Tuesday, December 27, 2011

Midlife crisis economics?

Like Paul Krugman, I find myself in deep disagreement with this pessimistic column by David Brooks. Brooks compares our own time unfavorably with the era of the Great Depression, when, he alleges, the economy was in its "adolescence" and its underlying potential to create mass prosperity was far greater than it is today. Krugman makes the simple but important observation that a similar attitude of defeatism was widespread during the 1930s, only to be rapidly turned around with the wartime recovery and subsequent postwar expansion. In Krugman's view, a substantial boost to aggregate demand is all the anti-depressant our depressed economy needs (presumably something other than World War III would be the best prescription).

There are other serious problems with Brooks's diagnosis. One claim is that the structure of the global economy today is much more prone to generating severe inequality in advanced countries than it was in the 1930s. Perhaps, but the data suggest otherwise to me: Top income shares were just as high in the 1930s as they are today. The following diagram, downloaded from the fantastic World Top Incomes Database page, tracks the top 1 and 10 percent shares in the United States:

Judging from this chart, as of the late 1930s you might have concluded that a profoundly unequal distribution of income was built into the very DNA of the U.S. economy. The ensuing four decades would prove you wrong, obviously.

The regulations that Brooks decries as creating a "lack of institutional effectiveness" have made the United States a much cleaner, healthier, and safer place to live. These improvements are not counted in conventional GDP or income measures, but they are every bit as real as a hamburger, haircut, or iPhone. Of course regulation could be smarter and more efficient. But do we really want less of it?

There are undoubtedly very real challenges facing that U.S. economy that did not exist in the 1930s. Health care costs are indeed outrageous and rising without any clear plan for controlling them. Advances in educational attainment have stagnated. Inequality has returned to Depression-era levels. Climate change is coming on faster than anticipated. Some of these problems we know how to fix and have chosen not to; others we are not so sure. Personally I have little doubt that the richest and most technologically advanced country in the history of humanity could get it all done, with a mix of can-do political will and technocratic competence. What most depresses me is how many people seem to mistake the current mix of political dysfunction and malignity for a genuine crisis of possibilities.

1 comment:

  1. As far I know this charge presents a false argument.

    Does the data collected represent "reported income before taxes"? because there were many more deductions before Tax reform in the 1980's.

    I cant imagine this data could represent unreported income. Is it from tax returns?

    As far as i know, and I am no tax professional, It was much easier to hide money and there were many more deductions available to individuals that had the income to hire good tax lawyers and accountants.

    I also understand that many individuals NEVER paid the government the reported 90% income tax because they took advantage of so many deductions and loopholes.

    Have you consulted a tax professional on these numbers? someone that has been in the business before the 1980's tax reform?

    I apologize for the anonymous post.