Wednesday, July 7, 2010

Forever More

My son Jerry sends me this Inequality and Crises PDF from Krugman's files -- slides for a presentation. "Sparse but interesting," Jerry says. "I don't know what 'words' were going along with the slides, but I like the graphs." My reaction, of course, is less brief.

The presentation opens with a graph from Piketty and Saez, showing the "top 1% share" of income. The graph is followed by Krugman's comments:

Pre-2008: When I would talk to lay audiences about inequality, I would mention that we were reaching levels not seen since 1929 – and that would inevitably lead to questions about whether we would soon have another Depression. No, I’d say – there really isn’t a clear reason why high inequality should lead to macroeconomic crisis.

And then ....

And then we had the Paulson crisis. Krugman never saw it coming. But that's not what bothers me. Look at Krugman's words: reaching levels on the one hand, and high inequality on the other. "High inequality" suggests stable inequality. "Reaching levels" implies change.

Here, let me re-word the thing. Krugman says income inequality is increasing. People ask if this is a problem. Krugman says high inequality is not a problem.

Krugman does not answer the question. His listeners probably never got to ask the follow-up question: What about when income inequality gets higher? But if Krugman answers, No problem, then ask: And what about when it gets higher?

I prefer a different graph, from Saez. This one I've used before. I added the red lines to show the trends that I see in the numbers.

The trend for most of the 1940s, the '50s, the '60s, and most of the '70s is flat. No change. Income inequality is what it is. End of story.

But it's a different story since the end of the 1970s. Income inequality starts increasing, and it increases relentlessly.

The midsection of the graph shows income inequality stable, and at a low level in comparison to the surrounding numbers. Karl Marx might have called it a high level of inequality. Either way, low or high, it is a stable, unchanging level.

The last 30 years of the graph show income inequality increasing: changing, and continuing to change. And that's the problem, that last bit: continuing to change. Obviously the trend of increasing inequality cannot continue forever. It cannot go beyond what Krugman might call "the upper bound." It cannot increase beyond 100%. And by the last year of the Saez graph it's already at 50%.

Income inequality does not fascinate me. I do not look to it for explanations of our economic troubles. I see income inequality more as a consequence of our economic troubles than a cause. A contributing consequence, if you prefer. But hey, try this on for size:

Suppose things were different. Suppose income inequality increased as shown, but then suddenly stopped increasing at 45% or even 48%. After that the trend would be flat again. We would have "high inequality" but there is no more "reaching" for even higher levels. Maybe then we would avoid the crisis?

If that sudden stop came as the result of policy, it would not be much different than what happened by accident. A few percentage-points less inequality, perhaps, and the crisis anyway. It is the stop that creates the crisis, not the level of inequality achieved.

Perhaps if rising inequality stopped gradually? No, I don't think that would make any difference. I think the wealthy few, like everybody else, want to turn money into "more money." I think they would not be fooled by a gradual decline in the growth of their income. I think we'd have had the crisis anyway.

I think that once the increase of inequality begins, if it lasts for any length of time, faster growth of income at the top becomes the new norm. And like anyone who gets paid, at the top they find getting a raise much easier to take than a pay cut. So once the increase of inequality begins, there may be no way to avoid a crisis when it ends.

I wonder if there are any stats on that.

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