Why are Economists so (Consistently) Led Astray About Inequality?

In a recent Boston Globe article Ed Glaeser, a conservative urban economist at Harvard, wrote an article titled Why income disparity in Boston isn't a bad thing. Glaeser is right that inequality increases in a city such as Boston can be due to selection effects, since poor people are moving into Boston for economic and cultural opportunities. Yet these selection effects (i.e., poor people moving into a geographic area in the hopes of upward mobility, which is generally considered a good thing) is drastically different from the observed outcomes (i.e., large disparities in people's wealth due to their social positions in a system of occupations, which is generally considered a bad thing). Yet Glaeser conflates the two, confusing the reader and, perhaps, himself. A more accurate title for the article would have been "Why poor people moving into Boston isn't a bad thing." This raises a question: why are economists so (consistently) led astray about the causes and consequences of economic, social, and political inequality?

Inequality: Everyone's Thinking About It

I ran into the following articles on inequality, which has not only been increasing structurally but culturally (in that more policy elites and journalists are discussing the topic openly). Here are some recent posts on inequality:

• Reuters is reporting findings from a group of researchers showing that Sweden has undergone an enormous increase in inequality, especially since the rise of the center-right in the political system. For those of us in the United States who look to Sweden as a model of development, in recent years even this country has regressed from the ideals of social democracy.
• Based on an online survey (with all the caveats about sampling procedures, of course), a group has surveyed wealthy Americans on their views on inequality. The biggest finding, which reinforces the importance of class-based analyses of electoral politics: among the wealthy there is a huge gap between self-identified Republicans and Democrats, with over 84% of the latter favoring policies taxing the rich while around 29% of the former.

Why Inequality Matters

The conservative magazine Commentary has published an article on how social inequality is on the political agenda and on the minds of most Americans, even though many conservatives would prefer the case to be otherwise. The authors argue that, in part, the discussion of inequality should be oriented toward social mobility and poverty, as well as the "injustices" of government policy. What the authors apparently fail to realize is the possibility that inequality causes poverty and immobility, not to mention "unjust" government policies perpetuating inequality. In particular, higher inequality can cause low social mobility by increasing socioeconomic distances between the highest and lowest rungs of society, higher rates of poverty by segregating groups and distorting resource allocations, and inequality-perpetuating government policies by shifting costs from the wealthy to the general population (through, for example, cutting funds for widely-available public services and increasing take-home profits from private organizations).

Inequality "Crisis" of Marriage

The Atlantic Monthly posted a fascinating article today on the inequality "crisis" of marriage. My favorite line in the article: "Gone are the days when the Harvard grad marries the girl with the high school degree simply because, well, she's pretty."

Misc. Links

•  MIT students are having a Pi Day recitation and celebration today (since today is 3.14, of course).
• The Financial Times discusses Goldman Sachs' corporate culture without, unfortunately, describing what is meant by the phrase; however, I'm glad to see that cultural factors are mentioned, since clearly faulty beliefs, norms, and values contributed to financial crisis.
• The U.S. Census Bureau recently released a report describing the inequality levels (expressed as Gini coefficients) of all counties in the United States from 2006 to 2010; the findings show, as one would expect, that more populous counties are more unequal.
• Finally, a new study suggests that first-generation immigrants face a disadvantage in attending college due a "cultural mismatch" in values and norms from between working-class youth and those from middle- and upper-class backgrounds.

MIT Inequality Talk

As part of the technology and culture forum at MIT, I attended a talk featuring the notable economists Frank Levy (Professor of Urban Economics at MIT), David Autor (Associate Chair of the MIT economics department), Peter Diamond (MIT Institute Professor Emeritus), and Arjun Jayadev (Assistant Professor Economics at UMass-Boston). I've read quite a bit of their work, and they have all conducted important research on inequality, poverty, and policy; for instance, Frank Levy's The New Dollars and Dreams: American Incomes and Economic Change is still (over a decade later since the last edition was published) one of the best overviews of trends in economic conditions in the United States since World War II. The panelists focused on the causes and consequences of income and wage inequality, as well as possible solutions, with moderation by David Autor.

Taxes and Inequality

The economist Daren Acemoglu and his colleague James Robinson have an excellent article on the problems with inequality in the United States. You can find it here. In general, I agree with them entirely, and they are persuasive in outlining the negative aspects of political inequality.

The Mystery of Power-Law Distributions

One criticism of sociology, and the macro social sciences more generally (such as political science, anthropology, and economics), is that there are very few "laws" of social reality. There are, however, some sociological regularities that are as yet not fully explained, and which seem bizarre. The most enduring and puzzling of these are power-law distributions (a well-known special case of this is "Zipf's Law"), which is the fact that  "large" instances of things are extremely rare, while "small" occurrences of things are extremely common (where size can refer to frequency in a population, population size, geographic space, and so on). In practice this means that a handful of words are much more frequent than other words (and most words are rarely used), wealth is concentrated in a small number of people (and most people are poor), there are a handful of really popular songs (and a vast number of unpopular tunes), and so on. Even the sizes of sand particles on a beach follow a power-law distribution: how often have you seen a boulder on a beach?

What might explain the ubiquity of power-law distributions? As far as I can tell, nobody is entirely sure, although we have some good guesses. For example, the sociologist Herbert Simon outlined a theory of preferential growth attachment (also known as the "rich get richer" effect), in which songs that are already fairly popular will become more popular, cities that are already large will become even larger, and words already used widely will become even more widely used. Note that this explanation hinges on a positive feedback effect: the probability that any thing gets "larger" is directly proportional to the current "largeness" of the thing; or, to put it another way, large values get amplified rather than cancelled out (as in a normal distribution).

Power-law distributions have important cultural, statistical, and political implications.

Culturally, there are several implications. First, most cultural constructs  are rarely used and only a handful are common among any group of people. To put it another way, the shared part of culture is likely to be relatively small, while the particular part of culture is vast. Second, frequently used cultural constructs are particularly stable over time; that is, 500 years from the word "the" will still be used, while "sesquipedalian" has a more uncertain future. Third, the stability of a cultural system is derived from the more frequently used cultural constructs, while the dyanmism is among the less frequently used constructs. Fourth, initial conditions are extremely important for the frequency and hence durability of cultural constructs: for instance, small, random fluctuations led to the popularity of "the" in the English language. Finally, following from the previous point, the consequences of initial conditions are highly unpredictable; given small initial changes English speakers today might instead be using the word "tha" or "se" instead of "the." 

Statistically, the presence of power-law distributions is a reminder that classical linear regression (based on the normal distribution) is not always the appropriate fit to a scatter plot of two variables, and that summarizing a distribution as a mean or median can be highly misleading.

Politically, power-law distributions have a unique implication for efforts to deal with wealth inequality: one effective way to alter the distribution of wealth is to remove the positive feedback effects from wealth. The desired distribution of wealth would thus be described by a normal rather than power law function. Importantly, removing the positive feedback effects of wealth would not lead to the removal of inequality, but rather a change in the distribution so that the mean, median, and mode are the same. From this perspective, policies should be in place so that (in principle) a person's change in wealth is independent of their current level of wealth. Such policies might include very high taxes on capital gains, restrictions on the influence of wealth in political decision-making, rules specifying equal monetary amounts from promotions for all occupational levels in a firm, and so on.

Culture and Poverty

The New York Times has an article covering the concept of the culture of poverty here. The article is fairly accurate, and does a good job highlighting that the study of culture and poverty had its origins in left-wing Marxists (although I would have mentioned Bowles and Gintis, who emphasized that cultural values and norms of obedience to capitalist ideologies rather than intelligence contribute to the social reproduction of inequality). The author elides the fact that the problem with the concept of the "culture of poverty" is that such a thing does not, and never has, existed: culture is everywhere, not just among the a subset of the economically disadvantaged. The appropriate question, then, is: given that we know that culture is a constituent part of the human experience, how does it matter not just for poverty, but for happiness, well-being, inequality, wealth, and so on?

Values and Politics

I'm a bit biased, but the front page of the Huffington Post highlighted a fascinating study on education, culture and politics today.

The Phil Gramm Effect

I recently re-read Andrew Abbott's brilliant article on the problems with classical linear regression. One of the most persuasive criticisms is that statistical models are extremely difficult to use for examining small changes with big effects (but big changes with small effects can be modeled). I like to call this the "Phil Gramm Effect" because arguably one of the most important causes of the 2008 financial crisis (an undoubtedly big effect) was Phil Gramm (a small change), since he was the driving force for gutting the Glass-Steagall Act and shifting government regulations in favor of private companies (often called "deregulation," but more accurately termed "re-regulation").

Murray on Cultural Inequality

The conservative sociologist Charles Murray has written a new book on cultural inequality, and he's written about his main arguments here in the Wall Street Journal. There are two glaring problems with his argument, however. First, although I appreciate his attempts to examine cultural factors of the economy, he frequently conflates behaviors with culture (which consist of values, attitudes, beliefs, not behaviors arising from these symbolic constructs). This muddles his argument, and leads to a profusion of of ad hoc claims that are weakly supported by the data, if at all. Second, his
explanation for cultural inequality falls short: in particular, he ignores how lack of public investments and conservative economic policies (for example, lack of investment in public transportation, public spaces, universal welfare systems, and the growth of car-based urban sprawl based on the profit-making concerns of private developers, among other things) are leading causes of the cultural fragmentation he is concerned about.

Inequality versus Dispersion

I'm glad to see that Alan Krueger, chairman of the Council of Economic Advisers (a fancy name for a panel of three economists), discussed the problems with inequality in his address today. You can find his remarks and graphs here. I liked his graphs, and he shows convincingly many of the standard findings in sociology and political science on politics and inequality in the United States. However, I found the following comments puzzling:

Although I have done much research in my career on inequality, I used to have an aversion to using the term inequality. The Wall Street Journal ran an article in the mid-1990s that noted that I prefer to use the term “dispersion.” But the rise in income dispersion – along so many dimensions – has gotten to be so high, that I now think that inequality is a more appropriate term.

The mixing of the statistical concept of dispersion with the sociological concept of inequality muddles the discussion. It's true that any distribution is often described by some measure of dispersion (e.g., standard deviation) and central tendency (e.g., mean or mode). But inequality encompasses a concept of equity, as well as some concept of disparity (or disparities), neither of which is analogous to the statistical concept of dispersion. Moreover, if we use Krueger's logic it's unclear at what threshold "dispersion" is labeled "inequality"; for instance, his comments imply that Sweden currently has dispersion, while the United States has inequality, although many Swedes would probably disagree.

Upper Class are More Unethical

This is the first study I've seen that explicitly claims that people in higher social classes are more unethical than those from lower classes; furthermore, the authors claim that this tendency is "accounted for, in part, by their more favorable attitudes toward greed." Aside from the well-known problems from the so-called "sophomore problem," this is a compelling and disturbing study that warrants replication in other contexts (based on, for instance, observational data from other populations).