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Transparency can increase inequality
Via @interfluidity, argument that wage inequality is increasing because it's easier to assess worker quality, so the most productive workers are self-segregating into high-profit firms leaving everyone else at low-profit firms. See also this post on job polarization.

I completely believe this dynamic exists. There's a related story playing out in online advertising, where the ability to target specific kinds of consumers has reduced the broad-based advertising that a lot of general interest online publications depended on.

My first thought was how to reconcile this with continued hiring discrimination, but I guess that's not actually hard. It just means that while firms have gotten better at picking out high-productivity workers from the available pool, they're still - partially intentionally, partially unintentionally - artificially limiting the size of that pool.

I have a harder time reconciling the stronger claims in the top post with the evidence that monopoly rents are a major driver of corporate profit inquality. I asked Waldman about this and ...

Sad lol.

Inequality and democracy
Piketty fears that given rising levels of wealth inequality, democracy is doomed. People will not tolerate high levels of inequality forever, and repressing their resistance to an unequal social order will eventually require dispensing with democratic forms. I’m not so sure ... procedural democracy limping on against a background of inequality, disdain and humiliation is not an attractive prospect, but it is already a big part of our present and may be the whole of our future unless egalitarian politics can be revived.
-Piketty, Rousseau and the desire for inequality

Yet the US political system has been under the influence of wealthy elites ever since the American Revolution. In some historical periods it worked primarily for the benefit of the wealthy. In others, it pursued policies that benefited the society as a whole ... unequal societies generally turn a corner once they have passed through a long spell of political instability. Governing elites tire of incessant violence and disorder. They realise that they need to suppress their internal rivalries, and switch to a more co-operative way of governing, if they are to have any hope of preserving the social order.
-History tells us where the wealth gap leads

You may pick two, but no more than two, of the following:


... if severe inequality is going to continue, then there must remain some sizable contingent of people who are socioeconomic losers, who will as a matter of economic necessity become segregated into less-desirable neighborhoods, who will come to form new communities with social identities, which must be pathological for their poverty to be stable.
-Tangles of pathology

Oh and the second link makes the point that when the pendulum swings back to more equality overall, it can still increase inequality between groups. The last link is the one that makes the picture really dark, because it suggests that the only way to end systematic oppression of black people is to either make the US more equal than it's ever been, or find a new group to oppress.

A justification for income redistribution
Let's say the Los Angeles city government has an empty lot they want to get rid of. They want something that will maximize economic return, in order to provide jobs and tax revenue (it might be worthwhile to dive into what measure of economic return they should use, but we'll ignore that for now.) Additionally, they're risk-averse and need to be able to generate public support for the plan in order to make it happen.

Now, which one of these plans will they choose?

  • Engaging a large, well-known real estate developer who provides a nice 3D rendering of the shiny, multi-million dollar mixed retail/residential development he'll build
  • Selling off subdivided lots piecemeal to smaller developers or individual owners

They'll always choose the first. The additional administrative complexity and risk involved in the second make it a non-starter. And, in this understandable way, they make the rich richer.

The government makes a ton of decisions beyond selling land that similarly impact the concentration of wealth, and an analogous process usually holds - if we need to regulate banks, for example, who should we turn to for advice? A million small players, or a few big bankers?

So, on average, government decisions will tend to be made in concert with large existing interests, and will tend to increase the concentration of wealth. I think this problem is structurally unfixable, and provides some of the justification for redistributing wealth.

The chimera of Financial Stability
"I have never understood why Financial Stability should be an objective of public policy. Desirable, measurable outcomes of benefit to the public should be the objectives of public policy. Stability is a silly and impractical goal in a capitalist economy ... One strength of the US banking system from the 1930s to the 1980s was that failures were dealt with quickly and certainly. Foreclosed properties had to be sold by banks within two years of repossession, leading to a quick and certain reallocation of assets from failed borrowers to new owners. The FDIC swiftly and mercilessly shut down failed banks ... with forbearance now institutionalised at all levels of the US economy, we are seeing Japanification instead of recovery. And it is even worse just about everywhere else where dominant banks are much more influential."

Why I Oppose Financial Stability

Markets are built of regulations
I've been simmering on this point for ages, waiting for someone to speak my mind for me. Regulations are not just an imposition on markets - the choice is not between free markets and regulated markets. Markets are constructed by multiple sets of regulations, beginning with property rights. The regulations we choose have consequences for who can enter markets, how those businesses can operate, and on what market outcomes are.

Whenever someone argues for de-regulation, they argue for removing a small piece of this whole edifice. They aren't arguing for truly free markets, they're arguing for a specific rule change that will have (usually clearly identifiable) winners and losers. These same people will often later be found to be advocating for greater regulation in some other area, in the name of punishing wrongdoers.

My first economics class made the simple point that rent control artificially limits the supply of housing, creating shortages. What was never mentioned in that class was that that in many cities regulations make building houses, especially low-income housing, nearly impossible. Ending rent control without making it possible to build more housing means that we are choosing to make housing more expensive, period.

That's why it's so laughable when banks kindly request the government to stay out of their business. Financial markets above all grow out of the regulations that define them.

read what sparked this rant at rortybomb

System D follow-up
Alan Furst described it as a kind of romantic improvisation in impossible circumstances. Foreign Policy says it's another phrase for the black market, and that it may be the future. The article cites sources claiming:

"... half the workers of the world -- close to 1.8 billion people -- [are] working in System D: off the books, in jobs that were neither registered nor regulated, getting paid in cash, and, most often, avoiding income taxes."

"... people in the European countries with the largest portions of their economies that were unlicensed and unregulated -- in other words, citizens of the countries with the most robust System D -- fared better in the economic meltdown of 2008 than folks living in centrally planned and tightly regulated nations."

Why we fight

Notes from Fault Lines talk
Went to a talk today by Raghuram Rajan, "Fault Lines: How Hidden Fractures Still Threaten the World Economy." I quit taking notes before the end, but I think I got the most interesting stuff. Most of this won't be new to you if you've been following the commentary on the crisis.

My favorite part was at the beginning: I'd always thought of rising income inequality as a bad thing, but I hadn't thought about how, in the absence of a credible plan for reducing it, it leads to bad policymaking.


Fault line 1 - Rising inequality - tough to address underlying problem of high school and college graduation rates - so politicians try to up consumption, in this case home ownership. [But rising inequality has at least as much to do with the transfer of manufacturing overseas]

Fault line 2 - under-spending exporters - japan / china model - it worked! Rapid growth. But weak domestic sector - cartels that work well for manufacturing export not so good for domestic consumption growth. So: savings surplus that has to be absorbed elsewhere.

These exports are our imports. This causes us to run large deficits [really?] which have put us over a cliff financially.

Fault line 3 - jobless growth in the US and an inadequate safety net. Tremendous pressure on Washington to get jobs back. So Fed gives public assurance of easy money to encourage job creation. Globally we are the stimulator of first resort. Leads to excess. This is bad policy.

Putting it together - policy wanted to extend home ownership. Wall of money looking for a home. Financial sector responds with mortgage-backed securities.

"More generally, are bankers evil?" - no but we have an arm's length system in which actors don't see the consequences of their actions. Profit is the only metric of success; it's assumed social value is being created. That's fine, but if price signals are out of whack things can go badly wrong. So this wall of price-insensitive money comes in and ...

World poverty is falling faster than expected
"From 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa." And: because world inequality fell, welfare measured for the world as a whole grew even faster than world GDP did, and more than doubled over the period 1970-2006.

Meanwhile, in the real world

Ha! it has a tag cloud.

Lots of financial info ... friend uses the 100-day as rough measure of volatility.

(Not that I'm going to use this. I am absolutely not going to start day-trading and spend all day checking stock quotes and trading "hot tips" with friends.)

uh oh

Stagflation is not a type of party...
via dealbreaker

"It is a country that seems to have achieved a sweet spot, combining the vigor of American capitalism with the humanity of European welfare, yet suffering the drawbacks of neither. And it manages this while keeping a consistent budget surplus. That country, rolling into its 16th year of uninterrupted growth, is Australia."

Shortage of skilled workers, you say? Hmmm...

The Wealth of Networks: How Social Production Transforms Markets and Freedom
Just published, sounds v. good. Buy at Amazon or download CC-licensed PDFs. Also see the associated wiki maintained by the author.

The Global Baby Bust
Philip Longman argues that declining birthrates will be socially and economically ruinous.

Tons of statistics in a bunch of categories, with different visualization options. Very interesting feature that shows you which variables are correlated with the variable you're looking at. Shame you can't look at things over time.

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