Why inequality hawks (and their opposites) frustrate me

Paul Krugman’s June 1 New York Times op-ed “On Inequality Denial” makes me mad.

In it, he criticizes Financial Times editor Chris Giles for his allegedly flawed critique of Thomas Piketty’s Capital in the Twenty-First Century. He writes,

We have two sources of evidence on both income and wealth: surveys, in which people are asked about their finances, and tax data. Survey data, while useful for tracking the poor and the middle class, notoriously understate top incomes and wealth — loosely speaking, because it’s hard to interview enough billionaires. So studies of the 1 percent, the 0.1 percent, and so on rely mainly on tax data. The Financial Times critique, however, compared older estimates of wealth concentration based on tax data with more recent estimates based on surveys; this produced an automatic bias against finding an upward trend.

Interesting. I haven’t evaluated Krugman’s claim myself. I haven’t read Giles’ critique. I haven’t even skimmed Piketty’s book. For all I know, Giles could be dead wrong and Krugman spot on.

But what frustrates me about inequality hawks like Krugman is their habitual unwillingness to consider how anything other than tax policy contribute to growing inequality (whether such a trend exists or not). At the end of the post, he writes,

…taxes and benefits don’t greatly change the picture — in fact, since the 1970s big tax cuts at the top have caused after-tax inequality to rise faster than inequality before taxes. This picture makes people uncomfortable, because it plays into the populist demands for higher taxes on the rich. But good ideas don’t need to be sold on false pretenses. If the argument against populism rests on bogus claims against inequality, you should consider the possibility that the populists are right.

If I had time, I’d sift through every other post on Krugman’s blog to mark every mention of how tax breaks for the wealthy and a general lack of state intervention on behalf of the poor contribute to growing income ineaquality. I’d compare these with his mentions of how inflation, bank bailouts, crowding out and regulatory capture make life more expensive all around, thereby harming the poor most of all. I can’t be sure, but from my many years of reading Krugman’s blog, I’m sure the former would outnumber the latter by something like one million percent.

I’m not in the inequality debate for kicks and giggles. I’m not in it to unilaterally defend the 1 percent, corporate America or “right-wing” economics. I’m in it because much of what I read is dead wrong and not enough people are saying the right things.

What the inequality debate needs is less lopsided analysis from the likes of Krugman (and many right-wing economists, for that matter) and more equitable commentary that examines not only how tax rates and loopholes contribute to skyrocketing wealth at the top, but also how existing government policy — QE infinity, inflation, unemployment insurance, minimum wage, etc. — exacerbates the problem. Is that not a compromise partisans are willing to make?

More on minimum wage

Yesterday I wrote about minimum wage. I cited what I consider a definitive condemnation of minimum wage as a means to actually raise wages for the working poor. Minimum wage’s true effect is to permanently disemploy everyone whose marginal revenue product is lower than the legal minimum wage.

But I must admit that while the minimum wage seems easy to refute, the idea has widespread support among economists. Not long ago, the Economic Policy Institute published an open letter signed by more than 600 economists asking President Obama and Congress to raise the minimum wage to $10.10. Polls substantiate the legitimacy of this sample — more than half of economists in a recent IGM Forum survey said the alleged benefits of minimum wage outweigh whatever costs it may impose on least-skilled workers.

I must also admit, however, that I’ve yet to see a pro-minimum wage economist level a convincing argument against the policy’s common criticisms (e.g. mine from yesterday). Paul Krugman, for example, stops with saying human relationships are complicated and that raising minimum wage does not automatically result in the laying off of least-productive workers. He writes:

…one theme in all the explanations is that workers aren’t bushels of wheat or even Manhattan apartments; they’re human beings, and the human relationships involved in hiring and firing are inevitably more complex than markets for mere commodities. And one byproduct of this human complexity seems to be that modest increases in wages for the least-paid don’t necessarily reduce the number of jobs.

I agree that these relationships can be complicated, but “relationships” is quite possibly the most insignificant factor in this equation. What about minimum wage’s effect on longer-term employee replacement rates? On profits, and by implication, consumer prices? On capital-labor substitution rates, whereby businesses replace labor with mechanized, non-labor factors of production? Even if employers hesitate to immediately act like the perfectly competitive agents economists often, for better or worse, assume them to be, higher labor costs will affect business decision-making at every level, possibly to the detriment of consumers, business-owners and the working class alike.

Krugman is just one example, of course, but countless other defenders of minimum wage have leveled similar, half-hearted justification for their views. Marxist economist Rick Wolff, for example, abandons the economic debate altogether, saying the issue ought to be made on political and ethical grounds because “we don’t know how raising the minimum wage will play out on employment.” Others, like Nobel laureate Bob Solow and Harvard professor Richard Freeman, make no theoretical argument for their positions, choosing instead to simply cite studies that show minimum wage hikes to have little-to-no effect on unemployment. But as Wolff himself notes, sifting through studies and surveys on the issue is a waste of time — they are largely inconclusive and have, for decades, fueled activism on both sides of the issue.