Expectations of the rich

September 20, 2010

This is a fantastic piece from Delong, the economist at Berkeley.  This section on increasing inequality at the top of the wealth distribution is illuminating:

He doesn’t say: “Wow! My real income is more than twice the income of somebody in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!” For he doesn’t look down at the 99% of American households who have less income than he does. And he looks up. And when he looks up today he sees as wide a gap yawning above him as the gap between Dives and Lazarus. Mr. Henderson doesn’t look down.

Instead, Mr. Henderson looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.

And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them–widening income inequality over the past generation has excluded him from the rich who truly have money.

It reminds me of a conversation I had recently with my father.  I was relating my recent (and belated) reading of Polanyi’s The Great Transformation and he was recounting a lecture that argued that critical to our modern economic system was the commercialisation of envy — that desiring or coveting what another possesses is the driving force of our demand-driven economies.  This suggests the causal mechanism operating on the rich — if those around you are becoming richer (or you become increasingly aware of those in the upper echelons of the top 1%, versus those in your immediate vicinity), you will covet more and more.  In addition, I would suggest that this mechanism was mitigated by social norms of modesty and gratefulness.  And that, in addition to increasing inequality at the top, this counteracting mechanism is increasingly unable to discourage the (already) rich from complaining about their lot.

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Fascinating article on the rise of judicial elections in the US during the 19th Century by Shugerman of Harvard Law School.  Available on SSRN here.  Here’s the abstract:

Almost ninety percent of state judges today face some kind of popular election. This peculiar institution emerged in a sudden burst from 1846 to 1853, when twenty states adopted judicial elections. The modern perception is that judicial elections, then and now, weaken judges and the rule of law. Indeed, some critics of judicial power in the early republic supported judicial elections for precisely those reasons, but instead, they focused on other more direct attacks on the courts.

Judicial elections swept the country in the late 1840s and 1850s and the key was a new movement to limit legislative power, to increase judicial power, and to strengthen judicial review. Over time, judicial appointments had become more a tool of party patronage and cronyism. Legislative overspending on internal improvements and an economic depression in the early 1840s together had plunged the states into crippling debt. A wave of nineteen states called constitutional conventions from 1844 to 1853, and in addition to direct limits on legislative power, these conventions adopted judicial elections. Many delegates stated that their purpose was to strengthen the separation of powers and to empower courts to use judicial review.

The reformers got results: elected judges in the 1850s struck down many more state laws than their appointed predecessors had in any other decade. These elected judges played a role in the shift from active state involvement in economic growth to laissez-faire constitutionalism. Oddly, the first generation of elected judges were the first to justify judicial review in countermajoritarian terms, in the defense of individual and minority rights against abusive majorities and the “evils” of democracy. This Article concludes with lessons about judicial independence and democracy from this story.

And some key conclusions from the end of the article:

First, judicial elections were not inevitable, but rather arose from a contingent set of events and passionate leaders that reframed the role of the judiciary from a threat to democracy to the protector of democracy.

Second, the concepts of judicial independence and the rule of law were popular and essential to the adoption of judicial elections. Today’s reformers can borrow from the Barnburners’ playbook by arguing that independent courts protect both democracy and law, rather than assuming that the two are inherently in conflict.

Finally, institutional change can move surprisingly fast: Judicial elections swept the nation in five short years, more or less. Perhaps there is another wave on the horizon that will revive the American Revolutions of 1848: a stronger judi‐ ciary for the people, by the people, and more able to stand up to the people when necessary.

The state of economics

September 23, 2009

The debates stimulated (pun intended) by Krugman’s recent article in the NY Times Magazine are incredible.  Here’s Krugman’s sensible article; here’s Cochrane’s rebuttal.  And here is Brad Delong ripping into some incredible comments of “freshwater” economists.

I find the freshwater economists slavish dedication to so-called Ricardian Equivalence particularly disturbing. Here’s Cochrane:

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more.

And here’s a graph showing US  government debt:

US National Debt-GDP

And here’s a graph showing US savings:

US Savings Annual

Something wrong?  The relationship seems to hold during WWII, although saving was appparently enforced as government policy during the war, but for the last 30 or so years Ricardian Equivalence seems to have been forgotten: government debt has increased signficantly while savings has declined. This trend is likely to change in the near future, as government debt increases, but surely this is due to households repairing severely over-leveraged household balance sheets rather than expectations of future taxes.

I really think it’s a fascinating time to begin a PhD, as for me the crisis has helped me to understand systems and policies that were previously taken for granted.  That said, I think there’s been some over reactions–that the crisis marks the death of capitalism.  I think what is more at stake (again) is a certain form of neo-classical, deregulated, laissez faire capitalism–which many thought was finished in 1929!