Monday, April 18, 2016

Maybe a Lot of What We Believe, Just Isn't So.

Imagine reading a murder mystery that has three heroes, each of them a legendary sleuth, working independently to solve the same series of murders. At the conclusion, each detective comes up with an utterly convincing case only each fingers a different suspect. It's hard to imagine that sort of thing would sell very well because it's deeply unsatisfying for the reader to realize he/she could have been persuaded to believe any of the three accounts.

Which, quite naturally, brings us to a discussion of economics. This brings to mind the line about how, when you find yourself in a room with 12 individuals each of whom has a markedly different idea of reality, you're either in a lunatic asylum or a conference of economists. There's a lot of truth to that.

Economic theory seems to be knowledge in pursuit of fashion. It both comports with circumstance and tries to restate it in its own lexicon. It has certainly played a major role in the rise of modern neoliberalism that has, in a brief few decades, gone from humankind's great hope to a global civilizational scourge, our world's Jekyll and Hyde economic operating system.

I abhor economics. It's dry and boring and demands a degree of intellectual effort that is almost never rewarded in the result. Still, it lies at the root of the modern contagion and, hence, must be explored as one might the oily bilge to find the leak in the hull.

I've become fond of the writings of economist James Galbraith, son of legendary economic seer, John Kenneth Galbraith. James Galbraith's endearing quality is his trait of taking existing, "settled" theory and peeling off one or two extra layers to discover what does, or more often doesn't, lie beneath.

In 2009, Galbraith wrote "The Predator State, How Conservatives Abandoned the Free Market and Why Liberals Should Too." In it he sets about to identify economic myths that both liberals and conservatives have come to accept as gospel. One subset deals with pay inequality. Galbraith explores the problem by focusing on Denmark.

Denmark is a small country, nestled in the north of Europe. Unlike its near neighbours Norway, Great Britain, and Holland, it is not floating on seas of oil or gas. Unlike Belgium, which grew rich on the rape of the Congo, Denmark never had major colonies; St. Croix was a minor enterprise, and Greenland is a dud. Unlike Switzerland, Denmark was occupied in World War II; it did not prosper by laundering German money. Denmark also lacks major industry, and apart from fundamental contributions to twentieth-century theoretical physics and lately a strong position in wind generators, it is not a major technological power.

And yet Denmark today is the third wealthiest country of Europe, evidence of strong, consistent, stable economic growth over the decades. It is also roughlky the most equal country in Europe and perhaps in the world. And it enjoys roughly the lowest unemployment rate in Europe, alongside one of the highest ratios of employment to active population. If Denmark's celebrated egalitarianism has forced it to sacrifice prosperity, the evidence for this is quite hard to find. Instead, in this one small case, we seem to observe the opposite: an egalitarian country that is also quite rich by European standards and exceptionally rich by the standards of the wider world.

Is Denmark a special case, somehow blessed with unusually gifted or efficient or altruistic people? No. It is, rather, the end point of a continuum that covers most of the countries of Europe. The rules of this continuum are straightforward. First, lower employment means higher income. The high-income countries of Northern Europe systematically enjoy lower rates of unemployment, most of the time, than their less wealthy Southern cousins. Second, lower inequality means lower unemployment. The strong welfare states of North Europe have higher employment rates and lower unemployment rates than the relatively unequal countries of the South. These rules apply across all of Europe. Denmark, which is about the most equal and one of the richest of them all,  merely sets the standard from which other countries of Europe may be judged.

...The Danish example merely shows that a low degree of inequality can be reconciled with an efficient, advanced, and wealthy system. But how do we explain this? Is the relationship between equality and efficiency we observe here accidental? Is it a fluke? Or is it actually a feature of the way well-run economies actually function in the real world?

Part of the answer to this puzzle is not complicated. Inefficiency in many countries arises from unemployment; people who are not working do not produce, and the loss of their goods and services makes everyone else poorer than they would otherwise be. Moreover, unemployment is in part an expression of discontent with one's existing station in life: people are unemployed when they are looking for a better job. The unemployment rates that we actually measure reflect, in part, the desire, and the ability, of people who would otherwise be peasants or on the dole to seek better employment at better pay.

...But in a fairly equal society, those relatively low-skill, low-productivity workers are already paid pretty well. They are within economic shouting range of their more productive compatriots. They therefore have much less incentive to leave their job, even to migrate, and join the search for a better one. Furthermore, highly equal societies subsidize many of the amenities of life, from education to health care to housing: they indulge in the efficient provision of public goods. That being so, who cares to leave? In a more equal society, more people stay employed where they are. The resulting society may lack excitement. Pushed too far, it can completely lack dynamism: again the Soviet example comes to mind. But if the right balance is struck, it is capable of producing high levels of output and economic well-being simply because the full use of human resources is efficient. This is the Scandinavian principle, and it is not an accident that Denmark is both egalitarian and rich.

...In the United States, unemployment and pay inequality rise and fall together, month by monthly and year by year. (This relationship holds monthly as far back as January 1947 and annually as far back as 1920).

Studies of the minimum wage echo the law. If the iron trade-off between efficiency and equity held, rising minimum wages would cause unemployment. But as economists David Card and Alan Krueger demonstrated, they do not. California and New Jersey raised minimum wages in the 1980s, and unemployment fell; the same happened when the national minimum wage was raised in the 1990s. Why did unemployment fall? With better pay, quit rates declines, hence job tenure increased and vacancies fell. foir the firm, there were also efficiency gains, since less had to be waited on training.

...Inequality produces unemployment. Unemployment produces inequality. Measures that reduce inequality also reduce unemployment, and measures that reduce unemployment also reduce inequality.  ...Reductions in both inequality and unemployment reduce waste and therefore increase economic efficiency and improve general living standards.


The Mound of Sound said...

Denmark,it seems, has succumbed to the American economic contagion:

"Denmark, however, is contending with many of the same issues that are widening the income gap in the U.S. and other European countries. Wealthy Danes are benefiting from the boom in global stock markets in recent years. Educated citizens with mastery over the latest technology are commanding bigger salaries, while middle class manufacturing jobs are disappearing. The Danish government cut taxes for the rich, while curtailing public assistance for the poor, jobless and recent immigrants."

"Denmark, along with Iceland, saw the largest increase in inequality in Europe -- rising 12% in each country between 2008 and 2012, according to Eurostat.

"The Top 10% of Danes saw their incomes grow by 29% over the decade ending in 2013, while middle-income folks experienced only a 12.3% bump, according to the Economic Council of the Labour Movement, a left-leaning think tank, citing national statistics. The poorest Danes suffered a nearly 1% loss in income, a rare occurrence in a country where everyone's income usually rises."

So, the change in Denmark's relative wealth standing from 2009 when he wrote the above passages to 2015 seems to reinforce Galbraith's theory linking equality to high employment and general prosperity.

The Mound of Sound said...

Sorry - the "above passages" refers to the text of the post itself, not the quotes in the comment.