That’s what Piketty provides.
  2. The explanation is based on an unusual measurement of wealth that compares a country’s total wealth (at a point in time) with it’s total productive capacity (at a time) in what is called the capital-income ratio or the wealth-income ratio. So, for example, if the wealth-income ratio is 5 (in this case, for the UK in 2010) that means that it would take 5 years of accumulating all the income in a country to equal the amount of capital that nation has on hand. In very, very simplified terms: how many years of income would it take to buy all the factories and land in a country? When wealth-income is high, that means that there is a lot of wealth/capital (relative to the country’s income). When wealth-income is low, that means there is relatively little wealth/capital. The historical range is from more than 2 to less than 7, and we’re currently around 4.5-6 (depending on what country you live in). If you can’t remember the details, just remember this: high capital-income means lots of capital.
  3. Countries have a natural resting point of capital-income that depends on two things: s (the amount that everyone in the country saves by buying more capital every year) and g (the rate of economic growth for the country). This is important, because if s and g are relatively stable, you know how much capital the country is going to move towards. Piketty has estimates for s and g, and based on that he believes that modern, developed countries are trending towards 6.5. In other words: we have lots of capital now, and we’re going to get more.
  4. Once you know how much capital a country has and you also know what the return on capital is (that’s a number that is fairly stable over the long run), you can determine how much of a country’s income comes from capital as opposed to labor. And, since return on capital is relatively stable, the more capital a country has, the more profitable it is to have capital.
  5. Here’s the final point: wealthy people always own proportionally more capital.

You should be able to put points 3, 4, and 5 together to reach this simple conclusion: all developed nations are on track to have more capital, which will make owning capital more lucrative, which will disproportionately favor the rich, which will continue to drive income inequality.

Thomas Piketty, the author of "Capital."
Thomas Piketty, the author of “Capital.”

This is pretty important. It’s important because it tells us that income inequality is going to continue to increase towards levels not seen since the late 1800’s.[ref]This isn’t mentioned, but on the bright side it also says they won’t go any higher than that.[/ref] It’s also important because it explains why this is happening, and it does so in terms of cross-cultural, international, non-partisan (mostly) terms. It’s not as simple as the Democrats or the Republicans selling you out to corporate America (although that probably doesn’t hurt). It’s driven by fundamentals.

Lastly, it’s important because it suggests a policy solution. Unfortunately, the policy solution is politically impossible. I mean, if you think that consumption tax would be a neat idea but you don’t think it’s realistic, that’s trivial compared to what would be required to combat this trend. Basically: you need to make capital less profitable. And that means you need to tax it. But, in order to be effective, this tax has to be international. Otherwise, if the UK taxed their capital, they would just be shooting themselves in the foot because all their rich folk would invest in French and American capital and legally avoid paying taxes.[ref]That’s called tax avoidance. It’s called tax evasion when you’re breaking the law.[/ref] So not only would the EU, US, Japan (and others) all have to agree to an incredibly unpopular tax, they’d also have to figure out how much to tax, how to enforce it, and what to do with the revenue. As Solow (the one doing the review says): Not. Going. To. Happen.

In simple terms, this means y’all should buckle in because we’re in for a bumpy ride. Income inequality foments radicalization and discontent, and so things could very well could ugly and even revolutionary.

Now, some caveats.

First, and obviously, if the forecasted numbers don’t pan out, neither do the results. Significantly change how much a country chooses to invest, or the rate of economic growth, of the long-run return on capital and the model veers off in one direction or another. Second, there is a contention that many wealthy Americans are already “the working rich” who get their compensation in labor rather than wealth. This would appear to contradict a key point (#5), but Piketty addresses that, Solow is convinced by it and so am I. (Although up until reading this article that was actually something I took seriously in my qualms with income inequality arguments.)

I have two unknowns of my own, however, which don’t come up in the model. First, I’d like to know more about the impact of international economic growth. We’re focusing on income inequality among people in the developed world. That’s what we tend to focus on because of what liberals would ordinarily call ethnocentrism.[ref]Not a dig. Just an observation.[/ref] While income inequality in that sense of the word is rising, income inequality globally is actually falling, and has been for decades. This is because the poorest countries are getting richer (in aggregate) faster than the richest among the developed world are getting richer than the poor among the developed world. And this advance of the poor countries is not just the mega-rich within those countries. As China has shown (again), you don’t get sustained economic growth without creating a middle class. The rise of the rest (as Fareed Zakaria dubs it) has important economic, ethical, and policy implications.[ref]Just to name one: if you think a capital tax regime is hard with just the EU, US, and Japan, what happens when you have to think about including the BRICS, too?[/ref]

But my biggest concern with this whole article is the focus on income taxation. In simple terms, you have to tax capital-based income so that it looks like labor-based income to mitigate the effects of rising income inequality. Not only is this politically infeasible, but it would also very negatively impact economic growth.[ref]If you tax factories, there will be less factories. If there are less factories, there will be less economic growth.[/ref] But do we really care so much about income? Or should we care more about consumption? Is it morally problematic that Bill Gates possess billions of dollars, or is it what he gets from those billions (yachts, influence, and safety) that causes the problem of income inequality? It seems, although this is just a first-glance at the issue, that a strong safety net and consumption based taxation goes a long way towards mitigating the problem of income inequality by looking at the problem in a new way.


Economist Jeff Smith Won’t Sign Minimum Wage Petition

I’ve written about my criticisms of minimum wage a couple of times already. (Walker has weighed in as well.) Here’s a good article, posted by Michigan economist Miles Kimball but quoting fellow professor Jeff Smith, on reasons why Jeff Smith refuses to sign a petition supporting a raise in the minimum wage. His concerns are:

1. It is poorly targeted relative to alternative policies such as the Earned Income Tax Credit (EITC). And, yes, I am familiar with the argument that the minimum wage and the EITC are complements; what is thin on the ground, so far as I am aware, is evidence of the empirical importance of this argument.

2. As pointed out recently by Greg Mankiw, it distributes the costs of the increased minimum wage in a less attractive way than alternative policies such as the EITC, which implicitly come out of general tax revenue.

3. Most importantly, raising the minimum wage fails to address the underlying issue, which is that many workers do not bring very much in the way of skills to the labor market. Rather than having a discussion about raising the minimum wage, we should be having a discussion about how to decrease the number of minimum wage workers by increasing skills at the low-skill end of the labor market. This would, of course, mean challenging important interest groups. It is also a bigger challenge more broadly because it is less obvious how to do it. But that is the discussion we should be having because that is the one that will really help the poor in the long run, in contrast to a policy that feels good in the short run but only speeds the pace of capital-labor substitution in the long run.

None of these arguments are novel, and I’ve cited all of them in the past, but they are worth repeating. Minimum wage: the best you can say is that it’s a really inept and obsolete policy.

Is Private School Evil?

Group of students wearing uniforms

Allison Benedikt has a piece at Slate urging people to “not just acknowledge your liberal guilt—listen to it.” Specifically, Benedikt states that “you are a bad person if you send your children to private school.”

I’d like to give Benedikt credit for having good intentions. The problem is that nothing in her argument actually substantiates her blind belief that if all kids went to public school, then public schools would improve. She even acknowledges that the rich would cluster in rich neighborhoods and nothing could be done about it, but somehow inner city public schools would miraculously rebound anyhow.

How? Benedikt doesn’t say. I feel bad pointing it out, but Benedikt might have done a better job at stringing together a cogent argument if her own education hadn’t been so poor. That’s not a mean-spirited slam on my part. I just don’t know what else to take from a piece that fails to provide any rationale whatsoever for its core thesis, but does include statements like “I left home woefully unprepared for college, and without that preparation, I left college without having learned much there either.” along with an eyebrow raising claim that “getting drunk before basketball games with kids who lived at the trailer park near my house” is an equivalent experience to reading Walt Whitman. Maybe if Benedikt had ever read Whitman, she would be qualified to weigh in on that, but since she claims to have hardly read any literary books ever I’m not sure why she thinks anyone would be interested to her opinion on the topic.

In the meantime, my kids don’t go to private school because my wife and I are rich and it’s a status symbol or class affectation. We stretch our budget to the breaking point to afford their tuition (and go without things like a second car) because we don’t want them to have to relive experiences like the vicious bullying I endured or the rampant sexism my wife survived. If you want us to risk putting our kids through that, you’ll have to do a damn site better than this as an argument. I’m guessing Benedikt doesn’t actually have kids, or she would understand that.

At the end of the day, the sad irony is that Benedikt’s piece is so terribly reasoned it is a stark warning against sending your kids to public school. If you do, they may end up writing nonsense like she does.