Watch what you Say in the Echo Chamber

In a recent blog post, Paul Krugman points out that there is no conflict between “standard economics” and concern about growing income inequality.

You can be perfectly conventional in your economics […] while still taking inequality very seriously.

This is absolutely correct and it’s a stance which economists need to embrace more often than they do. In an earlier post I argued that concern about income inequality is legitimate irrespective of how you think the economy works. You don’t need additional justification to desire a more equitable distribution of income or well-being. I personally count myself as an economist who more or less accepts the basic principles of the field, but who also recognizes that dealing effectively with the current state of income inequality is simply a necessity.

However, while Krugman is quite right in this case, both he and Noah Smith have made some remarks which I think liberals should never make. The remarks came in response to a commencement speech by Tom Sargent which has attracted a surprising amount of commentary among online commentators. In the convention speech, Sargent outlined 12 principles of economics that he felt college graduates should know. The principles were pretty uncontroversial and probably a good thing for Berkeley undergraduates to hear before the go out into the real world. However, one of Sargent’s principles struck a nerve:

There are tradeoffs between equality and efficiency.

Paul Krugman took issue with this remark saying that reducing income inequality might actually increase economic growth and (for an economy at the zero lower bound) that government spending “more than pays for itself.” He closes his remarks by saying that Sargent’s speech is simply “anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.” those people commenting favorably on Sargent’s commencement address are simply advancing “anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.” [1]

Noah Smith similarly found fault with the equity efficiency remark. He writes that it’s not generally true that there is such a tradeoff and he cites the Second Welfare Theorem as justification. As he goes through the list, Noah remarks that he can “start to see a policy implication emerge from the list” and in the end it all shapes up to be “one big caution against well-meaning government intervention in the economy by do-gooding liberals concerned about promoting equality and helping the poor.”

I understand the reactions by Noah and Paul. I just wish they wouldn’t succumb to the temptation to write this stuff. The truth is that most of the principles of standard economics carry with them a fairly conservative / neo-liberal message. I know there are exceptions but they are just that – exceptions. The truth is that if we want to really attack the problem of income inequality (promote equality and help the poor) then we are going to have to take stuff away from richer people and channel it to poorer people. This kind of action will most likely have consequences for markets and these consequences will be unsavory. Paul and Noah could argue (quite strongly I suspect) that these costs might be relatively small but they should not act as though they really think there are no costs. (In case you’re wondering, the Second Welfare Theorem says that if we can costlessly transfer resources across individuals then any efficient outcome can be supported as a market equilibrium…)

If you are a liberal, let me give you a sense of why this is a costly statement to make. Suppose one of Sargent’s principles included a public finance tradeoff: there is a tradeoff between low tax rates and high tax revenue. A conservative might take issue with this claim and write ‘you know this isn’t necessarily true. According to some models, lower tax rates actually lead to more revenue because they encourage economic activity.’ The conservative would of course be “correct” in a very narrow sense (this is a theoretical possibility) but he or she would be offering a very tempting fiction to their audience and to the public – the idea that you can have everything you want at no cost. Neither liberals nor conservatives should make remarks like this. When they do, it invariably costs them credibility and serves to drive a further wedge between voters who are already too polarized.

Talking in an echo chamber can be fun but public intellectuals like Paul and Noah have a greater responsibility to self-censor than most because they have large audiences. They have a responsibility to the public and also a responsibility to their liberal readers who take their statements to heart. The conservative echo chamber is probably worse than the liberal echo chamber (you can cut tax rates and raise tax revenue, cutting spending will stimulate the economy, the affordable care act is going to cripple the economy, … ) and conservatives had paid a hefty price as a consequence. They have boxed themselves into an intellectual corner which is going to be very difficult to escape from largely because they have adopted a narrative filled with soothing fictions.

Paul’s second post is the correct path to take. Liberals can simply say “Yes, there are costs to redistribution, but it is in society’s interest to bear these costs to fix the problem of inequality.” Similarly conservatives should say “Yes there are problems with income inequality, but we have to be smart and careful about how we design transfers so as to avoid too much interference with normal market functions.”

Is that so hard?

[1] In the earlier post I misinterpreted Paul Krugman’s statement to be commenting directly on Sargent’s speech when in fact he was referring to people who were themselves commenting favorably on Sargent’s speech.  Hopefully the above correction makes clear Krugman’s actual intention. Thanks to those in the comments section who noted my mistake. CH

Advertisements

50 thoughts on “Watch what you Say in the Echo Chamber

  1. Chris, you seem to disapprove of my post, but I don’t see where you disagree with any specific thing I say. Is there anything specific you disagree with, or did you just not like the tone?

  2. Perhaps its mostly tone but in the post you seem to suggest that Sargent’s principles have a conservative bias and that his equity/efficiency tradeoff in particular is not really true. Did I misread you?

    • My point was that I thought that Sargent was trying to caution Berkeley grads against the kind of well-intentioned interventionist policies to which they are probably inclined. He did not seem to be attempting to summarize the results of all of economics research, as was implied by the bloggers who rather breathlessly posted his speech the other day. That was my point. Naturally none of said bloggers listened to me. 😉

      Regarding equity-efficiency tradeoffs, the Second Welfare theorem is just a classic example of when there aren’t such tradeoffs. But I can think of other examples. Rent control, for instance. Occupational licensing. Possibly minimum wage (in the textbook case). Corporate subsidies. Probably a lot of public goods cases like highways, but I’m not sure. But in general, there seem to be quite a lot of cases where there’s no obvious tradeoff. It seemed to me that the reason Sargent mentioned such tradeoffs was because he thought Berkeley grads would be inclined to support redistributive taxation, which almost always *does* face such a tradeoff (unless you have a perfect Henry George style land value tax, which we do not). Now, maybe I got Sargent’s reason wrong. But I don’t think I’m incorrect on the substance.

  3. “The remarks came in response to a commencement speech by Tom Sargent which has attracted a surprising amount of commentary among online commentators.”

    I can think of no more suitable an endeavor for commentators than commentary. In a gracefully parallel manner, if something is going to attract commentary, from whom should it better come than commentators?

    In all seriousness, I think this is part of the trouble:

    “The truth is that most of the principles of standard economics carry with them a fairly conservative / neo-liberal message.”

    I might be with you on “neo-liberal,” but the principles of economics are only remotely “conservative” in any meaningfully modern, American sense of the word if you’re considering the sort of Tom Sowell / Henry Hazlitt nonsense. You know, taking a principles of micro book and writing 300 pages about how that’s all there is in economics. The only “conservative” idea here is that the baseline case (vMP = w, and so forth) that the rest of use as a starting point is where the “sober, rational” conservative economists want us to stop. To listen to these guys, you’d think they’ve got a patent on the tradeoff. Social democrats can talk “equity-efficiency tradeoff” with the best of them. “How much inequality are you willing to incur in order to wring another 0.001% of the inefficiency out the system?” for example.

  4. You write “The truth is that if we want to really attack the problem of income inequality (promote equality and help the poor) then we are going to have to take stuff away from richer people and channel it to poorer people. This kind of action will most likely have consequences for markets and these consequences will be unsavory.”
    I don’t see or smell anything unsavory about taxing those with inherited wealth and using the money for the common good. It would enable us to fix our infrastructure, invest in human talent, get the beggars of the street, advance science and technology, clean up our environment, and care for the sick, and put people to work. Heck, it might even make the wealthy work to keep up with their peers.What’s unsavory about this?

    • I’m not saying we shouldn’t do it, I’m just saying that you need to anticipate costs which go along with such a strategy (e.g., the wealthy guys will hide their inherited wealth or spend it on stuff that isn’t taxed, etc.). There is nothing unsavory about taking from the rich and giving to the poor. The unsavory part comes up when the rich take steps to avoid the transfer.

      • I’m presuming it’s a continuum since lord knows how much might be hidden offshore as we speak. Imagine how much it was when the marginal tax rate on the wealthy was twice what it is now? Maybe no one noiiced or cared back then since the “masses” were far better off. Now that there is so much wealth so concentrated we’ve started paying attention as so many seem to be just getting by.

      • This is a very bad argument; for the most part you are using the fact of less than 100% perfection to argue against doing something.

    • “This kind of action will most likely have consequences for markets and these consequences will be unsavory.”

      A surplus of desperate people also tends to have unsavory consequences for markets.

      Take your pick.

      • And Chris gave nothing to either support his idea, nor to support the proposition that the unsavoryness would be big enough to see, let alone matter, let alone outweigh the benefits.

  5. Even Larry Summers once said “There are more important things than economic efficiency” (as quoted approvingly by Megan McArdle from a lecture of his she attended, while Summers was consulting with the Al Gore campaign).

  6. Chris, you say: ‘[Paul Krugman] closes his remarks by saying that Sargent’s speech is simply “anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.”’

    But that’s wrong, in fact in Paul’s article he says the “sudden attention to Sargent’s 2007 speech” is simply “anti-Keynesian propaganda, cloaked in the form….”

    In other words, he was criticising the recent commentary around the speech much more than the speech itself.

  7. To add to what Marc says, Piketty’s book argues that the data, history and economics suggest that unless we do something “unsavory” we’ll get an oligarchy which subverts democracy. Fighting inequality is for many liberals simply a manner of safeguarding democracy. The history is that for the last 40 years we’ve had “savory” policies which have cut back on policies which “redistribute” downwards and increased policies which “redistribute” upwards. Possibly the rational was to lessen the distorting effects of redistribution so that more wealth and growth could trickle down. The results have been an increase in inequality not seen since the gilded age without much trickle down.

    • I think you are absolutely right though I might suggest that most liberals care about inequality for reasons beyond safeguarding democracy.

      • How about just because they care directly about the well-being of the less-fortunate?

        Perhaps I misunderstood you — You aren’t trying to say that if there were no possibility that democracy might be compromised as a result of inequality that liberals would stop caring about the poor are you?

  8. “while Krugman is quite right in this case, both he and Noah Smith have made some remarks which I think liberals should never make”. Seriously?! Liberals should not comment lest someone misrepresents what they said in order to make them look crazy? I say this will all due respect as it would seem you have taken what Paul and Noah have said out of context. I’m sorry but it is blog posts like these should not be written.

  9. Pingback: Cripes, Maybe I’m in the Echo Chamber … | Orderstatistic

  10. Hey Chris,

    I think you misunderstand Paul and Noah. They aren’t disagreeing with the notion that “there are tradeoffs between equality and efficiency.” They both state there are, sometimes, and that this is not one of the times we should be talking about the tradeoff.

    Noah, in particular, puts it well. It is good for 2007 Berkeley grads to be thinking about tradeoffs between equality and efficiency, but it is not great for post-crisis policymakers to be thinking about that rather than more pressing priorities.

    Similarly, it is good for econ 101 students to understand the standard model of wages and labor supply and the implications of placing a floor on wages in this limited model. However, it isn’t useful information for policymakers, since this simplistic model does not reflect the actual labor market.

    If I was going to communicate about the minimum wage to a policymaker I would talk about the quasi-experimental empirical work done around the issue–I wouldn’t go to econ 101 and crossing supply and demand lines. Noah questions, rightly, why we are talking about efficiency/equality tradeoffs which is much less relevant in a time of slack demand and unemployed resources (not to mention unemployed people).

  11. I stil haven’t seen a convincing conservative refutation of this simple parable: if 100 people each make $100,000 per year, they will likely buy a fair number of houses and cars and other stuff. If that same $10 million is distributed to 99 people making $10,000 and one person making $9,010,000, you might sell a couple of cars and a house or two. The high earner will save much of that money, and we’ll get much less economic activity. Ipso facto, excessive inequality depresses demand and hurts the economy. Low interest rates won’t help.

  12. House: “Suppose one of Sargent’s principles included a public finance tradeoff: there is a tradeoff between low tax rates and high tax revenue.”\

    But that was NOT among Sargent’s twelve “principles”, was it? Doing this could, depending on what you pose and how you pose, qualify as a thought experiment, potentially to benefit the discussion, or as a straw man, for, I’m tempted to say inevitably, mischief.

    The way you’ve posed it here is as the latter.

    • If I were giving an address to a mostly *conservative* audience I would probably take the opportunity to emphasize some rather uncomfortable truths like the basic relationship between tax rates and tax revenue and the huge problem we have in terms of current income inequality.

  13. In the USA 300 years from now, 99.999% of all after-tax income goes to 100 individuals. The rest of the income goes to the 500 million other Americans. Chris writes “In case you’re wondering, the Second Welfare Theorem says that if we can costlessly transfer resources across individuals then any efficient outcome can be supported as a market equilibrium…” Therefore, in the above hypothetical any attempt to increase equality *must* decrease efficiency. Frankly, I’m skeptical.

  14. I’d like to believe I’ve picked up a lot reading Krugman, but I am neither an economist nor a formal student of economics. Before I was a regular reader of Krugman’s blog (I more often frequented the WSJ editorials…) there was a since defunct discussion board on Google Finance that once provided a great deal of sometimes coherent perspective on matters business and economic. There’s a bit from a guy named Terhune that always stuck with me and seems quite relevant now that inequality is being discussed so often:

    “Redistributive taxation is a good idea if your concern is the efficient operation of markets. Free markets are most efficient when there is an even distribution of wealth, and they become less efficient as wealth is concentrated. Unfortunately, markets also tend to concentrate wealth. Redistributive taxation counteracts that tendency and helps keep markets efficient, but it must [be] somewhat limited so there is still incentive to compete. All this is trivial to prove mathematically with market models.”

    Now calling it trivial to prove may have gone too far, but the statement still carries a lot of weight for me. Is it fair to say concentrated wealth affects efficient market operations? If so, why doesn’t this factor come up more often? It’s only a slight exaggeration to say this years old statement opened my eyes to the possibility that redistribution arguments (especially from the WSJ) were framed completely wrong and that redistribution could be advocated on both moral and economic basis. It seems relevant because it contradicts the idea of trade offs between equality and efficiency. So I’d really like to hear the opinion of some of the (seemingly) more informed frequenters of this comment area.

    • I’m not sure that it’s clear that concentrated wealth creates additional distortions in markets. Concentrated wealth can be associated with market power (monopolies, regulatory capture, etc.). Concentrated wealth can also provide an undue amount of political power. Krugman mentions the possibility that efficiency might increase with a more equitable distribution of income. I think this is a possibility though I anticipate that from a pure efficiency standpoint, addressing income inequality will come at some cost (though I think it is a cost worth bearing).

  15. Although some commentators mention the context, it should be the focus here as it was in Krugman’s post. The post is all cautions against giving an opening to the right and the comments are a whole lot about economics. Krugman’s post was actually about calling out the blatantly propagandistic intention of those hyping Sargent’s speech. Focus on THESE points people:
    1. Sargent’s speech was to Berkeley graduates in *2007*
    2. Therefore his advice was in the context of a bubble people thought would never end instead of the quasi-depression we have been in since.
    3. So why would anyone think that advice tailored to a different world was relevant NOW all of a sudden, years and much grief later?
    4. Well, look at who hyped this in the first place, the ultra-right-wing “think tank” American Enterprise Institute. Hmm, wonder what their motive could *possibly* have been? Maybe to fog up current economic policy thinking with anodyne economic textbook blather of little relevance to the realities of 2014? Hmmm…
    This was the main message to take from Krugman’s post. As an economist, he went on to explain why he thought some of Sargent’s “eternal verities” did not apply in the current context. And all you economists just can’t resist chasing your economic tails discussing those points, hardly bothering to glance at the message about *political* motivations of right wing economists that Krugman was delivering– with Chris House even wagging his finger at Krugman for giving an opening to the right to attack him and claiming that “He closes his remarks by saying that Sargent’s speech is simply ‘anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.'”
    No no no, how can you so distort what Krugman’s point was? It was not about Sargent, it was about, as it says in the part that was NOT quoted, “So why the sudden attention to Sargent’s 2007 speech?” In other words, why all the hype for this essentially irrelevant piece of 2007 memorabilia *now*? As Krugman says: consider the source.

    • Hi Leo,

      In regard to your point above, you are quite right — I misinterpreted Paul’s comment. I have edited the original post above. Hopefully this correctly reflects his intention. Thanks for catching my error. CH

  16. If you want to understand white make privilege, look no further. Why do people read this blog? Because it’s arrival was noted by Noah Smith. Why do people read Noah Smith? Because prominent bloggers like Paul Krugman link to it! This, then, is reinforced by Mark Thoma.

    Ok, now what’s the result? Was it post number one which declared “Econ has a conservative bias”? And what do we have here? A mischaracterization of both Smith and Krugman in order to advance the (implicit in the post, explicit in the comments) claim that “Econ has a conservative bias”. Which is both a) trivial and b) false. The old boy network strikes again! What a waste.

  17. ” He closes his remarks by saying that Sargent’s speech is simply “anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.””

    I’m sorry. while the Krugman quote is correct, he clearly did not say it relative to Sargent’s speech itself. He was, very explicitly, referring to how the speech is being played now, seven years later, by some conservatives. That, is a big, big, difference. I suggest you re-read Krugman’s post.

    • Hi Michael,

      A couple of people have pointed out my error in the comments. You are quite right — I misinterpreted/misquoted Paul’s statement. I have edited the original post above and added a note to explain the error. Hopefully this correctly reflects his intention. Thanks for catching my mistake. CH

  18. It looks like Paul and Noah said that there may not be tradeoffs for lowering inequality under limited circumstances and specified examples of those limited circumstances.

    Then Chris House accused them of talking in an echo chamber for “act(ing) as though they really think there are no costs,” completely omitting any mention of the qualifiers Paul and Noah used.

    Then Chris House explained to liberals that talking in an echo chamber is supposedly a bad thing.

    Was any part of my retelling of this story incorrect, or did I omit important details? I, for one, would not want to just talk in an echo chamber without realizing it. It could be very embarrassing…

    • I wouldn’t say I accused them of talking in an echo chamber. I would say that whether we like it or not, we are talking in an echo chamber.

  19. Pingback: Who’s in the echo chamber? | BS Economist

  20. Chris, you have walked back with much better grace than you did from your earlier attempt to distance yourself from both (amorphous) left and (hegemonic) right. Have you since given any thought to the usefulness and validity of that impulse? You are quick to disdain non-economic reasons why Noah and Paul immediately resonate. Have you asked yourself what are the non-economic reasons for your reverse hair trigger?

      • After the dust settles, your economic reasoning looks very close to Noah and Paul’s. What non-economic reasons explain the dust?

        ( and yes, I’m in Australia enjoying the bracing experience of a new austerity-preaching, inequality-enhancing federal government who get their lines from the WSJ and the GOP, hence my interest in US doings)

  21. You say that liberals should not say that fighting inequality has economic costs. But I don’t think that must be correct, and I believe that’s also what Krugman argues. Yes, there are always costs, but there may also be gains. What matters is the overall net (economic) costs. And the argument is that this may well be negative, depending on the context. And I really think this is the case in the current situation. And when that is true, there really may not be a tradeoff between equality and efficiency. For instance, if all wealth were concentrated in one family, I don’t think that’s very efficient.

  22. I like the idea that economists are finally speaking up against this “efficiency vs equity” trade-off, but their arguments are still sophomoric.

    I think Krugman makes a good point that this argument only true at extreme levels, like Cuba……but then again, is this really Cuba’s problem….or is it rent-seeking? Noah goes into some mathematical identity to prove that this is not the case.

    Lets look at Mondragon or other successful worker cooperatives. A successful business strategy does not need to sacrifice efficiency for equity. Or look at the 1950’s or 1960’s where bosses and workers lived in the same neighborhood, and wages kept up with productivity.

    Sargent’s statement about efficiency that came right after criticizing the welfare state is most bizarre.

    Then again, most economists have an efficiency fetish. They believe that the welfare state is harmful since it distort efficiency and progressive taxation is even more harmful…or what else were layman supposed conclude from Sargent’s speech.

    Why would Sargent even make these comments? It only makes economists look stupid and completely removed from reality…..but then again, many economists are.

    There is no absolute truth between the trade-off of equity and efficiency, and the welfare state is one of the greatest inventions known to mankind. It is right up their electricity.

    Or do economists really believe that Social Security, Medicare, TANF, unemployment insurance are creating these great inefficiency gains and dragging down society?

    Do economists even think outside of the classroom?

  23. Pingback: Krugman’s blog, 4/29/14 | Marion in Savannah

  24. “The truth is that if we want to really attack the problem of income inequality (promote equality and help the poor) then we are going to have to take stuff away from richer people and channel it to poorer people.”

    Oh, really. The sad little rich people, who have to give their stuff to the poor people. Pardon me while I puke.

    That’s better. Now, how about:

    – getting rid of patent and trademark protections that channel money from poor people to rich people without encouraging innovation;
    – restoring bankruptcy protections for poor people without which rich people squeeze poor people who are in trouble or who have been legally swindled by rich people;
    – outlawing pay-day lending and other usurious practices that cheat poor people;
    – repealing legal obstacles to competition among physicians and other professionals who don’t have to compete in global markets while ordinary people see their jobs shipped off to China;
    – allowing the dollar to fall to a competitive level so that American manufactured goods can compete on the world market;
    – preventing companies from playing games to shift their profits to tax havens, thus throwing the cost of running the country onto the backs of poor people;
    – stopping companies from reneging on their promises to pay pensions and benefits, thus looting assets reserved for poorer people;
    – allowing Medicare to use competitive bidding for drugs, so that the government doesn’t keep throwing money taken from poor people into the pockets of companies owned by rich people;
    – cutting back on unnecessary military procurement, which takes money from ordinary people and dumps into the pockets of rich people;
    – forcing companies to internalize the externalities of pollution and workplace injury, which fall most heavily on poor people;
    – repeal ridiculous drug sentencing laws, which take huge numbers of poor people out of the workforce and condemn them to poverty for life, while barely touching the rich people who use the very same drugs behind closed doors.

    That’s for starters. Maybe when I think about it for a few minutes I can come up with other ways to attack income inequality without taking anything away from the poor liddle rich peepoo.

    • So many problems that we know the answer to. Although, I might quibble and suggest we keep the military spending but use it to invade the Cayman Islands, Switzerland, Luxemborg, Cypress, and maybe Ireland. Combined their military is smaller than Panama. Forget blood for oil, let’s have (very little) blood for taxes!

      But, what is the model? Does it have microfoundations?

  25. Not that anyone is still here, but before Chris House tells us sorrowfully again that poor people are poor because that’s just the way they are and the only way to make them less poor is to take stuff from the deserving rich people who are just naturally rich, he might want to address the destruction of well-paid American manufacturing jobs brought about by Clinton’s strong-dollar policy which has now continued for two decades.

    http://www.cepr.net/index.php/blogs/beat-the-press/bill-clinton-gave-us-a-hugely-over-valued-dollar-and-an-exploding-trade-deficit

  26. Pingback: Efficiency, Optimality and Values | BS Economist

  27. Sargent’s general point is that interventions to overturn market outcomes in pursuit of a redistributional objective generally involve an efficiency cost. Generally we pursue greater equity so the trade-off is usually referred to as an equity-effiency trade-off.
    Interventions to increase inequity would also generally incur an efficiency cost.
    Noah’s minimum wage and rent control examples (their conservative characterisation – ie that they worsen both equity and efficiency) embellish Sargent’s general point but don’t detract from it.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s