Why oh why can't we get a better left academic blogosphere?
2008-09-15 · Original WordPress address
I hope I live to see the day that statements like this:
And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades.
are openly mocked as hopelessly economically illiterate.
"The Poor" (or "The Bottom Quintile") ain't nobody ((Wouldn't it be funny if we talked like this about other transient attributes of people? "The College Town Dwellers" saw decreased incomes over the last couple of decades. "The Sneezers" saw increased tissue use inequality.)) is the obvious rejoinder so feel free to insert such a reply right ***here***. Or ***here***. Add exclamation points if necessary. And make sure to reference the Marxist Fallacy.
Economists usually have a deep appreciation for dynamics in society; intertemporal investment decisions, inflation expectations, growth dynamics and all that. Why is it when it comes to income distribution we slip back into this clunky static framework? As I pointed out earlier this summer, even within the stuffy confines of "income quantiles" thinking, expectations of moving between quantiles, of so-called income mobility, implies agents are ok with increasing income inequality as long as everyone's incomes are at least weakly increasing (aka "non-zero sum increases in inequality").
Of course, that result relies on the assumption that people only care about their own level of consumption. Things get sticky if people care about relative consumption. The problem is there just isn't compelling evidence of such "inequality aversion". In lab experiments (eg. 1, 2, 3 pdfs), agents do show social preferences, preferences over the consumption level of other agents, but those preferences are expressed as preferences for efficiency (i.e. maximize total consumption) or a preference to maximize the minimum consumption level in the "society" ((In the case of these lab experiments, society is just the other agents in the experiment.)).
If social preferences are for efficiency, then the result still holds because everyone's expected incomes increase with non-zero sum increases in inequality. Increases in everyone's incomes satisfy a preference for efficiency by definition. Furthermore, even if social preferences come in the form of maximizing the consumption of the worse off, then the result holds due to the fact that even the bottom quantile's income is at least stagnant by assumption. This is a key assumption and its reasonable given it conforms to recent experience.
Now, when people are surveyed, they say they don't like inequality (e.g. this pdf). Besides the usual litany of problems with survey data, a major defect of these studies is that you can't tell if these stated preferences reflect inequality aversion or maximin preferences or preferences for efficiency. Its next to impossible to ask a nuanced enough question to get at these distinctions and still expect survey respondents to understand what your asking. These distinctions matter a great deal for policy, of course. As mentioned above, social preferences for efficiency and maximin don't call for redistribution in the face of increasing non-zero sum inequality. Annoyingly, these distinctions are ignored by the survey researchers who interpret their results as measures of inequality aversion and then make the attendant policy recommendations.
Results from the lab have their own litany of problems, but on net they're a more reliable because they measure the thing we actually care about. Surveys tell us that people have social preferences, but lab experiments tell us people don't have strong aversion to inequality.
UPDATE: Notsneaky is provoking me in the comments: "I have no basis except my intuition for this claim, but its my blog and I'll speculate if I want to: quantile based income statistics are normatively biased against more dynamic economies. What do I mean by more dynamic economy? Dynamic economies are those that give more opportunities for individuals to reinvent themselves via schooling, relocation or just through norms that allow people to make dramatic changes in their careers. Personally, I think dynamic economies are better. Anyway, why do I think those economies are normatively biased against by quantile thinking? Dynamic economies will have more individuals that have temporarily low (or zero) incomes and so they'll have lower incomes in the bottom quantiles.
So we have this funny situation where dynamic economies (good) will be confused for unequal economies (bad). Now, I'm not sure if the American economy is unequal or dynamic, but I am sure that everyone assumes the statistics about "The Poor" are bad."