Lane Kenworthy kindly responds:

We should care about inequality of income not simply because it contributes to inequality of well-being, but also because it contributes to inequality of capability.

Even if consumption inequality has increased only a little, the rise in income inequality has produced a noteworthy increase in inequality of capability. The rich aren’t forced to purchase goods and services whose prices have increased more rapidly; they could switch to the same consumption bundle as the poor if they wished.

I feel like maybe we’re speaking a different language or something here. I’m not sure what Kenworthy means by “inequality of capability.” It sounds to me like he is using a currently popular term to repeat the not-contested because self-evident fact that people with a bigger budget have a bigger budget. And I’m not clear on the source of Kenworthy’s preference for thinking about what people can do with their money (capability) over what they do do with it (consumption), since it seems to me to come to pretty much the same thing, unless you think people really do systematically tend to act against their interests. No one disputes the fact that wealthier people have more options. That’s basically what it means to be wealthier. But isn’t the issue at hand the size of the difference in real quality of life once the wealthy and the poor have taken their best options? Anyway, that’s what I think the question is. If the best a poor person’s budget can buy improves faster than the best a rich person’s budget can buy, then that means the poor person’s quality of life has become more like the rich person’s even if the rich person’s budget expanded at a faster rate than the poor person’s. The analysis applies mutatis mutandis to capabilities. Isn’t this absolutely central to the question of economic inequality? Isn’t this in fact the central question of economic inequality — the gap in the quality of the lived experience of the rich and poor?

Kenworthy goes on:

In my view the Broda and Romalis analysis is important for our understanding of (absolute) poverty, rather than inequality. They find that the prices of goods poor Americans tend to purchase have risen less rapidly than the overall inflation rate. I can’t assess whether they’ve accurately analyzed the data and how much measurement error the data contain. But if the finding is correct, it suggests that the trend in living standards for America’s poor was more favorable (or less unfavorable) between 1994 and 2005 than income data imply.

I don’t get it. If living standards for the poor are better than we had thought, doesn’t that mean that the difference in living standards between the poor and the rich is smaller than we thought?

Lane Kenworthy writes:

I’m not sure why Broda and Romalis, or Levitt and Wilkinson, think this should alter our assessment of the trend in inequality. Do they mean to suggest that the revealed preference of the poor for cheap goods is exogenous to their income? In other words, people with low incomes simply like buying inexpensive lower-quality goods, and they would continue to do so even if they had the same income as the rich. Likewise, the rich simply have a taste for better-quality but pricier goods, and they would continue to purchase them even if they suddenly became income-poor. If this is the assumption, I guess the conclusion follows. But I can’t imagine the authors, or anyone else, really believe that.

Maybe I’m missing something, but it seems as though Kenworthy’s response might be based on some kind of conceptual misunderstanding. I’m not sure that this is it, but is the idea here that there is a single, standard, uniform price index, perhaps kept in a vault in Paris next to that famous platinum-iridium bar, the standard meter? But there is no standard index with which to determine the one true rate of inflation, or one true rate of change in real wages, because there is no one true standard consumption basket.

It seems that Kenworthy thinks there is something suspect about looking at the typical consumption basket of people at one part of the income distribution, looking at the typical consumption basket of people at another part of the income distribution, and then determining separately the change in rate of actually experienced inflation for people at those points in the distribution. I don’t see how this requires any weird assumptions about the exogeneity of preferences to income. All it requires is that we take seriously what different kinds of people tend to buy.

Think about it this way. Suppose you’ve got a country with only poor people and a country with only rich people. In each country, their version of the BLS creates something like the CPI. We find that price inflation is lower in the poor country. Then the rich country annexes the poor country. Does calculating separate CPIs suddenly become a kind of mistake?

As I noted in my first post on this paper, when I talked very, very briefly to Sachs about my paper on inequality, looking at the change in price of the typical consumption baskets of the rich and poor was the one thing he suggested one might try to do to get a better sense of what’s happening in terms of the trend in real consumption inequality. I said I didn’t have the technical wherewithal to do that. But Broda and Romalis do. I’m not convinced that they or Sachs or Levitt is confused.

I’ve posted on this paper once already, but it really, really, really deserves more attention. And people pay attention to Steven Levitt, so listen to him:

According to two of my University of Chicago colleagues, Christian Broda and John Romalis, everyone is wrong.

Inequality has not grown over the last decade — at least not very much. What we think is a rise in inequality is merely an artifact of how we measure things.

As improbable as it may seem, I believe them.

Their argument could hardly be simpler. How rich you are depends on two things: how much money you have, and how much the stuff you want to buy costs. If your income doubles, but the prices of the things you consume also double, then you are no better off.

When people talk about inequality, they tend to focus exclusively on the income part of the equation. According to all our measures, the gap in income between the rich and the poor has been growing. What Broda and Romalis quite convincingly demonstrate, however, is that the prices of goods that poor people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Consequently, when you measure the true buying power of the rich and the poor, inequality grew only one-third as fast as economists previously thought it did — or maybe didn’t grow at all.

Why did the prices of the things poor people buy fall relative to the stuff rich people buy? Lefties aren’t going to like the answers one bit: globalization and Wal-Mart!

With the recent rise in food and energy prices, I wouldn’t be surprised if inflation is now rising more quickly for the poor. But it’s just huge if everyone has been so wrong about rising inequality over the last decade. If you think economic inequality matters, that’s because you think relative economic well-being matters.  If you think economic well-being matters, then what you care about is consumption, not income. So what you’re worried about, my egalitarian friend, is consumption inequality. If the trend in consumption inequality is flat, will you please make a note of it? Indeed, will you please communicate to your friends that, despite the outsized income gains of the wealthiest, America has become scarcely more unequal because capitalism has done so much of specific benefit to the poor?  Of course you will.

In a post titled “Inequality and Death,” Ezra Klein writes:

I guess this goes into the unsurprising category, but a new study shows that the risk of premature death plummets as you wander up the educational ladder. To make a meta-point, I post on these sorts of socio-health studies frequently for a reason: We tend to think of inequality in terms of some people having more stuff than other people. That’s true, to an extent. But the poor in our society are also sicker, in more everyday pain, and have a greater chance of dying young. We’re comfortable with inequality of stuff, but are we really very comfortable ignoring such gross inequality of pain, of illness, and of death? That’s not to suggest that we’ll ever have a society where everyone feels the same amount of pain, but it is to argue that the poor are not just different because they have less money, but because their lives are substantially worse, and worse in ways that better social policy could help alleviate.

Naturally, I share Ezra’s concern for the alleviation of illness, suffering, pain, and death and think better social policy would help. (We disagree about those policies, I’m sure.) But isn’t the problem here illness, suffering, pain, and death and not inequality? Don’t we have reason to worry about these things just because they are bad? Because it is possible to help? I accept that our standards for adequate health and our expectations about suffering are contextual. In a decent society, the acceptable minimum rises over time. But whether people have enough stuff or experience too much illness is not therefore a question of inequality.

That said, not having looked at the study Ezra cites, it seems natural that educational attainment and health will have a common cause: time preference. The causes of differences in dispositions to act now to gain distant future rewards are unknown to me. I guess it has a great deal to do with an early sense of the stability or volatility of one’s practical environment. If you come to feel that involved plans tend to be dashed and that resisting gratification leaves you with less than you could have had, you’ll learn not to form involved plans or defer desire. I think having consistently enough money is a major factor in developing the sense that long-term projects can be successfully carried through. But having enough is itself largely a function of being able to carry through long-term plans. Poverty can be so pernicious precisely because it carries with it the conditions for its own reinforcement.

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.

Lane Kenworthy shows some evidence that when asked to choose one of five pictures that best represents their preference for their country’s income distribution, people tended to pick one of two options — options D and E:

D and E are identical in their population shares at the bottom. The difference between them is that D has a larger share in the middle, whereas E has a larger share at the top. Average income is higher in E. Inequality is lower in D.

[...}

I wouldn’t go so far as to conclude from this that people tend to value low inequality over high incomes. Other ways of posing the question might yield different results. But it does suggest that inequality matters to people.

I find these pictures a bit hard to interpret myself, and I think the idea that people have some kind of standing preference over the shape of the national income distribution is plain bizarre. The question embodies and encourages a nationalist orientation to economic patterns, as if this is the natural level at which to look at economic patterns, as if this is the natural level at which people will have preferences about such patterns. But why think people actually have prior preferences about such things? The national income distribution is not experienced. The local income distribution isn't experienced. Differences in local visible consumption may be experienced, and it seems plausible that people would have preferences about that. But that's not what the question was about. Anyway, this seems to me a bit like asking about my preference over the proportion of luxury to compact cars in the nearest parking garage. Why would I have one?

Anyhoo, if people really have these preferences then many of them are malicious. E is a world in which many people are better off than in D but in which no one is worse off. It's Pareto Awesome! If so many people really do like D better, does that tell us that there is latent support for egalitarian political institutions, that such support is based on a deep moral error, or both?

How about tackling the question a bit more rigorously? Will Ambrosini points us to Matthew Rabin and Gary Charness’s "Understanding Social Preferences with Simple Tests" [pdf], which tests plausible local preferences for equality, efiiciency, and reciprocity in a lab setting:

Our findings suggest that the role of inequality-reduction in motivating subjects has been exaggerated. Few subjects sacrifice money to reduce inequality by lowering another subjects’ payoff, and only a minority do so even when this is free. Indeed, we observed Pareto-damaging behavior more often when it increased inequality than when it decreased inequality. While this comparison is itself confounded by other explanations, our data strongly suggest that inequality reduction is not a good explanation of Pareto-damaging behavior.

My faith in humanity is restored. Sort of.

Googling around it looks to me that this paper by Ed Glaeser and Bryce Ward, “Myths and Realities of American Political Geography,” got only cursory attention on the blogs, which is really too bad, because it’s just terrifically illuminating. If you’ve been following this type of thing, you know interesting tidbits like: church attendance predicts voting Republican better than income these days; rich people in rich states tend to vote Democratic and rich people in poor states tend to vote Republican. But I did not know this:

Industrialization 85 years ago is an astonishingly good predictor of social and cultural attitudes today across states and a good predictor of support for the Democratic Party at both the state and county levels. As the share of the workforce in 1920 in manufacturing increases by one percentage point, the share of respondents today believing that AIDS is punishment declines by .28 percentage points, the share believing that military strength is the best way to peace declines by .16 percentage points, and the share supporting John Kerry at the state level increased by .42 percentage points.

Religious and political attitudes are better predicted by industrialization and immigration 100 years ago, than by the history of slavery and religion.

Glaeser and Ward hypothesize that the ethnic and religious heterogeneity of a largely immigrant workforce packed into densely-populated urban manufacturing centers created a strong incentive for the emergence of ideologies that minimized conflict by creating a climate of tolerance.

[I]f different religious or ethnic groups are prevented from using the power of the state to disenfranchise, enslave or kill each other, and if there exists a powerful group that benefits from eliminating conflict [i.e, the capitalists employing immigrant labor], then diversity can eventually lead to a watering down of core religious tenets or ethnic animosities.

That’s right. Industrial capitalism civilized religion, moderated tribalism, and created a moral and political culture in which Democratic politics thrives. Places far from manufacturing centers, or places that industrialized later, are more likely to now be home to more socially conservative evangelical Christians and Republicans. Glaeser and Ward argue that the middle of the 20th Century, in which economic issues took precedence over social issues in determining party affiliation, was an anomaly and we have lately returned to form.

Glaeser, together with Jesse Shapiro and Giacomo Ponzetto, has come up with a theory for predicting when we’ll see median-voter defying political extremism. Basically, if you can signal to a large constituency relatively radical intentions you can excite them and get an advantage in turnout. But you need to be sure that you’re inspiring your base more than arousing the opposition, so your communication needs a way to be narrowcast to the target group. If such a group is large enough (but less than half the population), its views can largely determine the main divide in electoral politics. Evangelical churches seem to serve this function for Republicans. And Glaeser and Ward suggest labor unions may have once done the same for Democrats, which may have pushed issues of economic distribution to the forefront of electoral politics. But as union membership has receded, so too have the electoral rewards of narrowcasting relatively extreme economically left-wing views to them.

This theory then provides us with two hypotheses for the changing importance of economic and social issues in American politics and for the realignments throughout the 20th century. One candidate is the rise and fall of unionization in America. At the beginning of the century, unions were a small part of the population. Only in small areas of the population did they provide an opportunity for targeting a significant fraction of the population. In mid-century, they rose to over 30 percent of all workers and today they are back down to 12 percent (Troy 1965, www.laborresearch.org).

The rise and fall of unionization corresponds reasonably with the connection between income and Republicanism shown in Figure 10. The middle decades of the 20th century were the high point of unionism and they were also the high point of the correlation between income and Republicanism. During this time period, the Democratic Party had access to the labor unions and this created an incentive for Democrats to move to the left on economic issues to get support in this important base. The rise and decline of unions provides at least one possible reason why economic issues rose and then fell in importance.

So de-unionization may play a role in explaining why rich people, especially those living in the tolerant milieu of the historical seats of heavy industry, are increasingly Democrat-leaning these days.

This is truly fascinating. All I can say about it is that Paul Krugman says something a lot different, so this must be wrong.

Jim Manzi’s post on the much-discussed Bartels correlation is extremely illuminating:

Bartels’s thesis is primarily the statistical artifact of the combination of two very simple observations: (A) there has been a higher proportion of Republican presidential years during the period 1980 – 2005 than the period 1948 – 1979 (64% vs. 48%), and (B) starting in 1979, US income inequality began to rise dramatically after a post-WW II period of relative wage equality. Accepting these two statements of fact does not imply accepting Bartels’s thesis that A caused B, and his academic paper on the subject provides no compelling evidence of causality.

It also turns out that Bartels’ result depends heavily on his choice to give presidents credit for ONE year after their term. If you credit them for just the actual years of their term, or for two years after their term, the result all-but-vanishes. There is a lot more in Jim’s post, all of it excellent, so do check it out.

To reinforce the point that even Rawls’ difference principle isn’t really concerned with inequality at all, look at this excerpt from Leif Wenar’s SEP entry.

The second part of the second principle is the difference principle. The difference principle requires that social institutions be arranged so that inequalities of wealth and income work to the advantage of those who will be worst off. Starting from an imagined baseline of equality, a greater total product can be generated by allowing inequalities in wages and salaries: higher wages can cover the costs of training and education, for example, and can provide incentives to fill jobs that are more in demand. The difference principle requires that inequalities which increase the total product be to everyone’s advantage, and specifically to the greatest advantage of those advantaged least.

Consider four hypothetical economic structures A-D, and the lifetime-average levels of income these would produce for representative members of three different groups:

Economy	Least-Advantaged Group	Middle Group	Most-Advantaged Group
A	10,000	10,000	10,000
B	12,000	15,000	20,000
C	20,000	30,000	50,000
D	17,000	50,000	100,000

Here the difference principle selects Economy C, because it contains the distribution where the least-advantaged group does best. Inequalities in C are to everyone’s advantage relative to an equal division (Economy A), and a more equal division (Economy B). But the difference principle does not allow the rich to get richer at the expense of the poor (Economy D). The difference principle embodies equality-based reciprocity: from an egalitarian baseline it requires inequalities that are good for all, and particularly for the worst-off.

Pay special attention to Wenar’s illustration with the chart. To correctly apply the rule you never have to look at the last two columns. That’s because they are irrelevant to the actual underlying principle obscured by the equality-centric language of the difference principle. (The last two columns are very relevant when we start thinking about the strains of commitment and stability in a dynamic context, but that’s a different issue.) The idea of inequality here is an idle conceptual gear that catches on nothing and does no intellectual work. Rawls’ real rule, cleared of distracting superfluities, seems to be: find the system that leaves the least-advantaged best off and pick it.

Rawlsians: what say you?

A few commenters looked at the post below and said, “Where’s the Rawls?” I was just making what I took to be a number of largely conceptual points about the economic patterns that emerge from social interaction — points mostly from Hayek and Nozick. That point is that the principles of social interaction are the primary subject of moral evaluation, not the patterns themselves.

This is Rawls’ view, too. Nozick’s criticisms notwithstanding, Rawls really isn’t concerned with patterns either. He’s worried about the principles of interaction, the terms of association. A just society is a scheme of cooperative mutuality. The basic rules of the game should benefit everyone. A good way to ensure a set of governing principles does benefit everyone is to pay special attention to how the least well-off fare under them. Rawls says: when choosing a set of principles, we should pick ones that leave the least advantaged class as well off as possible. I agree with this. This takes a comparative property of a pattern (the poor do better in this pattern than in alternative patterns) as a constraint on acceptable principles, but says nothing whatsoever about inequality. Indeed, Rawls offers what amounts to a powerful argument against fixating on inequality. Rawls says: fixate on the welfare of the least well off.

It’s also worth emphasizing that Rawls isn’t talking about the income distribution. He’s talking about primary goods. (”Distribution” in his sense is opposed to “allocation” and “distribution” is not about income.) Given a solid Hayekian understanding of the function of sound market institutions over time, it becomes easy to see that rising income inequality can and does often accompany innovation that leads to increasing equality in primary goods. But, again, Rawls isn’t even much concerned with equality in primary goods. He’s interested in maximizing the minimum.

It’s true that the difference principle is stated in terms of “conditions” social and economic inequalities must meet. I think this was a big, terribly confusing mistake, since it does no actual work. You could just ask: Are the poor doing better in this scheme than in alternatives? Now, this won’t satisfy pious Rawls purists, but Rawlsekianism does not try to hide the fact that it is a mongrel creed. For me, the main Rawlsian takeaway is that the mutuality at the heart of justice should lead us to put the welfare of the least-advantaged at the forefront of our deliberation over basic principles of association.

Here’s a fascinating post by Don Arthur at Club Troppo that asks how would a “progressive fusionist” answer the question “How much inequality is too much?” It turns out that my “Rawlsekianism” is an example of progressive fusionism. And Arthur rightly says:

From this perspective, it’s not possible to decide on a correct distribution in advance. That’s because the question isn’t a purely philosophical one. On its own, Rawls’ theory doesn’t tell you what shape the income distribution should be.

The income distribution among a selected group of people (are you sure the residents of a country compose the right group of people?) is a pattern. The same pattern can in principle be determined by many different mechanisms. The pattern that emerges from an unimpeachably just set of rules and one created by violence, theft, corruption, and oppression might turn out the have the same Gini coefficient, which is how you know that Gini coefficients convey approximately zero information of normative significance.

No shape is the right shape. If perfect equality is achieved through expropriation, then one might be tempted to say that there is too little inequality, but the problem is really too much confiscation, too much abuse of illegitimate authority, too little respect for rights. Likewise, if high levels of inequality are generated by the predation of an elite class, as is the case in much of the world, one might be tempted to say that there is too much inequality, but the problem is really rampant criminality, of which inequality is a side-effect. If I burn down your house, the problem is not that housing inequality has increased. The problem is that I have burned down your house. And when scholars tell us that inequality tends to be negatively correlated with economic growth, they are telling us, in an oddly roundabout way, that theft and corruption are not the path to prosperity.

There is no “too much” inequality. If there is any injustice or wrongdoing, it is too much. You don’t have to wait until you observe inequality to start caring about them — as if the smoke was the problem with a house on fire. But if a pattern of incomes is the result of fair-dealing among free people acting within just institutions, then there can be little objection, except from those who make equality a pointless fetish. Poverty is bad, whether or not it is a consequence of injustice, whether or not it exists alongside wealth, and the fact that it is bad alone gives us sufficient reason to do something about it.

It looks like I’ve been unfair to Dean Baker. Thanks to Chris Hayes, I see that he’s generally been quite good on promoting skilled immigration as a means of lower national inequality. For example:

If Leonhardt and the NYT were interested in free trade, we could ask hospitals what barriers prevent them from hiring Mexican doctors who would be happy to work for one-half of the wages of their U.S. counterparts. We could do the same for law firms, universities, and even newspapers. We could standardize education and professional standards so that Mexican kids could grow up and work as doctors in Los Angeles or lawyers in New York, just as easily as kids born in Chicago or Boston. This would lead to huge gains to the U.S. economy and greater equality in the United States instead of greater inequality.

That makes a lot more sense to me, and I’m glad to see it. All apologies, Dean Baker. That said, the post I dug into below is now even more confusing to me.

Of course, I think allowing in foreign skilled professionals in order to bring down national inequality is silly. The reason to do so is that they are people, they should be free to work where they like, and allowing them in makes both them and incumbent residents better off.

Of H1-B visas, Dean Baker writes:

By increasing the supply of highly skilled workers, the H1-B program undoubtedly reduces the wages for the most affected occupations. According to standard trade theory, this is precisely the point of the program. Allowing firms to get lower paid workers will reduce their cost and increase the economy’s potential output. It is the same argument that is used for the gains from getting cheap textiles or steel from foreign producers.

The argument from high-tech employers, that they simply can’t get enough high tech workers in the United States is ridiculous on its face. If these jobs paid millions of dollars per year (like jobs at Wall Street investment banks), then highly skilled workers would leave other occupations and develop the skills necessary to work in high tech occupations. Obviously, Bill Gates and the other high tech employers cited in this article want to be able to employ high tech workers at lower wages. The issue is wages, not a shortage.

It must be hard to know what you want. I imagine Baker wants to reduce national inequality. But increasing the supply of skilled labor would directly counteract the main economic cause of increasing inequality. So why isn’t this notable egalitarian doing cartwheels trying get the government to print H1-Bs like Mugabe prints money? Oh, because the people getting those jobs don’t already have American citizenship.

It seems that improving the material welfare of a great number of skilled foreign-born workers while at the same time lowering American income inequality would be quite appealing to certain people. But hey, screw reducing inequality if it helps foreigners! Much better to exacerbate national inequality by using immigration restrictions to reduce the relevant labor supply and increase the wage premium for skill. Then, when inequality surges further, we can lay the blame on the rich people who would have liked to welcome more high-skilled immigrants and then tax the crap out of them and the now-even-richer domestic tech workers whose wages we are subsidizing through immigration controls. Brilliant!

Krugman takes his point about immigration from Nolan McCarty, Keith T. Poole, and Howard Rosenthal’s Polarized America. Here’s how they put it:

The new immigrants are predominantly unskilled. They have contributed greatly to the economy by providing low-wage labor, especially in jobs that American citizens no longer find desirable. They also provide the domestic services that facilitate labor market participation by highly skilled people. On the other hand, immigrants have also increased inequality both directly, by occupying the lowest rungs of the economic ladder, and indirectly, though competition with citizens for low-wage jobs. Yet as noncitizens they lack the civic opportunities to secure the protections of the welfare state. Because these poor people cannot vote, there is less political support for policies that would lower inequality by redistribution.

This is just a terrific example of the distortions of analytical nationalism. If we assume a completely natural  and mundane moral perspective, in which the whole set of people involved is taken into account, what we see is a huge reduction in both poverty and inequality. If the question is “What happened to the people in this scenario?”, then the answer is “The poorest became considerably wealthier, narrowing the economic gap between them and the rest.” But what actually happened seems to be completely invisible to the authors, which certainly suggests that their analytical framework leaves something to be desired.

Here’s how it ought to go:

Immigration decreased inequality both directly, by sharply increasing the wages of low-skilled foreign-born workers, and indirectly, through remittance payments to low-income relatives at the immigrants’ places of origin. Because of American citizens’ opposition to liberalizing immigration,  large potential further reductions in poverty and inequality have not been realized.

Reading allegedly social-scientific accounts of inequality by celebrated economists and political scientists, one would simply not know that nation states are not in fact giant firms with profits (”national income”) to be divvied up into shares to various constituencies. But such a huge conceptual gaffe cannot be the basis of a scientific analysis of a society, which is not a set of people sharing a citizenship, or even the set of people inside some political boundaries, but the actual international system of cooperative interaction we act within every day.

Please absorb this extremely important advance in economic methodology and basic intellectual rigor:

Income Per Natural: Measuring Development as if People Mattered More Than Places

by Michael Clemens and Lant Pritchett

It is easy to learn the average income of a resident of El Salvador or Albania. But there is no systematic source of information on the average income of a Salvadoran or Albanian. In this new working paper, research fellow Michael Clemens and non-resident fellow Lant Pritchett create a new statistic: income per natural — the mean annual income of persons born in a given country, regardless of where that person now resides. If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare. The estimates differ substantially from traditional measures of GDP or GNI per resident, and not just for a handful of tiny countries. Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent. The authors also show that poverty estimates are different for national residents and naturals; for example, 26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States. These estimates are simply descriptive statistics and do not depend on any assumptions about how much of observed income differences across naturals is selection and how much is a pure location effect. Our conservative, if rough, estimate is that three quarters of this difference represents the effect of international migration on income per natural.

The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world. If economic development is defined as rising human well being, then a residence-neutral measure of well-being emphasizes that crossing international borders is not an alternative to economic development, it is economic development.

The whole paper is here.

Note that this isn’t an argument open to some kind of refutation. It’s just a better way of measuring things — a way that makes the way the world works clearer. Seeing this alternative metric in action should help us realize just how much of profound moral importance is obscured by the economic nationalism at the foundations of conventional welfare economics. Soon enough, it simply won’t be an option for honest intellectuals to ignore the perspective Clemens and Pritchett encourage us to adopt. Paul Krugman: hello!

Because I want to be certain not to argue against a strawman in my inequality paper, I’m arguing against Paul Krugman, for the most part. So I’ve been reading The Conscience of a Liberal for the third time. This is not pleasant work. Reading a John Bates Clark Medal winner shouldn’t feel this much like reading Ann Coulter. But it does. Liberal Fascism is a more intellectually evenhanded book, which says more about Krugman than it does about Liberal Fascism, I’m afraid.

But I digress before I even start. When Krugman talks about immigration, he has two points to make. One is that Republicans can’t win by being racists forever, because that’s sure to backfire once the Latin American population becomes large enough. The other point is that lots of low-skilled immigration makes it hard to politically mobilize the working class, since so few immigrants can vote. In Krugman’s view, if the working class contains many members without the franchise, it is itself disenfranchised. So it is that Krugman pretty nearly celebrates one of the most shameful chapters in 20th century American politics: the progressive (read: “racist”) imposition of strict immigration controls to keep shifty Asians and dirty Italian anarchists off our shores.

Krugman says that “a more fully enfranchised population” was an “unintended consequence” of the Immigration Act, but the effect that Krugman celebrates was not at all unintended by Samuel Gompers and the AFL, perhaps the most powerful driving force behind the law. And it is an effect Krugman thinks we should consider intending: “The disenfranchisement effect is, however, something liberals need to think hard about when confronting questions about immigration reform,” he delicately puts it.

What Krugman never says about immigration is that it is the most powerful engine of economic mobility and equalization there is. This make it obvious that Paul Krugman is not especially concerned with poor people or with economic equality. He is evidently not even especially concerned with poor people in the United States if they can’t vote. He seems to think it is at least worth considering keeping some of those people out of the country — keeping them poorer — if that would help achieve the redistributive politics he prizes. What kind of egalitarian is that?

Imagine a choice between two policies. Policy A would leave the level of redistribution just as it is, but would allow a much larger volume of immigration. Policy B would leave immigration as it is, but would increase the level of redistribution from rich to poor citizens. Which policy should a humanitarian favor? There can be no doubt: policy A. Which policy should an egalitarian favor? Well, Policy A will increase nation-level inequality by increasing the proportion of the population near the bottom of the income distribution. But why is this of any moral significance? If we take the set of people in the U.S. at time 2, and follow them all back in time to t1, when everyone is in whatever country he or she was in then, and see whether inequality has increased or decreased among this group of people, we will see that it has decreased a great deal, and that almost all of this decrease will have come from the poor becoming richer in real terms, and not from the rich losing income to taxes. If it were necessary to limit redistribution in order to make a greater volume of immigration politically feasible, then egalitarians and humanitarians ought to be for it.

Paul Krugman wouldn’t be for it, which is not surprising, since he appears to be neither a thoroughgoing egalitarian nor a thoroughgoing humanitarian. He is a nationalist social democrat, largely indifferent to larger concerns about equality and welfare. At this late globalizing date, “20th century Western European nationalist social democracy in yet another country!” strikes me as both a useless and unmoving conception of America’s ideal future.

Discussing Brink Lindsey’s outstanding New Republic piece on why the education premium isn’t drawing more people into higher education (about which more later), Yglesias says:

… nothing is going to change policywise unless people think that reconciling ourselves to ever-growing inequality is wrong and, therefore, we ought to be interested in ways to reverse the trend. Meanwhile, I think it’s not wrong to think of some of the aspects of our school system’s poor treatment of low-income kids as precisely representing affluent people gaming the system (by, among other things, withdrawing across jurisdictional boundaries which they then zone with large lot requirements and “overcrowding” rules so as to prevent poor people from moving there) to preserve positions of privilege for their children.

I think “gaming the system” is a bad way of looking at the structural barriers to the upward mobility of the poor created by the behavior of wealthier people. The problem is that (a) the reasonable motivation of the middle and upper classes to do the best they can for their kids and (b) the structure of our public educational institutions together combine to create a de facto barrier to the opportunity of poorer kids to get a decent education and subsequently a decent wage that really makes work worthwhile. There is no point in attacking (a). The problem is (b).

Here’s something sort of related that puzzles me. Suppose there is a growing premium for a more or less general high level of cognitive functioning. No matter how many people we train to achieve this higher levels of functioning, there will always be some kind of normal-ish distribution in it. Now suppose (this is the big hypothetical) the tendency of new technology is to increase the rate at which productivity increases as you move right across the distribution, and that wages tend to reflect productivity. In this scenario, we’ll get increasing earnings inequality no matter how well we educate people, i.e., even if we shift the whole cognitive functioning distribution to the right. Correct? Real economists?

Now this doesn’t really concern me, since this is a scenario in which everyone’s productivity, and therefore everyone’s wage rate, is rising, and I don’t care about inequality per se. I’m just wondering how much our world is like that, or is becoming like that.

Matt Yglesias writes:

I’ve been eagerly awaiting my opportunity to say something about Paul Krugman’s Brookings paper on trade and inequality but it turns out to be the case that real economics involves a lot of math I can’t follow. My best understanding is that his conclusion is that it’s . . . complicated. Trade with China in the 21st century may be a much bigger driver of inequality than earlier studies done in an earlier period indicated, but then again it may not be.

Matt sensibly concludes that if you want to bring down U.S. inequality, there are much better ways of doing that than restricting trade with China. That’s right. Nationalist egalitarians would be much better served by arguing for, say, less welfare for military contractors and more welfare for poor people. Of course, globalist egalitarians should die in the last ditch to avoid further restrictions on Chinese imports, whether or not it has any effect on inequality between already rich U.S. passport holders.

In The Conscience of a Liberal, Krugman seemed to want to minimize all non-political explanations of rising inequality, like trade. Is he now easing off his super-strong insistence on explaining inequality almost entirely in terms of politics and norms? But I suppose insufficient protectionism would be a matter of politics and norms, too, if you want to look at it that way.

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.

Speaking of structural barriers to the exercise of liberty, here I am talking with Princeton sociologist Douglas Massey about his book Categorically Unequal: The American Stratification System. If you think serious racial discrimination has dried up these days, try Chapter 3: “Reworking the Color Line.” It’s full of evidence of continuing labor market and housing discrimination, and is one of the the most depressing things I’ve read in a while.  I disagree with a good bit of what Massey takes to be the upshot of all this in his book, but I was glad we were able to find so much to agree about it in our chat.

Brad Pitt is leading an initiative to build a bunch of houses designed by fancy architecture firms in the Lower Ninth Ward of New Orleans. That’s nice. But why not build these houses elsewhere, perhaps a place less likely to flood, a place with jobs?

Responding to critics who question the wisdom of rebuilding at all in an area likely to get hit again, Mr. Pitt said: “My first answer to that is, talk to the people who’ve lived there and have raised their kids there. People are needing to get back in their homes.”

I don’t think this helps Pitt’s case, exactly. People ought to be encouraged to move where the opportunities are, not enticed with designer accommodations to stay in a struggling place prone to disaster. The stories we tell ourselves about who we are and where we’re from can, through some good old-fashioned emotional alchemy, create pride from deprivation. When that’s all you’ve got—or all you can get—that’s a great thing indeed. But our narratives of place and tribe are too often an identity-arresting form of self-indulgence that can consign our kids to second-class lives.  We may fear that we will disintegrate or disappear if we leave the neighborhood, quit the church, forsake our roots, sell out, but we won’t. Those fears are deep, terrifying, and almost completely unfounded. Our allegiance to our stories and our enchanted places do not save us so much as comfort us against the specters of uncertainty and enable us to feel righteous in inaction. People are not needing to get back in their homes.

Writing about Clive Crook’s clear-headed essay on the downsides of homeownership, a, umm…, certain Economist blogger said something that could just as well apply to Pitt’s project.

Subsidising homeownership through huge tax breaks not only reinforces a cultural ethos in which home ownership is considered central to the American Dream, but also reinforces pernicious communitarian myths of the profound romance in seeing nothing and going nowhere.

This is an exceedingly unpopular thought, but it is a necessary one. Often, when we discourage people from leaving, we discourage them from thriving. When a better life is a bus ride away, it is obviously inhuman to slap a tax on tickets. And just how different from that is a subsidy to stay? I’ll be very pleased if the people who are given these houses thrive, but I also won’t be astonished if their lives aren’t transformed by their sleek new designer anchors.

Thanks to Tyler for linking the pre-tax inequality post below. Not unusually, Tyler’s comments are cryptic but suggestive:

This is all well worth knowing, and it does help counter the view that growing inequality of income is a poliical [sic] conspiracy. But oddly both the critics and the defenders here are missing one major inequality-related difference between Germany and the United States, namely social norms. We have weaker families, weaker social pressures to conform, deeper bayous, and as a result more flat out lunatics, losers, and violent psychopaths. (Did I mention we also have more innovation?) That’s inequality too, though the usual political recipes aren’t likely to provide the cure.

My gut tells me that I agree with Tyler about his conjecture that America has higher variance in sanity, though I’m not sure what to make of this. However, Ryan Avent thinks Tyler’s speaking nonsense:

I can only imagine that he added all that bizarre stuff about bayous to cover the fact that his first sentence makes absolutely no sense at all. If pre-tax inequality isn’t all that unusual in America, relative to similar nations, but income inequality after taxes and transfers is unusual, doesn’t that suggest that the tax and transfer process might be contributing to inequality in a fairly significant way? And mightn’t that be because American tax policies favor the rich to a degree unmatched in other developed nations? How does this, in any way, debunk the notion that political efforts to protect the rich are in fact protecting the rich?

If it helps, here’s what I had in mind while writing the original post: John Rawls’s distinction between distributive and allocative justice.

Nozick had accused Rawls of offering the idea that social justice is a pattern of holdings. However, if people are able to make whatever voluntary exchanges they like, they will constantly disrupt the pattern. And so, if Rawls is right that justice is a pattern, the state will have to constantly interfere with individual’s rights and liberties in order to reinstate the pattern that is constantly ruined by free exchange. There seems to be a conflict between liberty and justice-as-pattern. So said Nozick.

Now, Rawls said that this confused allocative justice for distributive justice — which is what Rawls’s theory is supposed to be a theory of. A theory of distributive justice is a theory about the way the “basic structure” of a society’s institutions distribute opportunities and goods. Once you’ve got the basic structure right, such that the least-well off are generally doing as well as they can given the feasible institutional alternatives, then whatever pattern that emerges from that is fine, more or less. It will not in fact require the constant, meddlesome re-allocation of goods from some people to others.

Rawls likes a system that he called “property-owning democracy” (which I still for the life of me don’t really understand) which he contrasts with what he called a “market welfare state” (or something like that — this is off the cuff). If I remember right, Rawls thought that market welfare states didn’t really fairly distribute opportunities and goods at the level of the basic structure, and substituted tax-and-transfer policies of material reallocation as a kind of pale approximation of the kind of true-blue social justice that comes from getting the basic structure right.

OK! So the reason that graph was interesting to me is that I had a strong sense from reading Rawls and his students that the European social democracies are thought to be much closer to a proper “property-owning democracy” than the U.S. market welfare state, and so I found it telling that the U.S. and Sweden, say, are only negligibly different in terms of pre-tax inequality. For whatever reason, their basic structures are generating similar levels of inequality. And so the difference in final inequality may not so much reflect a difference in distributive justice, in the Rawlsian sense, but a difference in policies of re-allocation, which Rawls did not consider central to justice.

However, reading Tyler’s addendum containing the thoughts of his “very eminent source,” I see the similarities in pre-tax inequality do have quite different underlying causes: in the U.S. people get really extraordinarily rich; in a lot of Europe, a good chunk of the working-age population don’t have jobs at all, and so basically have nothing before transfers. So, in terms of basic structure, it may well be: advantage America! In Rawlsian terms, a basic structure that creates a high ongoing unemployment rate is going to be denying many of the least well-off with “the social bases for self-respect,” one of the most important Rawlsian primary goods.

Now, I understand not everyone (anyone?) shares my special interest in applied Rawlsianism. So, to actually address Ryan’s point, here’s why the pre-tax numbers may seem to cut against a “conspiracy” argument. My original thought was that if greater U.S. inequality was a function of uniquely weak unions, uniquely shifting compensation norms (allowing CEOs salaries to rise, e.g.), uniquely wild superstar markets, uniquely high levels of opportunity hoarding by the already privileged, etc., then U.S. pre-tax inequality ought to stand out more than it does. But since it doesn’t, the relatively high U.S. level of post-tax and transfer inequality is more likely a reflection of the simple fact that high-ish levels of inequality bother Americans much less than it bothers Europeans.

I think the main reason for this, culturally, is that modern Europe emerged from a system of predatory aristocratic privilege and rigid class stratification, whereas the U.S. started out as a relatively egalitarian society. So, to caricature the difference, Europeans see inequality as a sign of intolerable exclusive advantages while Americans see inequality reflecting the fact that some people, who are to be admired an emulated, have made good on the abundant opportunities America affords. If the difference in post-tax-and-transfer inequality simply reflects different cultural attitudes about inequality, then remaining complaints about the relatively high U.S. level of inequality are really just complaint about what Americans believe.

I’ve posted a reply to Yglesia’s inequality post over at Cato@Liberty. Also, FYI, this very smart Free Exchange post on exactly the same thing is by my sage colleague, not me.

I was surprised to discover that U.S. market income (i.e., pre-tax) inequality is lower than the U.K.’s, the same as Germany’s, and only slightly higher than Sweden’s, as can be seen in this chart (click for full size):

This is from Brandolini and Smeeding’s 2007 “Inequality Patterns in Western-Type Democracies: Cross-Country Differences and Time Changes” [pdf]. While the U.S. pre-tax Gini is still on the high side of the median of these 16 OECD countries, it is remarkable how much differences in tax and transfer policies push the U.S. to the top in inequality in disposable income. This is striking to me because, at a glance, it suggests that the U.S. is not all that distinctive in the way the basic structure of the economy affects the distribution of market income. Unions in Germany and the U.K. are rather more powerful than in the U.S., but (again, at a glance) appear to do nothing to reduce inequality relative to the U.S. Of course, eyeball empiricism isn’t dispositive. But it seems to me to fit pretty well with the weak effect of the relationship between declining unions and rising inequality found in other research, and suggests that the structure of basic American political-economic institutions is not especially conducive to inegalitarian outcomes.

After reading David Sirota’s response to Alan Greenspan’s suggestion for reducing inequality discussed in this Free Exchange post, it occurred to me that unions may play the same special role for some folks on the left that tax cuts play for some folks on the right: whatever is good, more unions (or tax cuts) will bring it about.

Bryan Caplan argues the 50/50 husband/wife domestic work norm runs afoul of the principle of comparative advantage.

What if a man has a much higher wage than his wife, but can’t clean, cook, or shop to save his life? Should he still do half the cleaning, cooking, and shopping? Wouldn’t husband and wife alike be better off if he specialized in bringing home the bread, and she specialized in baking it?

Well, maybe not. Maybe the wife would be better off with the sense of increased social status and independence that comes from labor market participation. Maybe the wife hates cooking and cleaning and would like to realize some of her potential as a human being through satisfying work that engages her talents. Imagine a possible world in which Bryan makes less than his wife. Is he making pot roast?

Moreover, part of the 50/50 point is about social expectations. If girls are expected and encouraged to semi-specialize in domestic labor and boys are expected and encouraged to specialize completely in some kind of non-domestic career and always burn the toast, it comes as no surprise when it turns out that it is generally more efficient for the husband to head to the office while the wife heads to the kitchen. But in this kind of case, the efficiency of the arrangement is evidence of a prior injustice, not of general hunky-doryness.