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Wednesday, October 15, 2014

'Understanding Economic Inequality and Growth at the Top of the Income Ladder'

A nice collection of essays on inequality and what can be done about it by Heather Boushey, Emmanuel Saez, Michael Ettlinger, and Fiona Chin:

Understanding economic inequality and growth at the top of the income ladder

For example, from Saez:

... Zucman and I show in our new working paper that the surge in wealth concentration and the erosion of middle class wealth can be explained by two factors. First, differences in the ability to save by the middle class and the wealthy means that more income inequality will translate into more inequality in savings. Upper earners will naturally save relatively more and accumulate more wealth as income inequality widens.
Second, the saving rate among the middle class has plummeted since the 1980s, in large part due to a surge in debt, in particular mortgage debt and student loans. With such low savings rates, middle class wealth formation is bound to stall. In contrast, the savings rate of the rich has remained substantial.
If such trends of growing income inequality and growing disparity in savings rates between the middle class and rich persist, then U.S. wealth inequality will continue to increase. The rich will be able to leave large estates to their heirs and the United States could find itself becoming a patrimonial society where inheritors dominate the top of the income and wealth distribution as famously pointed out by Piketty in his new book “Capital in the 21st Century.”
What should be done about the rise of income and wealth concentration in the United States? More progressive taxation would help on several fronts. Increasing the tax rate as incomes rise helps curb excessive and wasteful compensation of top income earners. Progressive taxation of capital income also reduces the rate of return on wealth, making it more difficult for large family fortunes to perpetuate themselves over generations. Progressive estate taxation is the most natural tool to prevent self-made wealth from becoming inherited wealth. At the same time, complementary policies are needed to encourage middle class wealth formation. Recent work in behavioral economics by Richard Thaler at the University of Chicago and Cass Sunstein at Harvard University shows that it is possible to encourage savings and wealth formation through well-designed programs that nudge people into savings.

Maybe if they had more income to save??? Another part of the essay gets at this (what I've called the mal-distribution of income, i.e. workers receiving less than the value of what they produce, and those at the top receiving more through rent-seeking and other means):

...while standard economic models assume that pay reflects productivity, there are strong reasons to be skeptical, especially at the top of the income ladder where the actual economic contribution of managers working in complex organizations is particularly difficult to measure. In this scenario, top earners might be able partly to set their own pay by bargaining harder or influencing executive compensation com­mittees. Naturally, the incentives for such “rent-seeking” are much stronger when top tax rates are low.

In this scenario, cuts in top tax rates can still increase the share of total household income going to the top 1 percent at the expense of the remaining 99 percent. In other words, tax cuts for the wealthiest stimulate rent-seeking at the top but not overall economic growth—the key difference from the supply-side scenario that justified tax cuts for high income earners in the first place.

[I talked what I think should be done to curb rising inequality here and tried to make the point that one of the first things we can do is to claw back some of the income from high income earners and return it to those who actually deserve it. In the short-run, this can be done through progressive taxation and the redistribution of income to where it belongs, but in the longer run I'd like to see the distribution mechanism fixed, at least in part, through measures that increase the bargaining power of workers so that the playing filed is a bit more level. In addition, I'd also like to see measures/policies that will produce better jobs for working class households.]

    Posted by on Wednesday, October 15, 2014 at 10:38 AM in Economics, Income Distribution | Permalink  Comments (93)


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