The Agenda

Daron Acemoglu on Inequality

Daron Acemoglu, who has won a Clark Medal to those of you who appreciate such things, offers a number of useful thoughts and caveats in a wide-ranging interview on income inequality, in which he discusses several books on the subject he finds particularly valuable:

Do Goldin and Katz go into the reasons why education is failing in the US?

They do discuss it, but nobody knows. It’s not a monocausal, simple story. It’s not that we’re spending less. In fact, we are spending more. It’s certainly not that college is not valued, it’s valued a lot. The college premium – what college graduates earn relative to high-school graduates – has been increasing rapidly. It’s not that the US is not investing enough in low-income schools. There has been a lot of investment in low-income schools. Not just free lunches, but lots of grants and other forms of spending from both states and the federal government.

So there’s no easy solution?

No, there is no easy solution. But it is important that this becomes a top priority. There are many things that can be done. Reforming schools and spending more on schools are not silver bullets, but they will certainly help.

This last part is surprising and somewhat disappointing: is it fair to say that spending more on schools will “certainly” help? And because the idea of “reform” is so contested, it seems safer to say that some kinds of reform might help while others might hurt. The same can be said about spending more money: it might or might not help, depending on how it is deployed. Regardless, Acemoglu makes a valuable contribution in his first reply: we are spending more, we do value college, and we are investing in low-income schools. 

On Piketty and Saez, Acemoglu notes the following:

One of the things they point out is that top income shares in the US and the UK started to increase during the Reagan and Thatcher administrations. Isn’t rising inequality just the result of Reagan and Thatcher reducing taxes on the rich?

I personally don’t think that’s the main thing, though it certainly played a role. It played a role for capital income. When you look at the top 0.1%, many of them are capital earners. So if you tax capital heavily, then the rich are not going to have as much capital left and capital income is not going to be as unequally distributed. There is a very mechanical effect from taxation there. But there are two other, more subtle, effects from taxation. One is that more progressive taxation – higher taxes at the top – may discourage people from working very hard and putting in effort. That will reduce their earnings and thus inequality. That may be inefficient, but it’s one of the things that happen when you have high taxes. Secondly, it might change the way in which people bargain with their companies and engage in “rent-seeking” activities in order to increase their pay or their bonuses. In the extreme – and I don’t think this contributes a lot, but just to illustrate – if top incomes were taxed at 99%, then no CEO would be tempted to do semi-illegal things in order to increase his pay, because there would be nothing to gain from doing so. If the top tax rate is 30%, on the other hand, and CEOs get pay from options, they may be tempted to do things like the Enron CEO, Kenneth Lay, did, because they get a lot of money in return. So while high tax rates at the top may inefficiently reduce these people’s labour supply, it may also reduce their rent-seeking activities.

In discussing his own work, Acemoglu raises the anxiety that extreme inequality might exacerbate “incumbent-protection” dynamics:

I am totally comfortable, from a personal point of view, with economic inequality emerging if that really reflects the different social contributions that individuals make. It’s a price that we pay for providing incentives for people to contribute to prosperity. But there is one caveat to that. If, in the end, income becomes very unequal, even if it’s for good reasons, it might create dynamic problems, because those who have become very rich now control so much of the resources of society that they might start using those resources for creating an unequal distribution of political power.

This is a legitimate point, yet I’m concerned about the lack of precision with which these arguments tend to be raised — that is hardly a characteristic failing of Acemoglu, and I imagine he is working on this question.

Unfortunately, Acemoglu seems politically naive, e.g., 

That’s what’s interesting about Occupy Wall Street. Its supporters aren’t just crazy lefties who don’t believe in free markets, but respected economists.

I’m definitely in that camp. I do believe in markets. I passionately believe in the importance of property rights and private property. I think they are absolute sine qua nons for prosperity. But I also believe that these things are very political and the politics shouldn’t be one-sided. Gore Vidal said, “The United States has only one party – the property party. It’s the party of big corporations, the party of money. It has two right wings; one is Democrat and the other is Republican.” If that is true, that’s a real threat to a free market and a fair society. For that reason I think Occupy Wall Street is very important. It’s a grassroots movement that tries to stand up to this tendency of our political system.

As we’ve discussed, however, the Occupy movement has evolved into a brand that has been effectively deployed by opponents of the kind of public sector reform Acemoglu endorses. Standing up to this tendency of our political system has fairly specific real-world political manifestations, and it’s not clear that they run in the right direction.

Acemoglu is easily one of his generation’s most creative and important economic thinkers. His understanding of U.S. political and institutional history, however, is somewhat flawed:

This is a political problem and the solution is also political. What I mean is that we have to make sure that the political institutions in the US have the same resilience that they showed at the turn of the century, during the Gilded Age. At that time we had a situation where a small fraction of the population was very wealthy, and extremely powerful. Money in politics was everywhere. But, in the end, there was a progressive movement. It was a populist movement that became part of the mainstream political parties, both Republican and Democrat. It led to Teddy Roosevelt and Taft and Wilson taking action – passing laws against trusts, against the financial industry, against the role of money in politics. It really changed the picture.

Unfortunately, Acemoglu is conflating a number of clashing tendencies, some of which were good and some of which wee much less so. For example, being “against the financial industry” meant different things in different contexts. Republicans of that era tended to oppose deposit insurance, preferring postal savings accounts. Was deposit insurance a subsidy to the banks that socialized risk? And were postal savings accounts a measure that undercut for-profit banks? In a similar vein, being “against the role of money in politics” had little bearing on a campaign finance system that remained sufficiently open that a small number of millionaires were able to finance Sen. Eugene McCarthy’s anti-war primary bid in 1968. The progressive movement was many things: it was a movement for transparency and civil service reform and public sector Taylorism, which had their virtues yet which also introduced rigidities. It was also the embrace of Prohibition, nativism, and eugenics, among other unsavory things. 

That was an instance when there was a significant challenge to the inclusive institutions in the US, and the institutions proved resilient. We have to do the same thing now. It cannot be something we dream up in our ivory towers – it’s something that the American people have to take part in. It has to be a grassroots movement. Will it be Occupy Wall Street? No, I don’t think so. But it’s still important because it’s indicative of how a grassroots movement can develop, and it’s already articulating what many people feel is unfair and wrong about the political system. At the moment, the political parties are not really listening, but I am an optimist. Perhaps in the next few years, there will be more openness to their complaints, and the political system can self-regulate itself.

As a generalized sentiment — we need to change things, and large numbers of people should be involved — I suppose I agree. But without some sense of the direction of reform, cheering on people who are vaguely displeased about the status quo regardless of their prescriptions seems unwise. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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