Blog

Part 3: Declining Inequality

This is part three of three-part series. In part one of this series, I discussed different kinds of inequality and which ones we should be concerned about. In part two of this series, I discussed measuring inequality. You can find part two here.

There is a widespread but mistaken belief that the tremendous progress across a range of metrics has coincided with increasing global inequality, but in fact the data in the Inequality of Human Progress Index (IHPI) created by myself and Vincent Geloso unambiguously show a decline in global inequality. That’s true on a variety of metrics, including income inequality, education inequality, and most important, overall inequality. In fact, across all but two of the dimensions of inequality that we analyzed, the world has become more equal since 1990.

Worldwide equality has grown continuously since 1990 for life expectancy, internet access, and education. Equality of political liberty has similarly improved almost continuously since 1990, although there has been a slight and troubling downturn in recent years. That recent reversal does not cancel out the long‐​term trend of widening access to political liberty but is a reminder that progress is neither inevitable nor irreversible. Political freedom can be lost if not safeguarded. Globally, incomes became less equal until the mid‐​2000s, but income equality has improved considerably since then. As for adequate nutrition, the trend line has been erratic, with a turn toward greater inequality in the early- to mid‐​2000s. Yet the long‐​term trend has been one of appreciable gains in nutritional equality, as access to an adequate food supply becomes more common around the world.

What about the two exceptions? Two indicators in the index show trends toward more inequality: mortality resulting from outdoor air pollution and infant mortality. Regarding air pollution deaths, they may be a result of economic growth in progress. Economists talk about this with references to the environmental Kuznets curve (created by Simon Kuznets), which predicts that pollution rises along with economic growth until reaching a critical threshold beyond which pollution decreases. The growing disparity in outdoor air pollution deaths may indicate that some countries are in the midst of this transition. Those developing countries will almost certainly experience gains in environmental quality similar to those seen in today’s rich countries as they, too, grow richer.

Regarding infant mortality, it is important to remember that in absolute terms, infant mortality has fallen around the world. The growing inequality in infant mortality outcomes could be attributed to the fact that reductions in child mortality in high-income countries have outpaced those in low-income countries since 1990. While infant mortality has, again, decreased globally as more and more children survive past their first year of life, advancements since 1990 appear to have simply occurred relatively faster in high-income nations with access to cutting-edge medical technologies.

These exceptions are important but our most significant finding is that overall inequality is down. In fact, when compared with inequality trends in prior indexes of inequality, which surveyed fewer dimensions, the IHPI shows a far greater degree of improvement toward global equality. This result suggests that older indexes tended to underestimate how widespread progress has been, as well as the share of improvements in living standards that have gone to the poorest people in the world. Global equality has grown faster than many appreciate.

In Adam Smith’s day, for each very rich man, there were at least 500 poor ones. Inequality was extreme. The wealth explosion since then has made even ordinary people today rich beyond the wildest 18th century dreams. In the past few decades, the world has become better off, and those gains have been widely shared. Increasing public awareness of the global decline of inequality may bolster support for the systems of free enterprise and liberalized international trade that Smith advocated and that have brought absolute poverty to record lows and made humans across the globe more equal.

Want more?

Nils Karlson, Is Inequality a Problem? a review of The Poor and the Plutocrats at Econlib
Angus Deaton on Health, Wealth, and Poverty at EconTalk
Kerianne Lawson on Equal Economic Freedoms at The Great Antidote (with a Great Antidote Extra by Kevin Lavery)

Chelsea Follett is the managing editor of Human​Progress​.org, a project of the Cato Institute that seeks to educate the public on the global improvements in well‐​being by providing free empirical data on long‐​term developments.

The US economy has never had a soft landing. It is possible that we are about to have one. If so, it will likely be due to the fact that a massive surge in immigration has provided a big soft pillow for the economy to land on.

[Note: I will not address the question of whether this immigration is good in any overall sense, just the impact on the macroeconomy.]

Some of the recent economic data is about as bizarre as I’ve ever seen:

Q2 NGDP up 5.2% annual rate, 5.8% over 12 months
Q2 RGDP up 2.8% annual rate, 3.1% over 12 months

And yet the household survey suggests that fewer that 200,000 net new jobs have been created over the past 12 months. That makes no sense. The real GDP data says we are in a major boom, and the household survey of employment suggests we are barely avoiding a recession. What gives?

The answer seems to be immigration. The household survey is not picking up the surge in immigration, many of whom are undocumented. But the government’s payroll survey of employment is picking up the immigrants, and shows a very large 2.6 million increase (1.67%) in net new jobs over the past 12 months. That data is roughly what you’d expect with the 3.1% RGDP growth.

The payroll survey has always been viewed as more accurate than the household survey for short run changes in employment, but I don’t ever recall seeing such a huge discrepancy. This discrepancy coincides with a historically large surge in immigration.

Yesterday, Bill Dudley had a Bloomberg piece suggesting that “The Fed Needs To Cut Rates Now”.  Here are a few of his arguments:

Slower growth, in turn, means fewer jobs. The household employment survey shows just 195,000 added over the past 12 months. The ratio of unfilled jobs to unemployed workers, at 1.2, is back where it was before the pandemic.

Most troubling, the three-month average unemployment rate is up 0.43 percentage point from its low point in the prior 12 months — very close to the 0.5 threshold that, as identified by the Sahm Rule, has invariably signaled a US recession.

As I suggested, I think the household figures are simply wrong.  I am a big fan of Sahm’s Rule, however, and indeed once developed a cruder version of this idea in an old blog post.  But in most cases, rising unemployment is triggered by a fall in labor demand.  In this case, a huge surge in labor supply seems to explain the uptick in unemployment (to a rate that is still low in absolute terms.)  Nonetheless, I would be concerned if unemployment rose up to 4.5%.

I do not offer opinions on where the Fed should set interest rates.  But I see no need for the Fed to ease monetary policy, as NGDP growth is still excessive, even accounting for labor force growth.  So monetary policy is not currently too tight, at least based on recent macro data and the implied predictions in various asset markets (especially stocks.)

Please do not take this as a statement that I am opposed to lower interest rates.  It is likely (but not certain) that interest rates will have to fall at some point over the next 12 months, if only to keep the stance of monetary policy roughly neutral.  Again, interest rates are not monetary policy.

A Fed anti-inflation program during a period of low unemployment normally produces a recession.  Not usually, it always produces a recession within a few years.  If it doesn’t happen this time, it will be our first soft landing.

[Note:  The media often applies the term “soft landing” to something like the mid-1990s, a period of rising and then falling interest rates with no recession.  I am using the term for a sustained period of cyclically low unemployment without rising inflation.  Say at least three years.  We’ve never had that, although without Covid we probably would have.  We are about 9 months away from me declaring this to be America’s first soft landing.  (Will Trump or Harris be able to take credit?)]

If we do achieve this sort of result (which is not that uncommon in other countries), we need to consider how it happened.  In my view, it would be due to a mix of luck and skill.  The skill would be the Fed’s ability to slow NGDP growth at a steady rate, without overshooting in either direction.  In retrospect, money clearly should have been tighter in 2022 and 2023, as there was an outright labor shortage.  But it’s hard to be too critical when they seem to have inflation moving in the right direction, albeit too slowly.  On the other hand, I am extremely critical of the Fed’s highly inflationary policy of 2021-22.

The luck part is the surge in immigration.  Consider the 5.8% NGDP growth over the past year.  Prior to Covid, the Fed estimated the economy’s trend rate of growth at 1.8%.  Thus you’d expect 5.8% NGDP growth to deliver roughly 4% inflation.  If inflation were still that high, the Fed would be under pressure to slam on the breaks, risking recession.  Instead, 12-month PCE inflation is down to 2.6%, mostly due to the fast growth in RGDP, caused by the surge in employment.  With inflation getting close to the 2% target, the Fed believes it can afford to be patient.

I would encourage people to be wary of pundits warning that money is too tight.  Both inflation and NGDP growth are still excessive.  Anecdotes about this or that sector of the economy don’t tell the whole story—the overall economy is still booming and the markets are optimistic.  I don’t see persuasive evidence that money is too tight.

PS.  Also be skeptical of people who say “Inflation would be only X is we adjusted for Y”.  NGDP confirms that underlying inflation is still too high.  Cherry-pickers want to only throw out the misleading data points that help their argument, not the misleading data points that hurt their argument.

For all those who have taken an economics course, you’ve no doubt heard plenty about market failure. I suspect you’ve heard relatively less about government failure. Part of the allure of the public choice tradition for me has always been its very clear explication of the latter. But in this episode, leave it to perennial favorite Mike Munger to put a wrinkle in my contemplative ease.

For starters, Munger places the earliest public choice insights well before the typical story (it even includes Pigou!). Munger describes the history of the concept of market failure as resulting from the quest to explain large fluctuations in aggregate economic activity. While economists of the time believed letting markets and the price system work would alleviate such “failures,” they wondered if there were interventions that might shorten this time period. As host Russ Roberts puts it well, “Can the government outperform the private sector, either by taking on some of its tasks or by improving, by intervening, by regulating, subsidizing, taxing, the choices that would emerge from a market private choice, a set of private activities?”

We hope you’ll join us in digging into this tangled history, and we hope you’ll share your thoughts with us today.

1- For starters, why do YOU think laissez-faire is so difficult for politicians- and citizens!- to accept?

2- Why does Munger believe that Arthur C. Pigou should be considered the first public choice theorist? To what extent did he convince you? How should we really interpret what Pigou has to say about externalities, according to Munger? As Munger says, “He [Pigou] wants to get prices right. He has an economist’s intuition about this. He thinks democracy can’t do it.” As evidence, Munger points to the Pigou quote below:

Why does Munger say that most of our apparent misunderstanding of Pigou comes from Ronald Coase? And most importantly, what does all this mean as far as how we should think about market failure?

3- At  ~28 minutes in, Munger explains the four kinds of market failure. What are they? Which are more or less subject to the vicissitudes of democracy? Which are more likely to be solved be allowing the market to work, absent interventions? Which would benefit most from government action?

4- Munger suggests we need to devise a new set of government institutions based on expertise that will guide markets correctly by getting prices right. As Roberts says, “Markets fail, governments fail, and therefore we need a third thing.” Munger agrees, but says we don’t even know what the third thing is yet. How satisfactory is this answer for you? To what extent can government be sufficiently insulated from political pressures sufficient to innovate and experiment? Should we be directing attention toward making bureaucracies more effective, as Roberts suggests? What alternatives might you suggest? Explain.

5- If we are to rethink government action in the way Munger suggests, how does this change our approach to industrial policy? Munger references his article, “A Good Industrial Policy is Impossible” (in a democracy), in which he writes,

…the usual separation between markets and politics, where markets are probably going to perform better than democracy in deciding how to allocate resources, was not only conceded by the Cambridge Welfare Economists: they anticipated Public Choice arguments by 60 or 70 years. They just had a different solution. Their solution was to have commissions of experts whose job will be in each sector to get prices right. An empirical question?

Is this an empirical question? If so, how might we begin to answer it? Can we find the “third way” mentioned above by disaggregating government failure unto institutional versus procedural failures?

Should we want the greatest good for the greatest number? (And, incidentally, should the “we” mean a numerical majority?) The Trolley problem in philosophy raised the issue. I was reminded of that in an interesting article by economist and philosopher Michael Munger, “Adam Smith Discovered (and Solved!) the Trolley Problem” (June 28, 2023), as well as in a follow-up Econtalk podcast.

The precise form of the Trolley problem was formulated by British philosopher Philippa Foot in a 1967 article. Imagine you see a runaway trolley speeding down a steep street and about to hit and kill five men working on the track. But you are near a switch that can divert the trolley to another track where only one man is working. None of the men see the trolley coming. You are certain that if you switch the track, only one will die instead of five. Should you switch it, as a utilitarian would ?

If you answered yes, consider an equivalent dilemma (quoting from Munger’s article):

Five people in a hospital will die tomorrow if they do not receive, respectively: (a) a heart transplant; (b) a liver transplant; (c) and (d) kidney transplants; and (e) a blood transfusion of a rare blood type. There is a sixth person in the hospital who, by astonishing coincidence, is an exact match as a donor for all five. If the head surgeon does nothing, five people will die tonight, with no hope of living until tomorrow.

Assuming there is no legal risk (the government is run by utilitarians who want the greatest good for the greatest number and are fond of cost-benefit analysis), should the head surgeon kill the providential donor to harvest his organs and save five lives? To answer this question, most people would probably change their minds and reject the crude utilitarianism they espoused in the preceding Trolley problem. Why?

Munger argues that Adam Smith formulated another instance of the Trolley problem in his 1759 book The Theory of Moral Sentiments and discovered the principle to solve it. Smith did not express it that way, but his solution points to the distinction between intentionally killing an innocent person, which is clearly immoral, and letting him die from independent causes, which is not necessarily immoral. Drowning somebody to kill him is immoral, but not saving somebody who is drowning may not be. Intentionally shooting an African child is murder; not giving to a charity the $100 that would save his life is certainly not criminal.

A more recent argument by Philippa Foot (see Chapter 5 of her book Moral Dilemmas: And Other Topics in Moral Philosophy [Oxford University Press, 2002]) explains that the underlying basic distinction is “between initiating a harmful sequence of events and not interfering to prevent it” (this concise formulation of her complete argument is from the abstract of her article). More precisely, she writes:

The question with which we are concerned has been dramatically posed by asking whether we are as much to blame for allowing people in Third World countries to starve to death as we would be for killing them by sending poisoned food?

Emphasizing moral agency, the basic principle is that

It is sometimes permissible to allow a certain harm to befall someone, although it would have been wrong to bring this harm on him by one’s own agency, by originating or sustaining the sequence which brings the harm.

In his 2021 book Knowledge, Reality, and Value, libertarian-anarchist philosopher Michael Huemer also considers the Trolley problem and comes to a similar solution, albeit more nuanced in extreme cases. His philosophical approach is “intuitionism,” as the subtitle of this book suggests: A Mostly Common Sense Guide to Philosophy. (My double Regulation review, “A Wide-Ranging Libertarian Philosopher, Reasonable and Radical,” gives the flavor of this book and of his The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey [2013].)

Anthony de Jasay’s condemnation of utilitarianism as a justification for government (coercive) interventions is based on the simple economic observation that there is no scientific basis for comparing utility between individuals; for example, it is meaningless to say that saving five men preserves “more utility” than killing one. Utility pronouncements, he writes, “are unfalsifiable, forever bound to remain my say-so against your say-so.” (See my Econlib review of his Against Politics.)

What is pretty sure is that utilitarianism, and certainly “act utilitarianism” (as opposed to “rule utilitarianism”), does not work, except perhaps in the most extreme and uninteresting cases—such as “stealing $20 from Elon Musk without him noticing and transferring the money to a homeless person would create net utility,” that is, Musk would lose less utility than the pauper would gain. Even if the statement seems to make sense, we can’t predict a single individual’s behavior, only general classes of events: perhaps that homeless person will use the $20 to buy cheap alcohol, get drunk, and kill a mother and her baby, who would have been a second Beethoven. He might even be a utility monster, deriving “more utility” from the harm he causes to others than what he himself loses. Even if the homeless person uses his $20 to purchase a used copy of John Hicks’s A Theory of Economic History, the story of his “gift” might spread and lead to a billion greedy people crying for the same transfer from Musk. Or they may agitate for the $20 billion to be directly expropriated by the state to finance subsidies for them.

****************************************

I tried hard to have DALL-E (the most recent version) represent the simplest version of Philippa Foot’s Trolley problem. Despite my detailed descriptions, “he” just could not understand–which is not really surprising, after all. Even the idea of a fork in a trolley’s track with five workers on one side and one on the other side, he could not represent. I finally asked him to draw a runaway trolley with one track and five workers in the middle of the track. The images he produced were among his most surrealistic, as you can see from the featured image of this post. Given his poor performance, I mentally apologized to Philippa Foot (who died at 90 in 2010) and instructed DALL-E to add to the image “an old, dignified woman (the philosopher Philippa Foot) in deep thinking and looking at the trolley coming.” In this simple task, the robot did quite well.

Philippa Foot wondering about how DALL-E could make such a mess of her Trolley problem

I was talking with a fellow tennis player during a break in a game. I’m at my cottage in Canada, and we play 3 on 3, which sounds weird but is a real kick.

He told me that he’s a socialist progressive and said that his beef with capitalism is the inequality it creates. He had in mind by “capitalism” the system that both Canada and the U.S. have.

I replied that you couldn’t state that the current degree of inequality is due to capitalism because we don’t have capitalism; we have a mixed economy.

I pointed out that term “mixed economy” is a good one. I came across it in Paul Samuelson‘s introductory text in my only economics course at the University of Winnipeg, in 1969 to 1970. (Our text was actually authored by Samuelson and Anthony Scott, a Canadian economist at UBC, because Samuelson needed someone who could add some of the Canadian content that dealt with Canadian institutions.) The term was widely used at the time.

But, I noted to my tennis friend, that term has virtually disappeared.

What is the mixed economy? Wikipedia has a nice treatment here.

The whole Wikipedia entry is worth reading but here are the first two paragraphs:

A mixed economy is an economic system that accepts both private businessesand nationalized government services, like public utilities, safety, military, welfare, and education. A mixed economy also promotes some form of regulation to protect the public, the environment, or the interests of the state.

This is in contrast to a laissez faire capitalist economy which seeks to abolish or privatize most government services while wanting to deregulate the economy, and a fully centrally planned economy that seeks to nationalize most services like under the early Soviet Union. Examples of political philosophies that support mixed economies include Keynesianism, social liberalism, state capitalism, fascism, social democracy, the Nordic model, and China’s socialist market economy.

Governments do many things that make inequality less and many things that make it greater. The particular example I pointed out to him of a government institution that almost certainly makes inequality greater is the government almost-monopoly on K-12 schools. Poorer kids get crappier education and the teachers’ union, which, like the government schools, is an almost-monopoly on the most important input in government schools, labor, makes things worse.

I hereby announce that I am going to do my bit to bring back the concept of the mixed economy.

UPDATE: I just noticed that I posted about this in 2011. Oh, well. It deserves to be said again, this time in the context of inequality.