Why 20th century tools cannot be used to address 21st century income inequality?

The remarkable  period of reduced income and wealth inequality in the rich countries, roughly from the end of the Second World War to the early 1980s, relied on four pillars: strong trade unions, mass education, high taxes, large government transfers. Since the increase of inequality twenty or more years ago, the failed attempts to stem its further rise have relied on trying, or at least advocating, the expansion of all or some of the four pillars. But neither of them will do the job in the 21^st century.

            Why? Consider trade unions first. The decline of trade union density, present in all rich countries and especially strong in the private sector, is not the product of more inimical government policies   only. They might have contributed to the decline but are not the main cause of it.  The underlying organization of labor changed. The shift from manufacturing to services and from enforced presence on factory floors or offices to remote work implied a multiplication of relatively small work units, often not located physically in the same place. Organizing dispersed workforce is much more difficult than organizing workers who work in a single huge plant and share a single interest. In addition, the declining role of the unions is a reflection of diminished power of labor vis-à-vis capital which  is due  to the massive expansion of wage labor (that is, labor working under capitalist system) since the end of the Cold War and China’s re-integration into the world economy. While the latter was a one-off shock, its effects will persist for at least several decades, and may be reinforced by future high population growth rates in  Africa, thus keeping the relative abundance of labor undiminished.

            Mass education was a tool for reduction of inequality in the West in the period when the average number of years of schooling went up from 4 or 6 in the 1950s to 13 or more today. This led to a reduction in the skill premium, the gap between college educated and those with only high or elementary school, so much so that the famous Dutch economist Jan Tinbergen believed in the mid-1970s that by the turn of the century the skill premium will be zero. But mass expansion of education is impossible when a country has reached 13 or 14 years of education on average simply because the maximum level of education is bounded from above. Thus we cannot expect small increases in the average education levels to provide the equalizing effect on wages that the mass education once did.

            High taxation of current income and high social transfers were crucial to reduce income inequality. But their further increases are politically difficult. The main reason may be a much more skeptical view of the role of government and of tax-and-transfer policies that is now shared by the middle classes in many countries compared to their predecessors half a century ago. This is not saying that people just want lower taxation or are unaware that without high taxes the systems of social security, free education, modern infrastructure etc. would  collapse. But it is saying that the electorate is more skeptical about the gains to be achieved from additional increases in taxes imposed on current income and that such increases are unlikely to be voted in.

            So if the high underlying inequality is a threat to social homogeneity and democracy, what tools should be used to fight it? It is where I think we need to think not only out of the box in purely instrumental fashion, but to set ourselves a new objective: an egalitarian capitalism based on approximately equal endowments of both capital and skills across the population. Such capitalism generates egalitarian outcomes even without a large redistributionist state. To put it in simple terms:  If the rich have only twice as many units of capital and twice as many units of skill than the poor, and if the returns per unit of capital and skill are approximately equal, then overall inequality cannot be more than 2 to 1.

            How can endowments be equalized? As far as capital is concerned, by deconcentration of ownership of assets. As far as labor is concerned, mostly through equalization of returns to the approximately same skill levels. In one case, it passes through equalization of the stock of endowments, in the other through equalization of the returns to the stocks (of education).

            Let us start with capital. It is a remarkable fact, to which little attention has been paid, that the concentration of wealth and income from property has remained at the incredibly high level of about 90 Gini points or more since the 1970s in all rich countries. This is to a large extent the key reason why the change in the relative power of capital over labor and the increase in the capital share in net output was directly translated into a higher inter-personal inequality. This obvious fact was overlooked simply because it is so…obvious. We are used to thinking that as the capital share goes up, so must income inequality. Yes, this is true—but it is true because capital is extremely concentrated and thus an increase in a very unequal source of income must push overall inequality up.

            But if capital ownership becomes less concentrated then an increase in the share of capital that may be (let’s suppose) inevitable because of international forces such as Chinese move to capitalism, does not need to lead to higher inequality within individual rich countries.   

            The methods to reduce capital concentration are not new or unknown. They were just never used seriously and consistently. We can divide them into three groups. First, favorable tax policies (including a guaranteed minimum rate of return) to make equity ownership more attractive  to small and medium shareholders (and less attractive to big shareholders, that is, a policy exactly the opposite of what exists today in the United States). Second, increased worker ownership through  Employee Stock Ownership Plans or other company-level incentives. Third, use of inheritance or wealth tax as a means to even out access to capital by using the tax proceeds to give every young adult a capital grant (as  recently proposed by Tony Atkinson).

            What to do with labor? There, in a rich and well-educated society, the issue is not just to make education more accessible to those who did not have a chance to study (although that too is obviously important) but to equalize the returns to education between equally educated people.  Significant source of wage inequality is not any longer the difference in the years of schooling (as it was in the past), but the difference in wages (for the same number of years of education) based either on the perceived or actual difference in school qualities.  The way to reduce this inequality is to equalize the quality of schools. This, in the US, and increasingly in Europe as well, implies improvement in the quality of public schools (a point argued by Bernie Sanders in the recent US election). This can be achieved only by large investments in improved public education and by withdrawals of numerous advantages (including tax-free status) enjoyed by private universities that command huge financial endowments. Without the leveling of the playing field between private and public schools, a mere increase in the number of years of schooling or the ability of a rare child of lower middle class status to attend elite colleges (that increasingly serve only the rich), will not reduce inequality in labor incomes.

            In my next post I will address the issue of the welfare state in the era of globalization and migration.  

How I “met” Samuelson and Friedman

Several weeks ago, a Belgrade weekly asked me to write a free-form piece with some reminiscences  of how intellectual life was for a student of economics like myself in the 1970s Belgrade. I am not a big fan of personal memoirs (of people whose lives, like mine, have no greater resonance) so I dithered until yesterday when I read this interview by Paul Samuelson. This brought back the memories of how I first “encountered” Samuelson.

I was then in my sophomore or junior year, studying economics and statistics. We knew of Samuelson vs. Friedman, one who was a kind of a social-democrat, the other a rightist. A very simplified version of  Samuelson’s Economics (just up to the Keynesian cross) was taught in our macro class. But his book was mentioned repeatedly and so students knew of him. I never took any finance classes, and I do not know if Friedman was ever taught there or not. (Yugoslavia was a market economy with predominantly non-private ownership of companies and persistently high inflation, so teaching both had some obvious policy meaning too.)

One day as I was waiting for my haircut, a copy of Newsweek laying around attracted my attention. This was unusual because foreign papers (few people spoke English) would not be normally found lying around in barber shops. (They still do not: I have never seen a foreign-language publication except for fashion magazines since.) It was also politically a bit suspicious. But my barber must have been quite pro-American because he had there also a propaganda monthly published in Serbo-Croatian by the American Embassy in Yugoslavia. I took the Newsweek (my English was quite good by then) and read a column by Samuelson. Afterwards, I  continued buying for perhaps a year every single issue of Newsweek where alternatively Samuelson and Friedman were writing their columns.

Gradually I became more and more disillusioned. Their articles were exceedingly narrowly US-based, dealt with (what I considered) tiny and unimportant topics, and were boring. For somebody brought up on the grandiosity of Marxist economics where economics is about the development of social formations, their columns dealing with (I remember that quite well) busing, housing rents in New York and similar topics were incredibly petty. I was expecting discourses about the future of mankind, and was offered a write-up on rent subsidies and cost of education. It was also difficult (America being a very different world from Europe), to understand many of their columns. I just couldn’t follow what is the big fuss about busing. I then had no idea how the American school system was organized and although I broadly guessed what were the issues, the whole problem was entirely alien to me. I did not know about the extreme decentralization of US school system, the huge variability of school quality and importance of going to the “right” school, nor did I realize fully the long physical distances between homes and schools.

So, after a year, I tired of both Samuelson and Friedman.

But then Samuelson reappeared a year or so later when I prepared for my GRE. I bought his beautifully-crafted and illustrated Economics (I still have the book, paperback edition) and I loved it. It just opened up for me an entirely new world where both the grand themes of economics and chicken-feed issues from his columns coexisted and enlightened each other. I read I think every word of the book: I still have my notes on the margins, my numerous one-pagers explaining this or that. The book was absolutely right for me as I was then at 21. It was neither too easy nor impossibly hard. It had challenging parts but such that  I knew I would, with effort, figure out.

Economics was not  an exceedingly expensive book (perhaps $10), although it was some 4-5% of the average after-tax salary. I have to say though that I was then, compared to most of my friends, quite “well-off”. I was earning money, mostly through consecutive translation but also from tutoring and other odd jobs, since I was 18. As I lived (like almost everybody else) with my parents and had zero living expenses, and also had a girlfriend who lived outside the country and so I was practically not going out, I spent most of my time either with friends at home, or reading and reading and reading. Both were cheap occupations and most of my money was spent on books and soccer games (and later on records).

There were however several small things in Economics that—I still remember this  40 years later--irritated me.  The first was Samuelson’s frequent exhortation to readers which would end with “Bon appetit!” (in French), and a similarly vulgar “the proof of the pudding is in the eating”. And then there was his parochialism where, other than for the classics, all other citations were from professors from about four or five top US universities. I found this annoying: was not there anyone else in this wide world who has done something worth mentioning? Constant references to person’s university were also silly because people would change universities. (I suppose Samuelson had then, in the next edition, to revise their provenance.) Also I did not like Samuelson’s use of possessives like “Harvard’s Johnson” (rather than “A. Johnson from Harvard University”) as if people were slaves of universities. But it was a great book, and I remember it warmly.

Fast forward to 1990, when I was already in the United States. A group of university friends who were then in the economic commission of the Democratic Party (that was the time when the multi-party system in Yugoslavia/Serbia was just born) suggested that we ask Milton Friedman for privatization advice. (I must say that I liked a lot his unfinished Price Theory and never cared for The Theory of the Consumption Function which I think was tautological.)

I wrote a nice letter. What was our surprise when a week or so later, we received a three-page detailed, nicely typed (this was before word processors) reply from Friedman! Unfortunately, I do not think I have kept it: it must have gotten lost in my many moves. It was friendly, substantive, used both UK and British Columbia privatization examples, and if I recall correctly, advised a free voucher privatization. Friedman never came to Yugoslavia (in the letter he said he would come to Belgrade if we could also arrange for him to visit Dubrovnik; but this was said in a very amiable way), and privatization went much worse than anyone expected. I read later that Friedman said how he, like everybody else, was wrong in underestimating the difficulties of transition and privatization.

Thus without ever meeting any of these two giants, they did influence a bit my economics. On a more serious note, I think that Samuelson may be remembered in the longer-term much less well than deserved by his intellectual capacities perhaps because he had a too narrow and too technical view of economics. Unlike Keynes, Pareto, Walras or Marx, for example, his interests were narrow and he was not a great writer.  Friedman may be different as he got closely associated with one big idea (as Nassim Taleb says, one should have only one big idea) and that idea will be around as long as economics exists. 

Pontius Pilate: the first Christian? Review of Aldo Schiavone’s "Pontius Pilate: Deciphering a Memory"

Aldo Schiavone is one of my favorite writers on ancient Roman economics, or more broadly Roman history. I learned a lot and truly enjoyed his elegant and small volume The end of the past which cleverly, and yet profoundly and in a beautiful prose discusses the greatness of a globalized empire created by Rome and the limits which prevented it from going further, developing ten centuries before it eventually appeared in Lombardy, a much more extensive form of globalized commercial economy. It was the economy of conquest leading to slavery and cheapness of labor that prevented Roman technological upgrading (a view shared by Marx and more recently by Bob Allen): “Military plunder turned out to be the sole mechanism for the self-support that the Roman economy managed to build” (The end.., p. 81).  In addition, Schiavone writes, there was disdain for labor in general, ideal life consisted of aristocratic rural indolence: all elements hardly leading to a capitalist economy. There was also a hubris, belief that the pinnacle of human evolution has been reached, that nothing new could be invented, summarized in a beautiful pithy sentence by Schiavone, “They all thought they had finished, but in truth they had not even begun” (The End…, p. 134).

Now, one of the most famous living historians of Rome has set himself the task in the just published, Pontius Pilate: Deciphering a Memory, to explore probably the most portentous meeting in human history: that of Pilate and Jesus. I was very excited when I saw that the French, and just a couple of days ago, English translations of the book are out. Nobody, I thought, could do this reconstruction better than Schiavone. I pre-ordered the book, and read it in one evening/night. It is short, some 200 pages including copious reference and discussion of numerous sources.

The first part, where Schiavone describes Judaea in some fifty years before the Common Era and in the period up to the year 30, when, by all evidence, the fatal encounter took place, does not disappoint. Schiavone describes very persuasively the intellectual febrility of Judaea, crisscrossed by preachers, holy men and vagabonds (imagine a Connecticut-size country with perhaps a several thousand Rasputins running around), its social structure, its implacable theocracy with high priests and Sanhedrin sitting on top of an aristocratic-religious regime that looks very similar to today’s Saudi Arabia. “It is no accident that the word ‘theocracy’ was invented by Josephus to describe the peculiarity of his county’s political tradition” (p. 110).

And then Schiavone explains perfectly the bewilderment of Romans in this environment that linguistically, and more importantly ideologically, they  find entirely alien. Although Jews and Romans (and Greeks) have lived together for several centuries by then, Roman incomprehension of Jews has never gone away. Gibbon gives literally dozens examples of their “oil-and-water” relationship—that is, when they were not at war. Even more difficult was it to be the prefect in such an environment, permanently trying to check the incipient insurrection while avoiding the converse danger that, in order to placate one faction of the Jews and prevent such insurrection, the Roman authorities may be used by that faction to suppress its rivals (the typical “tail-wags-the dog” dilemma of all big powers).

And this indeed is what happens here. The Jewish religious aristocracy feels threatened by the sudden popularity acquired by the Galilean preacher, convinces Pilate to arrest him, but then fails to produce the evidence that the preacher is undermining Roman political order. For the crux of the matter is here: Jewish religious establishment has a full control over its religious matters, but has no right to impose the capital sentence (which they desperately want to pass on Jesus). Only Romans can do that—but the Romans will do that, not because of a religious dispute  among the Jews, but only if the crime is political (that is, directed against Rome).

The rest of the story is well known and I will not tread on it here. It is where Schiavone’s two key points are made. First, he argues that, impressed by Jesus’s behaviors and answers (or lack of answers) during the interrogation, Pilate at first refuses to impose the death sentence even if it puts him in a potentially serious conflict with the Jewish establishment. But then—more extraordinarily—he is awed by this most unusual preacher who claims to descend from the Heavenly Kingdom, and becomes convinced that the preacher wants to be executed. The humiliating death on the cross is Jesus’s desired end-point, a culmination of his Earthly mission. We thus have at the very end, all three parties agreeing that Jesus should die: Jewish establishment wants to get rid of an inconvenient religious rebel, Jesus craves his sacrifice, Pilate is his willing accomplice.

Now, this part which I have just described is nicely argued and written but is in reality a genre of historical fiction. It could be that it happened exactly that way as Schiavone tries to convince us, but it could have happened in a myriad other ways. The number of parties, combinations of their interests, shifting alliances even in these twenty-four hours, leave may possibilities open. Schiavone makes a strange decision to treat John’s and the three Synoptic gospels as a textual evidence of what was said in the proceedings. But this is clearly baseless.  As Schiavone mentions,  very few people were likely to have been present at Pilate’s interrogation of Jesus; at most only the translators since Pilate was unlikely to have spoken Hebrew or Aramaic and Jesus unlikely to have spoken Greek or Latin (p. 102). Were Jesus’s disciples later in touch with interpreters? Did interpreters tell somebody else who then conveyed that information to the writers of Passion?  And even if we answer these questions is in the affirmative, it is naïve to believe that the Gospels would have written in a way unfavorable to Jesus. The nature of the documents is such that they have to present Jesus as a superior interlocutor in the duel between Caesar and God.

Further, since the textual evidence of the four writers differs on important points, Schiavone is reduced to doing what all writers who need to push one side of the story have to do:  to selectively choose now from one, then from another, writer. John is the most reliable (p. 97), before he becomes the least (“John’s account no longer holds up”, p. 164); tiny and probably meaningless or accidental inclinations in the text (e.g. “from then on” or “thus”) are given implausibly heavy interpretations. The whole story takes on an almost Hollywoodesque aspect where the implacable Roman prefect becomes awed by the holy man and decides to connive in his desire to die. “We are no longer in an interrogation. Progressively…we have been transported from the Praetoreum of Judaea to a dialogue of Plato” (p. 123). Roman prefect, hardened military man, some 15 years Jesus’s senior, caring about the eschatological mission of an itinerant preacher whose neither religion nor language he can understand? 

We are here touching at the  edges of Christian mysticism even if Schiavone tries hard to motivate presumed Pilate’s fall under Jesus’ spell by invoking the role of superstition in Roman lives.  The story totally collapses in that latter part: the scarce facts that we have cannot reasonably be expected to support Schiavone’s  heavy scaffolding.

The second important point that Schiavone makes, and which I am not qualified to discuss, is a theological/cultural one, namely that Jesus’s break of One God (omnipotent single God in a covenant with the Jews) into Two (divine and human nature of the God, and open covenant with the rest of the world) created “a breach of secularization”, “a theory of exclusion [between the secular and divine domains] within reformed monotheism” (p. 113) through which the entire history of the West went  through. In other words, Christianity got rid of the oppressiveness and doctrinaire intransigence of monotheism by reintroducing some elements of duality between the heavenly and earthly rules. To put it in a mathematical language 2 or 3 became closer to n than to 1.

Perhaps on that last point, Schiavone is right, but his story of the Pilate-Jesus relationship would have benefitted, in my opinion, from a much less definite reading than what Schiavone wants to impress on us. I would still strongly recommend the book: the description of Judaea, of the Roman military men in that enigmatic land, of Tiberius and Sejanus in Capri (“men of darkness”) who make cameo appearances are brilliant.