There was a lot of substance and very little editorializing in Mike Konczal’s interview with Chicago Booth economist Amir Sufi, and it’s a great introduction to Sufi’s take on the notion of a balance-sheet recession. Sufi sees the distribution of net wealth as an issue of central importance.
The distribution of net wealth matters a lot. Let’s suppose there’s $100 of wealth in the economy and there’s a hundred people. If everybody had $1 of wealth, and then there’s a massive drop in house prices, my argument is that this recession wouldn’t have been nearly as severe. It’s because the five guys at the top have all of the $100 and are just lending to the other 95, that’s why the recession is so severe when house prices collapse. Paul said this a few times on his blog, and he’s usually very clear, but I don’t think he’s been clear enough on explaining this. These models on why deleveraging matters are all about the net wealth distribution. We shouldn’t be surprised that this recession and the Great Depression were preceded by very large increases in wealth inequality. This is well documented during the 1920s and the 2000s. This is why I get a bit annoyed at the guys who are saying it’s just a pure wealth effect, because it’s something bigger than that.
It’s worth noting that the distribution of net wealth is somewhat more skewed than the distribution of earnings; a large swathe of the population has negative net wealth. One of my concerns regarding how we interpret the distribution of net wealth is that it reflects a number of different factors, including the demographic composition of the population. Older populations will presumably have different net wealth profiles than younger populations, for example. The longer you’ve been alive, the longer you’ve been playing an iterative game in which success in the last round makes success somewhat more likely in future rounds. So among 55-year-olds, within-group inequality might be somewhat higher than it is among 25-year-olds. Moreover, it might be sensible for younger people to take on debt to invest in human capital.
And then there are cultural differences. Some groups are more inclined to devote income to cultural consumption, e.g., going to the theater, etc., while others are more inclined to devote it to accumulating income-producing assets. These preferences have significant cumulative consequences. Some years ago, Ian Ayres and Peter Siegelman published an article on “race and gender discrimination in bargaining for a new car” and they found that car dealers quoted lower prices to white men than to blacks or women. They suggest that dealers were engaging in “statistical discrimination,” e.g.:
Some buyers experience the process of bargaining as costly, while others apparently derive pleasure from the give-and-take of negotiations. The key question in the present context is whether these bargaining costs are correlated with race or gender. We have no direct evidence on this point,36 but several findings suggest that dealers made it procedurally more difficult to purchase a car for “minority” testers. First, non-white-male testers were more often asked to sign purchase orders (40.2 percent vs. 27.6 percent for white males; X[I]= 7.14) and to put down a deposit (37.7 percent vs. 25.6 percent for white males; X[2] = 6.78). ” Minority” testers were also much more likely than white males to be “bumped,” that is, to have the dealership manager raise a salesperson’s offer (7.0 percent vs. 1.5 percent; X[2] = 7.66). Forcing non-white-male testers to overcome these additional procedural hurdles might have been one way dealers tried to take advantage of what they perceived as the higher aversion to bargaining of “minority” testers relative to white males.
Think about this for a moment. If members of some groups are more averse to bargaining than others, it will determine how much they will pay for various big-ticket items, which will in turn have an impact on the accumulation of wealth. It is reasonable to expect that attitudes towards bargaining are passed down from one generation to the next. One can imagine interventions that would help mitigate this problem, if we can even call it a problem. We might teach children in school that they should drive a hard bargain, and not reveal that their search costs are high, etc. Or this might be a perfectly valid difference in preferences and proclivities.
In 2009, Chris Rock made a brilliant documentary called Good Hair, about the resources African American women devote to making their hair conform to European-derived beauty norms. In a number of interviews, young women suggested that natural hair would be perceived as somehow unprofessional in the (presumably multiracial) working world, and so some kind of professional hair treatment was a requirement of full participation in the mainstream economy. Though I haven’t seen any rigorous statistical work on this subject, the film leaves us with the (perhaps misleading) impression that these conventions around beauty — or, to use Catherine Hakim’s phrase, these investments in “erotic capital” — might divert considerable resources from traditional asset-building. And there are analogous forms of consumption in many other communities as well. Might short men spend more on grooming than tall men, for example?
While this sounds trivial, I can’t help but think that wealth-building is embedded in a much wider set of cultural norms and practices. The share of resources devoted to consumption derives in part from what we feel we need to spend to protect our sense of self from injury.
One implication of this line of thinking is that efforts to redress the concentration of net wealth might more fruitfully draw on intergenerational cultural strategies rather than classic brute-force redistribution, as the latter might not yield the intended outcome.