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The Human Capital Premium and Inequality

May 19, 2013
the Economy: Home and the World
1 Comment

Update: Brad DeLong here notes that there’s a bit of a straw man argument that liberals don’t care about the skills-based gap. To the extent that I am a liberal, I definitely think he is right 😉 

Timothy Noah has a new post at the New York Times arguing that the 1 percent are only half the problem. Of course, my first reaction is that their share of the problem is even more disproportionately allocated than their share of the income! Snark aside, I’m not sure organized labor is the solution to America’s “skills-based gap”. Here’s Noah:

The decline of labor unions is […] important. At one time union membership was highly effective at reducing or eliminating the wage gap between college and high school graduates. That’s much less true today. Only about 7 percent of the private-sector labor force is covered by union contracts, about the same proportion as before the New Deal. Six decades ago it was nearly 40 percent.

The decline of labor unions is what connects the skills-based gap to the 1 percent-based gap. Although conservatives often insist that the 1 percent’s richesse doesn’t come out of the pockets of the 99 percent, that assertion ignores the fact that labor’s share of gross domestic product is shrinking while capital’s share is growing. Since 1979, except for a brief period during the tech boom of the late 1990s, labor’s share of corporate income has fallen. Pension funds have blurred somewhat the venerable distinction between capital and labor. But that’s easy to exaggerate, since only about one-sixth of all households own stocks whose value exceeds $7,000. According to the left-leaning Economic Policy Institute, the G.D.P. shift from labor to capital explains fully one-third of the 1 percent’s run-up in its share of national income. It couldn’t have happened if private-sector unionism had remained strong.

Now, for the record, I think strong and healthy union membership is a good, countervailing force to the power imbalance between employer and employee (particularly in scaled, factory environments). However, it’s not the answer to our economic woes. I’m a left-leaning liberal: but a lot of this sounds more like high rhetoric than a realistic assessment of history. See the emphasized, why on earth should the wage gap between college students and high school grads be smaller? 

As technology advances, and capital becomes an efficient replacement for labor, we would expect – unions or not – college graduates to earn more. As America develops, adjusts to a globalized world, and realizes its competitive advantage in “knowledge” products, are we really surprised that the relative wages of a programmer is growing faster than those of a bus driver? And – as left-leaning liberals – have not those of Noah’s ilk been calling for more education this whole time? Isn’t Noah blowing away the strongest argument for government-subsidized education, especially of the poor? And without education, where on earth will the poor we care so much about find social mobility?

Most importantly, why do we think this is a bad thing, the idea that college pays? Noah squarely places a good part of the blame on the financiers and corporate executives in the 1%, but he doesn’t go far enough. When he talks about America’s “mass affluent” and the growing gap between the top 10% and middle 20% he ignores a few things:

  • The lions share of income in the top 10% (his baseline is incomes $100k or so and up) goes to its top 1%.
  • By targeting the broadly educated elite, the burden of taxation is shifted from rent-earning executives to scientists, engineers, programmers, as well as  main street lawyers and bankers. We actually want more of these people, and there’s pretty good reason to believe STEMers are woefully underpaid.
  • I’d much rather the college premium be higher and more people graduate, especially if it means fairer wages for engineers.

Further, from a distributive standpoint, incomes allocated to the 1% are significantly more important than anyone else. I would much rather the marginal tax dollar be derived from a rent-seeking executive than a run-of-the-mill college graduate. This is a false dichotomy, but helps underscore my disagreement with Noah. A mass labor movement with the simplistic goal of narrowing the college grad/non grad gap is sure to bring the former down rather than the latter up. A mass labor movement, without any aid from strong, protectionist government policy, will result in greater unemployment. At a time when companies are finally reshoring operations, it would be wrong to petrify America’s labor market. 

Of course, the United States could implement strong industrial policy with full employment as a key goal, but not without dismantling the free trade system we built. After Bretton Woods, a good part of American foreign policy was creating an international system (indeed led by the United States) conducive to free trade. 

I’m not really a proponent of the right-to-work laws that are plaguing this country, either. After all, nothing seems more coercive than the government forcing firms to provide non-union contracts. But as we move towards a far more “knowledge-based” economy, for wont of a better term, I really don’t see union-building as a way to edge inequality.

From a social perspective, the lives of the mass affluent are far closer to the middle-class than the 1%. Sure, they might have more books at home, more savings, a higher priority on education, but the qualitative differences rise at much higher incomes. Mansions on Long Beach should be of more concern.

Justice by Michael Sandel – Rewarding if not riveting

January 3, 2013
Reviews
1 Comment

Though it fails to answer its titular question, “what’s the right thing to do”, Michael Sandel’s Justice is a highly worthwhile read. Sandel illustrates questions of moral agency with rich examples relevant to anyone who reads a newspaper. Ultimately, however, its success comes from an eminently accessible read that will enlighten all but the most educated not from presenting a novel way of thought, as suggested by some reviewers.

In a time of rife unrest about the so-called “one percent”, Sandel offers a book for the rest of us. He makes accessible ideas otherwise locked to students of expensive courses or to those with the time to actually understand dense translations of Aristotle’s Greek. Sandel’s ability to make his both book readable and relevant speaks volumes about his role as a modern day political theorist.

Though we learn of his neo-Aristotelian sympathies late in the book, his description of Kantian and Rawlsian  philosophies are hardly biased, offering an unobscured snapshot of their respective theories of justice.

The most irritating flaw was the very cursory consideration of the “trolley problem”, introduced in his discussion of utilitarianism. While Sandel gives a detailed explanation of this age-old puzzle, as well as a historical parallel in R v Dudley and Stephens the resulting discussion is rather staid, predictable, and lacks the animation found in his lectures.

Well, obviously we find it harder to push the fat man off a bridge – but Sandel leaves the question as a simple check on Bentham’s utilitarianism rather than a powerful question of ethical agency that is relevant in almost every political and legal discussion. While this beautiful puzzle is an excellent way to catch the mind of an uninterested reader, Sandel does not do justice to the rest of his book by considering this question as a teaser rather than as a culminating feature of the book, as it ought to have been.

I also found his discussion of Kantian and Rawlsian flaws to be rather vague. While it would be nearly-impossible to address completely every flaw of a political theory in a book as accessible as Justice, there was a glaring flaw in each theory which I sorely wish Sandel mentioned. I am sure I am not the only one.

When Sandel noted Kant’s dislike of sex outside of marriage, prostitutes, etc. as such unholy institutions undermined our autonomy, representing base instincts rather than a higher purpose, I couldn’t help but wonder, who decides that which is ‘higher purpose’. Kant seems to give us a few vague tools to gauge our autonomy (i.e. would we give to charity even if ripped of all human emotion?) but nothing worthwhile. I feel I am doing great disservice to a thinker like Kant, but I can hardly help but wonder if he was just another man that preached what he considered to be morally virtuous and defended it with contrived reason to maintain an illusion of secularism.

I liked Rawls much more, but I wish Sandel had spent more time discussing the “veil of ignorance”. My greatest qualm – one I am sure many share – is its impossible nature. Rawls wants those who craft the world, behind this veil, to be devoid of any human emotion (such as a predilection for risk), any knowledge of race, sex, sexuality, etc. Yet, by virtue of having the gift of thought (as someone crafting our world ought to have), by virtue of having the ability to philosophize about tax laws, about regulations one must have an opinion. One must have a bias. Even in the hypothetical world so romantic to political philosophers, I find it unbelievable to conceive a so called veil of ignorance that has un-opinionated men, entirely clueless of their station in life, someone able to create law and institute a government. I am sure Rawlsian thinkers would beg to differ, but I would have at least liked a greater discussion of this point.

Towards the end, it becomes clear that Sandel is racing towards Aristotle, who dominates the last one hundred pages. By virtue of length, Sandel provides a great glimpse into both the triumphs as well as flaws of Aristotelian thinking. He does an excellent job of advocating for what seems like a limiting and highly moralistic ideology. I was left wondering, however, who determines the purpose of an object? The maker? The patrons? The market? Ultimately it seems Aristotelian thinking, through the lens in which it is viewed, can be used to defend each of the previously studied philosophers. Its versatility makes it strong, but fails, then, to answer the guiding question “what’s the right thing to do?”

While the absence of eastern philosophers seems to be a common thread of complaint among reviewers of philosophy books, I thought Justice was already somewhat overambitious in its mission. However, in a failed attempt to answer so grand a question, Sandel provides a solid and entertaining journey through moral philosophy.

It would be very difficult to find a better way to spend the three to four hours required to read this rich if not riveting book.

Trust as Capital

December 12, 2012
Uncategorized
3 Comments

When I say that, I mean real capital (you know… that “K” stuff) not this new idea of social or “soft” capital. Last December, I was at Oxford for my interviews. On the last day, before my coach back to Heathrow, I stopped by this little market place. I don’t know what it’s called but it was a cute amalgam of a farmer’s market, a yard sale, and a used book sale.

The books were being sold on an honor code: please put in the box the noted amount for the books you take, we trust that you will not cheat us. I didn’t sit and observe, but I think we can all be sure that most, if not all, people did pay up. (I did, and I don’t think I’m that much more moral than anyone else who was there).

I’ve seen this kind of a set up so many times before – in the United States and Europe, at least. But maybe because this overlapped with those PPE interviews I actually started thinking about the whole system. The transaction between the buyer and the box is predicated on one assumption – trust (or at least a reasonably sufficient amount). If the bookseller did not expect to trust the consumers, he certainly would not have entertained such a exploitable set up.

Maybe this is a naivetĂ© of experiencing a Western upbringing (I’ve never seen anything of the sort in India, where I live today… more on that later), but I venture to say that this degree of trust is not even significant by any means. In modern discourse we may disagree with one another about big things – god, the economy, Donald Trump’s hair – but we run our lives on the assumption that we can trust most people (high school girls don’t count).

We take this so for granted, but the economic payoff of this trust must be incredible (I haven’t done any real reading on this so I won’t say that it is). Because the bookseller can trust his friends, he does not himself have to sell the books or hire someone to do it for him. If his enterprise was full-time, just that he could trust his friends saves him a salary (implicitly his or explicitly his worker’s ) of maybe 30,000 pounds!

Modern supermarkets are more and more equipped with advanced physical capital that allows people to check out their own goods, lest a loud alarm sound. In the end, it achieves (for a much greater cost) nothing more than what simple trust would achieve. Forget “perfect competition” and “perfect information”. Imagine if we had “perfect trust”. The cost of every retailer (which is a huge component of many modern economies). All the structurally unemployed could then work on something of actual use, building something physical, something intellectual. Although their services were one day necessary the modern social structure should no longer demand a guarantor of fair transaction, the cultural capital that we have built should overcome such a need.

The trust of which I speak is not purely of benign intention, and that’s fine. Part of it, of course, is that we are all today part of a panopticon, each of us a guard and a prisoner. Perhaps in more isolated markets we would be more comfortable stealing (I know I would be). However, the gripping anxiety within us should ensure security.

The standard game-theoretic outcome of this all would be chaos. Because regardless of what “you” do, I’m better off if I steal. Then the dominant strategy for both of us would be to steal, and we’d all be a bunch of thieves – set the clock back to early 19th century New York. But I think we cooperate more than we compete, one of the many reasons some Western societies today are richer than the rest. An interesting example, especially pertinent to India, is the new idea of “kakonomics” , or the actual preference for bad outcomes! That’s completely irrational you would think, but the logic goes as such: “I don’t think you’ll do a good job, so I don’t want to do you a good job, but I also don’t want you to do a good job because if you do then I’ll feel bad that I didn’t!”

Madness, you might say, but it’s real. Though the Indian economy has a lot to look forward to, I feel a lot of its economic frailty is due to the fundamental lack of trust, especially among the service organizations. Kakonomics is the  diametrical opposite of trust-based economics, and its results are as such. Instead of hiring one person, we hire five to do the same thing (in the formal sector, at least).

This same thinking can be extended to explain the littered streets and wretched public toilets. However, I don’t at all suggest that this is a cultural flaw. It is more a flaw of the situations in which people have been put (you give them a dirty street, they have no incentive to keep it clean). When there is a positive exogenous shock, people react well. For example, the new Delhi Metro. The same people who spit and litter on the road right outside the metro walk into the metro and guard it as if it’s their greatest creation (there is probably a panoptical force at work, too: you don’t want to be seen littering on clean ground in the presence of so many others). Because it was given to them as a clean, extremely well-built system, people acted as such.

If we could find ways not just to increase trust in the sociological way, but to put that trust to use in daily economic transactions, I think the outcome could be great. I think we have the cultural capital today to revolutionize the way we engage in transaction. Technologists, I’m sure, will find a way to overcome that with complex algorithms and cameras not too far in the future. But there is a fundamentally more human (and therefore better) way of doing it. With this great mutual trust we’ve built over the past many years, the structure of the economy could change as much, if not more, as it did with the advent of the internet.

Would the jobs of many be lost, especially in service-oriented countries like the United States? Certainly so. But the economic development would be tremendous, and this unemployment is only structural in nature. We could then with the great influx of financial capital incident upon us, educate the retailers and salesman for a fraction of the price. Some would become mechanics, some poets, some scientists, some businessmen, some academics, but all more gainfully employed.

———-

As an addendum, before we can look forward to a truly trust-based economy, there are still many instances of cultural erosion. Cultural erosion is markedly different from immorality because it is largely accepted by society, and therefore the human panopticon cannot ensure fair practice. The best example to this effect is the incredible amount of pirating and torrenting on a daily basis.

And the prevalence of such activities doesn’t have to do with wealth, either. I went to an incredibly rich high school, and most of my friends (admittedly including myself, for a while) used to torrent all kinds of software, movies, and games (that they could easily afford). It is, unfortunately, not socially unacceptable. People today still get bootlegged Bollywood/Hollywood movies and shows for a fraction of the price.

This is cultural erosion. You can go to a classy party and talk about some expensive software you just bootlegged. You can’t talk about the Armani suit that you might have stolen. However, the lack of trust in this kind of a situation is also structurally different. At an online store, you don’t need an unskilled-yet-expensive cashier process your orders, the system does that for you. So a “download and I trust you to pay” system isn’t economically necessary to begin with.

I don’t want to discuss the economics of piracy. A lot of people defend it with ridiculous logic such as “I wouldn’t have bought it anyway, so what’s the harm?”  Or, even worse, “These guys are already so rich!”  These people are clearly the idiots who will never come up with anything brilliant themselves. More importantly, by pirating/stealing, one is just driving up the price of those who are rightfully paying, further dis-incentivizing morality.