Cato’s Brink Lindsey has an informative, but ultimately pretty strange, new research paper out titled “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality”. You could almost think of it as two papers, in fact. One an informative discussion titled “Economic Policies, Social Norms, and Income Inequality” looking at the transition from the low-inequality equilibrium of postwar America to the high-inequality equilibrium of the present day. And the other a kind of silly attack on Paul Krugman that accuses him of being a proponent of misguided “nostalgianomics.”
The basic shape of things, however, goes like this. For a long time, a lot of people just kind of shrugged off increasing levels of inequality as the inevitable result of broad impersonal forces—the terms “skill-biased technological change” and “superstar effect” came into play a lot here. More recently, a group of social science researchers and a group of progressive media figures have called attention to the substantial evidence that SBTC and superstar effects can’t account for the whole thing. Krugman is both a very prominent social scientist and a very prominent progressive media figure, so he’s played an important role in calling attention to this stuff. In his paper, Lindsey takes the unusual-for-a-libertarian tack of agreeing with Krugman (and others) that public policy changes have played an important role. But he argues that the changes have mostly been changes that, on net, are positive. So it’s wrong of Krugman to espouse nostalgianomics and support a return to the policies of the 1950s. Which is fine, except I read almost every Krugman column and I’ve read Conscience of a Liberal (and, indeed, other works of Krugmanania such as Pop Internationalism and Peddling Prosperity) and it’s not as if the book ends with a call for the return of comprehensive regulation of airline fares or the re-establishment of the AT&T monopoly. To observe that the growth of inequality has policy roots isn’t to say that the right response to it is to methodically reverse every policy change of the past thirty years. It’s simply to deny the previous conventional wisdom—that it would be impossible to reverse the growing inequality of our society.
Indeed, I think that in a lot of ways the most interesting recent research on inequality turns out to be about skill-biased technological change after all. Specifically, Claudia Goldin and Lawrence Katz argue in The Race Between Education and Technology that we shouldn’t look at SBTC as something that just comes along and causes inequality. Rather, it causes inequality when society fails to respond to SBTC by expanding the quantity of educated citizens. Seen in this light, the SBTC component of growing inequality is, indeed, a policy failure.
But more broadly, the generic “progressive” idea is that we should have a more progressive tax code that spends more money on egalitarian social welfare programs. That’s not a return to the 1950s. It’s an effort to ensure that the gains of the past 30 years worth of policy shifts are spread more equitably. More liberal immigration policy, for example, is good for immigrants and on net good for the economy, but it’s bad for low-wage native born workers. But it really is on net good for the economy. In principle, the pie could be redistributed (through tax-and-transfer or tax-and-service) such that everyone winds up with more pie than they had before (and the immigrants end up with much more pie) rather than giving huge additional pie slices to the richest people. And the same goes for most of this over stuff. That’s what I’m for, and I’m pretty sure it’s what Krugman’s for. Conscience ends with a call for universal health care, not with a call for a return of the ban on interstate banking.