He refined his delivery over the years, but the underlying analogy was always the same. The bicycle dramatically increases the efficiency of human locomotion, and likewise the computer dramatically increases the efficiency of human thought. While that is still the case when computers, the Internet, and increasingly Artificial Intelligence and Machine Learning are used as tools to leverage our innate abilities to solve huge, complex problems, they can also become other things for the mind that are not so useful. We are seeing it happen more and more that as computers proliferate, shrink in size, and become more convenient and ubiquitous, they stop being treated as a tool and start being treated as a toy or simply as a distraction. Maybe computers are becoming less like a bicycle for the mind and more like something else.
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Are Computers Still a Bicycle for the Mind?
Steve Jobs had an enormous appreciation for the computer, believing it was the greatest human invention, and he commonly likened it to a bicycle for our minds. Here he is in one such explanation of this analogy:
He refined his delivery over the years, but the underlying analogy was always the same. The bicycle dramatically increases the efficiency of human locomotion, and likewise the computer dramatically increases the efficiency of human thought. While that is still the case when computers, the Internet, and increasingly Artificial Intelligence and Machine Learning are used as tools to leverage our innate abilities to solve huge, complex problems, they can also become other things for the mind that are not so useful. We are seeing it happen more and more that as computers proliferate, shrink in size, and become more convenient and ubiquitous, they stop being treated as a tool and start being treated as a toy or simply as a distraction. Maybe computers are becoming less like a bicycle for the mind and more like something else.
He refined his delivery over the years, but the underlying analogy was always the same. The bicycle dramatically increases the efficiency of human locomotion, and likewise the computer dramatically increases the efficiency of human thought. While that is still the case when computers, the Internet, and increasingly Artificial Intelligence and Machine Learning are used as tools to leverage our innate abilities to solve huge, complex problems, they can also become other things for the mind that are not so useful. We are seeing it happen more and more that as computers proliferate, shrink in size, and become more convenient and ubiquitous, they stop being treated as a tool and start being treated as a toy or simply as a distraction. Maybe computers are becoming less like a bicycle for the mind and more like something else.
Less Friction Generates More Waste
Last week I explored how reducing friction could increase choice, thereby actually increasing friction in the end, giving us a paradox of choice because too much choice is overwhelming. Reducing friction can have another undesirable side-effect. When things get easier, it increases the amount of waste that's generated in a system.
This outcome may seem counterintuitive because in physical systems friction generates waste as heat, and reducing friction makes the system more efficient because less energy is lost in the form of heat. More insubstantial systems like the economy or civilization as a whole don't work exactly like physical systems, though. When you look at how our civilization has progressed, we seem to generate more and more waste as we reduce the amount of friction in our lives. Will this trend continue, and how will we deal with it?
This outcome may seem counterintuitive because in physical systems friction generates waste as heat, and reducing friction makes the system more efficient because less energy is lost in the form of heat. More insubstantial systems like the economy or civilization as a whole don't work exactly like physical systems, though. When you look at how our civilization has progressed, we seem to generate more and more waste as we reduce the amount of friction in our lives. Will this trend continue, and how will we deal with it?
Inequality
As a follow-on to my review of two economics books on inequality, I'd like to spend some time analysing the problem in more depth. It is an incredibly complex problem, and it's very easy to forget the big picture and get lost in minute details. As a programmer, I deal with complex problems all the time, trying to find the best solution in a field of non-optimal trade-offs. Sometimes it feels like trying to find the least-worst solution, and that seems to be the case with inequality as well. Every potential solution has its own set of issues, and even defining the problem is difficult and open to endless debate. Regardless of the difficulties involved, let's see what the problem space looks like.
Inequality means many different things to different people. In this context we'll deal primarily with financial or economic inequality, so that narrows the idea somewhat—but not much. Bill Gardner over at The Incidental Economist has a great deconstruction of the different ways of thinking about equality, so we'll use his framework of answering three questions to define equality.
Equality among whom? Throughout America's history the idea of equality has expanded to encompass more and more people. Equality first applied only to white male landowners. With much blood, sweat, and tears it has grown to include women, all races, and the poor and middle class, at least on paper. (Racial inequality is still a huge problem in the U.S., and it's closely intertwined with economic inequality.) Immigrants are still excluded in many ways, and global equality is not in the forefront of most people's minds.
It's reasonable to expect that most people would think first about their own country. Not that it's right in a moral sense, but it's hard to believe that most people will find the energy or good will to care about the world's poverty while inequality is growing so much in the U.S., with more people struggling to make ends meet. In some ways we need to put our own house in order before we can expect our citizens to look outward. However, we should still pursue international aide whenever we can, if for no other reason than it is also in our own best interests.
Equality of what? Should we strive for equality of outcomes, opportunity, or well-being? There may be other dimensions, but these are the big three. Trying to create equality of well-being has the problem of who decides what constitutes well-being. Different people have different ideas about how they want to live, and who is to say what's right? There is also the problem of free-loaders. Not everyone wants to work, so how do we encourage everyone to be productive members of society?
Equality of outcomes and opportunity are hard to separate because the economic outcomes of parents heavily influences the economic opportunities available to their children. We may be able to come up with programs to improve opportunities for children—subsidized or even free post-secondary education, better public secondary and elementary education, school lunch programs, free preschool and day care, prenatal care, etc.—but it's hard to know where to start and where to stop. In reality, outcomes and opportunity cannot be separated, and programs to improve one will necessarily impact the other.
Why do we want equality? Is it equality for its own sake, is it to give everyone the wherewithal to survive, or is it because everyone deserves a basic level of respect as a human being? Mark Thoma gives an excellent reason why we should all want equality:
In the end, we could want equality because of our own self-interest. Having a more equal society increases everyone's safety and improves everyone's opportunity. We would all have a better chance of being a successful entrepreneur or productive employee, not just because everyone would be better educated and healthier, but because more people would have the means to afford more products and services. One of the reasons Henry Ford paid his assembly line workers good wages was so that they could afford to buy his cars. We should remember that powerful idea.
The basic opposing views on what causes inequality are that it is because of structural issues or individual decisions. Structural causes would be things like technology displacing workers, globalization moving jobs overseas, differences between regions of the country, or variations in the quality of education. I have a hard time believing that technology is having any more of an effect on inequality than it ever has in the past. The technologies being created today may be new, but the fear that technology will leave a vast swath of the population unemployed has followed every major technological advancement. In every case we found that there was more work to fill the gaps, and at the same time, we were able to enjoy more leisure. This time is probably no different. We just don't know what future work will look like, yet.
As for the other structural causes, globalization does effect some jobs, like manufacturing, but not others, like retail and most services. Over time the living standards of foreign workers will increase to the point where their wages and the increased costs of shipping, logistics, and management will increase the incentives for domestic manufacturing. On the other hand, regional and educational inequality pose real, persistent issues that should be addressed.
Individual causes of inequality are generally thought to result from poor decision making, laziness, or some combination of the two. This kind of reasoning smacks of a blame-the-victim mentality, but it is a fairly commonly held view, especially by certain out-spoken politicians.
Chris Dillow has an interesting analysis of structural vs. individual poverty, and he discusses why it is hard to separate them, much like equality of outcomes vs. opportunity. His comments stem from a debate between Matt Bruenig and Noah Smith on the same topic, and Smith has a great post with a number of thought experiments dealing with structural and individual inequality. In particular, he theorizes about what it would mean if everyone stopped working:
Another way to think about Smith's 100% unemployment thought experiment has to do with the economic theory of the marginal product of labor (MPL). MPL is the incremental output that one additional employee produces, and the theory suggests that each employee should be paid according to their marginal product. This idea is usually used to justify paying CEOs of large corporations exorbitant salaries and reducing labor costs for unskilled workers as much as possible. But suppose that "everyone" in Smith's thought experiment is everyone at a particular company, and the one person that tries to work is the CEO. In that case the CEO isn't going to be very productive on his (or her) own, and in fact his productivity in the company is partly (mostly?) a result of the rest of the company's employees. If that is true, then why is the pay difference between the CEO and the lowest paid employee so extreme? This argument may be good justification for more balanced wage structures in large corporations and a reduction in rent-seeking behaviour on the part of the CEO.
Rent-seeking is a major source of inequality in many ways. Companies building monopolies or oligopolies is a form of rent-seeking. Patent war chests and litigation are a form of rent-seeking. Aggressive lending using sub-prime mortgages, excessive student loans, or high-rate credit cards are all forms of rent-seeking. In every case, the person or company benefiting from the arrangement is making more profit than they could have in a purely free market, and so they are getting more than their marginal product as compensation. The people on the wrong end of these deals end up poorer as a result, and inequality grows.
First, it should be noted that reducing inequality doesn't mean creating a society with perfect equality. We already know such a scheme can't work because there are no incentives to work hard, to innovate, or to take risks—all necessary components of a working economy. We are no where near that extreme on the equality/inequality scale, though. We can certainly make substantial progress towards more economic equality without endangering America's entrepreneurial spirit. Reducing inequality will most likely improve incentives, giving more people the opportunity to take a risk and pursue their dreams.
How do we reduce inequality? One of the first ideas that normally comes to mind is to make changes to the tax system. This discussion on Hacker News, for example, spends a lot of time debating the pros and cons of different taxation ideas. Things like the EITC and the minimum wage currently do a lot to keep families above the poverty line, but there is a problem at the income threshold where these benefits disappear. There is a disincentive to make more than the threshold because the lack of benefits is equivalent to a very high marginal tax rate, and households that are barely over the threshold may actually bring home less income than they did before.
Other ideas like a negative income tax or a basic income for everyone are appealing because they do not have a threshold where a high marginal rate kicks in. These policies improve incentives to work harder and to move up the income scale. The disadvantage is that we would need to decide how to pay for such a policy, especially for a basic income, and people that don't need it are generally opposed to paying for it.
On the other end of the income scale, there is the question of out-sized tax benefits to the wealthy. The share of entitlement benefits is fairly well distributed between the bottom, middle, and top income households, with about 10 percentage points more going to the bottom and 10 percentage points less going to the top, as shown in the following figure:
On the other hand, the share of tax expenditures is grossly skewed towards the top income households, creating a massive tax benefit for the group of people that probably need it the least:
Most of the difference in the share of tax expenditures comes from the mortgage interest, state, local, property, real estate, and charitable contribution tax deductions and the fact that capital gains and dividends are taxed at a lower rate than earned income. Hedge fund managers especially benefit from the lower capital gains rate because they can claim most of their income as capital gains through the carried interest loophole. Finding ways to equalize the distribution of tax expenditures would go a long way towards reducing inequality.
Other effective solutions tend to fall under one of two categories. They either improve security or opportunity. Things that improve people's economic security include better health care and health insurance so that we have a healthier work force and getting sick isn't catastrophic, unemployment insurance or work sharing programs to protect workers in recessions, and retirement insurance so people are not destitute in their old age. Basically, any type of insurance that is widely available and spreads life's risks over the whole of society will help people deal with the rough spots in life. We have some form of each of these types of insurance today, but there is certainly room for improvement.
The opportunity category includes a wide range of things that give people the skills and resources to succeed, if they have the motivation and put in the effort. Quality, affordable education for everyone from elementary school through a college degree or vocational program would greatly improve people's opportunity to succeed. Getting money and special interests out of politics, and setting term limits on members of Congress would tilt the balance of power away from the extremely wealthy and back towards everyone else so government programs and policies would benefit citizens more broadly instead of serving narrow interests and private corporations. Full employment would increase workers' bargaining power and improve competition in the labor force so wages would become more fair and at least some forms of rent-seeking would be more difficult.
These solutions are certainly broad and general, and the details of implementing programs and policy changes that would bring about the reduction of inequality get complicated very quickly. The intent here is to show what the landscape looks like and what paths are likely to get us to a more equal society. There is no one outstanding cause of inequality. It results from a combination of structural problems, individual decisions, and random chance. Likewise, the solutions to the problem of inequality are widely varied. We need to address the distribution of income and taxes, the security of individuals when crisis strikes, and the opportunities available to everyone to achieve a better life. We are at a point in our history where inequality is becoming so extreme that it is damaging our ability to function and dragging all of us down. Turning that trend around and improving equality would go a long way to restoring trust in our institutions and each other.
Defining Inequality
Inequality means many different things to different people. In this context we'll deal primarily with financial or economic inequality, so that narrows the idea somewhat—but not much. Bill Gardner over at The Incidental Economist has a great deconstruction of the different ways of thinking about equality, so we'll use his framework of answering three questions to define equality.
Equality among whom? Throughout America's history the idea of equality has expanded to encompass more and more people. Equality first applied only to white male landowners. With much blood, sweat, and tears it has grown to include women, all races, and the poor and middle class, at least on paper. (Racial inequality is still a huge problem in the U.S., and it's closely intertwined with economic inequality.) Immigrants are still excluded in many ways, and global equality is not in the forefront of most people's minds.
It's reasonable to expect that most people would think first about their own country. Not that it's right in a moral sense, but it's hard to believe that most people will find the energy or good will to care about the world's poverty while inequality is growing so much in the U.S., with more people struggling to make ends meet. In some ways we need to put our own house in order before we can expect our citizens to look outward. However, we should still pursue international aide whenever we can, if for no other reason than it is also in our own best interests.
Equality of what? Should we strive for equality of outcomes, opportunity, or well-being? There may be other dimensions, but these are the big three. Trying to create equality of well-being has the problem of who decides what constitutes well-being. Different people have different ideas about how they want to live, and who is to say what's right? There is also the problem of free-loaders. Not everyone wants to work, so how do we encourage everyone to be productive members of society?
Equality of outcomes and opportunity are hard to separate because the economic outcomes of parents heavily influences the economic opportunities available to their children. We may be able to come up with programs to improve opportunities for children—subsidized or even free post-secondary education, better public secondary and elementary education, school lunch programs, free preschool and day care, prenatal care, etc.—but it's hard to know where to start and where to stop. In reality, outcomes and opportunity cannot be separated, and programs to improve one will necessarily impact the other.
Why do we want equality? Is it equality for its own sake, is it to give everyone the wherewithal to survive, or is it because everyone deserves a basic level of respect as a human being? Mark Thoma gives an excellent reason why we should all want equality:
...people who, because of their incomes, cannot participate fully in society are poor. A child getting enough to eat, and with clothes to wear, who cannot afford the toys needed to be part of the group of kids in the neighborhood is socially isolated and socially disadvantaged (we don't want to play at your house because you don't have a TV, you can't come with us because you don't have a bike, you didn't get my text message about baseball practice being moved?, etc., etc., etc.). Giving people, children in particular, what they need to participate in the society around them is an important element of how successful they will be in the future. It helps to determine their ability to give back to society as fully participating adults. ...Having more successful, participating adults would benefit all of us. In addition to requiring less support from everyone else, they could contribute more to the productivity and advancement of our society.
In the end, we could want equality because of our own self-interest. Having a more equal society increases everyone's safety and improves everyone's opportunity. We would all have a better chance of being a successful entrepreneur or productive employee, not just because everyone would be better educated and healthier, but because more people would have the means to afford more products and services. One of the reasons Henry Ford paid his assembly line workers good wages was so that they could afford to buy his cars. We should remember that powerful idea.
What causes inequality?
The basic opposing views on what causes inequality are that it is because of structural issues or individual decisions. Structural causes would be things like technology displacing workers, globalization moving jobs overseas, differences between regions of the country, or variations in the quality of education. I have a hard time believing that technology is having any more of an effect on inequality than it ever has in the past. The technologies being created today may be new, but the fear that technology will leave a vast swath of the population unemployed has followed every major technological advancement. In every case we found that there was more work to fill the gaps, and at the same time, we were able to enjoy more leisure. This time is probably no different. We just don't know what future work will look like, yet.
As for the other structural causes, globalization does effect some jobs, like manufacturing, but not others, like retail and most services. Over time the living standards of foreign workers will increase to the point where their wages and the increased costs of shipping, logistics, and management will increase the incentives for domestic manufacturing. On the other hand, regional and educational inequality pose real, persistent issues that should be addressed.
Individual causes of inequality are generally thought to result from poor decision making, laziness, or some combination of the two. This kind of reasoning smacks of a blame-the-victim mentality, but it is a fairly commonly held view, especially by certain out-spoken politicians.
Chris Dillow has an interesting analysis of structural vs. individual poverty, and he discusses why it is hard to separate them, much like equality of outcomes vs. opportunity. His comments stem from a debate between Matt Bruenig and Noah Smith on the same topic, and Smith has a great post with a number of thought experiments dealing with structural and individual inequality. In particular, he theorizes about what it would mean if everyone stopped working:
Suppose everyone, acting independently and on their own, just stopped doing any sort of work. The entire world would instantly fall into poverty. But would that poverty be "structural" or "individual"? Note that if you're the one person who wants to work in a society of people who do no work at all, you're not going to be very productive, because you can't specialize. So in the case where no one works, no individual's behavior can hoist him or her out of poverty. So that's "structural", right? But if you simultaneously persuaded a large fraction of people to work, then large numbers of people would climb out of poverty. So is the poverty "individual"?He makes a strong case for both structural and individual causes of poverty playing a role simultaneously, and he also brings up another major cause—randomness. It is certainly the case that some people are poor for no other reason than a run of bad luck. It's not their fault. It's not society's fault. Sometimes bad things happen, and that's a completely legitimate factor that needs to be taken into account.
Another way to think about Smith's 100% unemployment thought experiment has to do with the economic theory of the marginal product of labor (MPL). MPL is the incremental output that one additional employee produces, and the theory suggests that each employee should be paid according to their marginal product. This idea is usually used to justify paying CEOs of large corporations exorbitant salaries and reducing labor costs for unskilled workers as much as possible. But suppose that "everyone" in Smith's thought experiment is everyone at a particular company, and the one person that tries to work is the CEO. In that case the CEO isn't going to be very productive on his (or her) own, and in fact his productivity in the company is partly (mostly?) a result of the rest of the company's employees. If that is true, then why is the pay difference between the CEO and the lowest paid employee so extreme? This argument may be good justification for more balanced wage structures in large corporations and a reduction in rent-seeking behaviour on the part of the CEO.
Rent-seeking is a major source of inequality in many ways. Companies building monopolies or oligopolies is a form of rent-seeking. Patent war chests and litigation are a form of rent-seeking. Aggressive lending using sub-prime mortgages, excessive student loans, or high-rate credit cards are all forms of rent-seeking. In every case, the person or company benefiting from the arrangement is making more profit than they could have in a purely free market, and so they are getting more than their marginal product as compensation. The people on the wrong end of these deals end up poorer as a result, and inequality grows.
How can we reduce inequality?
First, it should be noted that reducing inequality doesn't mean creating a society with perfect equality. We already know such a scheme can't work because there are no incentives to work hard, to innovate, or to take risks—all necessary components of a working economy. We are no where near that extreme on the equality/inequality scale, though. We can certainly make substantial progress towards more economic equality without endangering America's entrepreneurial spirit. Reducing inequality will most likely improve incentives, giving more people the opportunity to take a risk and pursue their dreams.
How do we reduce inequality? One of the first ideas that normally comes to mind is to make changes to the tax system. This discussion on Hacker News, for example, spends a lot of time debating the pros and cons of different taxation ideas. Things like the EITC and the minimum wage currently do a lot to keep families above the poverty line, but there is a problem at the income threshold where these benefits disappear. There is a disincentive to make more than the threshold because the lack of benefits is equivalent to a very high marginal tax rate, and households that are barely over the threshold may actually bring home less income than they did before.
Other ideas like a negative income tax or a basic income for everyone are appealing because they do not have a threshold where a high marginal rate kicks in. These policies improve incentives to work harder and to move up the income scale. The disadvantage is that we would need to decide how to pay for such a policy, especially for a basic income, and people that don't need it are generally opposed to paying for it.
On the other end of the income scale, there is the question of out-sized tax benefits to the wealthy. The share of entitlement benefits is fairly well distributed between the bottom, middle, and top income households, with about 10 percentage points more going to the bottom and 10 percentage points less going to the top, as shown in the following figure:
On the other hand, the share of tax expenditures is grossly skewed towards the top income households, creating a massive tax benefit for the group of people that probably need it the least:
Most of the difference in the share of tax expenditures comes from the mortgage interest, state, local, property, real estate, and charitable contribution tax deductions and the fact that capital gains and dividends are taxed at a lower rate than earned income. Hedge fund managers especially benefit from the lower capital gains rate because they can claim most of their income as capital gains through the carried interest loophole. Finding ways to equalize the distribution of tax expenditures would go a long way towards reducing inequality.
Other effective solutions tend to fall under one of two categories. They either improve security or opportunity. Things that improve people's economic security include better health care and health insurance so that we have a healthier work force and getting sick isn't catastrophic, unemployment insurance or work sharing programs to protect workers in recessions, and retirement insurance so people are not destitute in their old age. Basically, any type of insurance that is widely available and spreads life's risks over the whole of society will help people deal with the rough spots in life. We have some form of each of these types of insurance today, but there is certainly room for improvement.
The opportunity category includes a wide range of things that give people the skills and resources to succeed, if they have the motivation and put in the effort. Quality, affordable education for everyone from elementary school through a college degree or vocational program would greatly improve people's opportunity to succeed. Getting money and special interests out of politics, and setting term limits on members of Congress would tilt the balance of power away from the extremely wealthy and back towards everyone else so government programs and policies would benefit citizens more broadly instead of serving narrow interests and private corporations. Full employment would increase workers' bargaining power and improve competition in the labor force so wages would become more fair and at least some forms of rent-seeking would be more difficult.
These solutions are certainly broad and general, and the details of implementing programs and policy changes that would bring about the reduction of inequality get complicated very quickly. The intent here is to show what the landscape looks like and what paths are likely to get us to a more equal society. There is no one outstanding cause of inequality. It results from a combination of structural problems, individual decisions, and random chance. Likewise, the solutions to the problem of inequality are widely varied. We need to address the distribution of income and taxes, the security of individuals when crisis strikes, and the opportunities available to everyone to achieve a better life. We are at a point in our history where inequality is becoming so extreme that it is damaging our ability to function and dragging all of us down. Turning that trend around and improving equality would go a long way to restoring trust in our institutions and each other.
Econ Book Face Off: The Price of Inequality Vs. House of Debt
In the spirit of my recent diversions from Tech Book Face Offs, I'm going to venture into the domain of economics with an Econ Book Face Off. I don't want to get too far into the field of economics and its ugly cousin, politics, on this blog, but I do think that inequality is one of, if not the major issue of our time, and it's worth spending a post or two talking about it.
We should all be taking a critical look at the state of our economy (this applies to many countries, not only the United States, even thought that is the country I'm focusing on) and how we want it to evolve over the next few decades. Being that our country is a democracy, I truly believe every citizen does have a voice, and together we can make a difference if we raise our voice strongly enough, in spite of all of the corporate money and special interests that are clogging the halls of power. To enact the change that will be most beneficial to all citizens, we need to know what the true issues are, and how to solve them effectively.
Like any software project, reducing inequality requires sharp analysis of context and trade-offs. The evidence is quite clear that inequality has been increasing for decades, and we have reached a point where the top 1% of income earners are bringing in as large of a percentage of total income as they were on the eve of the Great Depression.
We've already been through a Great Recession that has caused great hardship for so many people, and the weak recovery has left the bottom 90% of people essentially no better off than they were before the crisis while the wealthy have recovered their losses and then some. To try to better understand what has been happening to the distribution of wealth, what is causing the relentless divergence of income and wealth, and how to make progress in reversing this trend, I did what I always do. I picked out a couple of books to read.
Joseph Stiglitz is an excellent writer on economic issues, right up there with the likes of Paul Krugman and Robert Reich in his clear, understandable way of writing about economics so that the average person can easily get everything he's talking about. I thoroughly enjoyed this book because it hits on so many pertinent aspects of the inequality issue we're dealing with in a way that makes sense. In doing so, Stiglitz reveals how complicated inequality is and how there's no silver bullet for fixing it. This book is packed with great analysis and reasoned ideas for making our society more equal and fair without damaging the qualities that define us as a nation of innovators and entrepreneurs.
I can't really do the book justice in one short review, so I'll attempt to hit the most important points that made it resonate so strongly with me. Know that there is a ton more great material than what's represented here. Stiglitz starts off, as all economics books do, by defining the problem we're dealing with, and he puts it in the context of what a desirable economic system should be:
People tend to generalize and pick a primary source of failure as either the government or the markets, but the truth is both are susceptible to corruption and failure. Both are also capable of working efficiently and fairly when set up well. The natural reaction when things don't work well, and instead look broken, is to throw up your hands in frustration and throw out the trash, but that doesn't fix anything. Something is going to fill the void left by crippled government or over-regulated corporations, and the public is going to have less control over it than what they have now. Neither the government nor private companies will ever be perfect, but we should always work to make them better instead of blindly trying to make them smaller.
Stiglitz takes a pleasantly rational and balanced approach to the problem of rising inequality, and the ways that we can work to fix it through the channels of our government and private business. He ends with a chapter collecting and summarizing all of the various ways we can attack the problem from his discussions throughout the book. The solutions range from broad economic solutions of market fairness, tax reform, education, and public investment to immediate labor market improvements and household debt relief to political reform in campaign finance, voting, and media coverage. He elegantly addresses a huge, complex economic problem with an appropriately broad, multifaceted set of solutions. I highly recommend The Price of Inequality to get a real sense of what's at stake with this issue of inequality that affects us all.
Whereas The Price of Inequality covered the full gamut of issues surrounding inequality, House of Debt, by Atif Mian and Amir Sufi, takes a different approach. The focus was squarely on the housing crisis of the Great Recession and how the out-of-control lending and run-up of private debt before the crisis resulted in a severe, protracted recession that left our country even more divided than before the recession began. While the Great Recession cannot possibly explain the trend in inequality that has been going on for decades, it is a major contributor to our current predicament and is indicative of the larger issue of how the rich get richer and the poor get poorer.
The authors start out by clearly explaining how the benefits and risks of mortgage debt can be very asymmetric for the lender and borrower. Under most circumstances, the lender has a very safe income stream for the money they lent, backed by an asset that in normal times is very unlikely to lose value. In contrast, the borrower must pay interest on the money they borrowed while taking on most of the risk if the asset loses value. The borrower's equity is the junior share of the investment, so the borrower will lose everything before the lender will lose anything. If the borrower doesn't walk away in the event of going underwater on the mortgage, they end up losing more than they invested while the lender doesn't lose a thing.
The housing bubble was fueled by the lending boom, and the authors did a great job of showing empirically why this was the case. The consequences of this lending are well-known:
When the bubble finally bursts, the optimists lose their equity, but the pessimists still have their loans that they feel they deserve to collect. The pessimists did take some of the risk in loaning money, though, so they should share in some of the downside as well. There is precedent for this idea of lenders sharing the downside risk, and the authors relate some policy choices that occurred in the aftermath of the Great Depression:
The Price of Inequality is a great book for getting a broad view of inequality, its problems, and possible solutions. It covers most aspects of the issue, and Stiglitz is an effective and eloquent writer. House of Debt takes a more focused look at one major component of inequality, household debt, and what we can do to fix it. Mian and Sufi write clearly and thoroughly about the various arguments and concerns surrounding this sensitive topic. Both books were excellent at what they tried to accomplish.
There are certainly many other books on inequality that I could have read. In particular, why didn't I read Thomas Piketty's Capital in the Twenty-First Century? I would like to, and from what I hear, it's exceptionally well researched and bound to be a classic economic work. But honestly, I'm a bit intimidated by it, and I believe these two books, especially House of Debt, are much more approachable for the casual but concerned reader.
It's important to spread the knowledge about how serious a problem inequality is becoming. It creates a destructive cycle of unemployment and poverty leading to depression and helplessness, which leads to poor education and crime, which leads to more unemployment and poverty. It's a very hard cycle to break once it becomes rooted in a society. I think the public is waking up to these issues and starting to pay attention.
Once enough people are paying attention, we need to decide what we want the future to look like. Do we envision having a desperate underclass that struggles to survive and a disconnected wealthy class that misleads and exploits the masses, or do we want a future where everyone benefits from our technological advancements and leads healthy, happy lives with fulfilling work and enjoyable leisure? I believe the latter is entirely possible, if we decide that's what we want, and we do what it takes to get there.
We should all be taking a critical look at the state of our economy (this applies to many countries, not only the United States, even thought that is the country I'm focusing on) and how we want it to evolve over the next few decades. Being that our country is a democracy, I truly believe every citizen does have a voice, and together we can make a difference if we raise our voice strongly enough, in spite of all of the corporate money and special interests that are clogging the halls of power. To enact the change that will be most beneficial to all citizens, we need to know what the true issues are, and how to solve them effectively.
Like any software project, reducing inequality requires sharp analysis of context and trade-offs. The evidence is quite clear that inequality has been increasing for decades, and we have reached a point where the top 1% of income earners are bringing in as large of a percentage of total income as they were on the eve of the Great Depression.
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| Fred the Oyster at commons.wikipedia.org [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons |
We've already been through a Great Recession that has caused great hardship for so many people, and the weak recovery has left the bottom 90% of people essentially no better off than they were before the crisis while the wealthy have recovered their losses and then some. To try to better understand what has been happening to the distribution of wealth, what is causing the relentless divergence of income and wealth, and how to make progress in reversing this trend, I did what I always do. I picked out a couple of books to read.
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The Price of Inequality
Joseph Stiglitz is an excellent writer on economic issues, right up there with the likes of Paul Krugman and Robert Reich in his clear, understandable way of writing about economics so that the average person can easily get everything he's talking about. I thoroughly enjoyed this book because it hits on so many pertinent aspects of the inequality issue we're dealing with in a way that makes sense. In doing so, Stiglitz reveals how complicated inequality is and how there's no silver bullet for fixing it. This book is packed with great analysis and reasoned ideas for making our society more equal and fair without damaging the qualities that define us as a nation of innovators and entrepreneurs.
I can't really do the book justice in one short review, so I'll attempt to hit the most important points that made it resonate so strongly with me. Know that there is a ton more great material than what's represented here. Stiglitz starts off, as all economics books do, by defining the problem we're dealing with, and he puts it in the context of what a desirable economic system should be:
Some individuals will work harder and longer than others, and any well-functioning economic system has to reward them for these efforts. But this book shows that both the magnitude of America's inequality today and the way it is generated actually undermine growth and impair efficiency. Part of the reason for this is that much of America's inequality is the result of market distortions, with incentives directed not at creating new wealth but at taking it from others.These ideas really set the tone for the book. Fighting inequality is not about trying to redistribute income arbitrarily or waging class warfare. It's about finding ways to eliminate the distortions that are already present in our economy and to make the system more efficient so that everyone who contributes can get their fair share of our national product and technological advancements. If we can do this, then everyone can share in the growth, and better outcomes can be had by all. However, in order to achieve this goal, the wealthy and empowered will have to let go, somewhat. Stiglitz is careful but forthright as he makes his case:
[T]he rich do not exist in a vacuum. They need a functioning society around them to sustain their position and to produce income from their assets. The rich resist taxes, but taxes allow society to make investments that sustain the country's growth. When little money is invested in education, for lack of tax revenues, schools do not produce the bright graduates that companies need to prosper. Taken to its extreme—and this is where we are now—this trend distorts a country and its economy as much as the quick and easy revenues of the extractive industry distort oil- or mineral-rich countries.In many ways it is in the best interests of the rich to help everyone and make these investments in education to improve the workforce instead of exploiting it for short-term gain. The importance of improving the labor environment in reducing inequality cannot be understated. If there were better support and protections for labor, it would lead to more job loyalty, less churn in employment and the corresponding training costs, and higher productivity, which would create a positive cycle that is beneficial to both the employers and employees. Stiglitz raises the issue of fair treatment of workers numerous times in the book, and he also focuses on the closely related issue of trust:
I have emphasized how the country has to act together, cooperatively, if the country's problems are to be solved. Government is the formal institution through which we act together, collectively, to solve the nation's problems. Inevitably, individuals will differ in their views of what should be done. That's one of the reasons that collective action is so difficult. There needs to be compromise, and compromise has to be based on trust: one group gives in today, in the understanding that another does in another year. There must be trust that all will be treated fairly, and if matters turn out differently from how the proponents of a measure claim it will, there will be change to accommodate the unexpected circumstances.Here he is talking about trust of the government and democracy, which has been damaged by the catering to special interests and other corrupt practices that permeate our politics. The loss of trust can also be seen in the workforce, reducing worker's loyalty and morale, and it is clearly an issue with how the public now views the financial sector. Banks especially have lost trust by actively destroying it. If any other industry designed products that take advantage of the consumer the way that the banks did, I would imagine those companies would quickly fail, but we seem to be beholden to the banks in ways that don't allow us to let them fail.
People tend to generalize and pick a primary source of failure as either the government or the markets, but the truth is both are susceptible to corruption and failure. Both are also capable of working efficiently and fairly when set up well. The natural reaction when things don't work well, and instead look broken, is to throw up your hands in frustration and throw out the trash, but that doesn't fix anything. Something is going to fill the void left by crippled government or over-regulated corporations, and the public is going to have less control over it than what they have now. Neither the government nor private companies will ever be perfect, but we should always work to make them better instead of blindly trying to make them smaller.
Stiglitz takes a pleasantly rational and balanced approach to the problem of rising inequality, and the ways that we can work to fix it through the channels of our government and private business. He ends with a chapter collecting and summarizing all of the various ways we can attack the problem from his discussions throughout the book. The solutions range from broad economic solutions of market fairness, tax reform, education, and public investment to immediate labor market improvements and household debt relief to political reform in campaign finance, voting, and media coverage. He elegantly addresses a huge, complex economic problem with an appropriately broad, multifaceted set of solutions. I highly recommend The Price of Inequality to get a real sense of what's at stake with this issue of inequality that affects us all.
House of Debt
Whereas The Price of Inequality covered the full gamut of issues surrounding inequality, House of Debt, by Atif Mian and Amir Sufi, takes a different approach. The focus was squarely on the housing crisis of the Great Recession and how the out-of-control lending and run-up of private debt before the crisis resulted in a severe, protracted recession that left our country even more divided than before the recession began. While the Great Recession cannot possibly explain the trend in inequality that has been going on for decades, it is a major contributor to our current predicament and is indicative of the larger issue of how the rich get richer and the poor get poorer.
The authors start out by clearly explaining how the benefits and risks of mortgage debt can be very asymmetric for the lender and borrower. Under most circumstances, the lender has a very safe income stream for the money they lent, backed by an asset that in normal times is very unlikely to lose value. In contrast, the borrower must pay interest on the money they borrowed while taking on most of the risk if the asset loses value. The borrower's equity is the junior share of the investment, so the borrower will lose everything before the lender will lose anything. If the borrower doesn't walk away in the event of going underwater on the mortgage, they end up losing more than they invested while the lender doesn't lose a thing.
The housing bubble was fueled by the lending boom, and the authors did a great job of showing empirically why this was the case. The consequences of this lending are well-known:
Eager to create and sell profitable securities, lenders extended credit to so many marginal borrowers that they reached a point at which they lent to borrowers so credit-unworthy that they defaulted almost immediately after the loan originated. Once the defaults began to rise, the entire game unraveled, and levered losses kicked in.Much of the sub-prime lending can be explained by rising inequality. As the rich got richer and were looking for more investments for their growing wealth, sub-prime lending increased to meet the demand. The authors remind us that:
We are more than willing to blame "irresponsible home owners" who stretched to buy houses. But the house-buying binge was only possible given the aggressive lending behavior by banks.They go through an explanation of how debt is a necessary catalyst for inflating asset price bubbles, using a thought experiment of a set of optimists who will buy assets at a higher price because they believe the assets will increase in value, and a set of pessimists who enable the optimists by lending the money needed to buy the assets at the higher price. Even though the pessimists don't believe the assets are worth the higher price, they lend the money to the optimists because they believe the loans are safe. Without the pessimists lending money, the optimists couldn't inflate the bubble.
When the bubble finally bursts, the optimists lose their equity, but the pessimists still have their loans that they feel they deserve to collect. The pessimists did take some of the risk in loaning money, though, so they should share in some of the downside as well. There is precedent for this idea of lenders sharing the downside risk, and the authors relate some policy choices that occurred in the aftermath of the Great Depression:
When the United States went off the gold standard in 1933, the dollar was worth far less in gold than it had been. As a result, creditors all wanted to be paid the original amount back in gold. But the gold clause in debt contracts was abrogated by Congress. This meant borrowers could pay back in dollars that were worth far less in real terms than what they had borrowed. …They argue convincingly that it is not necessary that wealthy creditors get bailed out while struggling debtors are left under a mountain of debt. They also focus on the best ways to share the downside of a financial crisis equally between creditors and debtors, and why other policies, even fiscal policies, don't work quite as well:
Interestingly, the effects of the gold-clause abrogation were quite positive for both borrowers and lenders. As Kroszner demonstrates, both equity prices and bond prices rose when the Supreme Court upheld the congressional action. In other words, debt forgiveness actually made creditors better off. It is likely that we would have reached a similar outcome during the Great Recession had the government more aggressively facilitated the restructuring of household debt. [emphasis theirs]
[T]he most effective fiscal stimulus would be one in which the government taxes creditors and provides the funds to debtors. But why do we need fiscal stimulus? Mortgage cram-downs in bankruptcy, for example, would accomplish the same goal without getting taxation involved.The household debt problem has been a major driving force for rising inequality, and House of Debt is a great book that shows why it's a problem, how it works to enrich creditors at the expense of debtors, and what we can do to make the system more fair, more stable, and more efficient. It's another book on inequality that I highly recommend.
Fiscal policy is an attempt to replicate debt restructuring, but it is particularly problematic in the United States, where government revenue is raised from taxing income, not wealth. The creditors whom the government should tax tend to be the wealthiest people in the economy, which is why they are able to lend to borrowers.
Reducing Inequality
The Price of Inequality is a great book for getting a broad view of inequality, its problems, and possible solutions. It covers most aspects of the issue, and Stiglitz is an effective and eloquent writer. House of Debt takes a more focused look at one major component of inequality, household debt, and what we can do to fix it. Mian and Sufi write clearly and thoroughly about the various arguments and concerns surrounding this sensitive topic. Both books were excellent at what they tried to accomplish.
There are certainly many other books on inequality that I could have read. In particular, why didn't I read Thomas Piketty's Capital in the Twenty-First Century? I would like to, and from what I hear, it's exceptionally well researched and bound to be a classic economic work. But honestly, I'm a bit intimidated by it, and I believe these two books, especially House of Debt, are much more approachable for the casual but concerned reader.
It's important to spread the knowledge about how serious a problem inequality is becoming. It creates a destructive cycle of unemployment and poverty leading to depression and helplessness, which leads to poor education and crime, which leads to more unemployment and poverty. It's a very hard cycle to break once it becomes rooted in a society. I think the public is waking up to these issues and starting to pay attention.
Once enough people are paying attention, we need to decide what we want the future to look like. Do we envision having a desperate underclass that struggles to survive and a disconnected wealthy class that misleads and exploits the masses, or do we want a future where everyone benefits from our technological advancements and leads healthy, happy lives with fulfilling work and enjoyable leisure? I believe the latter is entirely possible, if we decide that's what we want, and we do what it takes to get there.
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