Sunday, October 21, 2012


From mine of 3 August 2011:

Keynes died.

End of story. Samuelson and the rest of 'em came along then, and started making things up and calling them Keynesian things. But they were not Keynesian things. They were Samuelsonian things, and like that. The economy was in a golden age in those years after Keynes died, the years after World War II, and no matter what Samuelson and the rest of them did, it worked. It wasn't that they were good. They were just lucky.

After a while their luck ran out...

At Economist's View: 'Ultimately Everything is Attributable to Luck', James Kwak writes:

A friend forwarded me Posner’s latest blog post, “Luck, Wealth, and Implications for Policy,” parts of which sound vaguely like a post I wrote three years ago, “Do Smart, Hard-Working People Deserve To Make More Money?“ ... In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as “merit,” like intelligence and hard work, that doesn’t mean that rich people have a moral entitlement to their wealth, because they didn’t do anything to deserve their intelligence or their propensity to work hard. In summary, “I have little patience for the idea that rich people deserve what they have because they worked for it. It’s just a question of how far back you are willing to acknowledge that chance enters the equation.”
Kwak is arguing that there is no moral basis for the inequality of wealth and/or income. (He is also equating wealth and income, which is incorrect.)

No moral basis for inequality? Myself, I always go for what I think is the strongest argument. Kwak's argument ain't it.

The strong argument is that inequality (as economic policy) is unsustainable. Let me rephrase that:

Graph #1, from Emmanuel Saez. (I eyeballed-in the red lines)

If the distribution of income is stable (1943-1978 on the graph), and the economy is still working, then that's sustainable. But if the distribution of income is unstable (after 1978 on the graph; also the 1920s), the trend cannot continue forever. Something has to give. The trend is unsustainable.

You can argue about the moral basis of things, forever. But you cannot keep increasing inequality forever. You cannot go beyond 100%. On the graph, it looks as if we cannot even go beyond 50%. In any case, there is most definitely a limit.

Always go for the strong argument.

On the notion "that rich people deserve what they have because they worked for it", I have two thoughts.

1. Somebody always wins the Superbowl, and only one team wins. The discussion can go on, forever, regarding the reasons why the winning team won. But when all is said and done, the fact remains that there had to be one winner, and only one.

2. In an attempt to favor growth, the U.S. tax code favors bigness. The tax code is not set up like "parity" in football. There are no limits to how much any one "team" can spend, and pretty much all of it is tax-deductible. Luck has nothing to do with that.

James Kwak quotes Richard Posner:
Posner now goes even further than I did: “I think that ultimately everything is attributable to luck, good or bad,” he writes, including the propensity for working hard, a low discount rate, and so on. “In short, I do not believe in free will. I think that everything that a person does is caused by something. . . . If this is right, a brilliant wealthy person like Bill Gates is not ‘entitled’ to his wealth in some moral, Ayn Randian sense.”

Snort. Bill Gates did really well. But he had a lot of help from the tax system. And the bigger he got, the more help he got from the tax code. We need to worry less about morality and other people's money, and worry more about harmful and unsustainable economic policies.

The 1920s was a decade of excessive financialization that led directly to the Great Depression. In the 1930s, people made the best of things but the best wasn't very good. In the 1940s, there was the war. The war employed people. But there wasn't a lot to spend money on, because of the war; and anyway after ten years of Depression people had gotten used to not spending much money.

Meanwhile, people had been paying down debt and defaulting on debt, so that by the end of the war there was not a lot of debt other than government debt.

After the war, people had a lot of money and not a lot of debt. And we had a whole wartime industry that was looking for something to do. And people had near 20 years of scrimping, and it was time to get new stuff.

These are the reasons that the U.S. economy experienced a "golden age" after the Second World War. It had nothing to do with Phillips Curves or Okun's Laws or Full Employment Budgets or any of the newly invented stuff that was called "Keynesian". It had to do with conditions. It had to do with the economic environment.

The one thing a business needs is customers willing to spend.

If you are looking at current conditions, and not at the big picture, then you are going to see a lot of things that look like luck. Like what Posner and Kwak see.

It doesn't depend on luck. It depends on conditions. This is what Keynes saw:

Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

It's not just luck.


Obiwan Kenobi said...

In my experience, there's no such thing as luck.

Jazzbumpa said...

The strong argument is that inequality (as economic policy) is unsustainable.

In ancient Egypt it lasted for millenia.

In Europe after the fall of Rome, it lasted another millenium.

I have come to believe that post WW II U.S. is an aberration in all of human history.

I am enormously lucky to have been born in 1946. My '70 to '72 kids - not so much.

Luck isn't everything, but it is a very big player. In fact, short of Divine intervention, there is no way to account for me running into my lovely wife - but that is a totally different story. [And I am NOT making this up.]