Income Inequality and the Crash of 2008

Some fellow named W.W. at the Economist is skeptical of the idea that rising income inequality had anything to do with precipitating our recent financial crisis. Economic historian David Moss thinks that rising inequality put too much power in the hands of Wall Street, thus allowing them to promote a wave of deregulation that put the system in jeopardy, but W.W. scoffs at that:

It's very hard to take seriously the idea as stated here. If Wall Street titans had "too much power" over policies regulating the financial industry, it's hard to see how a lower level of income inequality would have left their relative power much diminished.

Are we to imagine that somewhat less titanic Wall Street operators would have lacked sufficient motive and opportunity to rig the regulatory structure in their favour? In any case, regulatory capture is primarily an effect of asymmetrical information and the revolving door between government and business. What does the size of the gap between the first and fifth income quintile have to do with it?

This is a cramped view. Take a step back and try again. What kind of system would have produced Wall Street titans with less income and less power? Answer: a system in which there were competing power centers that prevented the rise of inequality in the first place. Those same power centers — primarily labor unions, but also public interest groups and the old non-corporate dominated Democratic Party — would almost certainly have fought a lot of the deregulation that ended up proving so dangerous. In other words, it's not inequality per se that's the problem, but the system that produced the inequality. A better system that produced wider prosperity would almost certainly have produced a better regulatory regime too.

This is, obviously, a counterfactual, and it can't be proven any more than any other counterfactual. But is it really so hard to believe? A system in which there are countervailing powers with the strength to demand that economic growth be shared broadly is also a system that fights Wall Street's efforts at deregulation. It's a system in which the rich have somewhat less vast pools of money to loan out to the working and middle classes. It's a system in which the incomes of the working and middle classes are growing faster and they have less need to borrow money in the first place. It is, in short, almost certainly a system in which the 2008 financial crisis was, at a minimum, less likely to happen.

It is also, unfortunately, not the system we have, and all the legislation of the past two years hasn't really done much to get us any closer to it. We continue to live in a world in which corporations and the rich have too much power, there's way too much stupid money sloshing around at the top of the wealth pyramid, and the middle classes continue to stagnate. It ain't healthy, folks.

Why ARRA Matters

Jon Cohn says that if Time's Michael Grunwald is enthusiastic about the 2009 stimulus bill "then you should be, too." OK then! But why should I be so enthusiastic? Because beyond the short-term tax cuts and jobs creation in the bill, about a sixth of it is dedicated to longer-term projects:

For starters, the Recovery Act is the most ambitious energy legislation in history, converting the Energy Department into the world's largest venture-capital fund. It's pouring $90 billion into clean energy, including unprecedented investments in a smart grid; energy efficiency; electric cars; renewable power from the sun, wind and earth; cleaner coal; advanced biofuels; and factories to manufacture green stuff in the U.S.

....The stimulus is also stocked with nonenergy game changers, like a tenfold increase in funding to expand access to broadband and an effort to sequence more than 2,300 complete human genomes — when only 34 were sequenced with all previous aid. There's $8 billion for a high-speed passenger rail network, the boldest federal transportation initiative since the interstate highways. There's $4.35 billion in Race to the Top grants to promote accountability in public schools, perhaps the most significant federal education initiative ever — it's already prompted 35 states and the District of Columbia to adopt reforms to qualify for the cash. There's $20 billion to move health records into the digital age, which should reduce redundant tests, dangerous drug interactions and errors caused by doctors with chicken-scratch handwriting. Health and Human Services Secretary Kathleen Sebelius calls that initiative the foundation for Obama's health care reform and "maybe the single biggest component in improving quality and lowering costs."

The whole piece is worth a read — and worth passing along to skeptical friends. There's nothing really new in it, but it's a pretty good distillation of a lot of underreported aspects of the stimulus bill. As Grunwald says, it won't leave behind a trail of physical icons the way the New Deal did, but "it will create new icons too: solar arrays, zero-energy border stations, an eco-friendly Coast Guard headquarters, an 'advanced synchrotron light source' in a New York lab. But its main legacy will be change. The stimulus passed just a month after Obama's inauguration, but it may be his signature effort to reshape America — as well as its government."

Down the Rabbit Hole

In the New York Times today, Timothy Egan doesn't just write about the "willful ignorance" of much of the conservative electorate, he takes the obvious next step and names the purveyors of this ignorance:

In the much-discussed Pew poll reporting the spike in ignorance, those who believe Obama to be Muslim say they got their information from the media. But no reputable news agency — that is, fact-based, one that corrects its errors quickly — has spread such inaccuracies.

So where is this “media?” Two sources, and they are — no surprise here — the usual suspects. The first, of course, is Rush Limbaugh, who claims the largest radio audience in the land among the microphone demagogues, and his word is Biblical among Republicans.

....[Second], there is Fox News, whose parent company has given $1 million to Republican causes this year but still masquerades as a legitimate source of news. Their chat and opinion programs spread innuendo daily. The founder of Politifact, another nonpartisan referee to the daily rumble, said two of the site’s five most popular items on its Truth-o-meter are corrections of Glenn Beck.

I don't really have anything original to say about this. At some point, the much maligned mainstream media is simply going to have to stop reacting to every outrage ginned up by the likes of Limbaugh and Fox as if it's a straight news story. They don't react that way to Keith Olbermann or Michael Moore, after all. But I'm not sure how to make that happen. There's really no excuse for repeatedly getting sucked down the same rabbit hole over and over and over — Megyn Kelly on the New Black Panthers, Breitbart on Shirley Sherrod, Limbaugh on Obama the Muslim, Hannity on the Park51 mosque — but they do anyway. They just can't seem to help themselves. What's the answer? As long as they play the game, is it any wonder that so many Americans are misinformed?

Clicking Your Way To Success

Brad DeLong provides the following instruction to new students in his Econ 1 class:

Given the benefits to your grade you will definitely want to acquire an i>clicker. Everyone is expected to have one and bring it to every lecture (including the first one). You can find new or used clickers online (at, say, or locally at the ASUC Bookstore or Ned's. They can be used for other courses for the duration of your time at Cal, and they can also be sold back at the conclusion of the semester. Once you purchase a clicker, register it at with your name and 8-digit student ID.

Huh? You need to have a clicker to take classes at Cal? Do students make clicking noises if they don't understand what the lecturer is saying? Click instead of raising their hand to ask a question? Tap out morse code? Or what?

None of the above. According to, i>clicker is an audience response system that "allows students to instantly provide feedback and answer questions posed by their instructors." It works like this:

  • Each student uses a "clicker," a portable, handheld device that allows students to vote by "clicking" on the appropriate button for his/her choice.
  • Instructors present a question and enable polling. Each student responds by “clicking” the appropriate button for his or her choice.
  • The instructor can then display voting results in a graph, to the audience. The results are also available for later analysis, grading, and exporting to any gradebook software or course management system.

Amazing. I'd never heard of this before today, which makes me feel really old. What's next? Classes taught by robots? Flying cars? Electricity too cheap to meter? The mind reels.

Quote of the Day: Remedial Math

From a math instructor in the California State University system, after one of his remedial students suggested she might have a mathematics learning disability:

"You very well might have a math learning disability. Such disabilities are prevalent and very real, but in your case, I think there might be stronger indicators at play here. Your attendance thus far is 50%, so you might have a showing up disability. You have turned in 30% of the homework thus far, so you might have a doing your homework disability. While I don't discourage you from getting tested for a math disability, I urge you not to discount those other two factors." Because of that comment, I never taught remedial math again.

Who knows? Maybe this guy is just a prick. But don't tell me you didn't laugh at this.

Why We Sue

Matt Steinglass is in Amsterdam, and he's pleased to find that his daughter can swim in the Amstel River if she wants. "If I'd tried letting my daughter do this in, say, the Potomac River in Washington, DC," he says, "I would have likely been arrested." Why the difference? Because in America everyone is afraid of getting sued, so they insist on putting in place ever more restrictive rules on what we are and aren't allowed to do:

The reason you can [swim freely in public waters] in the Netherlands is that if anybody tried to sue the city of Amsterdam because they or their child had been injured while swimming in the river, the suit would almost certainly be dismissed....Essentially, you still have the freedom to swim in the river in Amsterdam because people assume you have the common sense to avoid stupid behaviour, like diving in when you don't know what's underneath, or not keeping to the sides of the river during barge traffic hours. And if you don't, it's nobody's fault but your own.

But there's another reason why I can let my daughter swim in the Amstel, and that is that I'm pretty sure that in a well-regulated country like the Netherlands, the water is reasonably free of heavy pollutants and raw sewage. (I would not, for example, let her swim in the Mekong.) This, I think, outlines a useful distinction between different kinds of regulation....To generalise: for risks I can assess myself, I don't want regulations that prevent me from doing as I please just because I might end up suing the government. For risks I can't assess myself, I do want regulations that give me the confidence to do as I please. One kind of regulation stops me from swimming in a pond in Massachusetts. The other kind lets me swim in a river in the Netherlands. One kind of regulation makes me less free. The other kind makes me freer.

It's worth digging into this a bit. Why is America more litigious than Europe? With the obvious caveat that not every country in Europe does things exactly the same way, here are a few reasons:

  • America's common law culture has always given lawyers more power and greater scope for action than in continental Europe. Tocqueville commented on this 200 years ago.
  • In civil cases, most European countries have adopted a "loser pays" rule. If you sue and lose, you have to pay the other side's costs. This obviously makes people think a lot harder before they decide to file a suit.
  • In most European countries torts are tried in front of judges. In the United States the constitution guarantees jury trials, and juries are probably more likely to award damages than a panel of grizzled old judges. (Or even grizzled young judges.)
  • Largely thanks to conservatives, America has developed a litigation culture rather than an enforcement culture. In Europe the tradeoff generally goes the other way: they have more rules and tighter enforcement of those rules, which means that private litigation is less necessary.
  • On a related note, Sean Farhang argues that at the level of federal legislation, Congress actively encourages private litigation as an enforcement mechanism because it doesn't trust enforcement to the executive branch (which might be headed by someone who prefers to take it easy on favored constituencies).

Long story short, this difference between Europe and the U.S. is so deeply rooted that it's not likely to change — and it's not really due to a national culture that promotes a refusal to accept personal responsibility or anything like that. It's mostly institutional in nature, and the incentives of our institutions point in the direction of more lawsuits instead of more regulations. Conservative tort reform advocates are huge fans of implementing a European-style loser pays rule in America, and I might be too if they were willing to make the other half of the bargain and support European-style regulation and enforcement designed to make our institutions safer and fairer in the first place. But they're not.

Lifetime Social Security Payouts

Over at the Tax Policy Center, Gene Steuerle and Stephanie Rennane quote from a CBO report about how total lifetime Social Security payouts are increasing:

In today’s dollars, CBO calculates that a single person born in 1960 (assumed to retire at age 65 in 2025) who earns close to median wages over their lifetime is scheduled to receive approximately $250,000 in lifetime Social Security benefits, while a similar earner born in 2000, expected to retire in 2065, would receive around $420,000.

Does this show how generous Social Security payments have gotten? No. Just the opposite. Real per-capita GDP in 1960 was about $15,000. In 2000 it was $39,000. That's a 160% increase. Conversely, the real increase in total Social Security payouts over an average lifetime is going up only 70% for retirees born in those two years.

Social Security as a program will cost us more in the future than it does now. Longer lifespans are a small part of the reason, and the fact that the huge baby boom generation is about to retire is a much bigger reason. But lifetime payouts, far from spiraling out of control, are considerably stingier now than in the past. We're a far richer country than we were in 1960, but average wages haven't kept up with productivity growth for a long time — and since Social Security payouts are tied to average wages, not economic growth, benefits haven't kept up with economic growth either. Reducing them even further by raising the retirement age would merely be compounding one injustice with another.

Is Inflation Good For the Rich?

Felix Salmon sez:

Inflation is painful for the poor, but much easier for the rich, whose wealth is tied up in things like stocks and houses which tend to retain their real value.

Hmmm. I haven't thought about this in a long time. Historically, of course, inflation was generally a populist favorite because it reduced the real value of debt. Conversely, "sound money" was preferred by the banking class for exactly the opposite reason. They were the ones making the loans, and they didn't want the value of those loans to be eroded.

Of course, that was back in the day of fixed-rate lending. If you owed the bank a fixed $500 per month on your seed loan and inflation skyrocketed, that $500 became pretty cheap and farmers rejoiced. J. Pierpont Morgan, on the other hand, was not amused.

But what about an industrial era where loan rates are variable and everything is indexed to inflation? Then who benefits (relatively speaking) from inflation? That's an empirical question, and Romer and Romer provided the following answer in 1998:

We find that the short-run and long-run relationships go in opposite directions. The time-series evidence from the United States shows that a cyclical boom created by expansionary monetary policy is associated with improved conditions for the poor in the short run. The cross-section evidence from a large sample of countries, however, shows that low inflation and stable aggregate demand growth are associated with improved well-being of the poor in the long run. Both the short-run and long-run relationships are quantitatively large, statistically significant, and robust. But because the cyclical effects of monetary policy are inherently temporary, we conclude that monetary policy that aims at low inflation and stable aggregate demand is the most likely to permanently improve conditions for the poor.

A couple of years later William Easterly and Stanley Fischer took another look at the data and concluded that inflation had a very mild but negative impact on the poor, and that in polls, "the disadvantaged on a number of dimensions — the poor, the uneducated, the unskilled (blue collar) worker — are relatively more likely to mention inflation as a top concern than the advantaged."

This doesn't tell us anything about moderate levels of inflation — say, the difference between 2% inflation and 5% inflation. It's more geared to general long-term stability. Still, the days of yeoman farmers demanding free silver at 16:1 are just a memory. Today a bout of inflation just jacks up the rate on their credit card balances.

Healthcare For Students

Megan McArdle reacts to a story from Kaiser Health News suggesting that healthcare reform might prevent universities from offering low-cost student insurance policies:

I imagine that the administration has been blindsided by this one....Had this been written into the law, it probably would have passed unnoticed, but the farther this presses into the spotlight, the harder it's going to be to arrive at a politically acceptable answer.

Chalking this one up to the cost of passing multi-thousand page bills that no one has read.

Hah hah! Stupid Democrats didn't even read their own bill! I imagine we're going to be inundated with stuff like this over the next few years, as critics of reform crow over every story that suggests even the remotest possibility of some negative outcome on one benighted group or another. But here's my prediction: virtually none of these self-serving pity stories will amount to anything.

Take this one. We're not talking about university health centers here, we're talking about actual health insurance policies. And if you read through the rest of the story, you find that most students are insured through their parents' policies. According to the GAO, "only 7 percent bought their own policies or purchased school-based plans." Add to that the fact that so far there's no real evidence that healthcare reform will seriously impact student health policies anyway (colleges are merely "warning" that it might) and that a lot depends on the rules HHS sets, which is all part of how healthcare reform is designed to work. HHS rule setting is a big part of the process and was always intended to be.

So: do I expect vast hordes of angry students descending on Capitol Hill? No. Do I expect HHS to sit around and do nothing about this? No. Do I expect that some reasonable set of rules will be worked out in the end? Yes. Do I expect that critics will take any notice of the fact that yet another scare story about healthcare reform will turn out to be overblown and ridiculous? No indeedy.

Iraq Update

Anthony Shadid reports on a coordinated wave of insurgent attacks across Iraq yesterday:

For weeks, there had been sense of inevitability to the assaults, which killed at least 51 people, many of them police officers. From the American military to residents here, virtually everyone seemed to expect insurgents to seek to demonstrate their prowess as the United States brings its number of troops below 50,000 here. But the anticipation did little to prepare security forces for the breadth of the assault. Iraqi soldiers and police officers brawled at the site of the biggest bombing in Baghdad, and residents heckled them for their impotence in stopping a blast that cut like a scythe through the neighborhood.

....For weeks, insurgents have carried out a daily campaign of bombings, hit-and-run attacks and assassinations against the security forces and officials, seeking to undermine confidence in their ability to secure the country. They remained the target Wednesday in attacks in Falluja, Ramadi, Tikrit, Kirkuk, Basra, Karbala, Mosul and elsewhere.

....The attacks come amid deep popular frustration with the country’s politicians, who have failed to form a government more than five months after elections in March. Shoddy public services, namely electricity, have only sharpened the resentment.

Violence in Iraq is still far below its 2006-07 levels, but the main goal of the surge, in George Bush's words, was always to provide "breathing space" for political reconciliation that would make its security gains permanent. This has been its Achilles heel ever since it was completed, and the news on this score has continued to get worse for at least the past couple of years. The Florida-like inability to agree on the most recent election results and form a government of any kind is merely the latest act in the play.

And while we're on the subject of military intervention abroad, Fred Kaplan has a good piece in Slate explaining the regional politics that makes progress in Afghanistan so hard. I don't think I'm up for two separate posts on the subject of foreign wars today, so instead I'm just tacking this onto the Iraq news. It's worth reading.