A happy and healthy March to you. Welcome to “The Difference Principle: a Newsletter on Inequality”.
First, given the rapid spread of the coronavirus (COVID 19), I want to begin by wishing all readers and their families safety and good health. If you have not already, please consult the CDC’s recommendations on how to avoid contracting coronavirus and infecting others.
Since this is our first issue, I’ll begin by briefly sharing why I think it is so important to study inequality and what my plan for “The Difference Principle” is.
Modern US inequality is historically high but not unprecedented. During the “Gilded Age” of the late 19th and early 20th centuries, a new industrial elite emerged alongside stagnating working-class wages and higher living costs. These same forces have been present today, although there are good reasons to believe the modern problem of inequality is worse. Since inequity began to increase in the mid-1970s, I argue there have been effectively five major causes of inequality: the decline in unionization, globalization, financialization, bad policy, and technology.
High inequality matters because it is a scourge on society. It correlates with mobility, which is at the core of America’s promise to promote equality of opportunity and a capitalism that remains competitive. Higher inequality also correlates with a country’s homicide rate, depression rate, suicide rate, the prominence of drug use, and the shift towards radical and often intolerant politics. It also results in more costly economic recessions and lower rates of long-run growth. This is to say nothing of ethics and the notions of political justice that might provide ample reasons to resist inequality.
By highlighting major reports and news stories each month that can teach us about the causes and effects of US inequality, I hope this newsletter will be a useful resource. And I am excited to say that there are currently over 300 subscribers—people from diverse backgrounds, including scholars, policymakers, politicians, students, and journalists.
You will find all of the content below divided into four sections.
First, the “Top Story”, where I highlight a development that I think should receive particular attention. Second, “Big Ideas”, where I summarize major reports, research, and news stories from the past month that are relevant to US inequality and its discontents. Third, “What Else I’m Reading”, which is a brief collection of other reports and developments that deserve some attention. Fourth, “From the Bookshelf”, which will include older pieces of research or texts that are of particular interest. Then there is a quote of the month and a brief summary of what else I’ve been working on.
Since this is the first edition of “The Difference Principle” it is also longer than I anticipate subsequent issues of the newsletter will be—I cast a wide net and, to make sure readers don’t miss out on some of the most interesting work that has come out recently, included pieces that were up to three months old. This edition is also coming later in the month than subsequent issues will come. Expect future editions of the newsletter to pop into your inbox on the first of every month.
This March, our top story is about the rise of economic returns on college degrees and the role those returns have played in spurring greater wage inequality. We also highlight twenty-one reports in our “Big Ideas” section on a diverse array of topics, including the Black-white wealth gap, the role of student debt in reducing homeownership, and the spread of automation and skills-biased technological change.
Then, we briefly discuss thirty-four other reports and news stories that are worth checking out. We conclude with the “From the Bookshelf” section, where we turn to Walter Scheidel’s seminal text on the history of inequality from the Stone Age to the present: “The Great Leveler”.
See you again in April.
—Julian, writing to you from Ghent, Belgium.
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The Difference Principle:
“Assuming the framework of institutions required by equal liberty and fair equality of opportunity, [The Different Principle states that] the higher expectations of those better situated are just if and only if they work as part of a scheme which improves the expectations of the least advantaged members of society.”
—John Rawls, A Theory of Justice (1971)
(In “Spotlight”, we highlight one report or story from the past month that deserves particular attention.)
The race between education and technology… redux
(David Autor, Claudia Goldin, and Lawrence Katz, Journal of Labor Economics)
More than a decade ago, Harvard University economists Claudia Goldin and Lawrence Katz published a seminal study on the relationship between technology and the demand for high skills and college degrees by employers. Their research—titled “The Race Between Education and Technology”—showed that the earnings gap between the average high school graduate and the average college graduate doubled from 1980 to 2005 and that the increase in economic returns for college graduates was responsible for about 60 percent of the rise in wage inequality from the 1973—2005 period.
Seven years later, MIT economist David Autor showed that the gap between median college-educated and high-school-educated annual wages for men measured in 2012 dollars was $17,411in 1979 and $34,969 in 2012. And a paper Autor co-authored prior to the Goldin and Katz study showed that computerization might be responsible for 60 percent of the increase in demand for high skill/college-educated workers from 1970 to 1998. The findings of these studies are incredibly relevant to anyone studying inequality—they give a sense of both the scale of America’s growing gap between the rich and the poor as well as the underlying economic mechanisms spurring that movement forward.
This past January, Goldin and Katz joined Autor in publishing an updated version of their initial 2007 study. In this new version of “The Race Between Education and Technology”, they undertake the “Herculean task” of tracing the wage gap between high skill and low skill workers from 1825 until 2017.
What their findings reveal is that, as new technologies require workers to upskill, premiums on education increase. If the US fails to adequately increase educational attainment and schooling appropriately, wage inequality emerges. This was true in the early 20th century—it took a movement to send all students to high school in order to decrease the high school wage premium and earnings gap. Shortly after this period, rising premiums on college-degrees emerged, though they decreased during the Second World War and around the 1970s.
After 1980, however, things changed. This paper shows that 75 percent of the rise in US wage inequality from 1980 to 2000 is directly attributable to the premium on college degrees. Autor, Goldin, and Katz argue that this increase in premiums was a consequence of the slowdown in the growth of college-educated people. From 2000 to 2017, the role of the college premium was weaker—rising returns on high skills account for 38 percent of the rise in wage inequality. And, beyond this, it seems that there is a rising premium gap among college graduates—most of the increase in wage inequality occurred within that group as opposed to among non-college educated. This corroborates the notion that inequality is growing and that incomes are increasingly concentrated among an even smaller subset of people than the past.
(“Big Ideas” showcases particularly interesting stories and reports from the past month—organized by subject.)
~Business and Finance~
High levels of student debt are decreasing homeownership for young people
(Alvaro Mezza, Daniel Ringo, Shane Sherlund, and Kamila Sommer, Journal of Labor Economics)
By utilizing a unique dataset, members of the Federal Reserve Board looked at how student debt was affecting the homeownership rate of people in their mid-20s. For context, from 2005—2014, the homeownership rate plummeted by nine percentage points for people aged 24-32. That’s almost twice as high as the decrease for the rest of the population. Meanwhile, student debt has been increasing—in 2005, 30% of 22-year-olds had student debt, averaging $13,000. By 2014, those numbers increased to 45% and $16,000 respectively. With this in mind, the study finds that a $1,000 increase in student loan debt causes between a one and two percent decrease in the homeownership rate of student loan borrowers in their mid-20s. The report also finds that student debt tends to negatively impact borrowers’ credit scores, possibly excluding them from the mortgage market. Read.
Wage gains during “markups” are likely to go to “expansionary workers”
(Greg Kaplan and Piotr Zoche, Becker Friedman Institute for Economics at the University of Chicago)
In the past, economists have regarded laborers as individuals who produced existing things for the economy. This paper shows that, contrary to this belief, between 20 to 35 percent of US labor income pays for expansionary activities, which involve the creation of new products or the expansion of market share. Prior to this study, economists and policymakers put this number at zero. Expansionary workers are more likely to see benefits than other workers during a markup (when the gap between marginal costs and product prices grows). The report also finds that the portion of expansionary workers has increased since the 1970s, alongside economic inequality. Read
Why finance has not created faster economic and productivity growth
(Neil Irwin, The New York Times)
Why has finance-driven capitalism not catalyzed greater economic growth since the expansion of American financialization? Using a failed budget shoe chain as a case study, this article in the New York Times makes the case that private equity groups—tasked with improving poorly run corporations—often don’t make the companies they finance more productive or dynamic. As the author shows, in extreme cases, private equity seems clueless—electing to sell World-Cup themed sandals that wouldn’t arrive until after the World Cup, for example. The undergirding problem, this article shows, is that private equity often has a preference for swift profitability and improvements in productivity that might look good in the short-run but ultimately leave a company in a more precarious long-run position. Read
High inequality reduces mobility through declining high school attainment
(Melissa S. Kearney, University of Maryland; Philip B. Levine, Wellesley College)
In 2006 the economist Miles Corak showed that as a country becomes more unequal, economic mobility (i.e. your ability to improve or worsen your economic conditions) tends to decline. Six years later, economist Alan Krueger introduced the concept of the “Great Gatsby” curve to describe this phenomenon. It is unclear, however, whether higher inequality is causally responsible for the decline in economic mobility. This paper argues that one way higher inequality directly reduces mobility is through the perception among low-income students in highly unequal places (especially boys) that school is unlikely to improve their lives—as the authors put it, the perception of a “lower rate of return on investment in their own human capital”. This is measured through the increase in dropout rates, in cases where students’ stated reason for dropping out is not due to a difficulty keeping up with coursework. The authors see support for their hypothesis in survey data and discuss the potential policy implications of their findings. Read
Meanwhile, higher college attainment reduces inequality… a little bit
(Brad Hershbein, Melissa Schettini Kearney, and Luke W. Pardue, NBER)
Just as declining high school attainment was found to be both a cause and effect of inequality, this study provides a simulation of what might happen if college attainment increased for men and women aged 25—54 who are seeking either a bachelor’s or associate degree. By estimating the impact on earnings inequality, the authors find that higher college attainment would increase individuals’ average earnings and that those effects are concentrated in the lower half of the earnings distribution. This shows that higher college attainment can be a meaningful way of both reducing poverty and near-poverty rates as well as reducing inequality. The authors do concede, however, that the effects on overall US inequality would be relatively small, and certainly not large enough to reduce the income and wealth gap back to 1970s levels. This is because higher college attainment will do little to affect the earnings of the wealthiest individuals in the US income distribution, and that demographic is where most of the rise in inequality has taken place. Read
Graduating during a recession has long-term negative health consequences
(Hannes Schwandt and Till M. von Wachter, NBER)
This is the first paper to study the negative effects of entering the workforce during a recession has on mortality and the socioeconomic status of individuals after the age of forty. By focusing on groups born in the late 1970s—mid-1980s, the authors found that individuals who came of age and entered the workforce during the recession of the early 1980s saw a rise in mortality, which appeared in their late 30s and got worse through age 50. This rise in mortality was driven through both diseases (heart disease, cancer, etc.) as well as drug overdoses. Individuals who were unlucky while entering the workforce during the recession also earned less, were less likely to be married, and were more likely to be divorced and without children. These effects on overall mortality were similar by race; however, they were most pronounced among white men. Finally, it is worth noting that the study utilizes mortality as a benchmark for negative health outcomes. Since this study does not capture all the other long-term health effects that do not end in death, the authors note this study’s estimates should be considered lower bound. These findings are supported in an unrelated paper published by the Upjohn Institute. Read
Charts showing how working-class life is killing Americans
(David Leonhardt and Stuart A. Thompson, The New York Times)
In 2015, the economists Anne Case and Angus Deaton published an influential study that tracked the rise of American “deaths of despair”—dying from suicide, alcoholism, or drug abuse— which were concentrated in working-class white communities and, especially, among the non-college educated. This piece in the New York Times creates a portrait of the increase in these deaths of despair, highlighting who the people most affected are and what recent US trends have been. In short, the victims of deaths of despair tend to be white, non-college educated men. And non-college educated individuals are less likely to be married, more likely to suffer from chronic pain, more likely to drink heavily, less likely to attend church, and are generally less happy. The rise in deaths of despair has correlated with the rise of inequality in the US. Read
Emmanuel Saez’s latest work shows the efficient UE rate is as high as 6%
(Emmanuel Saez UC Berkeley; Gabriel Zucman UC Berkeley)
Emmanuel Saez is an economist who has been very influential in the study of inequality. A study he co-authored last year, which I recommend reading, created a blueprint for a progressive wealth tax, which subsequently became a central policy proposal in Senator Elizabeth Warren’s 2020 Presidential Campaign. In this paper, Saez estimates that the efficient unemployment rate, in which welfare is maximized, is 6 percent. By contrast, most economists put the natural rate of unemployment between 4.1 percent and 4.7 percent. To reach his conclusion, Saez relies on something called the “Beveridge curve”, which describes the relationship between unemployment and job vacancies. Of course, high unemployment and job vacancies (indicative of a recession) both come with welfare costs. And yet, the Beveridge curve shows that both cannot be reduced at the same time. Lower unemployment requires more vacancies and fewer vacancies create more unemployment. Saez’s 6 percent figure is where he reckons unemployment is most efficient along the Beveridge curve—that is, where it maximizes welfare. Read.
Higher inequality results in a preference for longer working hours
(Constantinos Alexiou and Adimulya Kartiyasa, Bulletin of Economic Research)
Drawing on research by Thorstein Veblen, this study looks at the relationship between economic inequality and an individual’s time spent working and in leisure. The authors find that greater inequality tends to correspond with longer working hours, and they attribute this conclusion to the apparent preference for conspicuous consumption (e.g. luxury goods) over conspicuous leisure (e.g. idleness) among the wealthy. The authors speculate that the corresponding rise in working hours may be a result of “consumption emulation”, whereby middle and low-income individuals seek to enhance their financially-derived social status by taking on more work. In other words, the consequence of the rich getting richer is greater consumption of luxury goods. And this, in turn, creates a psychological-pressure for the non-rich to work longer hours to keep up. Read
A brief history of US economic inequality
(Chad Stone, Danilo Trisi, Arloc Sherman, and Jennifer Beltran, Center on Budget and Policy Priorities)
This piece by the Center on Budget and Policy Priorities provides a brief summary of the recent history of US inequality. It’s a useful briefer on the topic because it summarizes some of the most important pieces of research that give us an insight into the rise of inequality since the Second World War. In short, the years from World War II to the 1970s were years of strong growth, less inequality, and the presence of a robust middle class. During this period, incomes double across all income demographics. This changed at the beginning of the 1970s—economic growth slowed and the income gap grew. Today the income gap is the highest it has been since the 1920s, during the Gilded Age. Wealth is even more dramatically concentrated—the share of wealth held by the top 1 percent rose from 30 percent in 1989 to 39 percent in 2016, while the share held by the bottom 90 percent fell from 33 percent to 23 percent. This report summarizes these statistics and offers guidance on how to read the recent history of US inequality. Read
Thomas Piketty has a new book out
(Thomas Piketty, book review in the New York Times, New Yorker, and Economist)
In 2013, Thomas Piketty published a 700-page account of rising wealth and income inequality in the US and Europe. It became a New York Times bestseller, despite an analysis of Kindle readership, which found that the typical reader only made it through an average of 26 pages. The new book “Capital and Ideology” is a one thousand page text with a central thesis that, as Piketty says, “Inequality is neither economic nor technological; it is ideological and political.” What results is a book perhaps even more ambitious than its predecessor. Using the lenses of philosophy, sociology, economics, political science, and history, Piketty attempts to retell the history of the world through a prism of inequality. The case studies “Capital and Ideology” looks at are unsurprisingly diverse—from the pre-colonial Hindu kingdom of Pundukkottai to contemporary Swedish corporate boards. Piketty ultimately proposes a type of modern socialism, with a more “democratized economy” and wealth taxes up to 90 percent. Read reviews in the New York Times, New Yorker, and Economist. Buy here.
~People and Places~
The Black-white wealth gap is bigger and more widespread than we thought
(Kriston McIntosh et al, The Brookings Institution)
When studying inequality, wealth—the value of all an individual’s assets (physical and intangible) minus all debt—is an essential unit of measurement. Unlike income, wealth serves as a safety net to keep people from losing their livelihoods during short-term hardships, such as losing a job. Wealth—and the safety net it provides— is essential to taking career risks, accessing housing in safe neighborhoods, and it is also taxed at much lower rates than income. Though economic inequality along lines of race is understood, this report by The Brookings Institution shows that the wealth gap between white households and Black households is higher than previously thought. In 2016, the net worth of the average white family was nearly ten times larger than the net worth of a black family ($171,000 compared with $17,150). This disparity is higher today than it was at the start of the century, in part because Black families were hurt particularly badly by the 2008 Recession. Though some of this gap may be due to the higher median age of white people when compared with Black people, this study shows that the wealth gap persists within age demographics and even within income brackets—the top 10 percent of income earners (only 3.6 percent Black) see its white members hoovering up 5 times more wealth than Black people. The report’s authors argue this is due, in large part, to the role of inheritance, and they conclude with a set of policy prescriptions. Read
The growth of the technology sector is highly unequal
(Mark Muro and Robert Atkinson, American Enterprise Institute)
Studying geographic inequality is an essential component of studying inequality generally speaking. Especially today. This report by two leading scholars discusses the consolidation of the technology sector (and the high wages and profits it commands) in a geographically unequal way. Despite the perception that the tech sector is becoming increasingly diffuse in the US, it continues to concentrate in a small group of wealthy cities. The authors identify San Francisco, San Jose, Austin, and Seattle as the places particularly benefitting, all while the US heartland has continued to stagnate. The report discusses these observations and offers policy suggestions about how the US can kindle faster economic growth in heartland cities. Read
Black businesses are valued less than white ones, regardless of quality
(Andre M. Perry, Jonathan Rothwell, and David Harshbarger, The Brookings Institution)
This report from The Brookings Institution’s Metropolitan Policy Program discusses the presence of consumer biases against businesses. By matching data from Yelp with financial performance data from the National Establishment Time-Series (NETS) Database, the authors highlight the economic costs of those biases. In total, the report reckons that Black-majority neighborhoods experience an annual loss of business revenue as high as $3.9 billion. And although Black people make up 12.7 percent of the US population, they comprise only 4.3 million of the country’s 22.2 million business owners—much of this may have to do with a lack of access to capital and credit. By using Yelp ratings as a measure for business quality, the authors found that establishments in Black-majority neighborhoods grow at roughly the same rate regardless of quality, and even highly rated establishments in those communities perform worse than poorly rated ones in neighborhoods that are less than 1 percent Black. Read
~Social Security and Taxation~
Wharton economists argue wealth inequality has not actually increased
(Sylvain Catherine, Max Miller, and Natasha Sarin (Wharton/UPenn Law)
Scholars from the University of Pennsylvania’s Wharton School argue that contemporary estimates of inequality vastly overstate the presence of wealth concentration. By incorporating the impact of social security retirement benefits into measurements of wealth inequality, the authors find that wealth inequality has not increased in the past three decades. Moreover, social security wealth increased from $5.6 trillion in 1989 to $42.0 trillion in 2016, when social security represented 58 percent of the bottom 90 percent of household wealth. Read
Developing a new progressive tax policy
(Emily Moss, Ryan Nunn, and Jay Shambaugh, The Brookings Institution)
The presence of an aging US population has created a need for greater government taxation. And meanwhile rising inequality necessitates that such a change in taxation policy be more progressive than what currently exists. This report by the Brookings Institution highlights some of the failures of the modern tax system before suggesting alternatives that would allow the US to reach its funding goals in a progressive way. The authors argue that modern tax policy relies on both payroll taxes and income taxes, while corporate taxes raise less revenue than they used to and capital gains and the estate tax raise a small share of income taxation. The report advocates the embrace of a more progressive tax system. Read
Automation creates a bias for high-skill labor, which increases inequality
(Daron Acemoglu, Claire LeLarge, and Pascual Restrepo, NBER)
New technologies, such as artificial intelligence, are expanding the scope of what labor can be automated. This paper models the effects of automating existing tasks that workers perform alongside the “counteracting” effects of new skill demands and the emergence of new work, which automation creates through efficiency gains. The authors find that automation has been a significant source of displacement and that demand for skills has grown since 1987 due to counteracting effects. These results are significant because they represent another account of how the US economy has shifted in a way that values “high skills” more highly than in previous decades. And all of this powerfully affects inequality and has the potential to reduce real wages, with potentially marginal changes in productivity. Read
Robots result in a decline in manufacturing work, as seen in France
(Daron Acemoglu, NBER)
Another study by Daron Acemoglu. This one takes France as a case study and looks at how the introduction of labor-automating industrial “robots” by a firm affects its workers. Perhaps unsurprisingly, Acemoglu finds that robots reduce the number of manufacturing jobs and increase productivity. For an individual firm, the introduction of robots can actually create more job openings in the short run because the efficiency gains (money saved in production) allow that firm to open new branches or increase production. These effects, however, are more than offset by the large reductions in employment at competitor firms. This leads Acemoglu to conclude that adopting robots has an overall negative impact on workers employed in manufacturing. Read
AI is most likely to automate routine and rural work done by young men
(Mark Muro, Robert Maxim, and Jacob Whiton, The Brookings Institution)
There have been numerous studies attempting to predict the numbers and types of jobs that will be automated by digital technology, such as artificial intelligence. A particularly significant attempt to do this came from the McKinsey Global Institute, which focused, not simply on what jobs would be automated, but instead on what tasks would be automated. The Brookings Institution’s Mark Muro uses data from that McKinsey report to analyze the impact of automation from 2016 to 2030 across 800 occupations. In total, he finds that about 25 percent of US employment—that’s 36 million jobs in 2016—face “high exposure to automation”. Meanwhile, 36 percent of jobs are at medium level exposure and 39 percent are at low level of exposure. In general, work that is easily automatable tends to be routine and rural, performed by young men--another Brookings report reaches similar conclusions. Read
A survey of research finds evidence that free trade can increase inequality
(Ann Harrison, John McLaren, and Margaret McMillan, World Bank)
There is little question that outsourcing and global liberalization has led to a significant upheaval of US labor markets—see this paper on the effects of shipping jobs off to China. Yet there is mixed evidence that trade and globalization have been a major force spurring inequality in the US. This report by the World Bank provides a survey of significant pieces of economic research (theoretical and empirical) that attempt to assess the impacts of trade on US inequality. It finds that available evidence supports the notion that greater openness increases wealth and income disparities, possibly through rising returns to “skilled labor” and declining returns to “unskilled labor”. Many economists remain skeptical, however, that trade—as opposed to technology or government policy—has been a chief engine of inequality. Read
Immigration slightly reduces low skill wages
(Vasil I. Yasenov, The Upjohn Institute)
How does an influx of immigration affect wages? This report by the Upjohn Institute shows that, since 1980, immigrants have been increasingly overrepresented in low-skill and low-wage work. Some of this, the author argues, may be a consequence of Americans downgrading the value of education and experience obtained abroad. Through two different methodological approaches, this study finds that a one percent increase in the number of immigrants in the US results in only a 0.2—0.3 decrease in wages. This indicates that immigration has not been a chief contributor to the rise of US inequality in the past few decades. The author notes that some of the attention immigration receives may stem from the perception of distinct winners and losers from an influx in foreign-born individuals. Read
What Else I’m Reading
(“What Else I’m Reading” is a very brief rundown of other noteworthy reports and stories.)
The coronavirus is decreasing student loan refinancing rates, benefiting students (Credible)
The coronavirus is disproportionately hurting low-income Black and Latino communities (The New York Times)
The British columnist Owen Jones argues the coronavirus shows that high inequality can harm peoples’ health and even kill (The Guardian)
Affordable housing is too often placed at a distance from where available jobs actually exist (Urban Institute)
New apartment buildings in low-income areas do not accelerate gentrification; they slow rent increases and increase migration from other low-income neighborhoods (Upjohn Institute)
Despite pre-corona headlines that indicated the US has a strong economy, the country has seen an affordability crisis, in which families and individuals were “bled dry” by rent, medical fees, university fees, and child care costs (The Atlantic)
At least 3.2 million more people should be classified as being “in poverty” based on inflation changes alone (American Progress)
Roughly a third of adults aged in their 40s—early 60s has given a parent money in the past year for things like groceries and housing (New York Times)
There are deep racial and economic inequalities in Long Island (Urban Institute)
The Brookings Institution published its annual Metro Monitor report on the socio-economic conditions in 192 metropolitan statistical areas (Brookings)
The decline of US dynamism has been particularly pronounced in rural areas, in part due to migration into cities (American Enterprise Institute)
Private school choice improves public school outcomes (NBER)
In the years after the Great Recession, the economy structurally (not cyclically) shifted in a way that privileges high-skill (educated) labor (NBER)
A guide for students, parents, and counselors on the “right” amount of student debt to take on for college (Urban Institute)
Credit card debt has reached record levels—currently at $930 billion, which is much higher than it was prior to the 2008 crisis. (Wall Street Journal)
Higher labor inequality leads to larger government debt, but larger capital inequality may lead to less debt due to changed government incentives to borrow (Economic Letters)
Trump’s 2021 budget would increase income inequality and widen disparities across race and ethnicity (Center on Budget and Policy Priorities)
The Brookings Institution outlines four potential approaches to developing a robust wealth tax policy capable of raising $3 trillion over the next decade (Brookings)
A pre-funding mandate for retiree health benefits threatens the ability of the U.S. Postal Service to continue to provide good jobs and universal service (Institute for Policy Studies)
Increasing the minimum wage improves child health (NBER)
Wages will generally rise under medicare for all, however, this will not be true for everyone (New York Times)
On how employers identify whether to hire (and pay) interns
(NBER)The Economist’s annual index ranking of women’s equality in the workplace shows Iceland in the lead and the US at 22, behind the OECD average (The Economist)
According to the Labor Department, labor unrest reached its highest level in nearly two decades in 2019, with 25 labor-related work stoppages, including strikes and lockouts (Wall Street Journal)
Lower immigration may have a short-run benefit to wages; however, that is hardly a reason to impose tighter restrictions at the border (The Economist)
By applying machine learning techniques, economists estimate the impact of automation on US jobs and assess policies aimed at addressing the loss of work and higher inequality (Brookings)
Policymakers should worry about the changing nature and demands of work, not the end of work due to automation (Brookings)
Uber is considering radical financing options to fund its driverless cars (Financial Times)
Manufacturing automation means production-heavy developing countries must now export services (NBER)
Greater access to broadband can promote better and more equal health and economic outcomes (Brookings)
Contrary to the warnings of Elizabeth Warren, the subprime auto loan market does not pose a threat to the economy similar to the pre-recession subprime mortgage market. (Progressive Policy Institute)
The 2020 election may be influenced by voters’ views of inequality and the Democrat’s ability to capitalize on those views (Financial Times)
Self-employed individuals are more likely to tolerate high levels of inequality due to preferences for autonomy (British Journal of Sociology)
Inequality in Finland increased until it fell during World War I and increased again until it fell during World War II, supporting the hypothesis that inequality tends to get reduced by dramatic shocks (European Review of Economic History)
From the Bookshelf
(Each month, we highlight one older text that offers valuable insights into inequality.)
“The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century” (2017), Walter Scheidel
“The Great Leveler” traces the history of inequality from the stone age to the modern-day. The central thesis of scholar Walter Scheidel is that high levels of wealth polarization only ever get remedied—or leveled—through cataclysmic disasters of one sort or another. And throughout history, these disasters have taken on four distinct forms: plague, civil war, mass military mobilization, and government collapse. As he argues, “this was as true of Pharaonic Egypt as it was of Victorian England, as true of the Roman Empire as of the United States”.
In this regard, Scheidel offers a push-back against economists who attempt to explain egalitarian leveling as a consequence of cyclical market forces. On the contrary, when we consider the case of “Gilded Age” American wealth, Scheidel shows that inequality only declined because of the Second World War. As he explained, “the physical destruction wrought by industrial-scale warfare, confiscatory taxation, government intervention in the economy, inflation, disruption to global flows of goods and capital, and other factors all combined to wipe out elites’ wealth and redistribute resources.”
What I’ve Been Working On
(A brief summary of projects that I have been working on in the past month.)
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Quote of the Month
"Inequality isn’t just about the billionaires, it’s about the fact that the top 10%, and particularly the top 1%, have done disproportionately well. The vast mass of everyone else, including those who you’d consider to be middle-class, although in absolute terms they’re doing much better, in relative terms they’re doing much worse. That’s not how you build a successful country."
— James Crabtree, Associate Professor at the Lee Kuan Yew School of Public Policy.
Thanks for reading! See you in April.
That’s a wrap on the first edition of “The Difference Principle”
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Interview with Yanis Varoufakis, On Inequality, Automation Financialization, Liberty, and Bernie Sanders
A few months ago, I interviewed Yanis Varoufakis for the Brown University Journal of Philosophy, Politics, and Economics.
Many economists have their explanations about where inequality comes from, such as financialization, credit, globalization, technology, and bad policy. When thinking about the causes of inequality in the last thirty years, are there specific areas you think we ought to devote our attention to?
Well, there’s one word that answers your question: financialization. Financialization came on the back of the post-Bretton-Woods drive for completing a surplus society loop, where the United States operated like the world vacuum cleaner, sucking into its territory the net exports of the world on the basis of pushing down wages, lowering inflation, and, of course, Wall Street and the exorbitant power of the dollar. But the tsunami of capital that was going into Wall Street every day to close this loop and to pay for the increasing trade of the US was what shifted the center of gravity of power from industry to finance.
Private credit played a big role in that?
Of course. It’s all private credit. You know, financialization is 99.9 percent private money lending. Consider the financialization of blue-collar workers, in which their homes became the only way of catching up and competing with the Jones’, and since their average earnings were stuck at 1973 levels in real terms, it was only the appreciation of house prices that allowed them to continue the American Dream of rising standards and consumption. And in 2008 that came crashing down, and ever since then, you have a process leading to Trump.
So today’s extreme inequality is due to a very significant class war against the American working class that started at the end of Bretton Woods. And Paul Volker, who recently passed, was central to this. All of this created a new phase in global history: financialized globalization. It pushed inequality back to 1920s levels, financialization collapsed, and then central banks and governments like that of President Obama’s refloated finance, creating socialism for the very few and permanent austerity for everybody else. That’s the answer in a nutshell. That’s my narrative. But, I have to tell you, since your focus is on inequality, I’m one of the very few left-wingers that doesn't much care about inequality or so much about equality. I don’t consider equality to be such a well-defined term. Equality of what? How do you define it?
What about income inequality?
Inequality is a terrible thing, but it’s a symptom. For me, it’s not the issue. The issue is exploitation. If we have huge levels of exploitation it is because we live in an extractionary economy in which the very few extract value from humans and from nature. Deep down, I’m a liberal, who thinks that liberalism has not served the cause of liberty.
You’re a liberal who thinks that liberalism has not fulfilled its promises.
No, it’s gone completely against its mission, like the Marxism of the Communist Party in the Soviet Union led to a regime that violated every principle of Karl Marx. Similarly, what passes as liberalism has created remarkable illiberties and spread them globally. So what matters to me is freedom from the extractive power of others over you and over nature. Capitalism, through its ever-expanding power, destroys the planet and the air that we need to breathe.
People like Harry Frankfurt argue that what we should care about is not the gap between the rich and the poor, but rather how well off the worst off are doing.
That’s rubbish. This willfully and purposefully neglects the source of the riches of the rich. It is as if it’s a random distribution based on DNA, on ability, and on god-given talents. In the standard debate between John Rawls and Robert Nozick, I was always far more impressed by Nozick than by Rawls because the Rawlsian veil of ignorance is lovely, but the critique of it by Nozick is devastating. He says ‘ok, let’s say we agree with Rawls and we work out what the uniquely just and therefore rational income distribution is. Let’s say we agree, so everybody gets slotted into the income distribution we agreed is uniquely just.’ And then suddenly he’s got this example from basketball, in which one of us becomes very famous for a particular kind of basketballing technique, and people are prepared to pay a lot of money to watch us. Do we ban ourselves from doing this and receiving the money that people are willing to give? Illiberal. Or do we allow ourselves to receive that higher income, in which case we have just proven that the income distribution we decided is uniquely just is not uniquely just?
So in the end, what really matters is not what you have, it’s what you do in order to have it. That is perfectly Marxist to me. And, as a leftist Marxist, the point where I disagree entirely with Nozick is on his definition of entitlement. In his entitlement theory of justice, he says anything people agree to give you under any circumstances means you have it justly and that you are entitled to it. I say this is nonsense. So if you’re starving and I have some food to give you and your kids, and then I make you become my slave voluntarily, that is as coercive as it would be to point a gun at you. So, the distribution of basic goods according to Rawls is important because, without the minimum basic goods, you volunteer to give me things that I’m extracting from you coercively. That’s the Marxist critique. I’m neither Rawlsian or Nozickian, but the process that Nozick brings into the conversation, as well as Hayek, is crucial. But where we disagree with the right-wing is on what qualifies as, firstly, sustainable process and, secondly, just process.
Would it be fair to say the distinction also comes down to the difference between positive liberty—the capacity to act—and negative liberty— the right to act?
Here I think the theories of the Canadian philosopher CB Macpherson are helpful. He criticized the Isaiah Berlin distinction between positive and negative liberty by asking, very correctly, that if negative liberty is freedom from interference, how do you define interference? If you and I meet in the desert and you are dying of thirst and I have a glass of water and say ‘if you want this, you have to sign a contract saying you pass along all your belongs—your house, your car, and everything’. If you say yes because you are dying of thirst, is this interference? Is this a voluntary transaction? Am I impeding your negative liberty? According to Berlin, I’m not because I’m not forcing you to do anything. You are choosing to give me things for a thing.
In my view, the inequality of access to basic goods like water allows me to exercise extractive exploitation over you and therefore to impede your basic freedom. If you accept the distinction between positive liberty and negative liberty, you end up saying, in the end, ‘we’re only going to accept negative liberty because who gives a damn about positive liberty—it’s too dangerous because it legitimizes all sorts of violations of negative liberty. My model is the following: if instead of negative liberty, you have freedom from extractive power, and instead of positive liberty, you replace it with the notion of developmental freedom—the freedom to develop as a character.
Would you say part of the reason it’s so important to object to high levels of inequality comes down to the fact that, in highly unequal societies, you have very different abilities to participate (e.g. unequal baskets of basic goods)?
When so much of one side doesn’t have enough to live on, then you have exploitative power and extractive power that functions to deny every liberty to the party that doesn’t have access to that basket of basic goods. This is, of course, the original argument by Karl Marx.
Do you think a big component of that comes down to education and access to education?
No, it comes to ownership. As long as we have shareholders, we’re going to live in an illiberal society. What do I mean by shareholders? As long as you have tradable shares and anyone can buy a share in a company in which they don’t work, then you create this situation where the majority of the shares of any company are going to be owned by people who have nothing to do with the company. And once you enter that process, you create an alliance with finance because finance creates the capacity to buy shares and fictitious capital minted out of thin air that allows the oligarchy the right to extract the value of others.
Yet imagine a situation in which we have shares, but it’s one share and one vote for one person. So anybody working in our business has one vote. I think of it as similar to a library card. When you’re enrolled in a university you get a library. Everyone gets one. You can’t trade it. It would be similar, in this model I am proposing. As long as you work, you have your share. And then you have one vote. Imagine if corporations operated along those lines. There would be inequality because we would all vote on bonuses, and not everybody would get the same bonuses because we would collectively decide that a certain person is of high value to us and so this person deserves more of a bonus. But the differences would be much smaller. And that has to do with the way in which property rights are distributed.
Doesn’t this create an incentive for companies to hire fewer people because it would require cutting the company up into thinner slices?
I don’t think that holds water because if you and I create a startup and we add a third person to expand, and the growth rate is higher than the basic wage in our company, then we would do it because it’s in our interests to do it. And the fact that companies would be small and not have more than 300 or 400 people —because you can’t scale this up—is a fantastic thing. We need small companies. The whole point about competition is that you have many small companies competing. Now, we have no competitive markets. So one of my criticisms of capitalism is that it is completely anti-competitive. It’s monopolistic.
So on some level, it’s almost this Polanyi-Esque argument about liberalism undermining itself and actually requiring government state intervention in order for it to even continue as liberalism.
Yeah, the Polanyi argument and also the Marx argument. Any attempt to set the state against the market or the market against the state is historically pathetic because the market was created by states. Even the enclosures in Britain that created the circumstances for capital to emerge in Britain would not have happened without the king’s army. To pit the state against the market is historical nonsense.
The only reason capitalism happened in Britain and not in France is that there was a powerful central government in the former but not the latter. And the central government dispatched the army in support of the lords that pushed the peasants off the land and replaced them with sheep. The sheep had the capacity to produce wool which was internationally traded, and suddenly the land had value. Without the king’s army, it wouldn’t have happened.
Your focus is on financialization when explaining inequality since the 1970s, but do you think that technological innovations played a role in that as well? In the Industrial Revolution, you saw rising inequality because of increased productivity but stagnant wages. Today, researchers talk about how modern inequality seems at least partially a consequence of the hollowing out of middle-skill/middle-wage work because innovations automated work in that middle sector.
I don’t think we have seen this yet. I think we probably will see it. The hollowing out of the middle class is evident, but I don't think it’s because of automation. I think it’s simply a situation whereby two things coalesced. On the one hand, it was the introduction of two billion workers in capitalistic markets after 1991 through the Soviet Union satellite states and the rise of China. Two billion workers came from those countries. There were huge shifts of factories to those countries, whether it was Poland or China. But the proletarianization of former peasants is a standard process that has nothing to do with technology per se. That’s the first dimension. The second dimension is the increasing role and capacity of the financial sector in turbocharging private money minting. Through all the financial derivatives and fast trading, without having to press a button, I can transfer billions at lightning speeds. That technological innovation made a huge difference in shifting and increasing power from the industrial scene into the sphere of finance.
How did that work? I would imagine a lot of the competition would be between investing firms and companies with better algorithms and better technology.
Yes, but between 1980 and 2008, in 1980 dollars there was an average inflow of money into Wall Street every day of between five and six billion, on average. Now, if you give a banker five billion every day, even for ten minutes, they will find ways of multiplying it. It’s called derivatives, options, financialization. Computers helped them create really complicated instruments that totally blew up the multiplier. So from that five billion, they could create a hundred or two hundred trillion in securities, which very soon started to operate like money to the extent that they were mediums of exchange and a source of value. So effectively they created as much value as they wanted. And immediately, political power shifts to Goldman Sachs, and General Motors becomes a hedge fund that produces a few cars that nobody cares about. So that’s what I mean by financialization. And that creates huge inequality because just think of all the bonuses.
And very few people have a stake in the stock market.
Most of this was not in the stock market. The derivatives were traded under the table. And so you have a huge new body of the proletariat coming, factories shifting to china. The Chinese people were coming up very slowly in terms of per capita income, but of course, they lose a lot of the old values—community values, environmental values, cultural identity. And fifteen boys living in one room today might make 15 dollars a day, which in the world bank statistics is a fantastic improvement for them. But maybe their life is far worse than it was when they were in their village milking a cow.
Yuval Noah Harari makes the point that, for many people, even the shift to agriculture from hunter-gatherers resulted in a dramatic decline in standards of living. And the same was certainly true of people in the Industrial Revolution. So how do you reconcile that argument with the notion that all of those innovations resulted in improvements in the standard of living that were eventually felt by everyone?
I simply reject it as uninteresting nonsense. When people say to me, ‘look at the last 200 hundred years and the massive decrease in poverty’, I ask ‘how do you measure poverty?’ Take the Australian Aborigines. When Captain Cook arrived in what is now New South Wales. These people had zero income, but they lived very full and fulfilling lives. Today, an Aborigines person gets a hundred Australian dollars a week from some kind of social security fund, and they are obese, they have diabetes, and they are dying from a number of diseases, if not from police brutality. So you consider that to be an improvement because they went from zero to a hundred dollars?
But going back to what you were saying—the hollowing out of the middle class—we should come to that. Given that financialization was based on this exponential growth in fictitious capital that made the very rich exceptionally rich, and at the same time, to have this money coming into Wall Street, you had to have American wages kept very low and below American standards. And this means prices must rise against the home so that people can afford to buy stuff and fill up their garage with rubbish. And then, of course, in 2008 this house of cards comes crashing down. With jobs moving to China and, at the same time, financialization collapsing under the weight of its own hubris, that’s what explains the hollowing out of the middle class. These people initially turned to Barack Obama. He betrayed them. And now they turn to Donald Trump. But AI and automation are going to hit us when we’re down already. I don’t think the hollowing out has to do with automation, but now that the hollowing out has taken place for reasons that don’t have to do with automation, automation will be the second part of the double whammy.
A lot of people are very happy about automation because they believe in its potential to improve productivity. However, if you believe technological change results in significant short-run damages to certain people’s livelihoods, is it worth trying to stop automation?
Automation would be catastrophic. But why would it be catastrophic? It’s a question of nationalizing it and of socializing it. It’s a question of who owns it. Because if the machines are owned by the very few like they are, then those who own them will look at them as a source of personal enrichment, which means there will be a serious crisis by which those machines will be replacing workers who have no access to the returns of that capital. And so they will not be able to buy stuff. So we’re going to have a collapse. But if we all benefit and we all own the robots collectively, we would not have that problem. This is why I keep coming back to questions of ownership. And this is where I find some commonality with the extreme libertarians, because they also put a great deal of emphasis, not so much on income distributions, but on property rights, and I do too. They want to defend the property rights of oligarchy. I want to socialize property so that everybody has equal access to it.
When you think about the recent UK elections and the failure of Jeremy Corbyn and the British left to challenge more traditional and conservative leadership, what do you think about the prospects for a US presidential candidate like Bernie Sanders?
Privilege has a remarkable capacity to reproduce itself and kill any challenge to its reproduction. If the challenger is Bernie, Jeremy, you or me, they will crush us. There’s no doubt about that. When I was elected, I never expected for a moment that I would not be vilified. If I wasn’t, then I would be worried, ‘why are they not vilifying me? Am I doing something wrong? Have I sold out already?’ What I find astonishing is that, in 2016, Bernie Sanders came so close. And he would have won it had he not been robbed by Hilary Clinton. This is what happened yesterday with the Labour Party, which was effectively defeated from within by the extreme center—the Blairites and the hard “remainers” that did everything they could for two years to undermine their own party and to undermine Jeremy Corbyn. Why? Because they were in concert with the privileged classes.
Tactically, what do you make of the primacy of emphasizing cultural issues over economic ones? Do you think the left makes a mistake when it focuses on cultural issues instead of socio-economic challenges?
Yes, the left has been catastrophic. Look, I’m an old Marxist. The economics is always at the base of it. It’s at the base of Brexit. Why did Brexit happen? Because you had a financial sector collapse and you had the rubbish assets of the banks put on the shoulders of taxpayers. But at the same time, the European Central Bank was contracting the money supply and the Bank of England was expanding. And that meant three million continental Europeans went to Britain. And for the country, this was substantial and some people felt they were being pushed out of their own country. So their grievances are economic, even if they don’t consider it clearly as an issue of economics. Whenever we have this kind of economic recession, it’s easy for a fascist to jump on the soapbox and say, ‘I’ll make you proud again by getting rid of foreigners.’ You see this with Salvini or Farage. Why did Trump get elected? He didn’t get elected because of the culture wars. He got elected because half of Americans, for the first time since 1923, could not afford the cheapest car on the market. These people felt betrayed, and here comes a guy who says ‘I’m not the worst person on earth, but there’s a good reason to vote for me: it will annoy the shit out of everybody you hate.’ Of course, the fascists take advantage of these economic grievances and build a narrative by saying that they will make you proud and look after you.