Responses to rising inequality

Larry Summers writes about inequality in today's FT:

It would, however, be a serious mistake to suppose that our problems are only cyclical or amenable to macroeconomic solution. Just as the evolution from an agricultural to an industrial economy has far-reaching implications for almost all institutions, so too does the evolution from an industrial to a knowledge economy. Trends that pre-date the Great Recession will be with us long after any recovery.

The most important of these is the strong shift in the market reward for a small minority of citizens relative to the rewards available to most citizens. .... In 1965, only 1 in 20 men between 25 and 54 was not working; by the end of this decade it will probably be 1 in 6, even if the full cyclical recovery is achieved.

So what should be done about it? More open auctions for public assets like electromagnetic spectrum or implicit insurance, he says, as well as keeping the estate tax, and containing the rise in college costs. It does seem like a small-scale response to a massive shift in the underlying nature of economy.The argument I've been making is we need to think about underlying incentives and behavior and public ethics. That is why I have (a little to my own surprise) found myself discussing Aristotelian virtue or contemporary ideas about happiness as much as, of not more than, the labor market and growth.

The Four Books of China

Let's talk again about virtue versus neutral rules. First, a recall: I found Alisdair McIntyre's book After Virtue very refreshing when I read it recently. McIntyre argues that a rediscovery of Aristolte's take on the virtues, and hence an older tradition of moral philosophy, gives us a route of the relativistic dead-end into which contemporary liberal politlical theory has backed itself. The neutral state, which does not have any conception of the good life, is empty.

Is this just a eurocentric prejudice? I've been reading The Four Books: The Basic Teachings of the Later Confucian Tradition translated with commentary by Daniel Gardiner.

It is a summary and commentary on the four most seminal books of ancient China, including Confucius' Analects and the Mencius, as interpreted by Song Dynasty commentator Zhi Xi in the 13th century.

Almost every educated Chinese gentleman for a thousand years spent much of their youth pondering these books. The books played a central role in the culture for 1500 years before that. Indeed, the books, together with the Five Classics were much of education. They formed the core of the Chinese civil service examinations which chose ruling offiicals for nine centuries, right up to the early years of the twentieth century.

I found my way to reading them because they played such a dominant role in another book I read recently. I loved Jonathan Spence's Return to Dragon Mountain, the evocative true story of a Chinese family in the seventeenth century as the Ming Dynasty collapsed. Much of their energy was spent studying these classics, and therefore competing for power as officials and reputation as cultivated gentlemen.

The fascinating thing is they have some broad, rough similarities to Aristotle, who of course lived almost comtemporaneously with Confucius in the "Axial Age" . It was an unimaginably long way from Macedonia to Shandong Province, but something must have been in the air.

Confucius believes, above all, in virtue and setting a virtuous example. He consistently shies away from setting down universal moral rules. The aim is to cultivate oneself, so one does the appropriate thing whatever the specifics of the situation may be.

For example, the commentary on the Analects notes (p39)

Note here that, asked about true goodness, Confucius again presents characteristics or qualities of it, not a definition. These qualities are universally desirable, according to him, and are to be exhibited even when the truly good person finds himself among peoples who have no stake in Chinese culture or customs.

And in the fourth book Maintaining Perfect Balance, 2:2, it says

The superior man maintains perfect balance and keeps to the constant because, as a superior man, he accords with circumstances in finding the perfect balance

The commentary on this extract says

Preserving the balance is situational and is determined by the circumstances of the moment. There is no unchanging, absolute standard of right. The challenge for the individual is to weigh all circumstances senstitively and behave in a manner fully appropriate to the circumstances. (p113)

Of course, I don't want to overdo similarities. The cultivated man, in the view of these sages, probes for the underlying principle in things, and then tries to act appropriately.

And there is no doubt that it is a hierarchal and quite stuffy view of the world, filled with ritual and obedience - perhaps conditioned by the strife and chaos of the era. People clutched to whatever sense of order they could. In some ways it is a celebration of bureaucratic diligence which did not always serve China well.

But what I take from this is the Four Books are at root about cultivating personal qualities first, not applying universal rules of conduct or neutral law. There are personal qualities that everyone can aspire to, and which serve as examples to others.

6. The Master said, One who practices government by virtue may be compared to the North Star : it remains in its place while the multitude of other stars turn around it.

Commentary: [Virtue in the rulrer exercises a moral power over those he governs; this virtue operates silently and without force, through a sort of charismatic attraction. Virtue's capacity to exert influence over others, even to transform them, is spoken of repeatedly throughout the Analects]

And most famously (section 74, p37)

If you desire good, the people will be good. The virtue of the superior man is wind; the virtue of the small person is grass. When the wind passes over it, the grass is sure to bend.

Change of Pace Photo

The Walll St bull fenced in at the foot of Broadway, about two weeks ago

De-Occupy Wall St

The police cleared Zucotti Park in the early hours of last night, and then power-scrubbed the park clean. Protestors have reassembled there this evening, but they are not being allowed tents and sleeping bags.

The novelty of the protests is wearing off, as the weather gets worse. The surprising thing has been how small the overall encampment was. The park is not very big, maybe two-thirds the size of a football field. And some of it just gets stilly. Middle-aged hippies relive their boomer youth.

But regardless of the actual reality of Zucotti Park, there has been an underlying... sympathy is the wrong word among the general population. But an understanding of where people are coming from.

I wonder if there will be more violent clashes at the big marches that were planned before this for Thursday.

Virtual jobs

I'm discussing Martin Ford's book The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future.

He believes that the structural unemployment caused by automation could tip the mass market into decline, as a matter of straight arithmetic.

And he stresses the importance of the mass market. Warren Buffet is never going to buy a million cellphones for his own use, for example. If you lose the mass market, you lose the bulk of consumer demand.

So he argues consumer demand is the fundamental necessity for the economy. Production is not the problem. Generating enough demand to sustain that production is.

What, then, is the solution? Ford proposes new taxes, especially on capital-intensive industries to reflect the negative externality they have on the mass market.

When a business eliminates a job as the result of automation technology, the income that was previously paid to that worker does not simply vaporize. In fact, it is redirected in two ways: (1) Some of the income accrues to the owners and managers of the business, and (2) some of the income is redirected to the consumers of the business’s products or services in the form of lower prices. Therefore, the government can recapture the wages from the automated job with some combination of two types of taxes. First, higher business taxes, capital gains taxes and more progressive income taxes on wealthy individuals can be used to recapture the income that goes to the business’s owners.

Secondly, some form of consumption tax could be used to recapture that portion of the lost wages that results in lower prices. This consumption tax might be a simple sales tax or a value added tax (VAT) similar to the ones already popular in Europe. It would also be possible to design a wage recapture scheme which de-emphasizes direct taxes on business and relies more on a consumption tax.

This much is interesting but not that unusual. Hundreds of tax reform schemes exist.

Of course many people would hate the idea, he says, because it seems more progressive, a sort of Robin Hood scheme to take from the successful and productive. But the wealthiest and most successful would lose if the mass market goes into a tailspin as well, he argues.

More interesting is what he says should be done with the money.

While it is conceptually not difficult to envision how the government might recapture lost wages through special taxes, it is much harder to design an effective way to direct that income to consumers in the absence of jobs. The lack of these incentives is a primary problem with current welfare programs. Welfare, as it is currently implemented, provides few incentives for self improvement and little hope for the future.

So government and welfare redistribution is not the answer, he argues. Instead - and this is a wonderful phrase - we need to create "virtual jobs".

A program in which everyone is provided with a relatively equal income—in return for doing nothing—provides no motivation for self improvement, no sense of self-worth and no hope for a better future. This is the problem with existing welfare programs. What we need then is a mechanism that provides for unequal (but not unfair) incomes. We need to synthetically recreate the rewards and incentives that are currently tied to jobs. ... Most importantly, we need to insure that the incentives built into the system motivate individuals to do what is best for themselves and for society as a whole.

At the most basic level, a job is essentially a set of incentives.

So the really important thing then becomes - what are the incentives? He proposes three main criteria - level of education, participation in "activities that enhance community, civic and cultural development. ", and reducing externalities like environmental damage.

It is, of course, easy to laugh or sneer at the idea that people should be paid to read instead of to work. But, as I have tried to point out here again and again, if we transition into an automated economy, we will have to pay people to do something—or we will have a general collapse of consumer demand.

He cites Keynes' Economic Possibilities essay, and concludes with ideas about transitional arrangements. There should be more work-sharing, more decoupling of benefits like heath care from employment, and more streams of income based on his alternative incentives. He then discusses the impact on developing countries.

It is the idea of a virtual job which is the really interesting thing here, where incentives are decoupled from production and exchange of basic goods and services. It is a different idea altogether from government planning or rights-based welfare transfers. It replaces the 20th century idea of the welfare state, which really did transfer money to people in return for nothing,

But it will encounter much of the same skepticism about government. People will fear elites will hijack the incentives to create a stifling liberal paradise - for a while - before it all turns into Greece.

However, I think there really is something very important here. It focuses attention on the incentives we believe we ought to have in society, rather than the labor market in isolation.

The problem is we have deep problems talking about incentives, because the standard liberal framework forbids discussion of ends.

I've argued throughout this blog that people need a new sense of purpose, and we need to think more about the fact that our economic needs change as we saturate our needs for basic goods and services.

This is one way to think about setting up society and a new economy for achieving broader stimulation, engagement and purpose, rather than maximizing the dollar value of GDP.

The Lights in the Tunnel

One other book I've finished recently is Martin Ford's The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future. The book itself is an interesting story. Ford is a venture capitalist and software entrepreneur in Silicon Valley. He self-published this book in 2009, because, he says, developments which were plainly obvious and actively discussed in his circles in Silicon Valley seemed to be invisible in economics and policy circles. And even technology people are mostly thinking about how to get their immediate next product to market.

Now the book is getting serious attention in at least some economic circles, including respectful mention in the e-book by two prominent MIT researchers I was talking about recently.

Ford argues that the "Luddite fallacy" in economics - that technology ultimately destroys jobs - is itself wrong. Just because it has been true for 200 years, as technological advance always created more jobs than it destroyed, does not mean that will be true in the future.

One of the main reasons, he says, is technology is improving at an exponential rate. There is no reason to expect that is going to change in the near future.

Exponential growth has the property that it can appear to take a long time to get going by the standards of later growth. If you keep doubling a quantity, 2, 4, 8, growth is very rapid - but almost invisible by the standards of 20 or 30 moves later, when it is growing by a billion or several trillion each move.

Unfortunately, the purveyors of econometrics labor under the delusion that they are economists, when in fact they are historians. Statistics is well suited to measuring things which are relatively constant or which are changing gradually.

So if like a good econometrician you look back and study recent history, you may see virtually no sign of an exponential trend which will burst into almost overwheming prominence before long.

All the immense changes wrought by technology so far are just a small precursor, if advances keep going at their current rate. That's a matter of basic math.

And that means the labor market as we know it is in deep trouble, he says.

The reality is that the free market economy, as we understand it today, simply cannot work without a viable labor market. Jobs are the primary mechanism through which income—and, therefore, purchasing power—is distributed to the people who consume everything the economy produces. If at some point, machines are likely to permanently take over a great deal of the work now performed by human beings, then that will be a threat to the very foundation of our economic system.

Offshoring and outsourcing are just temporary distractions.

The point I am making here is that offshoring is really a precursor of automation. Offshoring is what you do when you have some technology, but not enough to fully automate a job. ... Offshoring is the small wave that distracts you. Automation is the big one further out that you don’t see coming.

Some of the traditional ideas about coping with change - more education puts you in a better position, or knowledge workers are the workers of the future - are also wrong, he says. Indeed, many high-skilled jobs, like radiologists, are much more likely to be automated.

Not only are their jobs potentially easier to automate than other job types because no investment in mechanical equipment is required; but also, the financial incentive for getting rid of the job is significantly higher. As a result, we can expect that, in the future, automation will fall heavily on knowledge workers and in particular on highly paid workers. In cases where technology is not yet sufficient to automate the job, offshoring is likely to be pursued as a interim solution.

Artificial intelligence and non-desktop technology like robotics are likely to be the next boom areas, he says. If the military can plan to use drones in highly uncertain and difficult wartime environments like Afghanistan, more use of robots to restock store shelves is easy. Down the line, nanotechnology is likely to deliver even more fundamental change.

At some point before long, he says, production is not going to be the problem. Consumption is. Production can get so capital intensive that a tipping point is reached and falling prices for consumer goods no longer deliver enough disposable income to other workers to raise consumption in general.

It may not be next year, or the next few years, but before long the basic job that we have known for several hundred years will be over. Structural unemployment could affect a majority of the population. At that point,

We need a mechanism that can get a reliable income stream into the hands of consumers. This of course, is a proposition that will be very difficult for most of us to accept; the idea that we must work for a living is one of our most basic core values.

What happens when technology reaches the point where most human labor is no longer essential? At that point, we will have to undergo a quantum shift in our value system. In order to preserve the free market system, we will have to come to the realization that while work (at least for most people) may no longer be essential, broad-based consumption is essential.

Is this realistic? There is no doubt that technological change has always delivered more jobs in the past. But I think we do have to confront seriously the possibility that it may not do so in the future. I found the Brynjolffson and McAfee book (linked above) very persuasive in that regard. Prices may not fall so low that it is profitable for some entrepreneur to reemploy the structurally unemployed at a livable wage.

We'd have to think about more fundamental change in society. And Ford has some interesting. if sketchy ideas about that, which I will talk about in the next post.

The different world of the left

We were out socially last night and talking to some academics. They were talking about affect theory, Hart and Negri's Empire, Althusser, the Frankfurt School. It is such a different intellectual world. It is almost a little sad how people can have such different mental landscapes without more cross-fertilization.

But that is part of the more general problem. I think there are few things in the culture or the social sciences that are genuinely completely new. There is always likely to be a sub-industry of people who work on it, and an intellectual lineage that stretches back, sometimes tenuously, for generations or centuries or millenia.

So just as in technology, much progress comes from recombination and synthesis. People talk of interdisciplinary communication all the time. But it is difficult.

Besides critical theory, the academics were also saying the tax rates aren't fair. And in particulars or details I agree with that (although tax simplification is much more important, and focusing on just high marginal rates is crazy).

. But it is again such a deep-rooted idea, that taxes should go higher to support more public services, which is mostly unexamined. People really aren't exposed to the arguments of the other side, or even some of the details.

I don't think people think through public issues, so much as say what their friends or social circles think. Indeed, I think the political science studies of voting behavior say as much.

It reminds me of the famous quote by Pauline Kael, who was a critic at The New Yorker when Nixon won the election and active in Upper West Side circles. She was dumbfounded. How could that possibly be, she asked. No one I knew voted for him.