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Home Publications Blogs Beat the Press Ezra Klein Misses the Mark: Inequality and Unemployment Are the Same Problem

Ezra Klein Misses the Mark: Inequality and Unemployment Are the Same Problem

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Saturday, 14 December 2013 09:01

In his Washington Post column this morning, Ezra Klein dismisses the problem of inequality and argues that progressives should instead focus on unemployment. While he will get no argument from me on the need to focus on unemployment, the idea that this is a separate issue from inequality is seriously misplaced.

Ezra gets to this spot by first dismissing the idea that inequality harms growth. He is certainly right that the evidence is less conclusive than we might like, but I would attribute that largely to the reluctance of the economic profession to even consider this possibility.

For example, Ezra notes my friend and co-author Jared Bernstein's conclusion that it is difficult to find a link between rising inequality and weaker consumption in the data. This is true, but the obvious reason is that the decades of rising inequality have also been the decades of the stock market and housing market bubbles.

Standard economic theory predicts that these bubbles would increase consumption, a story that fits the data well. Consumption as a share of income hit highs (i.e. savings rates reached lows) at the peaks of both the stock and housing bubbles. Consumption fell sharply following the collapse of both bubbles.

If we just do some simple arithmetic we can get an idea of the size of the effect of the upward redistribution of 10 percentage points of disposable income from the bottom 80 percent to the top 1 percent. If we assume that the bottom 80 percent would have spent 95 percent of this income and the top 1 percent would only spend 75 percent, then the difference would be 20 percentage points or 2 percent of disposable income.

This would translate into a loss of demand of 1.6 percentage points of GDP. That is what would have to be made up by larger budget deficits, trade surpluses, or a flood of investment. We certainly had much larger budget deficits on average over the last three decades than we did in prior decades so that can make up the shortfall in demand, although we also had much larger trade deficits making the problem worse.

In any case, the fact that we didn't have solid evidence on this issue should not be as surprising as Ezra suggests. While some of us have long warned of this scenario, leading economists like Paul Krugman and Larry Summers have just recently begun to take seriously the possibility of secular stagnation. For decades the profession has treated it as an article of faith that there could not be sustained shortfalls in demand so inadequate consumption due to the upward redistribution of income could not possibly be a problem.

However the other side of the unemployment inequality issue is possibly more important. One of the main points of Jared and my new book is that unemployment is a main cause of inequality. This is because when more people get hired it disproportionately benefits those in the bottom half and especially the bottom fifth of the income distribution.

These are the people who are most likely to get jobs. And those with jobs will also have the opportunity to work longer hours. And, a tight labor market will create conditions in which workers at the bottom will have more bargaining power. Walmart and McDonalds will be paying workers $15 an hour if that is the only way that they can get people to work for them. 

For this reason, the high unemployment policy that Congress is pursuing with its current budget policy is a key factor in the upward redistribution of income that we have seen in the last three decades. This means that people concerned about inequality should be very angry over budgets that don't spend enough to bring the economy to full employment (also an over-valued dollar). So Ezra is absolutely right that progressives should be yelling about unemployment, but inequality is a very big part of that picture.

 

Comments (18)Add Comment
Inequality depressing growth
written by Steve Bannister, December 14, 2013 8:38
I think this IMF paper focuses on LDC, but I strongly suspect the same mechanism is at work in advanced economies, including US. So evidence for inequality harming growth is building:

http://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf
growth-unemployment-inequality
written by Steve Consilvio, December 14, 2013 10:29
Growth can't solve anything. The problem with inequality is how the pie is divided. Growing the pie does not change how it is cut. Those with more get more, those with less get less. Since the population is always growing, the pie is always growing, too, but the percentage share remains an inequality.

Unemployment is a problem because a zero share does not increase as the pie grows, either. Being employed in an unequal system only means that you will be marginally better off.

A lot of people see inequality as 'natural' or as a result of training or skill, marketplace conditions, etc. Inequality is the result of one thing, and one thing only: how we divide the pie.

Growth, job training, deficit spending, philanthropy, etc., won't solve it. EVERYONE needs to give as much as they take. Inequality is taking more than you give, or getting less than you give. Hence the divide between winners and losers. The way we handle money is the problem.
...
written by JimV, December 14, 2013 10:58
Thanks for the excellent post. I hope Mr. Klein sees it and considers it.
Jobs AND Minimum Wage
written by PJR, December 14, 2013 11:23
Pressures to increase wages for all come from the need to attract them and the need to have higher pay for higher positions on the ladder. I believe a higher minimum wage addresses both types of pressure, leading to higher wages at rungs above the minimum. At the top-most level, pay currently is so far above the pay below that it won't be affected by these upward pressures. So creating jobs and reducing unemployment is critically important, but it's also important to raise the pitifully low minimum wage.
Growth is pointless to those who don't get a share.
written by J. Miller, December 14, 2013 11:39
Following on S. Consilvio. Growth does nothing for those who don't get a share in terms of an increase in their own income. And those who don't in recent years have consisted of the great majority of the population.

Whatever may be the underlying causes of growing inequality, it has immediately resulted from, and indeed essentially consists in, the preemption of the dividends of productivity growth by the top few percent.

The idea that promoting growth should be the priority is at bottom simply trickle-down economics. We have been so indoctrinated by right-wing propaganda that it is assumed without question that more growth is better for everyone, when manifestly at present it is not.

Right now promoting economic growth to the exclusion of other initiatives is simply another way to make the rich richer.
PS
written by J. Miller, December 14, 2013 11:55
I see that I digressed a bit in the previous post. To complete the thought... Even if inequality does not reduce overall growth (and that's not at all clear), it certainly does reduce relevant or effective growth for the great majority of the population.
Economists discover the world is not flat after all!
written by Perplexed, December 14, 2013 1:53
It wonderful to see our prominent economic "scientists" finally beginning to question their religious beliefs and realizing that these beliefs just don't fit the data in any plausible way. Why they were the last data analysts and mathematicians to see this huge discrepancy remains a mystery and something their "science" will need to address if it wishes to have any real credibility going forward. Millions have suffered needlessly as a resulted of their unfounded religious beliefs. We all owe a tremendous debt to Picketty & Saez for forcing the profession to confront the paradox of their faith and the real data. Unfortunately, while economists were in denial mode, our wealth inequality has reached .87 and our plutocrats have bought control of our legislature and elections. It will take a tremendous effort on the part of everyone to turn this around and minimize the damage going forward. If economists had just been honest about the extent of what they actually knew based on science and what they "knew" based on faith, those that wanted to turn a blind eye to the impacts of inequality for their own benefit at the expense of others would have a much more difficult time doing so.

Hopefully economists will soon confront the faith-based notion that unemployment and "sticky prices" are some sort of "natural" phenomenon that's a "fundamental" part of a "free market" and confront the fact the exclusion of labor (the product of the 95%) from anti-trust protections provided to all other producers is "unequal treatment" under the law and Constitutionally prohibited under the 14th Amendment, yet unenforced. If economists would "come clean" about how the Phillips curve is actually a measurement of the effects of this lack of access to a real market, maybe we'd all learn more about how unemployment plays a role in empowering employers to coerce workers and ultimately undermine their power. If everyone were bearing the costs of an output gap instead of dumping the full cost on a powerless minority, the pressure to do what's best for working people and jobs would be tremendous. We the People need some real "scientists." There are lots of other religions to choose from.

Could this even lead to the measurement of rents and revival of the study of the real impacts of monopoly, price discrimination, and other forms government provided rents? Probably wishful thinking, but the possibilities of real "science" to improve peoples lives have surprised us in the past.
Trying out for CNN?
written by leo from chicago, December 14, 2013 2:04
When I read Ezra's post, I figured he was just trying out for CNN.
Reality is Warped by Perception
written by Richard Isacoff, December 14, 2013 2:52
The debate over Mr. Klien's column, and the issue of unemployment v inequality causing stagnant growth has no answer that can produce any results Quoting Mr.Klien, "Asking whether inequality or joblessness or growth is the defining economic challenge of our time is like asking how many John Boehners can dance on the head of a pin".

His use of the $85,000 income earner is a "tell". These folks have disposable income. They may consider it essential income but dealing with such issues EVERYDAY in my law practice, has shown that, with $85K/yr even a family of 4 has disposable income. They can create demand. And, if there are children not yet in the workforce, those kids have a much better probability of getting a job than folks who are over 50 and unemployed, or 25 and have a high-school diploma or a GED.

I have no answer either. I am not an economist, but I am a realist. We perceive that there is a modicum of fair play in the system. We perceive that if only the unemployment rate receded to 6% all would be well. WRONG -(maybe). If the gap continues to grow, and the "Famous Pie" doesn't get bigger, the plight of the lower 80%+ will get worse. There will be less and less to get. There will be no growth in the economy, as the term is being used for this discussion and by Mr. Klien.

I believe (that perception issue again), that unless the top of the pyramid creates a torrent rather than a trickle, or that the virtual pie is divided differently, there will be no growth. The markets will make those who HAVE MONEY TO INVEST wealthier, while the 80%, from the bottom up, will become entrapped in perceptual and REAL abject poverty.

The real poverty is hidden by gov't programs that are now being cut. Food stamps, Subsidized housing, Head Start, Unemployment insurance, have kept the 80% fed and clothed with a roof. Once gov't spending stops, and reality hits like a Category 5 Hurricane, we will have civil unrest. We have weathered this storm because of Gov't backstops. Once gone, the levees will burst and we will all (except for the so-called 1% and maybe the next 19%)be paying the price of a break-down in society.

Mr. Klien puts the chicken and egg question front and center. I maintain it matters not. We have what we have. How to fix it? What was done in the 30s to get us out of the Depression. No Zoloft so we had a war. We will be facing the type of societal unrest that Germany did after the Allies in WWI made Germany's economic recovery impossible if it played by the rules. Are we really that different. No, I DO NOT MEAN NAZI Germany, I mean starving unproductive Germany.

Does anyone care about "growth" when he/she is destitute? We can create growth by training and employing hundreds of thousands of "US". 10 yr project? Yes!! But, if people have hope, especially the under 50 group, they will WORK to obtain a standard of living to which they aspire.

The 1% will always be "above the fray". The next 19% have to deal w/ it. Those who are "the fray" need the perception that their vision can become reality; that there can be growth and that there is a better future. If not - just be ready for the feeling of hitting a brick wall on a motorcycle at 80 mph (w/o helmet).

Quoting Mr. Klien again, "Today, as (Lawrence) Summers notes, the economy seems mostly back to normal-but joblessness is still endemic. Growth simply isn't producing enough jobs. This is a more severe and more urgent problem than inequality. Moreover, fixing it is necessary, though not sufficient, to making real headway against inequality." Growth creates jobs? Jobs create Growth? Is Inequality the result of either of the first two issues or is it the cause? Maybe it's neither, but rather the third variable. DOES IT MATTER? We need to fix all three simultaneously. ANYONE GOOD AT CALCULUS?

Richard Isacoff isacofflaw@msn.com
Why isn't this obvious?
written by Kea, December 14, 2013 4:50
When the vacancy rate for apartments is high, rents don't go up; when the vacancy rate is low, they do. Same for the unemployment rate.
...
written by Alex Bollinger, December 14, 2013 6:52
There is also a relationship between inequality and unemployment whose causality is reversed: inequality means rich people get more power, and they don't really care about unemployment as much as inflation and a few other issues.

Krugman mentions this now, and that's good and I'm happy that mainstream liberals are jumping on this bandwagon. I remember that, way back when the dinosaurs roamed the internet (6 years ago), it was almost impossible to get such a concession from mainstream liberals. "The world is just!" they cried. "It's just a matter of getting poorer people out to vote!"

Well, almost 5 years of recovery and look at the unemployment rate. And look at how much Congress cares about it: one party is trying to keep the unemployment rate from increasing more but, meh, it sometimes goes up, and the other is actively trying to unemploy all government employees. No sense of urgency about this.
Perplexed?
written by Squeezed Turnip, December 15, 2013 1:10
Many economists did fail, and continue to fail, to adequately critique the Chicago school's mis-step of adopting the efficient markets hypothesis as a given. And the same people have had an outsized influence on policy decisions. But let's not throw out the baby with the bathwater. Treynor and Black,Tobin, and yes Keynes knew their models weren't quite reality, but the models did provide a clear insight into economic operations of the world.. The problem with this science is that most experiments have to be natural not designed.

On another point, thanks to Dean for this analysis. But where do we find the data showing the breakdown of disposable income growth/decay by economic strata? Real disposable income is on the trend line, I found this on FRED but could someone point me to the data source for these analyses? (not that I doubt, I want to play with the data)
A Sustained Shortfall in Demand
written by Ron Alley, December 15, 2013 7:14
"For decades the [Economics] profession has treated it as an article of faith that there could not be sustained shortfalls in demand so inadequate consumption due to the upward redistribution of income could not possibly be a problem."

This is a wonderful, insightful statement.

The economics profession, in evaluating the United States economy, relies heavily on postwar data. With the expanding population of the baby boom and the concurrent expansion in employment, increasing demand was taken for granted, much as the increasing home prices were taken for granted during the expansion of the housing bubble.

At the present time we are experiencing a continuing GDP increase. Economists traditionally have equated increasing GDP as indicative of economic vitality. The secular stagnation being observed and commented upon by Krugman and Summers is a recognition that an increasing GDP is not a sufficient measure of economic vitality.

I wonder whether a prolonged period of secular stagnation will result in economists formulating a better measure of economic vitality and whether government and other institutions will adopt such a measure.
...
written by Fred Brack, December 15, 2013 9:58
Thanks, Dean, for a corrective to those people, like Steve Randy Waldman, yelling at Ezra Klein. Instead, you provide thoughtful insights that deepen the discussion.

Still, I'd like provide Ezra some support. For some time he's been infuriated that few in Washington have been paying any attention to the human crisis brought about by mass unemployment/underemployment. Now along comes inequality as a topic to further distract attention from the ongoing catastrophe of unemployment/underemployment blighting the lives of millions of actual human beings.

As I read Ezra's subtext, the fact that the wealthiest among us are leading lives of comparative extravagance should be of lesser importance to progressives at the moment (!) than the fact that millions of our fellow citizens are without jobs and thus without basic human needs, not to mention hopes for the future. An unemployed person, as I can attest from past experience, doesn't give a darn about how well the top 1%, or 10%, are doing. She/he just cares about how poorly she/he is doing at the moment (!). She/he wants a job with income so she/he can pay the rent, buy groceries, and avoid the humiliation of sending kids to school dressed in donated used clothing.

If 16% of progressive economists had been out of sufficient work for years, scrambling to provide for themselves and their families, and with no job prospects in sight, how many of them would be musing about inequality instead of mass unemployment?

As I read it, there's no consensus among economists as to the causes, the effects, and the remedies (if they are needed) to inequality – much less a consensus among congresspeople, who are the only ones who could do something about it. But there is a consensus among macroeconomists about the cause and remedy for mass unemployment/underemployment. Let's concentrate, Ezra says, on that – for the moment (!).

Moreover, as you, Dean, point out a blow could be struck against inequality – even if it would not be sufficient – merely by putting millions of people back to work. That might not fully satisfy progressive economists concerned about inequality, but it would surely satisfy millions of non-economists who are unemployed/underemployed at the moment (!).

(Infuriatingly, this is all, er, academic as long as Republicans control Congress.)
...
written by Ted Boettner, December 15, 2013 10:47
I would argue that the growth in household debt - which was made possible from deregulation and easy credit - also allowed middle income people to spend more than they have and that's why it doesn't show up in consumption data.
Bottom Up Rather Than Top Down
written by leo from chicago, December 15, 2013 7:07
Ultimately we can't leave it up to elites like Ezra Klein to decide whether inequality is a 'defining issue' or not. Rather it's up to working people themselves to decide priorities through activism and civic engagement. 100 years ago, we didn't make the first moves towards minimum wage or a graduated income tax because 'experts' thought these were interesting things to try out. Rather they did it because there were tons of working people outside on the streets demanding that they do it.

It's bottom up in this country; not top down.
...
written by kharris, December 16, 2013 8:02
I'm surprised at the poor quality of thinking represented in Klein's piece. That seems to be a common problem when good thinkers feel pressure to produce, as is the case with running a public blog, or are given space in the "big show" of a print piece, as is the case here.

On nearly every key point in this debate, Klein picks delivers the dodge that has been offered up by apologists for inequality. Since his real value is the ability to see through bad arguments, this is a very odd position for him. It's as if he has decided the "conventional" argument is the newly resurrected one against inequality, rather than the more conventional "conventional" argument from inequality apologists.

Here's just one example of really weak argumentation:

"But if inequality really was the central challenge to growth, would proof really be so hard to come by?"

First, it assumes an interaction between growth and inequality, demanding "proof" that inequality hampers growth. After decades of being fed the opposite argument, often in tacit form, shouldn't there be a larger burden of proof on the argument that a rising tide lifts all boats?

Klein must know that "proof" is not what research such as offered by Bernstein produces. The closest we can come is "evidence". Mistake? Well, why this mistake? Why do all the mistakes in this article lean the same direction? That's typically a symptom of writing that begins with a conclusion and then crafts an argument to support it, rather than a fair effort at investigation.

So maybe Klein has feet of clay, and simply fell into the trap that lots of write-on-demand folks do. That would be the generous view.
The Limit to Growth is old news
written by mike r, December 16, 2013 10:00
My name isn't Summers or Krugman but isn't this an awfully old story to be new?

Growth is needed to end poverty but as currently structured will not end poverty due to feedback loops in place by which it is easier for the rich to save/invest and multiply capital than for poor to do so. Not my original thought of course. That courtesy Club of Rome (1970). Marx observed this tendency, implicitly if not explicitly, a while before that. Jesus got and delivered that message too for which he was made a fine example.

As an aside, Noam Chomsky suggested that free market ideology supposes that private vice leads to public gain and that such can only be true if one assumes that 1) the world is an infinite resource 2) the world is an infinite garbage can and 3) the amount of damage humans can cause is relatively limited.

Hope some of that helps.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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