I hate it. I am terrible at it. As a consequence, I bought nothing in Turkey other than tickets to various things, room, food, and a poster of Ataturk. And I overpaid for all of these things, I’m sure, which has left me a bit bitter about the place. Surely this is inefficient overall, no? I understand the price discrimination argument for haggling, especially in a country with a lot of poverty and tourism. But probably hundreds of my dollars stayed in my pocket because I didn’t have good information about the quality of products and I knew the retailer is better at bargaining over the surplus than I am, so… there was no transaction and no surplus. Sure, there is a lot of successful gouging going on, but add up millions of instances of “I know you’re going to screw me,” and I suspect that the average retailer is doing worse rather than better under the haggling system. And how about the average native consumer? In competitive posted-price markets, the system basically pre-haggles the price down to the point where the consumer gets most of the surplus. This is why Wal-Mart is a humanitarian triumph, and a shining symbol of civilization. In the world of Wal-Mart, when it comes to divvying up the surplus from exchange, the retailer has very little freedom to try to take you to the cleaners, but profits by assuring you that you will win the argument.

When Tyler says to shout something from the rooftops, I comply. From Zubin Jelvah’s summary of a new paper from Christian Broda and John Romalis [pdf]:

Instead of focusing purely on what’s produced outside of the country, Broda and Romalis turn their attention to an interesting but obvious relationship between imports and consumption within our border: The goods exported by poorer countries are typically consumed by lower-income Americans. Our typical methods of quantifying inequality, however, don’t take this into account.

At the same time, inflation in the price of these goods has fallen behind inflation in services, which make up a greater portion of what wealthier people buy. Taken together, these trends imply that official measures may be overstating the rise in inequality.

Looking at trade data between 1994 and 2005, Broda and Romalis construct inflation rates for different income groups and find that rates for the richest outpaced rates for the poorest by about 4 percent over the period. Since income inequality between the top and bottom 10 percent of earners grew by about 6 percent, the different inflation rates among income groups wipes out about two-thirds of the rise in inequality.

China’s role in this new way of analyzing inequality is large, accounting for about 50 percent of the total reduction.

(A very interesting aside. Broda and Romalis also find that the poor are more likely than the rich to buy newer goods. Because of the lag in how quickly the CPI tracks new products, the researchers argue that once this “new goods bias” which serves to keep official inflation rates higher than they actually are since newer goods are typically cheaper, is factored out, inequality between the rich and the poor between 1994 and 2005 may not have changed at all.) [emphasis mine]

When I talked to Jeffrey Sachs briefly (at the Economist debate) about my project on thinking clearly about inequality, he suggested that constructing inflation indices for different income groups would be a good idea, and I said I wish I had the wherewithal to do that. I’m thrilled to see someone has done it.

I read Kevin Phillips cover article [$$$] in this month’s Harper’s, and thought he was completely crazy. First of all, I was amazed that they printed an article largely about one of my pet interests, the methodology of the Consumer Price Index, which I thought was a bit too esoteric for a general readership. But I was really baffled by Phillips’ claim that the CPI massively underestimates inflation. Phillips thinks the Boskin revisions were a big mistake, despite the fact that they were very conservative, and most economists who know about this that I have talked to think the problem goes in the opposite direction. Tyler is his usual ambassadorial self in his blog review of Phillips’ book Bad Money when he says:

Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man.  I find the former scenario more plausible.

But thankfully he really lays it out there in his comments:

A lot of the Phillips book is simply economically illiterate. For sure America has its economic problems, but they are not the ones identified in *Bad Money*

Perhaps it is time to convene an Overcoming Bias colloquy about how it is that estimates of the trend in real wealth can be so massively divergent.

Tyler Cowen’s take on Jeffrey Sachs’ new book:

Imagine a smart and diligent but not insightful or self-reflective person doing a “color by numbers” version of what a Jeffrey Sachs book should read like.

Shorter: Sachs has become a cartoon of himself.

From Tyler Cowen:

When a Pole moves to London he can buy many more goods and services.  It’s a big move up in real income plus lots of new goods are introduced to the consumption basket.  So when there is lots of voluntary movement from poorer to richer regions, changes in measured income will understate some of the true gains.

The other measurement understated is the reduction in real consumption inequality.

I say, again and again, that it is an embarrassing non-sequitur to argue that people are “irrational” and then leap to the conclusion that they need benevolent paternal guidance from the state. After all, if people are irrational then voters are irrational, politicians are irrational, bureaucrats are irrational, etc. To this, Ezra Klein responds:

I’m not sure what exactly it is that Will finds so inexplicable here. Behavioral research often finds that consumers act irrationally in certain situations. So given a specific set of constraints, they may underestimate future risk, prove oversensitive to loss, exhibit significant status quo bias, and so on and so forth. All problems.

Now, the government may be made up of people, but it is not made up of people carrying out transactions under these conditions.

Perhaps Ezra is right, but only because people acting inside government institutions are much less likely to themselves bear the cost of their mistakes, and will therefore likely make more of them. There is no way to wriggle out of the fact that people who win elections are just like the rest of us.

I really wish people would pay more attention to Vernon Smith, who invented experimental economics, won the Nobel Prize for it, and remains by far the most philosophically rigorous theorist of the relationship between individual rationality and institutional performance. (Ted Bergstrom’s paper here [pdf] is a good overview.) What Smith’s work shows is that, yes, individuals in isolation don’t act according to canonical postulates of rationality, but that well-structured market institutions will nevertheless tend to converge on the efficient outcome, as if the agents were behaving with full “rationality”, even though they are in fact limited, confused, and ignorant. The “rationality” of the outcome is more a function of the structure of the institution than of the “rationality” of those acting inside it.

Responsible social science therefore compares the way real people perform when embedded in different real-world institutional settings. What you surely don’t do is perform selective empirical work to discover an “anomaly” in decision making, and then deploy a priori high theory to infer that one set of institutions (markets) won’t work, because, in fact, the performance market institution might turn out to be indifferent to the anomaly or limitation. That’s what Smith has proved. If you’re going to be an empiricist, then be an empiricist, and actually test the effect of the anomaly in the performance of the relevant institutions. Until you do this, it’s either arbitrary, naive, or willfully ideological to posit another set of institutions (government) as a fix. Because there may be nothing to fix. And, even if there is, government may be the wrong kind of institution to fix it. You’ve got to run the experiment.

There is a great deal of carelessness in generalizing the results of anomaly-focused behavioral economics. As Steven Levitt and John List write in their short article on behavioral economics in Science ($$$) this month:

Perhaps the greatest challenge facing behavioral economics is demonstrating its applicability in the real world. In nearly every instance, the strongest empirical evidence in favor of behavioral anomalies emerges from the lab. Yet, there are many reasons to suspect that these laboratory findings might fail to generalize to real markets. We have recently discussed several factors, ranging from properties of the situation — such as the nature and extent of scrutiny — to individual expectations and the type of actor involved. For example, the competitive nature of markets encourages individualistic behavior and selects for participants with those tendencies. Compared to lab behavior, therefore, the combination of market forces and experience might lessen the importance of these qualities in everyday markets.

List has run a number of field experiments that show that this is the case. Smith has run a number of lab experiments that show that the frequency of a “mistake” goes down as the cost of making it goes up.

Ezra continues:

An easy example is the research on opt-out 401(k)s. We know, from the economists, that investing in 401(k)s is generally a wise idea. We know, from the statisticians, that far fewer people do it than should. We know, from the behavioralists, that far more people would do it if the default setting put you in the 401(k), rather than forced you to wander down to HR and specifically ask for it. And so folks in the government, acting with more information and in a different context than folks in an office, think up a policy to “recognize the power of inertia in human behavior and enlist it to promote, rather than hinder, saving.”

At exactly which point in this process does Will fear that the same irrationality that keeps someone from creating a retirement account will foul up a regulator’s efforts to ease their way into a retirement account?

As I said to Dan Ariely in our chat, I think behavioral work is really valuable, especially when it suggests to us how people might better structure their affairs to get more of what they want. I think the evidence shows that 401(k) opt-out defaults are often a good idea, and that businesses ought to make that part of their standard labor contract, if that is something that they think would be appealing to their prospective employees.

I also think that this minor fact about the general distaste for filling out complicated forms can hardly be used to justify further encroachments on the right of individuals to negotiate the terms of their contracts with employers. I think Ezra’s argument here is both strangely narrow and ungenerously extreme. I don’t doubt that non-terrible policies are sometimes successfully enacted. To doubt that would be a bit like a market skeptic doubting that anyone ever succeeds in buying a candy bar. That would be terrifically dense. What I doubt, very strongly, is that the discovery of “irrationalities” undermines the authority of market institutions more than it undermines the authority of government institutions. Are people more or likely to behave irrationally when voting for their congressman or when buying a sandwich? Do buyers for private organizations sign contracts for $76 screws? Etc.

So, no. I don’t fear the mandatory opt out 401(k) plans in particular will be a giant debacle. But I do fear that half-baked behavioral economics is being used to undermine support for market institutions in general, way ahead of the evidence. And I fear that a fundamentally confused assault on “rationality” is being used successfully to promote paternalistic control by elites and, necessarily, to encourage the docility of those who are to be controlled.

[Added: If you have not read Ed Glaeser's "Paternalism and Psychology" [pdf], then you probably should.]

Today on Free Will I chat with Tim Harford about his new book The Logic of Life.

Tim’s book isn’t just another foray into pop econ. It’s a fascinating and entertaining overview and synthesis of a good deal of the most important recent research in economics. I wasn’t expecting to discover work that would help me on my inequality project, but I did.

Jonathan Chait replies to my criticisms. He basically seems to me to say:

(1) Like the author of The Party of Death, I am completely confused by why anyone would think this book is a partisan hatchet job.

(2) Low taxes are actually good. I just have a hard time saying that clearly.

(3) George W. Bush’s tax policy made the system less progressive, and ran up the deficit, which is a problem for me for reasons I won’t disclose.

(4) People who wanted to privatize social security are either stupid or lying when they tell you that they would have made it more progressive. I could tell you why, but I won’t.

(5) The state really does own everything, and cutting taxes for the rich really is upward distribution. I have arguments to that effect, but I’d rather not debate it. Instead, I’d rather discuss my book in a way that takes all my wildly contentious normative premises for granted, while still pretending to be a pragmatic empiricist.

Meanwhile, I’ve added a follow-up post on why Chait’s class war thesis really is incredible.

Regarding the supply-side foofaraw, I loved this comment by “8″ on this Alex Tabarrok post:

How hard is this to understand? The taxpayer doesn’t care about maximizing government revenue.

Politician A: Mr. Joe Sixpack, we can maximize government revenue by raising taxes by 10%, because you see, we’ll only lose 9% to slower growth, so our revenue actually increases! Then we can spend it in lots of ways to make you happy!

Joe Sixpack: So, you’re raising taxes by 10% and you’re going to slow the economy?

Poltician A: Don’t look so glum! It’s for the children!

Politician B: Me cut taxes. You keep money, economy grow fast. Ugh. Me like cookie.

Joe Sixpack: I pick B.

That pretty much gets to the heart of this. Or, as NBER chief Martin Feldstein puts it:

financing additional government spending by an acrosss the board rise in all marginal tax rates would make the cost per dollar of government spending equal to $1.76.

These two facts — that the actual revenue is only 57 percent of the static gain and that the deadweight loss is 76 cents per dollar of revenue — should be central to any consideration of tax policy. And yet they are not.

It is possible that the state can make its citizens better off by taking $1.76 to spend $1.00, if those very expensive dollar bills are spent on highly valuable public goods folks can’t coordinate to provide privately. But I reckon this kind of bona fide public good is a pretty small part of the existing budget.

Also,  people’s money is, well,  their money, and it is obviously wrong for other people to take it from them absent a special justification. If the government is taking more than is justified, then it should cut taxes and cut spending. It happens that the government is taking more than is justified. So it should cut taxes and cut spending. It seems like a number of folks on the left are practically hyperventilating with excitement over this supply side business, but it strikes me that 8 has both the economics and the politics right.

Not surprisingly, I found Ezra’s reply to my post on the demand for populism unpersuasive. Here’s Ezra:

Notice, here, that Will uses “life satisfaction” rather than anything directly related to the economic numbers for his point. That’s because the economic numbers are very bad for his point, But as Will — who dearly loves his “alternative status hierarchies” — fully knows, economic status is not the only determinant of life satisfaction. If you don’t have health care but are really happy with your attempts to restore the heat and spark to your marriage, you may be both satisfied and a populist!

Moreover, invoking current polls is completely non-responsive to Ross’s claims. Ross — and Alan Blinder, and everyone else — expect tens of millions of white collar jobs to come under pressure from outsourcing within the next few decades. If Will doesn’t think this will upset anyone, he’s got to construct a plausible theory as to why, not note that the Harris poll says many folks are satisfied with their lot now.

And this goes across the board. Will may not like the trends, but it requires some fancy libertarian footwork to argue that continually rising health costs, substantially stagnant wages, the enduring pressures of globalization, the decline of the corporate welfare state, and all the other forces buffeting the bottom 80 percent will elicit no response in the electorate. Indeed, it’s hard to argue they’ve not already done so.

Why cite numbers on people’s satisfaction with life and their assessment of whether their “life situation” has improved or will improve? Because Ross claims that middle-class Americans in fact are and are going to continue to be highly anxious about their economic condition. If people’s alleged economic anxiety is important enough to create a powerful demand for populist policies, you would think it would have some effect on either their life satisfaction or their evaluation of their “life situation.” But the evidence is that people are increasingly satisfied, and fewer people expect their life situation to get worse. Either increasing economic anxiety is a myth, or it is not sufficient to affect people’s evaluation of their satisfaction or prospects. Either way, it is difficult to see how it is supposed to drive demand for a middle-class populism. Ezra notably fails to address the troubled Jacob Hacker thesis on volatility, which seems to have been Ross’s main piece of evidence in favor of the existence of high levels of economic society. Should I assume Ezra thinks I’m right, and that there is no good evidence for an especially politically significant level of anxiety?

Indeed, Ezra proceeds, as he often does, simply by changing the subject. So now we are talking about the future and what people will be feeling. Ezra says people will be upset by outsourcing. But I was talking about evidence for economic anxiety and the demand for populism now.

Anyway, like Alan Blinder and all sensible people, I think lots of firms will be seeking less-expensive foreign labor, that this will have a significant effect on the jobs available to Americans, but also on the price of many goods and services (down) and on the incentives to acquire new and/or improved skills (stronger). This is going to make middle-class Americans wealthier, improving their objective economic security. Many people will surely be temporarily upset when the shifting incentives of the global market upset their usual patterns of work and life, very much as people in the Rustbelt were upset by the process of deindustrialization. But these changes are going to take place incrementally over decades, not all at once. At any time during the process, huge segments of the middle-class will be seeing significant improvements in their standard of living while other, smaller segments struggle to find new niches in the labor market.

I don’t believe I bear any burden to show that this transition won’t produce demand for populist policies. The positive claim, and the burden, is on the other side. Indeed, the sometimes dramatic dislocations of America’s transformation from a primarily industrial to a primarily service economy delivered two terms of Ronald Reagan, a term of George H.W. Bush, and two terms of Bill Clinton, while leaving the U.S. with historically low rates of unemployment, a leaner, more efficient, more productive manufacturing sector, lower taxes, scores of free trade agreements, etc. Ezra should explain to us why the anxieties of deindustrialization fell so far from delivering a populist politics.

I don’t deny that there are business cycles, and that the electorate’s economic anxieties rise and fall, or that politicians can ride a cyclical wave of economic discontent to power. I was replying to Ross’s suggestion that there is a long-term or secular trend toward increased middle-class economic anxiety, and that this is likely to generate a populist politics that could dominate politics for twenty years. Neither he nor Ezra has said anything more than fantastically conjectural on the point.

Last, what is populism anyway? I think of a politics that pictures the economy as a huge zero-sum game, sets social and economic classes against each other, and promises “the people” free stuff at the expense of some other, usually richer, people. Ezra adduces evidence from the recent Pew Political Typology that shows increased support for a bigger, more domestically activist government. I certainly don’t dispute it. But what does that have to do with populism, exactly? Is this shift in opinion Ezra identifies motivated by “people vs. the powerful,” “two America’s” stuff? Where’s the evidence of that? And, more to the point, if there is any evidence of it, where’s the evidence that it is driven largely by economic anxiety? Because that’s the specific point I was rebutting.

My guess is that some intellectuals get excited about populism because they thrill to the fantasy of riding popular passions to power and harnessing them to set in place their ardently desired policies. It is a thrilling, if repulsive, dream. The best evidence the dream does exist is the habitual evidential overreach of pro-populist intellectuals. A complacent electorate is routinely met with desperately table-pounding op-eds practically begging readers to be mad as hell. Any faint sign of traction, that the fickle mood of “the people” is turning their way, is greeted with bold predictions of an all-new politics! Our politics! Hope triumphs over reason, but, inevitably, hope is dashed.

There are also ups and downs and quick reversals, if not cycles, in political opinion. As Ross mentions in his article, just a year or so ago, there were still books rolling off the presses trying to explain why the Democrats are perpetual losers. Are Republicans wizards at “framing”? Are they more fluent in the visceral emotional language of politics? Have they gerrymandered themselves permanent majorities, destroying any chance of a real American democracy? I don’t believe it is even minimally reasonable to now think the tide of public opinion has semi-permanently turned. What I think it is safe to say is that the incompetence, corruption, and disastrously failed war delivered by years of Republican rule have powerfully soured many Americans on policies they identify, rightly or wrongly, with conservatives. Anyone making projections further out than the next election is just guessing, and usually wishfully. A big majority opinion seemingly in favor of a big policy change — in favor of social security privatization or nationalized health care, for example — can collapse in a matter of months in the face of well-coordinated negative political and media campaigns. Go ahead, Ezra, dream. But brace yourself.

So, again: What is the evidence that there is in the U.S. a secular trend toward increased economic insecurity or anxiety?

David Brooks once wrote a column based on an astonishing sociological insight seldom noted by teenagers to the effect that not conforming is just another way of conforming when you do it in the way everyone else is doing it, say, by getting a tatttoo. Opting out is hard! Robert Frank noted this dynamic with the bygone multiple piercing fad in What Price the Moral High Ground. As whatever it is that having a piercing signals gets diluted by widespread adoption, you need more more bangles in holes to get the signaling job done. Frank says something about this costly race subsiding as norms against “bodily mutilation” kick in. That sounds wrong. What kicks in, I think, is a kind of signaling backfire — the ”trying too hard” phenomenon. If you’re out toward the right tail of the piercing distribution, you can attempt a kind of counter-signaling: “I’m not in fact trying too hard; I look this way because I seriously don’t give a f*ck what you think,” but it takes a very special person to make this work. People who invested in the signal early, before it got noisy, generally just drop it and search for something else. 

But let’s back up a second. Frank is right that it seems like there is a kind of waste here. If some kind of truce could be established in the form of a norm that that three, but no more than three, piercings is maximally edgy, people could signal precisely the degree of edginess desired without fear of signal dilution and the costs of an escalating arms race. But in cases where the goal is to signal willingness to deviate from widespread social norms, it seems that additional widespread social norms regulating the pursuit of this goal can’t possibly be stable.

This obviously relates to the paradox of the avant garde, which I spent way too much time thinking about when I was an art student back when giants like Kurt Cobain walked the Earth. Each new shocking work intended to jar the bourgeousie out of their dull complacency only further desensitizes the burghers and hausfraus until even churchgoers and patriots become well-nigh unshockable and the game is used up. So, like a guy who affiliates with a community of tattoo afficianados among whom it doesn’t look like he’s trying too hard (and who provide an explanation), artists shift their frame of reference and create “the art world” and try to impress and dismay the denizens of that world — other artists, critics, collectors, hangers-on — with other kinds of limit-pushing. At some point, it seems, it became radical to paint figurative pictures in a traditional style and bisect sharks. It never ends! Think of the waste!

So how could a “truce” norm possibly work in this context? It couldn’t, unless there is a prior implicit agreement to refuse to confer status upon those who satisfy, entertain, and stimulate with paradigm-shifting novelty, which is not forthcoming. Therefore, artists continue to angle for attention and praise by producing interesting things. Positional arms races do seem to exhaust lines of creation. Each envelope-pushing success imposes costs on competitors. These days Piss Christs and dung-smeared madonnas need media blitzkriegs to invent a minor hubbub. Blank canvases get no blanker, empty rooms no emptier, etc. But as long as there is prestige (money, too) to be won, the aesthetic search pushes into neglected corners and fresh frontiers. Like oil companies with ingenious new extraction techniques, artists unsuited to blazing new trails return to fields that had seemed tapped out, but weren’t. The fecundity of these races is precisely in their norm-defying trucelessness.

Entrepreneurship, I think, is a lot like that.  Or, rather, that’s an example of entrepreneurship at work. Something like this dynamic is behind a great deal of economic discovery in addition to artistic innovation. The supply of human creativity is too low. And status-seeking is probably a greater spur to creativity than even wealth-seeking. We need it. One argument against both taxes and certain social norms intended to limit positional competition is that they further reduce already undersupplied creativity. Of course, positional competition along certain dimensions — for political power, say — can be incredibly destructive and we’d be doomed without robust norms tighly regulating it.  But we should be careful about what exactly we are taxing, socially and fiscally. 

I love it! Matt’s Econ101-disdaining commenters are completely devastating in their muscular deployment of advanced labor economics.

Question for Bryan Caplan: Is there data on the consensus among economists on this one? My guess is: there is.

Yglesias makes a perfectly sound point in this post about paid vacation:

A paid vacation is a kind of accounting fiction — you continue to draw a paycheck (and health care benefits, etc.) even while you’re on vacation. But nobody’s going to pay you to go on vacation. You’re paid for the work that you actually do.The money you get on your vacation days is part of your payment for the work you do on the other days. Over the long run, if the government mandates a certain number of paid vacation days, then positions that currently offer fewer vacation days [than] that will become less lucrative.

Things like this assure us that Matt isn’t economically illiterate. But to some of his commentators, economic literacy amounts to treason. Witness Bloix:

At one point, Matt was an intelligent moderate liberal. All of sudden, he’s a wingnut spouting moronic right-wing talking points.

Incredible! Bloix, like a number of other commenters, seem peeved that Matt did not mention that productivity and wages could go up, due to happier, better-rested workers. And even if productivity did go down, wages could be kept constant by cutting executive pay, or shafting shareholders. Why are you such a wingnut, Matt!?

I like the point about highly tanned, highly productive workers, since it strikes me that it turns on something very like the logic of the so-called Laffer Curve. At the “no vacation” limit, you don’t get zero productivity, but the workers may be worn down, demoralized, listless, and perhaps even spitefully sluggish. At the “permanent vacation” limit, you do get zero productivity, since no one is ever at work. Somewhere in between is the productvity sweet spot. I suppose it is easy to imagine that we are currently at a point where more vacation would give us enough extra productivity to compensate for the time off. More productivity from less working! Like more revenue from lower taxes! Damn right-wing talking points.

Now, since companies obviously have no incentive to hit the productivity sweet spot, since companies don’t like making money, we may indeed need the government to step in here and make sure we all get the vacations our employers would give us if they had any reason to try to get us to really put our shoulders into it. Naturally we can be sure the government will find the optimal vacation sweet spot. You can’t buy bombs with taxes on unrealized profits!

Whetever you do, don’t tell the Chinese about weekends off!

Paul Krugman has published an interesting article on trade and inequality at VoxEu that nicely illustrates the morally puzzling nationalist assumptions of standard welfare economics.

After economists looked hard at the numbers, however, the consensus was that the effect of trade on inequality was probably modest. Recently, Ben Bernanke cited these results – but he recognised a problem: “Unfortunately, much of the available empirical research on the influence of trade on earnings inequality dates from the 1980s and 1990s and thus does not address later developments. Whether studies of the more recent period will reveal effects of trade on the distribution of earnings that differ from those observed earlier is to some degree an open question.”

But the question isn’t really that open. It’s clear that applying the same models to current data that, for example, led William Cline of the Peterson Institute to conclude in 1997 that trade was responsible for a 6% widening in the college-high school gap would lead to a much larger estimate today. Furthermore, some of the considerations that once seemed to set limits on the possible inequality-promoting effects of trade now seem much less constraining.

There are really two key points here: the rise of

China, and the growing fragmentation of production.

Conclusion:

What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.

This doesn’t mean that I’m endorsing protectionism. It does mean that free-traders need better answers to the anxieties of those who are likely to end up on the losing side from globalisation.

I’m just going to assume that Krugman is right about everything. Maybe he is. If a large part of Krugman’s argument is that we increasingly buy stuff from China (and other such countries), since they can produce it more cheaply, then it is a large part of Krugman’s argument that ”the economy” in which Americans participate is increasingly one in which parties to complex forms of exchange work and reside in different nation-states. Krugman, as far as I can tell, thinks the increasingly globalized network of exchange creates a larger overall surplus than would exist in a more highly protectionist world, and Americans on average are better off for it. But, the argument seems to be, the share of that larger surplus going specifically to low-skilled American workers is smaller than it would be in a more heavily protected economy. These folks are on ”the losing side.” The policy upshot, I’m sure, is that “winners” might need to compensate “losers.”

I think there are lots of conceptual problems here that flow from knee-jerk economic nationalism. Let’s imagine just U.S. - Chinese trade, to make things simpler.

First, it is not clear why the scenario of a continued, less-globalized status quo ante, in which low-skilled American workers earn higher wages, counts as the relevant baseline. That is a world in which, I guess, we are supposed to imagine that the Chinese economy has not been liberalized, and so there is less competition from Chinese workers. Implicit in this idea is that unreformed Chinese communism — which keeps its workers off the world labor market – is a subsidy to low-skilled American workers. But now the subsidy has been withdrawn, making low-skilled workers “losers.” There is clearly a kind of perspective relativity going on here. We could just as well say that the prior generation of low-skilled workers were winners, receiving a bonus from Chinese economic illiberalism. I think the normative baseline should be competitive world labor markets — a world in which individuals’ passports have no effect on their freedom to trade with one another. And so the opening of Chinese labor markets is a reversion toward the baseline, and a withdrawal (from other low-skilled workers) of a positive externality of injustice.

Second, it seems to me that American low-skilled workers are suffering from a classic pecuniary externality (that is, the withdrawal of a positive pecuniary externality). If you and I are both in the hot dog biz, and I sell my hot dogs for a lower price, a reduction in your profits may be (to you) a negative external effect of my offering a lower price. But this is not the kind of thing you can claim as a “harm” or a basis for compensation. Pecuniary externalities are essential to competitive markets: we want them. Nobody is doing anything to low-skilled domestic laborers. It is simply that their segment of the labor market has become more competitive, bidding down wages. It’s just as if you had to cut the price of your hot dogs to stay in business, resulting in lower profits. Now imagine that our friend Larry is now buying hot dogs from me rather than you, since my hot dogs are cheaper. There are gains from our trade, which he and I divide. Larry comes to me not you, because he gets a relatively bigger bit of the surplus than he did with you. At the end of the year, Larry has more cash in his pocket than he would have had if he had been trading with you. And you have less in your pocket than you would have had if he had been trading with you. So the inequality between you and Larry has increased, all because I’ve been offering a cheaper hot dog. But I had next to nothing before I was selling cheap hot dogs. So the inequality between me and Larry has decreased.       

That’s what it’s like, isn’t it? Many Americans get a boost in real wages from the relative decline in prices due to cheaper stuff made in China. But that boost isn’t enough to fully compensate workers who would have been doing the work the Chinese are doing (if the ChiComs hadn’t opened their markets.) Meanwhile, hundreds of millions of Chinese edge ever slightly closer to American wages. Which change in inequality matters morally? It simply isn’t obvious that it’s the gap among fellow Americans.    

Now, it may be the case that if the class of citizens who suffer a pecuniary externality is large enough, they may drum up effective political demand for restrictions on trade (for reinstating their previous subsidy, by other means), which would make most other citizens worse off in the short term, and everyone worse off in the long term. So we might want to enact direct wage subsidies, or an increase in the EITC, retraining programs, or whatever, to get those on the ”losing side” of globalization from trying to use the political process to make themselves “winners” again. But, if that’s the real argument, we should be clear that the point of this is not to ameliorate the injustice of increasing national income inequality caused by global trade, because there is probably no such injustice. Increasing national inequality may be a side-effect of a straightforward improvement in justice globally.

It may also be that Krugman is not right about everything. 

Following in my illustrious footsteps as an Economist.com guest blogger, Brookings senior fellow Jason Furman writes thusly of rising income inequality: 

According to the Congressional Budget Office’s income inequality data, the top 1 percent of households have seen their incomes go up by 7 percent and the bottom 80 percent have seen their income shares go down by 7 percent.  In total that is a $664 billion increase in inequality, representing $7,000 for each household in the bottom 80 percent and nearly $600,000 for each household in the top 1 percent.

That number motivates a Hamilton Project tax strategy paper co-authored by Larry Summers, Jason Bordoff and myself that is being released today.

It is far from obvious what has caused the change; in just the last month alone the National Bureau of Economic Research has released three working papers with divergent explanations:  a reduction in the bargaining power of workers, an increased reward for skills and worker productivity, and the destruction of good jobs by trade.

Regardless of the cause of rising inequality, lefties, utilitarians, Rawlsians and anyone with a deep-seated reverence for markets and the capitalist system should all be concerned.  As Alan Greenspan memorably stated, “income inequality is where the capitalist system is most vulnerable.  You can’t have the capitalist system if an increasing number of people think it is unjust.”

Well, I consider myself a sort of Rawlsian (a Rawlsekian!) with a deep-seated reverence for markets and the capitalist system. Should I be concerned? I agree with the sainted Greenspan that capitalism cannot survive a widespread conviction that it is unjust. And I agree that income inequality is one of those things that some thinkers like wheel out to try to convince us that capitalism is unjust, at least around the edges, in order to build popular support for such things as more steeply “progressive taxes combined with expanded benefits like health insurance,” like Furman wants. But I’m not so worried by rising income inequality as I am by Furman’s facile slide from income inequality numbers, which are meaningless by themselves, to the possibility of a crisis of legitimacy.

It is worth repeatedly and forcefully emphasizing that income inequality may or may not be symptomatic of injustice. The three hypotheses for rising inequality Furman mentions are perfectly consistent with advances in justice. And if they are generating income inequality, then it may vindicate capitalism. For example, the loss of jobs, a decrease in wages, or a decrease in bargaining power for some workers may be a consequence of lifting coercive restrictions on voluntary exchange across borders — restrictions that are themselves a form of injustice. Furman himself notes that protectionist policies could decrease inequality, though he advises against them, and rightly so, since they are unjust. But if protectionist policies are lifted, and inequality increases, that uptick in inequality is a side-effect of justice, not a symptom of injustice.

Inequality may reflect real injustice in our culture and institutions, and some portion of it probably does. But then our focus ought to be on rooting out those injustices, not papering them over with confiscatory redistribution which, in the absence of a reason to do it other than arbitrarily reducing measured inequality, is straightforwardly immoral.

Let’s set aside the matter of the intelligibility of “shares” of “national income” as a subject of justice for another time.

[Cross-posted from Cato@Liberty.]  

Bryan and I ”diavlog” about his new book, The Myth of the Rational Voter, here.

Point of conceptual clarification. As far as I can tell, income mobility studies don’t actually study mobility in the sense of the ability to move. They study actual movement in incomes. Mobility is a dispositional term. If I have been immobilized, I am prevented from moving. If I am immobile, but not immobilized, then I could have moved, but didn’t. If I sit in my chair all day, my measured physical movement for the day will be low, but I may also be a spectacularly mobile person, able to run marathons, climb sheer rock faces, swim channels, etc. What we are interested in normatively from economic measures of mobility is whether there are structural barriers to upward movement, especially for the less wealthy, not the average deviation from parents’ earnings. Can people earn more if they try? Once the average income reaches a certain threshold of material comfort, we should expect people’s labor market choices to reflect preferences for many things other than income. So relatively low measured mobility (generation 2’s income highly correlated to generation 1’s) could indicate that people are fairly well satisfied with their parents’ level of income and are optimizing on other margins. The better off people become materially, the less you ought to expect actual measured intergenerational movement in average income to reliably indicate the opportunity to move. 

I have an extraordinarily interesting job that probably pays about 1/3 of what I could get on the labor market doing (for me) much more boring things, and so here I am happily foregoing twice what I actually make not to be bored. (So: what are my really real wages?) It turns out that this choice keeps my income in the neighborhood of my Dad’s at my age, I’m guessing. (I, however, don’t have a wife and three kids to support!) I am incredibly grateful to be at liberty, both economically and socio-culturally, to make this kind of tradeoff between income and satisfaction.  And I’m sure I’m not alone. 

The opportunity to make this kind of tradeoff in the labor market is largely a function of education. I think our current system of public schooling does create a structural barrier to upward movement for many of the least well-off, which is why we should scrap that system and replace it with a market in education as a matter of justice. But that’s a matter of particular barriers to upward movement, which are what we should focus on, not some meaningless-by-itself average.

One of Ezra’s co-bloggers, John, writes:

Mark Weisbrot has a good column explaining that, no, France’s economic problems are no more severe than those faced by any other G8 country, including the US.  At the very least, there’s no convincing evidence that the usual proposed “solution” — more liberalized market reforms — is going to solve the problems France faces.

I thought Weisbrot’s column was an half-assed attempt to explain away France’s poor economic performance by someone who would like to see failed French policies implemented in the U.S. But who cares what I think?! One thing’s for sure, Weisbrot isn’t going to win the Nobel Prize in economics, unlike Edmund Phelps, who won it last year and wrote in February:

As is increasingly admitted, the economic performance in nearly every Continental country is generally poor compared to the U.S. and a few other countries that share the U.S.’s characteristics. Productivity in the Continental Big Three–Germany, France and Italy–stopped gaining ground on the U.S. in the early 1990s, then lost ground as a result of recent slowdowns and the U.S. speed-up. Unemployment rates are generally far higher than those in the U.S., U.K., Canada and Ireland. And labor force participation rates have been lower for decades. Relatedly, the employee engagement and job satisfaction reported in surveys are mostly lower, too.

Why does it suck so bad there “compared to the U.S. and a few other countries that share the U.S’s characteristics?”

In my thesis, the Continental economies’ root problem is a dearth of economic dynamism–loosely, the rate of commercially successful innovation. A country’s dynamism, being slow to change, is not measured by the growth rate over any short- or medium-length span. The level of dynamism is a matter of how fertile the country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.

There is evidence of such a dearth. Germany, Italy and France appear to possess less dynamism than do the U.S. and the others. Far fewer firms break into the top ranks in the former, and fewer employees are reported to have jobs with extensive freedom in decision-making–which is essential at companies engaged in novel, and thus creative, activity.

Further, I argue that the cause of that dearth of dynamism lies in the sort of “economic model” found in most, if not all, of the Continental countries. A country’s economic model determines its economic dynamism. The dynamism that the economic model possesses is in turn a crucial determinant of the country’s economic performance: Where there is more entrepreneurial activity–and thus more innovation, as well as all the financial and managerial activity it leads to– there are more jobs to fill, and those added jobs are relatively engaging and fulfilling. Participation rises accordingly and productivity climbs to a higher path. Thus I see the sort of economic model operating in the Continental countries to be a major cause– perhaps the largest cause–of their lackluster performance characteristics.

Another thing Weisbrot is not going to do is write a comprehensive, top-notch economic history of The European Economy since 1945, like Berkeley’s Barry Eichengreen just did. In a lecture just over a week ago, Eichengreen concluded: 

So, in a month when we mark the EU’s 50th anniversary, it is worth remembering that Europe has a lot on its plate. It needs further deregulation of labor and product markets. It needs stronger incen­tives for innovation and entrepreneurship. It needs more immigration-friendly policies. It needs lower tax rates and more efficient delivery of public servic­es.

Funnily enough, John’s post is titled, “Is it something about France that makes people stupid?” Maybe! 

Nicholas Eberstadt’s American Interest article on American demographic exceptionalism is a great antidote to the badly undermotivated worry that America has lost its animal spirits and assimilationist mojo. His conclusion:

U.S. demographic exceptionalism is not only here today; it will be here tomorrow, as well. It is by no means beyond the realm of the possible that America’s demographic profile will look even more exceptional a generation hence than it does today. If the American moment passes, or U.S. power in other ways declines, it won’t be because of demography.

Hell yeah! To those who worry that strong American birthrates are actually due to high rates of immigration, and that we will shortly become the Estados Unidos Norte Mexicanos, Eberstadt points out that

The single most important factor in explaining America’s high fertility level these days is the birth rate of the country’s Anglo majority, who still account for roughly 55 percent of U.S. births. Over the past decade and a half, the TFR [total fertility rate] for non-Hispanic white Americans averaged 1.82 births per woman per lifetime–subreplacement, but more than 20 percent higher than corresponding national levels for western Europe, and much higher if one compares “Anglo” TFRs with those of western Europe’s native born populations.

So what explains the fact that America is the land where white people reproduce? Here’s Eberstadt:

Public opinion surveys, for example, have thoroughly established that Americans tend to be more optimistic about the future than Europeans–a disposition that could weigh on the decision to bring children into the world. Similarly, more Americans report being “proud” of their country than do Europeans, which, quite plausibly, could lead to more births. All else equal, patriotism or nationalism may conduce to higher birth rates. Most portentously, perhaps, survey data indicate that the United States is still in the main a believing Christian country, with a high percentage of households actively worshipping on a monthly or weekly basis. In striking contrast to western Europe, which is often provocatively (but not unfairly) described as a post-Christian territory these days, religion is alive and well in the United States.

He then goes on to lament that the U.S. Census collects no data on religious affiliation. My gut says that Eberstadt wants the religiosity hypothesis to be true but seems to know that the macro-level trend in religious participation cuts the wrong way for his theory, which perhaps is what led him to produce this sentence:

Attempts to connect those two factors on the basis of broad, aggregate observations and trends run the risks of committing what statisticians call the “ecological fallacy”–mistakenly associating two unrelated phenomena for want of examining relationships at the individual level.

Well, I will run the risk by showing you a chart of the aggregate trend in religious participation in the U.S.

This is from Ronald Inglehart and Pippa Norris’s Sacred and Secular: Religion and Politics Worldwide. The U.S. has been getting markedly less religious, even during the upsurge in fertility after the mid-70s nadir. Norris and Inglehart also note that the U.S. is not really that exceptional in religiosity relative to, say, Italy, which has about the lowest birthrates around. For the religiosity hypothesis to account for rising and then stable white fertility rates, we’d need to find that the ever-smaller proportion of white religious people have been breeding at ever-higher rates. Perhaps certain denominations have been pumping out neonates at rates sufficient to offset the general decline. But in that case, fertility wouldn’t be a function of religiosity generically but of Mormonism specifically — just for example.

I like the optimism explanation. It’s easy to see why folks would refrain from reproduction if they thought their kids had only a broiling, denuded planet full of wretched consumer-zombies living pointless lives in cookie-cutter McMansions and soulless big box strip malls to look forward to. The data are convincing. This Harris Poll lays it out:

Nearly two-thirds (65%) of adults in the United States say they expect their lives will improve in the next five years [Best in the world!] . . . At the other end of the spectrum, only 23 percent of Germans, 35 percent of Austrians, 36 percent of Belgians, and 37 percent of the Dutch expect their personal situations will improve.

In a fantastic paper [pdf] by Deutsche Bank Research’s Stefan Bergheim, the OECD countries with higher average self-reported happiness also had higher birthrates. And what are the correlates of high levels of happiness? Bergheim says, high trust, low corruption, low unemployment, high education levels, high incomes, high employment rates for old people, small shadow economy, high levels of economic freedom, low employment protection, and, well, high birth rates. We should consider the possibility that some portion of high happiness and high birthrates are jointly caused by these other variables. Bergheim observes that in happy countries, “societal institutions and social cohesion are evidently so good that many people decide to have children.” However, social cohesion happens not to be the U.S.’s greatest strength relative to the European countries. But how about this?

Leaving France [which appears to have implemented successful natalist initiatives] aside, the overall analysis of the ten happiness-relevant dimensions in this report shows that a truly successful family policy is normally accompanied by good conditions in many other segments such as the labour market.

Now we’re getting somewhere! It turns out that America’s optimism outstrips even it’s own considerable levels of happiness. Maybe we’re just a sunny bunch, laboring under a mass delusion. Or maybe Americans expect the future to turn out well on the basis of past experience. I think flexible American labor markets have something to do with this.

In a fascinating review of recent literature in family economics by Shelly Lunberg and Robert Pollack question the effectiveness at policy aimed specifically at encouraging higher birthrates:

Kohler, Billari, and Ortega (2006) review studies of population policies in low-fertility countries, including family cash benefits and work–family reconciliation policies such as parental leave and childcare subsidies. They report that the effects of such policies are at best only modestly positive and have more influence on the timing of births than on completed family size. They conclude that policy measures tend to affect reproduction only in the long-term, so that consistent and credible application of policy over time may be a precondition to effectiveness. They also suggest that policies reducing economic uncertainty in early adulthood—for example, reducing high unemployment—may have stronger pro-natalist effects than subsidizing births or childcare. Children imply very high costs, both in money and time—particularity mother’s time—over many years. Hence, governments can only influence fertility decisions with very large subsidies, or with credible long-term commitments to support childrearing. [emphasis mine]

At this point, the correct question to ask about exceptional American fertility is: what would Gary Becker say? Why not this? If white Americans produce more children than their European counterparts, then the (expected total) cost of children must be lower for Americans, especially women. Maybe this has to do with some mix of confidence in the possibility of successful re-entry into the work force after time out, or in the possibility of flexible work arrangements. Might American optimism have something to do with the fact that things really are better economically in the U.S.? It might. In any case, the belief, true or not, that things are getting better must have some effect. If we bring our children’s welfare inside our own welfare functions, the expectation of an improving standard of living for our children lowers the cost of having them. Right?

It’s late. That’ll have to do, as a start.

From Scientific American:

By measuring response time, the researchers got a sense of how quickly people learned which one of the abstract pictures indicated money would follow. They noticed an inverse correlation between how much money a person had (assets and income) and the swiftness with which they were conditioned. The poorer people tended to figure out which card signaled money ahead within about 12 trials, says neurobiologist Philippe Tobler, the study’s lead author, whereas the richer people took about 35 trials.

The team next repeated the experiment while the subject’s brains were scanned by an fMRI (functional magnetic resonance imaging) machine. Researchers focused their scans on the midbrain (which contains neurons or nerve cells that produce dopamine, a neurotransmitter central to reward-based learning), and the striatum, another reward-based center located under the cerebral cortex. This time, however, the participants did not have to physically respond. “We didn’t want them to do that because there are neurons in the striatum that are responding to initiate an action of responding to reward,” Tobler says. It was this response preparation that the researchers timed.

Once again, an inverse association between wealth and learning appeared, with poor people displaying more increased activity in the midbrain and striatum when compared with the more affluent subjects.

It seems like every experiment I see confirms the idea that effort is not free. Take a unit of anything valuable — money, happiness, whatever — and there will some point at which the modicum of effort to acquire it isn’t worth it.

Here’s what happens when you wait a day to publicize your new article in the Australian Centre for Independent Studies’ magazine Policy, “Out of Position: Against the Politics of Relative Standing“: David Friedman goes and writes an excellent blog post about the same subject:

It seems obvious that, if one’s concern is status rather than real income, we are in a zero sum game. If my status increases relative to yours, yours has decreased relative to mine. So this point of view seems to support the approach to politics that sees it mainly as a question of who gets to benefit at the expense of whom, of which side who is on.

Like many things that seem obvious, this one is false. It is true that my status is relative to yours. It does not, oddly enough, follow that if my status is higher than yours, yours must be lower than mine, or that if my status increases someone else’s must decrease. Status is not, in fact, a zero sum game.

This point was originally made clear to me when I was an undergraduate at Harvard and realized that Harvard had, in at least one interesting way, the perfect social system: Everyone at the top of his own ladder. The small minority of students passionately interested in drama knew perfectly well that they were the most important people at the university; everyone else was there to provide them with an audience. The small minority passionately interested in politics knew that they were the most important ones; their friends were there to be herded into meetings of the Young Republicans and Young Democrats in order to get them elected to positions in those organizations that were the stepping stones to further political success. The small minority….

Right on! Indeed, I talked with David about exactly this for about a half-hour in Vegas this April, though I claim no influence whatsoever. Nevertheless, I claim comprehensiveness! Here’s a taste of my 3600 words… (footnotes omitted)

Crucially, there is no limit to the possible forms of excellence. So, while the number of positions on any single dimension of status may be fixed, there is no reason why dimensions of status cannot be multiplied indefinitely. It does not in fact require a violation of mathematical law to produce more high-status positions, for it is possible to produce new status dimensions.

New dimensions of excellence and status often open up due to technological innovation. It was impossible to be a chart-topping pop star or a champion triathalete before there were radios and bikes. Liberal market societies not only create new technologies, they create proliferating forms of association, affiliation, expression, and identity at a sometimes alarming rate. Each musical genre, each hobby, each committee, each church, each club, each ideology, each lifestyle provides a new dimension—a new frame of reference—for positional competition. Environmental purists can compete with one another to conspicuously consume eco-friendly products (or conspicuously refuse to consume much at all), while punk rockers duke it out on grounds of anti-establishment authenticity, and economics professors knock themselves dead trying to get articles into esoteric journals no one else cares about.

The cultural fragmentation some critics lament is precisely what liberates us from unavoidable zero-sum positional conflict. Surfer dudes don’t compete with Star Trek geeks for status. Dynamic market liberal societies create higher-order positive-sum games (for example, the ‘create a new status dimension’ game, or the ‘find the status dimension on which you rank highest’ game) that have lower-order zero-sum games as parts.

Once we recognise the anarchic multi-dimensionality of status, the frequent supposition of Frank, Layard, Cassidy, and others that the distribution of income—whether within the office or within the nation—is the the main dimension of positional competition begins to look bizarre. Struggling artists do not doubt their superiority in the face of successful accountants. And it should not need pointing out that many of us simply don’t know how much our friends make, and don’t much care.

[...]

We are not destined to want fancier cars, bigger houses, and more upscale outfits, nor are we helpless to feel diminished by those who out-consume us. We can opt out by opting in to competing narratives about the composition of a good life. And we do it all the time. We can, like Gauguin, quit law and family to paint naked natives in Tahiti. Or, better, we can move the family to a quieter place where houses are cheap and schools are good. (‘Is this heaven?’ ‘No, Iowa.’) If we are aggrieved by the rigours of the rat race, the answer is not the clumsy guidance of a paternal state. The answer is simply to stop being a rat.

There is, of course, much more. Please check it out.

I have a longish essay today in TCS Daily on John Cassidy’s New Yorker article on neuroeconomics, arguing that neuroeconomics provides no special justification for paternalist policy.  My piece will make a lot more sense if you read Cassidy’s article first. So do that.

In his latest response to Paul Krugman on inequality, Greg Mankiw says:

Even if rising inequality is exogenous, the government could still respond to it by making the tax code more progressive. That is a coherent policy viewpoint, driven as much by political philosophy as economics, about which reasonable people can disagree. I am the first to admit that the study of economics by itself does not tell you how to balance efficiency vs equality. And it certainly does not tell you whether it is more noble to be an egalitarian or a libertarian.

Many economists—even super-smart ones like Mankiw—think that efficiency and equality are contraries rather than complements and that libertarianism isn’t a form of egalitarianism. This philosophical muddleheadedness of  economists makes the policy debate frustratingly obtuse. But the fault really lies with philosophers, who usually think the same things. It’s sort of neat, in a bad way, how oppositions like “efficiency vs equality,” partly the fruit of philosophers’ embarrassing economic ignorance, get repeated by economists.   

Krugman is apparently obsessed with nominal inequality, the difference in the size of people’s money incomes. There is no doubt that there is increasing nominal inequality. But it is almost completely mysterious why nominal inequality ought to concern anyone. I wish people like Mankiw would stop acting like it’s worth caring about. It just isn’t.

I think part of the problem is that nominal inequality is confused with material inequality—differences in material living conditions. But while nominal inequality is increasing, material inequality continues to decrease. As market competition pushes prices down,  goods at the bottom of the price range more and more closely approximate goods at the top of the price range. (Which is why efficiency and equality are complements.) Food is probably the most striking example of material equalization. If you compare the diets of the top and bottom quintiles 100 years ago with the diets of the top and bottom quintiles now, you’ll see that we have become immensely more equal, not less. My favorite pair of jeans, which I bought at Wal-Mart for $16, is a close substitute for jeans that cost 5 times more.

The trend toward material equality in market societies helps explain several trends, such as the increasing value of good design. Substantive equality leads us to value aesthetic differentiation ever more highly. But even good design trickles down. Which is one reason why material equalization makes it ever harder to signal status and why the materially status-conscious (many of them ideological egalitarians!) are willing to pay an increasing premium to claim inherently scarce and strongly status-signaling positional goods, like spots at Ivy League schools, apartments with Central Park views, or what have you. The feverishness with which high school kids (and their parents) compete for scarce Ivy League slots is an indication of the drive to have something everyone can’t have in an egalitarian world where even the modestly remunerated can have most everything.   

But why give a crap about material equality anyway? Why is it something we ought to aim at? What purpose does it serve? I care a great deal that people have enough in material terms to realize their basic capacities and to implement the projects that give their lives meaning. I certainly don’t think we’re there yet. For instance, by putting a wall between education and market feedback mechanisms, we have created an apartheid system that ensures that millions of the poorest among us don’t fully develop some of their crucial basic capacities, trapping them and their children (who will go to the same terrible schools) at the bottom of the pile. The point is not that schools need to be more equal, but that schools for the least well-off need to be as good as my $16 Wal-Mart jeans.

If you think money translates into political power, and that inequalities in political power are objectionable, then you’re right! Inequalities in political power are objectionable. People with political power can oppress people in a way that people with just money can’t. Libertarianism (used to be called “liberalism”) is, by the way, the egalitarian political philosophy that says that inequalities in political power should be minimized. And libertarianism tells you how to get money out of politics: take political power off the auction block by restricting political power to narrow limits.

No doubt a great deal of material inequality can be socially destabilizing. Hey, there’s a good reason to care! But we’re getting more, not less, materially equal. Fixation on nominal inequality leads some on the left to make absurd dark comments to the effect that the plump middle class will soon storm the streets wielding  sharp barbecue implements unless the median wage keeps pace with productivity growth. Absurd. Some folks like Richard Wilkinson say material inequality as such makes us sick, or, like Robert Frank, that we’re so hopelessly status-conscious that we can’t help but be aggrieved by the success of others. Neither argument is very persuasive, for reasons Fly Bottle readers are probably already tired of hearing me rehearse.

Anyway, if anybody really cared about equality or sufficiency, they would be agitating to build a market in education. Union participation and the progressivity of the tax code are distractions (except insofar as unions are the chief antagonist in the fight to end educational apartheid.) Here is battle cry: Equality through efficiency! Equality through liberty!