Krugman and Income Inequality

Russ Roberts at Café Hayek has a very good analysis of Paul Krugman’s NYT column of July 14 on income inequality (see here). What is puzzling for anyone who has studied economics is the policy solution Krugman derives from Piketty’s and Saez’s analysis: raising the minimum wage. Even if the stats were correctly interpreted (which, as Roberts points out, is not the case), it is hard to see how raising the minimum wage would be the best policy response, considering the unintended consequences it creates (this echoes what Pete Boettke said a few days ago on the coherence of economic discourse - see here).

Thomas Piketty and Emmanuel Saez are good examples of the kind of scientists who come out of French universities. They are both highly skilled mathematicians (they both went to the Ecole Normale Supérieure) and then went abroad for their PhDs (EHESS, which is in France, and LSE for Piketty and MIT for Saez).

France has a long tradition in mathematics (along with Russia and others), which is reflected in the importance of a few schools/universities such as the Ecole Polytechnique and the Ecole Normale Supérieure. F. A. Hayek has a very interesting discussion of this topic in relation to the attitude towards planning in his Counter-Revolution of Science.

Looking at Piketty’s and Saez’s publication record, it is probably fair to say that their favorite subject is income inequality. This, in my view, reflects the obsession that many European economists have with market outcomes rather than trying to understand market processes. However important these questions are, they do not justify the rejection of first principles. That the minimum wage is a policy response (at least in Krugman's eyes) to a perceived income distribution problem shows how technical virtuosity can make one blind to the teachings of economics.

Comments

[James Fahringer]

It's sad that those in favor of minimum wage don't realize that this policy increases unemployment (especially among the poor) thus hurting many of the people it was meant to help. If they really want to efficiently help the poor at the expence of the rich, they would favor direct redistribution rather than hopelessly indirect policies such as minimum wage.

[John Nye]

Let me register a dissent here. The fault lies not with their schooling but the system of rewards in economics.

I agree that it is likely that the economics profession overvalues technical virtuosity. However, I feel there is almost no such thing as excess virtuosity in training. The French elite schooling system does an excellent job of screening the best and brightest. The elites are bastions of excellence in a world of politically correct intellectual egalitarianism and Ivy League social engineering.

It is the flaw of modern economics that merely technical work is so heavily rewarded. Change the social status incentives and those same technicians will adjust the focus of their research. But there is no need to condemn a system that serves its limited function of certifying those who are able to complete a rigorous course of studies based around math and science.

I am agnostic on the strengths/weaknesses of Piketty/Saez's specific work.