Economists and Inequality By Paul Krugman, The New York Times 10 January 16

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Jan 11, 2016, 12:02:06 AM1/11/16

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Economists and Inequality

By Paul Krugman, The New York Times

10 January 16

’m a few days late on this characteristically lucid Justin Fox column on why it took so long for economists to focus on income inequality. But as one of the economists who did write about inequality — especially the rise of the one percent — pretty early, I think Fox has missed one important aspect: it’s a hard issue to model.

Let me back up a bit. There are, broadly speaking, two kinds of income distribution analysis you might want to conduct. One involves the factor distribution of income — capital versus labor, and highly educated versus less educated labor. Economists never lost sight of that issue, which is a classic concern — it’s actually a major theme in David Ricardo, and can be modeled in terms of good old marginal productivity theory. In my original home field, trade, debates about the effects of trade on the education premium were a major concern all through the 1990s.

The other involves the personal distribution of income and wealth. Why are investment bankers paid so much? Why did the gap between CEOs and the average worker widen so much after 1980?

And here’s the thing: we really don’t know how to model personal income distribution — at best we have some semi-plausible ad hoc stories. Part of why Piketty made such a big splash was that he offered a sketch of a model of wealth inequality that tied it into broader macro numbers — r-g and all that — which gave all of us something systematic to talk about. But he himself concedes that the big rise in inequality so far has come from a surge in the right tail of earnings, which may have had something to do with norms, but in any case isn’t well explained by any model we have right now.

It’s worth noting that we’re not just talking about a problem of Anglo-Saxon neoclassical types. Nobody has a good handle on personal distribution. Marx is all about factor distribution — his book is titled Capital, not The One Percent — and there’s nothing there that helps make sense of the past 30 years.

But, you may say, shouldn’t you study important issues even if you don’t have neat models? Well, yes, but ability to say something interesting does affect research topics, and that’s even justified up to a point. Remember Raymond Chandler:

Other things being equal, which they never are, a more powerful theme will provoke a more powerful performance. Yet some very dull books have been written about God, and some very fine ones about how to make a living and stay fairly honest.

True, at this point, economists are doing much more on personal income distribution; mainly it’s empirical, part of the data revolution in the field. And that’s a good thing. But they have a better excuse than you might think for not doing more of this earlier. ***