Thoughts On Inequality

From Ezra Klein, comes this paper by Ian Dew-Becker and Robert Gordon exploring the rise of inequality. Or more accurately, two types of inequality. One, the seperation of the top decile (10%) from everyone else, and two, the rise of inequality within that top decile. Of course, these two phenomena seem related, but they really aren’t. The factors driving the great accumulation of wealth among the tippity-top are different, according to Gordon and Dew-Becker, than what’s responsible for the 90th percentile running away from everyone else - skills based technological change, or more specifically, increased returns to managers:

During  1979–97 fully half of the growth in the college wage premium can be attributed to the increased relative wage of the group called “managers,” and only 17 percent to the computer-related occupational groups. The Autor et al. three-way distinction would place computer programmers and many types of engineers in the middle, rather than high category, as jobs subject to outsourcing and not benefiting from a rapid growth of demand relative to supply…

It’s hard to see why this type of inequality is ipso facto objectionable. It seems to be purely an effect of markets working, basically, as they ought to. The problem is that in the past, when the college wage premium increased, more people would go to college and it would balance back out. So I don’t think our efforts here should be focused at decreasing inequality, per se, but instead at trying to increase opportunities for people to get that skills-based wage premium, and if not that, than increased unionization and raising the minimum wage could help boost incomes for everyone else.

The second inequality is that within the top decile. This isn’t driven by SBTC, decreased unionization or a flagging minimum wage. They identify two main factors: the “superstar effect” and clubby relationships that ensure high CEO pay:

Superstars include the top members of any occupation that provides disproportionate rewards to the first-best as contrasted with the second-best. The superstar phenomenon has at its core the magnification of audiences, the fact that a single performance can be witnessed by an audience of one person or ten million people, depending on the perceived attraction and talent. The second category includes law partnerships, investment bankers, and hedge fund managers, where there is no obvious analogy to audience magnification but where there are steep wage premia for the very best in an occupational niche, and where it is apparent that incomes are highly market-driven.

The most contentious question regards the third category, top executives in public corporations. The core distinction is that CEO compensation is chosen by their peers in a system that gives CEOs and their hand-picked boards of directors, rather than the market, control over top incomes. The idea that managers, rather than stockholders, control directors goes back to Berle and Means (1932). This idea that the principal-agent control of stockholders should be reversed has been applied fruitfully by such authors as Bebchuk and Fried (2004). They argue that managerial power lies behind some of the outsized gains in CEO pay.

Although there should certainly be some reforms relating to CEO compensation, it seems like the biggest driver of inequality in the highest decile is market based. The Nation’s special inequality issue has a great chart showing that the compensation of the top 5 hedge fund managers is 43 times greater than that of the top 5 CEOs.  So, Gordon and Dew-Becker ultimately conclude that there is only one mechanism which can reduce top-decile-inequality: tax policy.

This, I think, is a central question for liberals. All left-of-center folk agree that there should be higher taxes on the rich and that we should be promoting policies which will expand opportunity for the bottom 90 percent. This means increased educational access, universal health care, more union-friendly policies and so on and so forth. But even if we were to implement a fairly progressive agenda tomorrow, we’d likely see little decrease in pre-tax inequality (or even post-tax inequality). That’s because the forces driving the extreme inequality we see today have little to do with decreased unionization or the college wage premium being so high. They have to do with the fact that individuals can make extremely large amounts of money in the financial markets. And this is where the split will occur.

The Nation argues that the existence of concentration wealth is, in and of itself, a bad thing. The reasoning is actually fairly persuasive. It will be impossible to enact those reforms I listed above when people like Bruce Kovner can make billions of dollars and fund AEI and the Manhattan Institute to agitate against those progressive ideas. In short, with concentrated wealth comes intrinsic conservatism, as those wealthy people will inevitably use their great clout to preserve their position. An so there is a feedback loop, whereby ideologues/rich people implement policies that make them richer (deregulation, lower marginal tax rates, union busting etc) which then allows them to influence the system to preserve those policies to ensure their high position. The reduction of concentrated wealth thus becomes “the reform that makes all other reforms possible.”

Now, I don’t agree with this position, because I think the measures necessary to truly disperse or eliminate concentrated wealth would be bad for growth, but it’s one that has lots of support and will only gain more.

So, for now, as inequality has exploded under a Republican president, nearly everyone from the center-left to the progressive left is convinced that something ought to be done. But expect the debates to become heated once modest tax increases don’t reduce top decile inequality all that much.

Greatest Modern Thinkers

Stephen Dubner asks the question, and solicits the internet’s answers. As usual with these types of questions, the answer isn’t nearly as important as the criteria for selecting answer. And so to make this easier, I’ll limit myself to those thinkers that are A. Alive and B. made contributions whose importance are recognized by people outside their field and/or the general public. So here we go, in no particular order.

Noam Chomsky - The man invented modern linguistics almost entirely on his own. He also single handedly vanquished two theories that had dominated the social sciences before him - The Sapir-Whorf hypothesis and behaviorism.

James Watson - discovered the double helix. He’s responsible (along with Crick, of course) for the biological sciences taking over physics as the science which has been making the greatest advances in explaining our world

Vint Cerf - Invented the internet.

Norman Borlaug - Not so much a thinker, but he’s the scientist who’s had a direct, positive impact on more people’s lives than just about anyone else in history.

You’ll notice that this quick list doesn’t include anyone from the humanities. That’s because even though I dearly love philosophy and literature, there are very few novelists, theorists or philosophers that I would define as “important.” That’s because very few of them ever change the material conditions in which they operate, or really have a whole lot of realinfluence (much the same can be said about economists, another filed I ignored). I guess a few philosphers (broadly defined) have - Marx, Friedman (even that is debatable) - and maybe some novelists (Harriet Beecher Stowe…), but nowhere near on the scale that any of the scientists and inventors that I’ve listed have.

Chomsy certainly seems to stand out - it’s hard to recognize the influence of his linguistics on the world at large, and it definitely pales in comparison to Watson or Borlaug - but I view Chomsky as a thinker who’s intellectual contribution, as far as changing the way people view an entire field (or inventing an entire field) is certainly comparable to Darwin or Smith, and maybe even Einstein or Newton.

Now, if we got rid of my first criteria of “alive” and just talked about “Modern” thinkers, then the list would obviously change a lot. If we define modernity as starting in the early 19th century, then the Greatest Modern Thinkers would be Darwin, Einstein, Marx and Maxwell. (Smith is only omitted because Wealth of Nations was published in 1776)

Prices, Trade and Why People Care

Ezra Klein follows up on Dani Rodrik and notes that while trade lowers prices for people who buy things (everyone), for those who make things it can be bad, because it raises the relative price of exports and make them less competitive:

Put broadly, opening ourselves up to trade is really good for people who buy things, and less good for people who make things. Now, a lot of folks both buy and make things, so the story is complicated. But one reason the elite classes are so hegemonically enamored with trade is that they don’t really make anything at all, and so experience none of the downsides of trade. As Dean Baker likes to point out, we’ve structured our trade deals such that unskilled manufacturers face a lot of international competition while reporters, say, face almost none. But if you think about how reporters deal with layoffs and cutbacks — policies pursued, like trade, because they save money and increase efficiencies — you can basically predict how they’d feel about trade if their profession was suddenly outsources to Indian reportage firms.

But while the “elite classes” don’t experience the downside of their exports becoming less competitive, Ezra is conflating what happens to the prices of what people consume (they go down for everyone) and what happens to the jobs and wages when trade is liberalized. There’s some pretty good evidence showing that since liberalized trade lowers prices of non durable consumer goods and since the poor spend a much larger proportion, they benefit disproportionally (”inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period.”) If you were Will Wilkinson, you could probably make a Rawlsian argument that liberalizing trade is morally required by the difference principle in light of this analysis. But let’s get back to Ezra’ argument.

The second point, on how people’s personal situations vis a vis trade and international competition affects their view of liberalization, there’s been some pretty good research on this question. Dani Rodrik wrote a paper arguing that, not surprisingly, the more one benefits from trade, or is already better off, the more likely they are to support liberalization:

Preferences over trade are also correlated with the trade exposure of the sector in which an individual is employed: individuals in nontraded sectors tend to be the most pro-trade, while individuals in sectors with a revealed comparative disadvantage are the most protectionist. Third, an individual’s relative economic status, measured in terms of either relative income within each country or self-expressed social status, has a very strong positive association with pro-trade attitudes. Finally, non-economic determinants, in the form of values, identities, and attachments, play an important role in explaining the variation in preferences over trade.

And why this analysis could very much apply to the journalists (and bloggers!), it most notably does not apply to the very economists whose work these advocates and analysts cite. Bryan Caplan points out that economists, despite having high job security, are incredibly open to foreign competition. To crib form him, Dani Rodrik is a Turkish born professor, and the academy is pretty open to foreigners, especially in social science as math-heavy as economics.

I don’t really know what the point of all this is, but it seems interesting and relevant nonetheless

Baker Freaks Out Over Furman

I should probably stop responding to left-wing critiques of Obama, but Dean Baker’s broadside against Wall Street Democrats has a huge, gaping misrepresentation:

When it comes to economic issues the tone this crew sets is decidedly more in line with Wall Street than Main Street. This can be seen on issue after issue.

They have trumpeted the Social Security “crisis” for more than a quarter century, convincing the bulk of the public that the program is on the edge of bankruptcy. While proponents of the crisis view are all over the news, editorial pages, and pundit shows, the basic facts about the program’s finances are almost never mentioned.

The non-partisan Congressional Budget Office projects that the program can pay all scheduled benefits for nearly 40 years with no changes whatsoever. And even if nothing is ever changed, Social Security will always be able to pay future retirees a higher benefit (adjusted for inflation) than current retirees receive. Where’s the crisis?

Ok, so plenty of Democratic centrists wanted some sort of entitlement reform. But Baker is wrong on two main points. One, just about none of them supported the Bush reform plan. Gene Sperling and many others talked about adding on private accounts, but Democrats were all very unified on the specifics of opposing Bush’s rhetoric and his plan. And the Democrat who was leading that charge was none other than Jason Furman. Brad DeLong documented both Furman’s substantive opposition to the plan, as well as his day-to-day advocacy against it. So it’s hard to see exactly what point Baker is trying to make. If Furman is the apotheosis of “Wall Street Democrats,” then complaints that “they” were soft on social security reform are just pointless. Robert Rubin is not on the Obama economic team and it’s not 1993. So please, if someone is going to criticize Furman, criticize Furman, not a vague and poorly defined group of thinkers with varying temperaments, ideologies and ideas.

Greg Clark Continues His Jihad Against Sociology

Greg Clark is on a interesting crusade. First in a piece for Chronicle of Higher Education, he lambasted left-wing, worlds-system theorist Giovanni Arrighi and his book calling China a fufillment of Adam Smith’s vision of the economy. Clark’s review made the book itself seem rather stupid, but he also included all sorts of potshots at the field of sociology (of which Arrighi is a rather eccentric member):

In summary, the evidence Arrighi offers for his sweeping cosmology is astonishingly thin. The book indeed is little more than an extended anti-market, anti-capitalism, anti-Western harangue. Statements of dramatic import are proffered with little explanation: “The decisive battle to contain the rising power of China is still being fought in Iraq”; the Iraq War “aimed at using military might to establish U.S. control over the global oil spigot”; “China is not a vassal of the United States, like Japan or Taiwan.”

The book offers more insight into the sad state of intellectual development in sociology departments, even at such prestigious institutions as Johns Hopkins, than it does into the realities of wealth and poverty in the world economy.

Clark was being incredibly abtuse by implying that world-systems theory is preponderant in American sociology or political science departments, because it isn’t. Most sociologists do rather careful work, much of which is quantitative. There are, of course, social theorists that Clark probably doesn’t care for, but if he really wants to cast out the work of Weber, Durkheim and even Benjamin and Adorno into the “romantic” left-wing trash bin, he would be making a rather silly move.

Greg’s second attack on the discipline goes to a work that is actually beloved by social scientists, especially sociologists - Karl Polanyi’s The Great Transformation. But once again, he radically overstates his case. The weird tension in his short essay is that he seeks to A. disprove Polanyi’s historical argument that free markets are deliberate political and human inventions and B. take potshots at his generally left-wing, anti free market politics. So Clark goes on to say that there were really free markets in pre-Industrial Revolution Europe, Ancient Greece, Mesomopotamia and so on. But how does this square with Greg’s own work, which makes the argument that the Industrial Revolution was a world-historical change like no other. This fairly problematic tension makes itself pretty obvious:

But Polanyi was no better a historian than a prognosticator. Indeed, the more we learn of history, the more evident it is that the free market was not an 18th-century innovation, but one of mankind’s oldest social institutions. Medieval England, for example, had elaborate free markets in goods, labor, capital, and land. Forget groaning serfs, over-weaning lords, the lash of the whip; think private property, wage labor, market incentives, and social mobility. By 1200, a large class of landless laborers worked for cash, bought their food in markets, and rented their dwellings. The free market indeed has some claim to be the natural habitat of modern people, not a perverse and unnatural innovation. (We have evidence for extensive markets long before the time of Christ: in the Roman Empire, in ancient Greece, and in ancient Babylon.)

The Industrial Revolution in England did not represent a trade-off between gains for plutocrats and the horrors of poverty and unemployment for the poor. Instead, the greatest beneficiaries of the Industrial Revolution were the unskilled; this truly great transformation reduced the terrible inequalities that existed since at least the Middle Ages. The elaboration of the modern credit nexus eventually produced cyclical unemployment, but the Industrial Revolution also reduced the enormous annual shocks to income pre-industrial workers endured because of harvest successes and failures.

But wait, I though free markets had always been around, then what was that innovation of “modern credit”? And if the Industrial revolution was just the continuation of institutions and practices that had been around forever, then why did all these good things happen because of it?

Clark and other free market advocates/libertarians need not be so afraid of Polanyi that they simply take a shotgun approach to his work. Instead, they should probably concede his argument that the free market we see today is a relatively recent human invention. They should just say that it’s a good human invention! That things really have gotten better since the Industrial Revolution! That the atomization Polanyi criticizes allowed individuals to break free from tyrannical social arrangements from which they previously had no hope of exit! Sure, go after his predictions and general left wing slant of his argument, but there’s really no reason to fear the fact that great political changes allowed the free market that you all love to exist in its beautiful form.

More Polanyi related commentary, check out Will WIlkinson and Mark Thoma.

And for sociology that doesn’t suck (but even has a fain echo of Polanyi) watch Will WIlkinson’s diavlog with Douglas Massey.

Naomi Klein…

Sometimes I feel like I’m concern trolling whenever I read Klein’s stuff and get really angry. So I won’t actually write a post critiquing her article on Obama’s economic team, I’ll just let yall figure out what I would say.

Furman Backlash

I knew this would happen - labor groups are getting their hackles up over Obama’s Furman pick:

Senator Obama, Democrat of Illinois, hired Jason Furman, a Harvard-trained economist closely associated with Mr. Rubin, a Wall Street insider who served as President Clinton’s Treasury secretary. Labor union leaders criticized the move, and said that “Rubinomics” focused too much on corporate America and not enough on workers.

“For years we’ve expressed strong concerns about corporate influence on the Democratic Party,” John J. Sweeney, president of the AFL-CIO, said Wednesday in a statement implicitly critical of the symbolism of the appointment, no matter Mr. Furman’s economic skills.

Although I’m sure that Sweeney and many other labor leaders disagree with Furman’s advocacy of free trade and his research on Wal-Mart, it’s just absured to say that he’s a creature of “corporate influence” in the Democratic Party. Unlike Rubin, Furman is an academic economist who lead the wonk-charge against social security reform and is one of the brightest economic minds in the Democratic fold. Of course, it’s convenient for Sweeney to raise the bloody shirt of trade agreements that haven’t been proven to reduce employment or wages, but this type of demagoguery does no one - especially the working class Americans he represents - any good. The Times article has some good stuff on Rubin and his “camp” which, as I’ve been saying, has shifted from its deficit hawkery of the early 90s:

The Rubin camp and the group loosely led by union leaders also differ on which should take precedence: balancing the budget or public investment. The Rubin camp gives preference to budget balancing, but Mr. Rubin says the choice is no longer as stark as it was when Bill Clinton came to office in 1993. Then, the deficit represented a much bigger percentage of the nation’s economic activity and deficit reduction was a necessary priority in his view.

“We need today a multiyear path to a sound fiscal position, but in that context you need to make room for critical public investment,” Mr. Rubin said, arguing in effect that public spending could be increased in the current circumstances before the budget was brought into balance.

What people fail to recognize is that Clinton and his economic team didn’t pursue deficit reduction at the expense of public investments because of some overwhelming ideological belief, but because of the unqiue political and economic circumstances of 1993, which everyone should know, was 15 years ago. Also, I think that the Bush experience - when he squandered a budget surplus on tax cuts for the rich - has humbled Rubin’s wing about the benefits of surplus building and deficit reduction. Also, Sweeney and his ilk can’t be shocked at this decision: Obama has always been somewhat centrist in comparison to the labor union economic left on issues like trade. Don’t we remember Austan Goolsbee?

All this whining over Furman is stupid. As Paul Krugman pointed out, Furman isn’t in charge of formulating economic policy for eight years of an Obama presidency, he’s instead in charge of organizing other people to give advice, and formulating the economic message on a day-to-day basis. And his experience running the Hamilton Project and his work in the trenches of the Social Security debate show, there’s no reason to think that he wouldn’t be excellent in this role. I think that this last quote from the man should silence all the doubters:

“I am not here to tell Senator Obama what to think about Wal-Mart,” he said, “but to help him implement his ideas, and they are ideas I share, like universal health insurance, progressive taxation and not privatizing Social Security.”

Surprising Things To Know About Robert Reich…And Some Notes on Neoliberalism

Robert Reich is oftentimes assumed to be on the left wing of the classic Rubin vs left wingers camp. And he was on this side in the Clinton White House. That’s because he supported more public investments, while Rubin was a deficit hawk. This used to be the central Democratic economic debate. But it’s since moved on to the question of trade. And while the divisions are roughly the same, Rubin, Furman, Summers et al want more, freer trade while Baker, Bernstein and Robert Kuttner are more skeptical. But there’s the exception of Robert Reich, the original casualty of the wonk wars. He, of course, is something of an unabashed free trader whose rhetoric on the issue is very similar to that of Rubin/Summers:

Well, I‘m still a free trader, although I will tell you, Chris, it is becoming—there are fewer and fewer of us. It‘s a very unpopular position.

In Michigan, you can find almost as many free traders as you can chicken hawks. There are not many. The trouble is that most people blame free trade and blame free trade for the failure of American middle class to expand, the decline of middle-class wages, all of the problems, theeconomic problems, we have.

This presents something of a problem for those (Steve Clemons, Chris Hayes) that call the centrist wing of the party “neoliberal.” That’s because neoliberalism has two distinct meanings that can often be confused. One definition of neoliberal is the domestic, political one. It describes those liberals who, in the early 1980s, turned on many liberal orthodoxies such as unions and welfare and advocated a more centrist approach to economic issues for Democrats. They mainly coalesced, originally, around Charlie Peters and the Washington Monthly. Bill Clinton was, in many ways, the apotheosis of the neoliberal vision. He embraced welfare reform, made a point of repudiating the left wing economic elements of the Party in the New Orleans Declaration he gave as head of the DLC and was a true third way politician. Furman and Summers are orthogonal to these original neoliberals, who were mainly political appointees, policy wonks and journalists, not academic economists.

The second definition of neoliberalism that is often intertwined with the first is the international, economic one. Neoliberalism in this context means adhereing to a vision of economics and economic policy which supports freer markets, less government control of the economy, free trade and privatization. In short, liberal economics that is rooted in the thought of 19th century liberals like Bastiat and Mill. It’s often argued the purest expressions of neoliberal economics were in the privizatization and deregulation pushes started by Carter and followed out by Reagan, the reforms of Thatcher’s Britain and the promulgation of the Washington Consensus in international development circles starting in the 1990s. It’s this vision of neo-liberalism that The Nation and much of the true Left (capital L is very deliberate) have a particular distaste for. Of course, they don’t like domestic neo-liberalism much either, which overlaps with the international version on some issues: namely trade - and entitlement reform and welfare  reform, but only somewhat. But even though they overlap on some issues, they are not the same and really don’t have much to do with each other. One’s an approach to development and economic policy on a global scale for all countries, while the other is a domestic political strategy for the Democratic Party . So one could be like Reich, a traditional liberal in terms of Democratic politics, and still support free trade (like a neo liberal!)

So when Clemons and Hayes are calling Furman a “neoliberal” they should make it clear whether he wants a centrist leaning (but still liberal) domestic economic policy, or whether he wants to implement the Shock Doctrine.

The Audacity of Furman

Chris Hayes, quoting Steve Clemons, voices the left wing critique of Obama’s Furman pick:

But calling a spade a spade, it’s clear that Furman is no Dean Baker or Robert Blecker or Jared Bernstein—all important economists who have been far more right as of late than the Rubin crowd in anticipating the stress points in globalization, the housing bubble, trade, and the like.

Good point! Would it be asking too much for the Obama campaign to bring someone on board its paid economic policy team that brings with them an unabashed left-liberal perspective?

I think Will Wilkinson makes a good point on the politics/optics of this pick - at this point, Obama doesn’t really need to reassure those who want an “unabashed left-liberal perspective,” but instead throw some meat towards centrists who are likely to be impressed with Furman’s all around awesomness (oh yeah, and centrist/Brookings cred). And while I’ve come more around to the Baker/Bernstein crowd, it’s unclear if Obama really is closer to them than he his to Rubin/Furman types. After all, his initial economic policy ad visor was Austan Goolsbee, whose support for free trade caused no end of consternation for the campaign. Also, Furman made some noises about consulting with and talking to Bernstein and Jamie Galbraith, whose leftiness can not be impeached:

“My key mandate, which came directly from the senator, is to bring him a diverse set of voices and ideas, because that’s the kind of debate he likes to hear to make up his mind about his economic agenda,” Furman said. He named Rubin, former Treasury Secretary Lawrence Summers and former Federal Reserve Vice Chairman Alan Blinder as advisers the campaign would turn to.

Furman also named Jared Bernstein of the Economic Policy Institute and James Galbraith

It’s also important to note that the real policy space between the Summers/Rubin/Furman wing and the Bernstein/Galbraith/Baker wing has decreased radically in the past eight years. At this point, they can all agree on higher taxes on the rich, increased public investments, some form of universal health and increased regulation in the financial industry. Of course, there are detailed and marginal differences which matter greatly, and my aggregation of a wide range of policy thinkers into two groups is inevitably obscuring some crucial distinctions, but I think we can all agree that we are basically past the Rubin-Reich feuding that marked the Clinton years.

At this point, the central difference of outlook on trade seems almost stylistic. That’s because there’s very little good evidence to support the general left wing critique of trade (as opposed to specific trade agreements), namely, that it lowers wages for the lower and working classes. BUT, at the same time, the political support for anything resembling an ambitious trade agenda has totally collapsed. For one, there’s no way Doha is happening anytime soon, and those liberal advocates for free trade have come to realize that bilateral FTAs do little to bring about the global trading environment we desire, but do a lot to impose US standards on things like IP on smaller, weaker countries. So, hopefully, there can be rapprochement between the two sides - at least until Obama is in the White House, then they’ll start fighting again.

Obama Picks Furman, I Celebrate

Ezra Klein reports that Jason Furman of the Brookings Institution has been brought on as Obama’s chief economic adviser. In my mind, this is great news. At the Hamilton Project - the Robert Rubin run economic policy shop at Brookings - he managed to break the logjam of Democratic centrist policy suckiness that Gene Sperling exemplified (woo hoo deficit reduction and small bore tax credits!). And although he primarily focused on budget and strict-fiscal issues at Brookings, he is totally on board for ambitious liberal policies like universal health care. This quote seems to capture the evolution from the deficit hawkishness of Robert Rubin to the near consensus on public investment across the Democratic party:

The stabilization of the long-run deficit is inevitable—policymakers have no choice but to abide by the iron laws of arithmetic. But the most important budgetary issues are the choices policymakers make about how much to invest in research, how much to spend ensuring that everyone has health insurance, and what is done to make our nation more secure.

For Furman, and even for the Hamilton Project as a whole, health care is an “economic imperative” that should have priority, along with broad based public investments, poverty reduction and tax reform. Klein also thinks is a good move, saying that Furman is an “extremely bright, and extremely politically skilled, economist.” I also think it was a good move, politically, to bring Furman on board after Obama wrapped up the primary. That’s because of Furman’s Brookings-cred, it can be said that Obama is optically “moving towards the center” (despite the fact that Furman is a hair to the left of Obama’s former economic adviser, Austan Goolsbee).

Also, bringing Furman on earlier would have raised some hackles with the economically nationalist wing of the party. He has a history of left-wing contrarianism about that most sticky of issues: Wal Mart. He debated Barbara Ehrenreich on whether Wal Mart was good or bad for the American working class and poor (he thought it was good because low prices on consumer goods meant more disposable income) and even wrote a paper entitled “Wal Mart: A Progressive Success Story.” For what’s it worth, I think he’s substantively right on this question, but I’m sure some lefties will be critical of Obama for this step. Maybe that’s why Furman is promising to talk with Jamie Galbraith and Alan Blinder, who have more leftie cred than the old guard of Summers and Rubin (who, of course, will also have a voice in the Obama campaign/administration).

All in all, I think this is a good pick. I agree with Furman both on many specific issues, and more generally, on his approach to economic policy. He talks about broadening participation in the economy, so that everyone can reap its gain, as he puts it, “You need to empower people to make the economy work for them.” This approach, I feel, can thread the needle between the essential GOP/Supply Sider/early 90s DLC truth that economic growth best advances all social ends, while acknowledging that unless a broad base of people can participate in said growth, the result will be enmity, inequality and a concentration of power in the hands of a wealthy few.

Furman also repersents the (intellectual) death knell of the deficit reduction uber alles wing of the Democratic policy elite. When Furman is running a policy shop founded by Robert Rubin, and he can be so liberal and talk so much about public investment, you know that the days of Clintonian timidity on the economy are essentially over. But even if we won the intellectual battle, the real question is if we can swing centrist-minded Blue Dogs to support a more ambitious economic policy.

Homogeneity And The Welfare State

Brock sees a racist rat in the discussions of the sucessful Scandinavian welfare and its vaunted homogeneity:

Whenever I see claims that the Scandinavian welfare state owes its success to its “homogeneous population”, I always hear this in the background:

“America can’t have a successful welfare state because of all those lazy n—–s.”

I’m generally critical of imputing malign motives to ones political opponents, but I read this claim so often, with not a shred of empirical or theoretical evidence to back it up, that I think there really is a bit of racism behind it.

That’s certainly one way of looking at it, and I think when you hear about the Scandinavian work-ethic, one could easily make the argument that this notion is covering up some ugly sentiments. But when it comes to the argument that homogeneity is one reason why Scandinavians are willing to tolerate a high level of income redistribution, it has a fair amount of logical and empirical support. First, it just makes a lot of sense that people are more willing to redistribute income to those that look like them and with whom they have a broad base of cultural and almost tribal similarities with. And, I think, the evidence has generally borne this out. Ed Glaeser and Alberto Alesina have published research showing that racial diversity can undermine support for income redistribution or for the funding of public goods. Glenn Loury, in his seminal article on crime and race, wrote that:

Before 1965, public attitudes on the welfare state and on race, as measured by the annually administered General Social Survey, varied year to year independently of one another: you could not predict much about a person’s attitudes on welfare politics by knowing their attitudes about race. After 1965, the attitudes moved in tandem, as welfare came to be seen as a race issue. Indeed, the year-to-year correlation between an index measuring liberalism of racial attitudes and attitudes toward the welfare state over the interval 1950–1965 was .03. These same two series had a correlation of .68 over the period 1966–1996.

It was during this period, of course, when the public largely turned against welfare. Just about every political scientist or observer admits that America’s history of racial conflict, and more fundamentally, of racial diversity makes large scale redistribution more difficult. Sheri Berman, in her history of European social democracy, The Primacy of Politics, makes the argument that some sort of social solidarity, one that can often be nationalistic and even exclusionary is necessary for social democratic politics to work:

A few of the commenters raised questions about my notion that social democracy has an
inherently communitarian nature—and here again I will stand my ground. You may not
like it, it may smack of nationalism or exclusivism, but the fact is that if you want an
order based on social solidarity and the priority of social goods over individual interests,
some basic sense of fellow feeling is required to get that order into place and keep it
politically sustainable. So long as nation-states remain the basic form of political
organization in the world, moreover, such fellow feeling will have to be fostered within
national borders. Social democrats who can’t accept and deal with this will just end up
ceding ground politically to the radical right and various populists, who will step in to
supply the communitarian cravings that publics continue to display.

The necessity of this type of communitarianism, which very much has a “dark side” of nationalism and even fascism, has turned off some liberals from the very idea of redistributionist politics, like Will Wilkinson: “the kind of homogeneity and conformity necessary to generate the sense of solidarity that leads to popular, high levels of redistribution ought to be unattractive to liberals, who are either cosmopolitan pluralists or not really liberals at all.”

So the question becomes for liberals who favor some higher levels of redistribution and a social-economic make-up resembling a social democracy is how can we create the levels of solidarity necessary to convince people to give up a (greater) portion of their income to people who live far away from them and look very different from them.

Many, like David Sirota, have proposed a very fervent economic nationalism, whereby Americans of all colors can be unified around the fact that they’re getting screwed by transnational elites. This approach, as evidence by Sirota’s paucity of ideas that would actually improve the economic situation of anyone in that article, would seem more likely to lead to pointless demagoguing against Dubai Ports or foreign ownership of infrastructure, and more dangerously, easily feeds into Dobbsian rhetoric against immigrants. Even Sirota admits that the Minuntemen are dark cousins of the very populists he lauds.  And if it comes to a choice of greater redistribution within the United States, or greater immigration into the United States, I’ll always chose the latter. And while admirable social democracy in Europe may have been built upon solidarity and a certain level of cultural and ethnic homogeneity, it’s not at all obvious that it was built upon the negative solidarity and fundamentally confrontational model of politics that Sirota and his ilk propose.

My proposal may seem idealistic, but I think it’s the best shot we have: simply convince people that social democratic arrangements are better! With the huge run-up in inequality and the health care crisis, we should be able to simply win some arguments on the margin. But it’s also important to stick to the big thing(s): ensuring every American has access to a decent and worthwhile life. The economic nationalist approach, which seems to value confrontational solidarity and nationalism as values in themselves is just too risky and, empirically, hasn’t exactly delivered the goods.

Musing and Countermusing

Megan McArdle countermuses on how the Scandinavian welfare state could be sapping the cultural foundation of its dynamic and very open economy.

I wonder if this will continue to be true. It occurs to me that Scandinavia, with its homogeneous population, may have been spending down the accumulated social capital of its pre-welfare state society. Before the widespread welfare state, people who attempted to free ride by collecting benefit when they could be working faced both internal guilt and considerable external social pressure; the neighbors essentially functioned as the fraud police.

But as the generations who grew up before the kribbe-to-grav safety net die off, and are replaced by a newer generation perfectly comfortable with broad public charity, this is clearly breaking down. Sweden’s rates of long term disability, sick leave, and so forth, are very high. The Scandinavians I know generally report that the once-famous work ethic is not really all that impressive any more, and there’s little stigma attached to malingering on long-term sick leave.

I think we generally underestimate how much culture matters to economic success. It isn’t even a matter of getting the rules just right; it’s a matter of cultivating a hidden law, a sort of cultural operating system, that limits abuse of public and private trust. Hayek understood this very well; his intellectual heirs on both sides of the political spectrum, less so. We’ve made amazing strides in allowing people to trust perfect strangers enough to transact with them multiple times every day. But I’m not sure how well we’re doing at supporting the safety net.

This is certainly a concern - if the welfare state makes the type of risk taking that an open, growing economy requires, it would clearly represent something of a crisis. But there hasn’t been any crisis yet, for the last 60 or so years, the Scandanavian welfare state has been remarkably sucessful. Sure, it may require some tinkering and some reform (much of which is already happening) but it’s not at all clear that the basic structure of the Northern European welfare state is particulalry in danger. Lane Kenworthy has a great run down of the Swedish political economy, and finds that its unemployment rate is roughly the same as the US, incredibly high levels of foreign trade, high competitiveness and has a 13% immigrant share of the population.

All of this good news is particularly important to note when we’re talking about Hayek’s critique of such social-economic arrangements. The argument made in the Road to Serfdom is an extreme one that is disproven by the Scandanvian welfare state, despite the long term adjustments that need to be made. As far as Megan’s concern that people are going to stop working as hard as they need to drive the economy, I’m not particularly working. The basics of the Scandanavian model are still incredibly strong - like their high social mobility - that things would have to get a lot worse before anyone needed to get seriously worried. Anyways, it’s still a very stable, highly sucessful social-economic model that raises serious questions for the doctrinaire declinism of Hayek.

As for the idea that culture matters to economic sucess, especially trust, there’s some evidence from Sweden that high levels of inequality actually damage trust between people. I guess the real question - and the one that could really win the debate for the Scandanavian model - is whether the high levels of inequality that the American system encourages (or at least seems helpless to stop) discourage people from participating in market exchanges because they feel like they’re getting screwed by the man. I’m not saying that I know the answer one way or the other, but it sure seems important.

Reclaiming Hayek

Jesse Lerner has a fantastic piece in Dissent appraising the work of Friedrich Hayek from an explicitly left wing prospective. In Lerner’s opinion, Hayek got one thing absolutely right: that planned economies are horrible, horrible ideas. He thus spends a lot of time on Hayek’s most famous work - The Road to Serfdom - but not so much on his ideas about pricing in markets and the importance of dispersing knowledge.

What’s interesting about these two ideas, which are by far Hayek’s most influential intellectual contributions, is how obvious and almost redundant they seem today. The Road to Serfdom is either horribly overblown or very narrowly descriptive. His description of what inevitably happens when a state controls and plans the entirety of the economy is early prescient and perceptive, but is only applicable to situations in which the state control the entirety of the economy. Road became horribly bastardized when conservatives and libertarians would point to every instance of European social democracy or the existence of some state-owned industries and then wave around Road and say that tyranny was just around the corner(arguably, Hayek is partially to blame for this unfortunate tendency). But when we see that European social democracies are some of the most substantively and formally free nations on the face of the earth, we must grapple with the fact that either Road was wrong, or it was right about a system that has little relevance today. That’s not to say that Road wasn’t an important contribution in 1944, when many British socialists were promoting an incredibly technocratic, “enlightened totalitarian” model, but it’s hard to discern its relevance today when the most “socialist” states (Scandinavian social democracies) have the freest economies.

Hayek’s second great idea, his price theory, has a similar historical pedigree. His theory, that prices can only be determined efficiently by decentralized, dispersed markets, as opposed to central planners, came out of the Socialist Calculation Debate. Basically, in the 30s and 40s, lots of socialist economists argued that a planner and technocrats who were operating a centrally planned economy could set prices for goods that would efficient for their pseudo-market to function. Hayek pointed out that the equations and calculations necessary to determine prices from a centrally-planed perspective were just too complex for any planners, and thus the knowledge inputs that determine prices should be distributed widely and communicated through a relatively free market. Hayek, of course, was totally correct. But like his claims about an entirely planned state leading to totalitarianism, his arguments about pricing have largely been assimilated into mainstream thought and economics, and no one really disagrees with him anymore.

Hayek was a very influential and prescient thinker, and on the big questions of his day, he was indisputably correct. But when it comes to the messy part of actualizing Hayek’s thought into politics, too many have used his work to justify a doctrinaire libertarianism that is neither wholly supported by his thought or particularly commendable.

Selective Protectionism…Does It Help Poor People?

Ezra Klein notes that many “free traders” are perfectly happy to see free trade and mobility in inexpensive goods and in the jobs of those in the working class, but when it comes to expanding trade to include those middle class and professional jobs, we see some “selective protectionism”:

Dean Baker has long argued that there’s no such thing as free trade in this country. Rather, what we have is a trade regime that pushes the prices of manufactured goods down by encouraging competition for downscale jobs but keeps the prices of professionalized services high by protecting skilled industries. It’s essentially what you’d expect if you were Karl Marx and you were trying to figure out what a trade policy created by the economic elite would look like.

But today Dean Baker has a nice term for these folks that I’ve not heard before: What we’ve got, he says, are not “free traders,” but “selective protectionists.” And it’s true. Low wage jobs? Trade em, and stop being so sentimental. Law jobs? Protect ‘em. Software patents? Protect! Drug patents? Protect! Hell, you can’t even be president if you’re born outside this country. But just think how little a Chinese president would work for! And he’d probably put in longer hours, too.

First off, there are some problems with this analysis. We are starting to see professional jobs - software engineering, x-ray reading - that are already ending up in India. Rememeber Alan Blinder’s concern that 40 million jobs could be offshored? He notoriously started to raise concerns about offshoring and the like when he realized that middle class jobs could be departing for overseas. Or look at Dianne Feinstein, a bona fide free trader, who constantly pushes for letting more foreign high-tech workers come into the US.

But generally, Klein and Baker are right: we’re substantially more likely to increase labor, employment and financial mobility in those cases where professionals aren’t immediately worse off. What’s odd, however, is that where we have embraced trade full heartedly, it has greatly reduced the costs of consumption for poor people. It is generally the rich, or at least middle and upper middle class, who consume the products of those sectors that we haven’t liberalized as much. I would, of course, like to see full-spectrum liberalization
of all types of labor and less restrictive IP regulation, but it’s certainly possible that what trade liberalization we have seen, despite Klein describing it as the type of policy one would expect “if you were Karl Marx” could disproportionally be delivering gains to the poor…

Let’s Look at Botswana

Marian Tupy, Cato Policy Analyst, has a piece in the American lauding Botswana’s considerable economic and political progress, especially compared to its neighbor Zimbabwe.

On the economic front, Tupy is nothing but correct, Botswana has made impressive gains. It’s experienced 40 percent growth since 1966, and now has a GDP per capita of 10,813, which would put it sixth in Africa. But in literally the sentence after Tupy extols Botswana for its growth, he mentions the one fact that overshadows all or any progress that Botswana has made economically or socially - AIDS. Botswana has an infection rate of 24% and has seen its life expectancy plummet from 62 to 35 years since 1980. And although things like GDP growth, political stability and non-corrupt governance are all well and good, it’s hard to call them a victory when people are living one half as long as people in the developed West.

The second major victory Tupy hails Botswana for is political stability. Since independence in 1966, Botswana was governed by a ruler with a white wife and has thus pursued a policy of racial reconciliation. Instead of kicking out white farmers and giving their farms to cronies, Botswana generally tried to work with their 7% white minority. And Botswana also hasn’t suffered from the civil wars, coups and proliferation of warlords that many post-colonial African states have. But the flip side of “political stability” is one party, albeit democratic rule. The president after independence, Seretse Khama, served for 14 years until his death
in 1980. Since then, his Botswana Democratic Party has ruled. Tupy calls Khama’s son, Ian, taking over a sign of “Botswana’s relative comfort with racial diversity.” That’s one of way of putting it, the other way is that it’s a sign of a one party state that passes power along through families, hardly an encouraging sign for such a supposedely advanced state. In its first 42 years since independence, Botswana had three presidents, all from the same party.

One of the most striking features of Botswana’s recent parliamentary election is that even though the Botswana Democratic Party won a mere 52% of the vote, they got 44 out of the 57 seats in parliament. And although much of the results can be chalked up to the incompetence and feuding between opposition parties, it still shows that there is something of a democratic deficit in Botswana. There are also worries that Khama, who previously served in the military, has “authoritarian habits” and a general disdain for the party machinery. But these are all minor systemic worries, Botswana still has a better functioning government than most in Africa.

Back to economics: Tupy claims that much of Botswana’s growth is due to pursuing liberal economic policies like lowish personal income taxes, low corporate taxes and trade liberalization. But despite this liberal agenda, Botswana is still, according to an analysis done by the Institute for Security Studies, an African think tank, an “essentially mixed economy.” A huge part of this mixture is the diamond industry, which is the main source of Botswana wealth. Tupy doesn’t mention diamonds once, despite the fact that some 70 percent of the diamond’s industry’s profits go to the government and that 85 percent of its exports are diamonds¹. And, in opposition to what most economists and especially Cato-types recommend, Botswana largest diamond company, Debswama, is 50% controlled by the government. In fact, when you look at diamonds, Botswana appears to be a much more “normal” resource-rich developing world country. And although it seems to have avoided the corruption that the Dutch Disease brings, it’s still largely overdependent on the value of one resource. This is part of the largest problem in Botswana’s political economy: unemployment,. In 2006, unemployment was 24%. This can be expected from a resource dependent country, because extraction, especially as it becomes more mechanized, doesn’t provide all that many jobs. Botswana also has a relatively high Gini coefficient of 60. Although inequality doesn’t seem like a huge concern considering the bottom line economic growth Botswana has experienced, it is still a country which has a huge number of very poor people, meaning that income inequality can be deadly when 61% of the population lives on less than 2 dollars a day.

It’s hard to say that Botswana is a model for African countries. It is more of a model for resource-rich African countries. Because it has mostly managed to avoid the resource curse, and because of a strong, unified government which tampered down any conflict over its diamonds, it has experienced amazing growth. But it’s unclear how much of that growth can be attributed to good policy which can then be replicated across Africa, and how much of it can be attributed to having lots of diamonds. As always in development economics, it’s complicated.

1 - “The Political Economy of Botswana’s Public Sector Management Reforms” Motsomi Morobela, http://globalization.icaap.org/content/special/Marobela.html

Couldn’t We Just Ban It?

First of all, everyone should watch/listen to Megan McArdle and Raj Patel’s bloggingheads discussion about food, global trade and development. Usually, I find people on the Naomi Klein/anti liberalization side of these discussions to be incredibly frustrating, but Patel is clearly a very smart, rigorous and intellectually honest person in these discussions. It doesn’t hurt that he’s a real bona fide social scientist and  former development economist. On a slight side note, why hasn’t Dani Rodrik been on blogginheads yet? Rodrik v Cowen? Rodrik v Patel? That would be sweet.

Ok, ok, back to the point. Towards the end of the episode, they discuss a “junk food” tax. McArdle’s against it, Patel is skeptically for it. The main point Megan makes - besides that these type of paternalistic taxes are paternalistic - is that a fast food tax would likely push middle and upper middle class folks into eating less crap, while poor people, who have drastically fewer food options, would be eating the same crap and just paying more for it. This seems like a silver bullet argument against a tax, but not a silver bullet argument against a ban. McArdle and Patel are, after all, using cigarette regulations as a model for their discussion of junk food. And, many municipalities are getting past the weak tea of taxes and getting straight to banning cigarette smoking in public. If we agree that junk food and cigarettes both exact high social and personal costs and that people are limited in their options as far as consumption goes, shouldn’t we just ban junk food?

Of course, I’m not saying that we should tell ever McDonald’s and Jack in the Box to board up - after all, where am I supposed to eat cheap? - but when it comes to consumption of specific ingredients in high amounts that is incredibly harmful, namely trans fats and large amounts of high fructose corn syrup, trying to internalize the costs through taxes or greater information is likely to be impractical. We could just accelerate the Hayekian magic by banning the most egregious ingredients from mass market food and see what the fast food joints and supermarkets do with that.

You Endorse What Economic Plan?

When John McCain floated his inane idea for a gas tax holiday, it made it painfully clear that he isn’t on board for doing anything serious about climate change. That’s because, at least in the short term, we need to get fewer people driving, which means learning to deal with a world of high gas prices, instead of short-term gimmicks. One of the best summations of our need for higher gas prices is a piece by Harvard economist Keneth Rogoff in Foreign Policy, in which he talks about the need for 6 dollar a gallon gas.

The first thing the next American president should do upon taking office is to insist that the U.S. Congress pass a huge increase in gas taxes. To be more precise, the United States should implement steep carbon taxes that hit coal, heating oil, and natural gas. The tax should be enough to raise the price of gasoline by at least $2 a gallon.

Pretty drastic, don’t ya think? And certainly not a proposal endorsed by John “gas tax holiday” McCain. But wait, what’s that I see? Kenneth Rogoff endorsed McCain’s economic plan?

We enthusiastically support John McCain’s economic plan. It is a comprehensive, pro-growth, reform agenda. The reform focuses on the real economic problems Americans face today and will face in the future. And it builds on the core economic principles that have made America great.

His plan would control government spending by vetoing every bill with earmarks, implementing a constitutionally valid line-item veto, pausing non-military discretionary government spending programs for one year to stop their explosive growth and place accountability on federal government agencies.

One could argue that a carbon tax is technically “environmental policy,” but that’s a pretty silly distinction to make when a cornerstone of Rogoff’s ideal evnironmental policy is a huge tax levied on everyone who buys and sells carbon. Shouldn’t Rogoff hold out a bit longer before singing McCain’s high praises?

Voluntary Doesn’t Work

Milton Friedman once said that “”there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Whether this is true as a normative claim is up for debate, but it certainly is (and if you’re a stockholder, you better hope so) from a positive claim. In the long run, corporations will do (or least will try to do) what is best for its stockholders.

So what happens to companies that volunteer to reduce their carbon footprint? Some new research by Karin Thornburn of Dartmouth indicates that their stock prices go down:

Specifically, we studied the stock market’s reaction when companies joined Climate Leaders, a voluntary government-industry partnership in which firms commit to a long-term reduction of their greenhouse gas emissions. Importantly, when the firms announced to the public that they were joining Climate Leaders their stock prices dropped significantly. Controlling for general market movements, the average abnormal stock return was -0.9% over a three-day window and -1.5% over a five-day window around the announcements. For the 46 sample firms that joined Climate Leaders, the total loss in market value was $16 billion. The stock price decline was smaller for firms in carbon-intensive industries, where regulatory action is more likely (and thus partially anticipated in the stock price), and greater for high-growth firms, suggesting that the green investments crowd out growth-related capital expenditures.

Firms joining Climate Leaders conduct a careful inventory of their greenhouse gas emissions before they subsequently announce a reduction goal. The average firm in our sample set a goal to cut its total emissions of greenhouse gases by 17%. Interestingly, the stock price plummeted even further (on average -1.3%) when the greenhouse gas goal was announced, and the more aggressive the goal, the greater the price decline. The study also included 22 firms joining Ceres, a network addressing sustainability challenges whose principles are adopted by its members as an environmental mission statement. Stock returns were largely unaffected by the Ceres announcements, perhaps reflecting—in contrast with Climate Leaders—the lack of specific environmental investment commitments in Ceres. In addition, we looked at portfolios of industry competitors, but found little movement in stock prices when their rivals joined an environmental program.

Of course, we all knew that only coordinated, mandatory action could ever convince corporations to reduce their carbon footprint, but it’s nice to have some empirical data showing that voluntary action will never work.

Income Per Natural

Will Wilkinson wrote about this new metric developed by Lant Pritchett a while ago, and Tim Harford has the definitive run-down in Slate. The idea behind income-per-natural is one I’m deeply sympathetic with. Instead of calculating the average income of people who live within a country, you calculate the income of people born in that country, no matter where they live. Although in rich countries, the difference between income per natural and GDP per capita are trivial, in poor countries like Mexico or the Philippines, much of the wealth generated by Mexicans and Filipinos comes from immigration to richer countries. But because of the way Gross Domestic Product and other measures of national income iare calculated, a Mexican who immigrates to the US lowers average income of both countries, despite accruing great gains to himself. When we become obsessed with GDP and using the nation as our standard unit of economic and social analysis, you get all sorts of absurd commentary, like Robert Samuelson attributing poverty in the US to Mexican immigrants, despite the fact that those immigrants had gotten much, much richer.

The myopia of looking at nation-states as the fundamental economic unit is also exposed in discussions of Mexican immigration. We so often hear that the “solution” to the immigration “problem” is that we should try to develop the country of Mexico. John Judis, for example, proposed that the US adopt a policy along the same lines of the EU towards Greece or Portugal - preferential trade agreements and massive investments to jumpstart the economies so they could be eventually be on an equal playing field with their rich neighbors.

The problem with this approach - which accepts the normative assumptions behind GDP per capita - is that it ignores the needs and desires of Mexicans alive right now. Developing the Mexican economy will be a long, arduous task, and so it seems mighty imperious for America to, instead of opening the floodgates to immigration, insist on Mexicans staying in America. As James Suroweicki said in his review of Ha-Joon Chang’s Bad Samaritans, “What’s missing is a recognition of how mysterious the secret of economic growth remains, despite all the energy that economists have poured into solving it.” Although how to best promote growth of national level economies is indeed mysterious, how to promote the increase in personal well being is not. Immigration from poor to rich countries works. And so until we can think of something better, allowing unfettered labor mobility should be the primary tool to fight global poverty.

Can I Call It Ambivalence About Fair Pay Day?

Via Feministing, I see that today is Blog For Fair Pay Day. And since I haven’t written about Fair Pay in a while, I feel now is a good time to rehash my thoughts at some length.

The first question of Fair Pay is what does it mean. At its most basic, it means equal pay for equal work. In simple terms, the implication is that a man and a woman, doing the same job, should get roughly equal compensation. And so discriminating hiring practices, discriminating promotion practices, firing women because they’re pregnant and so and so forth are violations of this principle. And, fortunately, this principle is enshrined in the law. This doesn’t mean that it isn’t under fire. The Supreme Court, in Ledbetter v Goodyear, made it much more difficult for women to file pay-discrimination suits. The Court did, however, open the door to Congress making the statute more amenable to women suing under it. So despite the Court’s horribly reactionary decision, Title VII and the Equal Pay Act, which protect women from pay discrimination for the same work, are still on the books and can be strengthened by Congress, and probably will be if a Democratic president is elected.

But the principle of Equal Pay, notwithstanding the Court, is not what today is all about. Instead, it’s about Fair Pay. What Fair Pay aims at is not explicit pay discrimination, but the actual pay gap between men and women. And the pay gap is real. According to the Bureau of Labor Statistics in 2006, women earned 81 cents for every dollar men earned. To give some historical perspective, in 1979, women were earning 63 cents on the male dollar. So the question becomes, is this gender gap ipso facto unfair, and if so, what are we to do about it?

Most advocates for Fair Pay say that the gap is the result of two trends. One is that women are paid less because of their tendency to drop out the workforce due to pregnancy and motherhood. This means that more women drop out of the labor force in their most productive years or go to part time, which drives their hourly and total wages down. Because women tend to flock to careers that allow them to have more flexible schedules - teaching and nursing are good examples - the wages in those jobs tend to be low. There’s also the fact that women “pick” certain career paths. For example, men make up a huge majority of the highest paying college majors, while women are predominate in the liberal arts. Adding up these three factors – fewer hours, fewer years in the work force and different career paths - June O’Neil found that 97.5% of the wage gap could be attributed to their aggregate effect.

The second factor that Fair Pay advocates point to is systemic sexism in how society values certain occupations. They see the fact that nurses, teachers and receptionists get paid less not as evidence that, due to the productivity of their work as well as the supply and demand of labor, they get paid less than plumbers, but instead of a deep institutional injustice directed against women. The principle is no longer “equal pay for the same work” but “equal pay for equivalent work.” They remedy for this in the 1970s, when the concept of fair pay first emerged, was that the government would measure the “worth” of each profession, and declare which ones would be equal. So if nurses and plumbers in a hospital were doing “equivalent” work, then they would have to be paid the same. Only this way could we correct the societal prejudice that makes women financially inferior to men.

The problems with this old-school, Comparable Worth approach are obvious. We know from Hayek, as well as from the historical failure of central planning, that government is not very good at determining market imputs, to make them fair or to achieve any other goal. There is simply too much that goes into a payment decision, that the government couldn’t possibly say what’s fair for a specific job. This bureaucratization of the labor market would inevitably distort it, making it harder for women to get jobs in specifically female professions like teaching and nursing because the wages were at above a market equilibrium level. When wages are artificially forced too high, employers hire fewer people. There could also be the problem of the wages for certain productive or societally useful work getting “equalized down” so that its wages could be “fair” compared to “equivalent” woman’s work. If doctors were mandated to get paid less, or oil rig workers, we would have fewer people entering these professions. It’s been very rare where the market hasn’t, on average, done the best at determining aggregate utility.

Because of the myriad practical and political problems with Comparable Worth proposals, as they were called, Fair Pay advocates have come up with new ideas. The most widely supported Fair Pay proposal these days is the Fair Pay Act. The Act, which was co-sponsored by Barack Obama, would be based around class action suits which would cl