Free Lunch: What is to be done?

Δημοσιεύθηκε: 7 Μαΐου 2015 - 12:11

More than Piketty

Inequality is back in focus as one of the main economic and political issues of our day. Thomas Piketty may have hogged the limelight last year. But a flurry of new books and a wave of new research are helping to bring inequality and social mobility back to the core of the political agenda.

Two of those books, by Anthony Atkinson and Francois Bourguignon, are reviewed in a book essay by Martin Wolf. Bourguignon's book is a guide to the international trends, which show that the rise in inequality is far from a universal phenomenon - which suggests it is amenable to be influenced by policy choice. Atkinson's book focuses on what those policies could be (as does a shorter article); they are also nicely summarised by a somewhat sceptical Tim Harford. Jamie Martin's review of two other inequality books in the London Review of Books is more optimistic about the ease with which policy can reduce inequality, and quietly insistent about the need to do so, as the title "Just Be Grateful" suggests. The piece is also worth reading for its overview of how rapidly the economics establishment is moving from seeing inequality as the price to be paid for growth to an obstacle retarding economic progress.

What are the causes of rising inequality and what can be done about them? The NYT's Eduardo Porter recently highlighted how labour markets in many countries around the world fail to redistribute wealth. And in the US, new research is adding to our knowledge of how inequality - and in particular unequal opportunity or socio-economic mobility - is itself unequally distributed.

We have written before about the research led by Raj Chetty showing that the prospects of US children of the same parental background depend significantly on the neighbourhood in which they grew up. The NYT's Upshot has published an interactive atlas of how neighbourhoods compare, with snapshots of families that have moved to try to improve their children's chances. But why is there such a difference - is it because people with poor prospects (for whatever reasons) congregate in different neighbourhoods from those who end up doing better, or is it because the neighbourhood itself influences life chances? Whether individual choices (such as moving) or public policies can make a difference depends on which explanation is correct.

The answer, it turns out, is the latter. The always readable Justin Wolfers has an excellent non-technical overview of the research, which in part involved Chetty and colleagues revisiting a fascinating policy experiment from the 1990s. "Moving to Opportunity" offered randomly selected families vouchers for housing in better neighbourhoods. Early research found little effect, but it turns out that is because it did not take into account children's age at the time of the move. Chetty et al establish that every year spent in a good neighbourhood matters - so young children benefited hugely, while for teens, the disruption of the move may have outweighed any smaller positive effects. The difference can be seen within families as well as between them.

Perhaps the result is not surprising. But it overturns what social scientists had thought the evidence (disappointingly) showed. And the policy implications are huge. The findings put the onus squarely on policy to improve bad neighbourhoods or otherwise make the good ones more accessible to poorer people. Such policies might pay for themselves: Wolfers points out that the estimated rise in tax revenue that children who moved at age 8 in the Moving to Opportunity programme would pay over their lifetimes more than pays for the cost of the housing voucher for a two-child family.

Wolfers concludes that "the relentless accumulation of evidence is now so compelling that I believe it will sustain a new consensus. That consensus, simply stated, is that place matters." And that, no doubt, will feed into a US election campaign in which inequality and mobility are set to play a big role.

You saw it here first

The first-quarter US growth disappointment took most forecasters by surprise. But as early as two months ago, Free Lunch published this chart (updated here). It showed how one type of prediction technique saw early on that the US was slowing down sharply and being overtaken by the eurozone:

In an FT video interview, the chief executive of Now-Casting.com explains what now-casting is and why it picked up the turnround that conventional forecasters missed.