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What is an economic “conspiracy theory”?

Reviewing a research article by Michael Spence and Sandile Hlatshwayo about globalization (a paper with the sobering message that “higher-paying jobs [are] likely to follow low-paying jobs in leaving US,” Tyler Cowen writes:

It is also a useful corrective to the political conspiracy theories of changes in the income distribution. . .

Being not-so-blissfully ignorant of macroeconomics, I can focus on the political question, namely these conspiracy theories.

I’m not quite sure what Cowen is referring to here–he neglects to provide a link to the conspiracy theories–but I’m guessing he’s referring to the famous graph by Piketty and Saez showing how very high-end incomes (top 1% or 0.1%) have, since the 1970s, risen much more dramatically in the U.S. than in other countries, along with claims by Paul Krugman and others that much of this difference can be explained by political changes in the U.S. In particular, top tax rates in the U.S. have declined since the 1970s and the power of labor unions have decreased. The argument that Krugman and others make on the tax rates is both direct (the government takes away money from people with high incomes) and indirect (with higher tax rates, there is less incentive to seek or to pay high levels of compensation). And there’s an even more indirect argument that as the rich get richer, they can use their money in various ways to get more political influence.

Anyway, I’m not sure what the conspiracy is. I mean, whatever Grover Norquist might be doing in a back room somewhere, the move to lower taxes was pretty open. According to Dictionary,com, a conspiracy is “an evil, unlawful, treacherous, or surreptitious plan formulated in secret by two or more persons; plot.”

Hmm . . . I suppose Krugman etc. might in fact argue that there has been some conspiracy going on–for example of employers conspiring to use various illegal means to thwart union drives–but I’d also guess that to him and others on the left or center-left, most of the political drivers of inequality changes have been open, not conspiratorial.

I might be missing something here, though; I’d be interested in hearing more. At this point I’m not sure if Cowen’s saying that these conspiracies don’t exist, or whether they exist (and are possibly accompanied by similar conspiracies on the other side) but have been ineffective. Also I might be completely wrong in assigning Cowen’s allusion to Krugman etc.

This discussion is relevant to this here blog because the labeling of a hypothesis as a “conspiracy” seems relevant to how it is understood and evaluated.

10 Comments

  1. There tend to be two sources of "conspiracy" here. One is wealthy donors anonymously funding "grass roots" movements which then advocate positions that are more advantageous to the donors than the members. For example, the Koch brothers anonymously channeling funding to the Tea Party that then advocates tax breaks for the extremely wealthy.

    The second source is misleading and incorrect economic claims that certain policies will help "the middle class", where the actual claimed benefit is overstated. For example, Ronald Reagan's "trickle down" economics, which George Bush labeled "voodoo economics". The conspiracy comes in as these claims tend to benefit large campaign donors. That is the particular windmill that Krugman tends to tilt against.

    Admittedly, it is not a grand conspiracy in the sense of Robert Anton Wilson (although it always *might be* and I am simply not in the know :), but it does make one question a lot of the political rhetoric, and wonder (as you explore in your book) why people would vote against policies that are seemingly against their pocketbook interests.

    One thing I find interesting in this debate is the extent to which both the Left and the Right couch their policy arguments in terms of claimed effects on the middle class. So the Right sells policies that help the wealthy as providing relief for the middle class, and the Left sells policies that help the poor as benefiting the middle class. It would be truly interesting if we didn't have to live the results.

  2. marcel says:

    I think the word "conspiracy" here refers to belief about the cause of the change in the distribution. Consider 2 questions.

    1) Is the change due mostly due to either "natural" causes or policies that conventional economic theory supports and does not indicate would have this kind* of direct effect on income distribution?

    2) Or are policies whose direct effects clearly have that effect believed to have an important role?

    Answering "yes" to this 2nd question, and focusing on things that support that answer leaves you open to Cowen's charging you with being a (grassy knoll) conspiracy theorist.

    The former group would include things like:

    a) changes in technology that increase demand for more highly educated workers relative to less educated ones;

    b) reductions in trade barriers (i.e., free trade) & regulation (e.g., transportation, financial markets) that increase competition in product markets

    The latter group would include things like:

    a) legal changes that make it harder to organize and sustain unions, including, but not restricted to, recent actions in WI, and currents ones in other states (OH, IN, MI, NH)

    b) minimum wage policy

    c) tax and benefit changes that alter the after-tax income distribution

    d) a variety of other legal changes, e.g., in corporate governance, standing to sue corporations for damages, discrimination, and so forth.

    More briefly, I think it's accurate to describe the first category as:

    -anything other than government policy +
    -govt. policy/legal change that is intended to increase competition, esp. in product markets.

    The 2nd category is pretty much all other govt. policy and legal changes.

    *i.e., making the distribution less progress.

  3. Gappy says:

    I don't think Cowen referred to the Piketty-Saez paper, which is mostly descriptive and undisputed (by him at least), but rather to the Bartels-Krugman-Hacker-Pierson theories that causes of inequality are endogenous to the political process, as mentioned above, rather than exogenous (e.g., technology, globalization). Those who believe in the former also believe that "the rich" have captured the regulators, the local politicians, the grassroot organizations. The Koch brothers and Rupert Murdoch are examples. It is a view of societal change driven by occult pressures and agreements between tiny minorities of the poulation, and of which tax cuts or declining union membership rates are only symptoms.

    Cowen may have overdramatized a bit, but I think he captures the beliefs of a good section of the intellectual and emotional left.

  4. Sebastian says:

    Those who believe in the former also believe that "the rich" have captured the regulators, the local politicians, the grassroot organizations. The Koch brothers and Rupert Murdoch are examples. It is a view of societal change driven by occult pressures and agreements between tiny minorities of the poulation

    While I'm sure this argument about occult pressure is made by some activists on the left (though I'd argue that the Koch brothers are for many more of a symbol of the disproportionate influence of money than actual 'puppetmasters') , I'm a little confused how you square this claim with the interest-group based theories underlying the Hacker/Pierson argument: I think they would argue that a lot of this – taxation & tax loopholes, union busting, corporate governance rules – happens in the open, some of it very public (Grover Norquist), other things still public enough to be visible (e.g. the recent NYT story about GE's anti-tax lobbying) – in fact, they write a whole book describing these processes. The point of the book is precisely not that there are some evil people ruling the universe, but that politics is made by interest groups and the balance in the US is out of whack. Now, one can certainly disagree with that, but I don't think "conspiracy theory" is a terribly useful term to describe it.
    The clearest sign why this isn't a conspiracy theory is that conspiracies can't be falisified, whereas there is a vigorous debate on the empirical merits of H&P's argument, including on the academic left.

  5. Phil says:

    I agree (I think) with Gappy: to the extent that "conspiracy" is the right word, it's because of the back-room back-scratching deals. Yeah, the fact that lots of rich people want to get their congresspeople to reduce taxes, that's right out there in the open; but the methods they use to make that happen…well, how could we know?

  6. gappy says:

    I think I agree with Sebastian with regards to the fact that the term "conspiracy" is inappropriate, with respect to Hacker and Pierson. While I have read Krugman and Bartels, I haven't read Hacker & Pierson. But, as a regular reader of Krugman's blog, of the New Yorker and occasionally of other progressive magazines, I think I am not misrepresenting their views (and, paradoxically, even Cowen's) on inequality by saying that they believe that the financial services industry has effectively captured both parties by first blocking or reversing regulation, and then by socializing their losses, while at the same time increasing the sector's profit and their own compensation. This adds to the recurrent complaint that free trade has no popular support but is advocated by an influential minority. These important changes in policy, according to them, happened outside of the democratic process and of public scrutiny. Maybe this doesn't qualify as a "conspiracy", but to the ears of the target audience, it sound very close.

  7. Ole Rogeberg says:

    If I read Cowen correctly, he means "theories that see the large increase in inequality as the intended consequence of policies that were promoted in a number of ways (both open and possibly closed) by people who foresaw benefits to themselves."

    Couldn't the word "Conspiracy" be chosen by Cowen simply to make explanations he doesn't agree with seem more wacky and silly than they would otherwise seem? "Conspiracy" brings to mind claims that "the US government was behind 9-11" or that "the jews are plotting to bring about a one-world government."

  8. Andrew Gelman says:

    Ole:

    Sure, but people promoting policies that are good for them . . . that's not conspiracy, it's just politics.

    I'm guessing that there were some unintended consequences of the 1980s-era reductions in the top tax rate. Sure, people foresaw that this would deliver lots of dollars to rich people right away and increase the immediate incentives for rich people to make more money. But I don't know that they anticipated how these incentives would change the culture of compensation. In any case, this doesn't seem to fit into the category of "conspiracy theory."

  9. Mike Russell says:

    Here is one conspiracy theory that centers around changes in the income distribution that Tyler has been pretty critical of in the past: http://www.naomiklein.org/shock-doctrine/the-book

  10. Matthew Bown says:

    A conspiracy can be tacit, i.e. the parties don't need to overtly agree. If you accept the principles of "follow the money" or "cui bono" it's reasonable to posit a conspiracy between big government and big business, especially those at the top of big business, the people who control it and reap the super salaries. If you have progressive taxation, which we do in the UK, with rates of 20%, 40% and recently 50% (leaving aside National Insurance, which alters the percentages but doesn't remove the progression), then it is in the interests of big government, which seeks maximum tax receipts, to have an income distribution that is as unequal as possible. If a sum S is available to be distributed as wages, and S is distributed to everyone equally, the tax take will be substantially less than if it is distributed unequally with the lion's share going to a relatively few super earners. Thus big government and super earners have an incentive to conspire in policies and propaganda that perpetuate extreme income inequality. This may explain why even nominally socialist governments, such as the recent Labour regime in the UK, would in fact collude in unequal income distribution and oversee its growth, not its diminution. I imagine you could draw a couple of graphs, of the growth in income inequality and the growth in big government, and you'd find they have grown up together.