Economist's View

Rising Wage Inequality Continues

Elise Gould at the EPI:

Rising wage inequality continues to be a defining feature of the U.S. labor market: It’s well documented and widely understood that wage inequality has grown dramatically over the last four decades as productivity and compensation growth have become delinked. Despite an expanding and increasingly productive economy, wages have stagnated for the vast majority. Looking at the most recent data—through the first half of 2016—we see that wage inequality has continued to grow, with top earners faring far better than those in the middle or bottom of the wage scale. First, the data paints a striking picture of growing wage inequality since the last business cycle peak in 2007. Second, average wage growth overall is slow, and any significant real wage growth continues to be driven by low (and below target) inflation—not meaningful acceleration in nominal wage growth. Last, strong payroll employment growth the last couple of months suggests positive future trends for not only wage growth, but also declining unemployment and rising labor force participation. ...

Today’s Inequality Could Easily Become Tomorrow’s Catastrophe

Robert Shiller:

Today’s Inequality Could Easily Become Tomorrow’s Catastrophe: Economic inequality is already a concern, but it could become a nightmare in the decades ahead, and I fear that we are not well equipped to deal with it. ...

One way to judge the likely outcome is to look at what has happened in the past. ...Kenneth Scheve ... and David Stasavage ... looked at 20 countries over two centuries to see how societies have responded to the less fortunate. Their primary finding may seem disheartening: Taxes on the rich generally have not gone up when inequality and economic hardship has increased. ...

Professor Scheve and Professor Stasavage found that democratic countries have not consistently embraced more redistributive tax policies, and most people do not vote strictly in their narrow self-interest. ...

This is consistent with my own survey results, which focused on inheritance taxes. ... Taxing around a third of wealth, more or less, seemed fair to people. And perhaps it is reasonable, in the abstract, yet what will we do in the future if this degree of taxation won’t produce enough revenue to meaningfully help the very poor as well as the sagging middle class? ...

Angus Deaton..., commenting on what he called the “grotesque expansions in inequality of the past 30 years,” gave a pessimistic prediction: “Those who are doing well will organize to protect what they have, including in ways that benefit them at the expense of the majority. ” And Robert M. Solow ... said, “We are not good at large-scale redistribution of income.” ...

No one seems to have an effective plan to deal with the possibility of much more severe inequality, should it develop. ...

Despite past failures, we should not lose hope in our ability to improve the world. ...

Bosses Pay: The Right's Problem

Chris Dillow:

Bosses pay: the right's problem: The High Pay Centre said yesterday that FTSE 100 CEOs’ pay rose 10% last year to an average of almost £5.5m. It’s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.

First, high CEO pay is due in at least part to a market failure. ...

Secondly, rising CEO pay, especially when accompanied by a degradation of “middle-class” jobs means we’re shifting from a bourgeois society to a “winner-take-all” one. This has potentially nasty cultural effects. ...

Thirdly, it’s possible – I put it no stronger than that – that high CEO pay is bad for overall productivity. ...

Finally, there’s a danger that rising inequality will produce a nasty backlash. ... Political instability is no friend of business or free markets. ...

My point here is a simple one. There are good reasons why Theresa May has spoken of the “irrational, unhealthy and growing gap” between bosses’ and workers’ pay. It’s because such a gap threatens the values and interests of many conservatives.

Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can’t all be just hypocritical shills of the rich, can they?

(There is an explanation of each point in the full post.)

What is Inclusive Growth?

Tim Taylor:

What is Inclusive Growth?: "Inclusive growth" is an unquestionably astute rhetorical formulation. Those who use it can support both economic growth and helping the poor in a two-word phrase. But where did the term come from? Does the term have different content from seemingly similar terms like "broad-based growth" or "pro-poor growth"? Or do all these terms mean pretty much the same thing? Most of all, is "inclusive growth" a specific set of policies or just a desirable outcome?

Rafael Ranieri and Raquel Almeida Ramos explore the history of the "inclusive growth" terminology in "Inclusive Growth: Building up a Concept," published in May 2013 by the International Centre for Inclusive Growth (Working Paper #104). A little earlier,  Elena Ianchovichina and Susanna Lundstrom produced a note on "What is inclusive growth?" for the World Bank in a note published on February 10, 2009.

Apparently, the term "inclusive growth" originated in an essay "What is Pro-poor Growth?" by  Nanak Kakwani and Ernesto M. Pernia, which appeared in the Asian Development Review in 2000. They use the term "inclusive" growth only once, and in a way which makes it synonymous with "pro-poor growth." They write: "Broadly, pro-poor growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. It is a major departure from the trickle-down development concept. It is inclusive economic growth."

The reasons why "inclusive growth" or "pro-poor growth" seemed like a new thing back about two decades ago was rooted in how people used to talk about development economics . A common framework at that time was the notion that low-income countries were trapped in poverty, and needed big boost of investment capital to jolt themselves forward into a process of industrialization. The "Kuznets curve" held that a process of economic development first brings a period of greater inequality, as new industries take hold, which would then followed by a period of greater equality as prosperity spreads or diffuses through an economy.

All of these frameworks have been challenged in various ways. It's not clear that low-income countries are in a poverty "trap"--it's just that they have slow growth, which isn't necessarily the same thing. It wasn't clear that industrialization would necessarily diffuse through an economy: for example, Latin American countries had a reasonable degree of growth from the 1960s on, but with persistent and high levels of inequality. By the 1970s, arguments were emerging that poverty itself held back economic development, so rather than seeking development first and hoping it would reduce poverty eventually, a direct approach to improving the nutrition, health, education, and income-earning prospects of the poor could bring development. The greatest economic development success stories from the the 1960s through the 1980s, the East Asian "growth miracle" that saw the take-off of economies like South Korea, Thailand, and Taiwan didn't involve a large rise in inequality, nor did the earlier take-off of Japan's economy. As Ranieri and Ramos note:

Another core reason for the shift of development thinking towards a constructive, or at least not pernicious, relationship between growth and equity was the phenomenal developmental performance of the so-called Asian tigers: Hong Kong, Singapore, South Korea and Taiwan. The East Asian developmental experience, which unfolded over the course of a larger time span but received most attention from the 1970s into the 1980s and early 1990s, decisively challenged the existence of an inescapable trade-off between growth and equity. Combining rapid growth in per capita income with relatively stable and low inequality,  it suggested that “there might be policy measures to foster the benign combination of high growth and rapid poverty reduction” ...

But as the goal of inclusive growth became common, a number of detailed questions emerged. For example, did inclusive growth mean an improvement in the level of standard of living for the poor, or did it mean that the standard of living for the poor needed to be faster than the average for the middle and upper income groups? To what extent did the word "inclusive" apply to the broader middle-class as well as the poor? Does inclusive growth refer to income that includes government transfers, or only to income earned in the market? Does inclusive growth include only private income, or does it also refer to improved provision of government services like education, health services, sanitation and water, or reliable electricity? Should the "inclusiveness" of growth be understood at least partially in terms of institutions for democratic representation and governance?

These different concepts of inclusive growth have different policy implications. While it's easy to feel an attraction to the concept of inclusive growth, it's not clear that it offers a growth formula that works. After all, for many low-income countries around the world, it hasn't seemed that their choice was between "inclusive growth" or "noninclusive growth," but rather they were just struggling to have meaningful growth of any kind.

There's no question that the conceptual problems with "inclusive growth" are severe. Rememver, the Ramieri and Ramos working paper is written for what is called the International Policy Center for Inclusive Growth (which in turn seems to be a joint venture between the UN Development Programme and the Brazilian government), and the writers nonetheless conclude:

"[G]overnments and multilateral development institutions speak of inclusive growth and devise and label objectives, strategies and policies accordingly. But there is no clarity about what is actually meant by inclusive growth; definitions vary and tend to be vague. In general, what seems to be implied is that inclusive growth involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions. But exactly what these entail and whether and how they are interconnected is not made clear. As the meaning of inclusiveness determines policy objectives, while it remains unclear, so do the objectives to be sought in designing policies aimed at promoting inclusive growth."

But despite the conceptual confusion, it seems to me that the terminology of "inclusive growth" does capture some important themes. The great problem of economic development is we cannot yet enunciate any compact list of government policies that reliably leads to a growth miracle. Indeed, given the many different circumstances of nations and economies, it may be that no single list exists, and that instead each country must diagnose which economic or institutional constraints are holding it back. Or it may even be that such diagnosis is too faulty to be reliable, and the best a a country can do is to work on basics like education, health, physical infrastructure, rule of law, and hope for best.

But when thinking about either the inputs to the development process or the outputs of the process, the inclusive growth concept can offer a useful reminder.  When thinking about policies to encourage development, it's a reminder that steps which help lower-income people in a direct way are worthwhile, not only because they might help to bring about economic growth but because benefiting those with lower incomes is beneficial in itself. In the general category of policies to help people in a direct way, I would include not just vaccinations and schooling and nutrition, but also policies that help people overcome the hurdles to starting a small business, or that allow people to monitor how public officials are spending money. When judging the results of development efforts, it's a useful reminder to look beyond the images of a huge and flash project like a dam, highway, factory, or mine, and consider the extent to which the project improved the day-to-day lives of lower-income people--whether through jobs and wages or through more affordable goods and services.

To steal a phrase from Ranieri and Ramos, the inclusive growth agenda is to search for a "constructive interaction of declining poverty and inequality and economic growth." That may be an insufficient agenda for economic development, in and of itself, but keep the potential for such constructive interactions in mind is surely worthwhile.

In Defense of Equality (without Welfare Economics)

Branko Milanovic:

In defense of equality (without welfare economics): When I taught recently at the Summer School at Groningen University, I began my lecture on the measurement of inequality by distinguishing between the Italian and English schools as they were defined in 1921 by Corrado Gini...

I put myself squarely in the camp of the “Italians”. Measurement of income inequality is like measurement of any natural or social phenomenon. We measure inequality as we measure temperature or height of people. The English (or welfarist) school believes that the measure of income inequality is only a proxy for a measure of a more fundamental phenomenon: inequality in welfare. The ultimate variable, according to them, that we want  to estimate is welfare (or even happiness) and it is distributed. Income provides only an empirically feasible short-cut to it.

I would have been sympathetic to that approach if I knew how individual utility can be measured. There is, I believe, no way to compare utilities of different persons. ... The only way for the “welfaristas” to solve this conundrum is to assume that all individuals  have the same utility function. This is such an unrealistically bold assumption that I think nobody would really care to defend it...

Now, the welfarst approach continues to be associated with pro-equality policies. Why? Because if all people have the same utility function, then the optimal distribution of income is such that everybody has the same income. ...

My students then asked how I can justify concern with inequality if I reject the welfarist view which is the main ideological vehicle through which equality of outcomes is being justified. (A non-utilitarian, contractarian alternative is provided by Rawls. Yet another alternative, based on equal capabilities—a close cousin to equality of opportunity (of which more below) is provided by Amartya Sen.)

My answer was that I justify concern with income inequality on three grounds.

The first ground is instrumental: the effect on economic growth. ...

The second is political effect. In societies where economic and political  spheres are not separated by the Chinese wall (and all existing societies are such), inequality in economic power seeps and ultimately invades and conquers the political sphere. ...

The third ground is philosophical. As Rawls has argued, every departure from unequal distribution of resources has to be defended by an appeal to a higher principle. Because we are all equal individuals (whether as declared by the Universal Charter of Human Rights or by God), we should all have an approximately equal opportunity to develop our skills and to lead a “good (and pleasant) life”. Because inequality of income almost directly translates into inequality of opportunities, it also directly negates that fundamental equality of all humans.  ...

I have to say here that in addition inequality of opportunity affects negatively economic growth...

My argument, if I need to reiterate it, is: you can reject welfarism, hold that inter-personal comparison of utility is impossible, and still feel very strongly that economic outcomes should be made more equal—that inequality should be limited so that it does not strongly affect opportunities, so that it does not slow growth and so that it does not undermine democracy. Isn’t that enough?

It is More Difficult for Workers to Move Up the Income Ladder

Austin Clemens at Equitable Growth:

New analysis shows it is more difficult for workers to move up the income ladder: Against a rising chorus of concern about increasing income inequality, some economists are pushing back, suggesting that it is not income inequality we should be concerned with but rather income mobility. Income mobility describes the ability of individuals to move up and down the income ladder over some period of time. As long as mobility is healthy, they argue, society can remain egalitarian in the face of inequality, because the poor can move up and the rich down. ...

Equitable Growth grantees Michael D. Carr and Emily E. Wiemers at the University of Massachusetts-Boston used a new dataset to revisit the measurement of earnings mobility, the part of income that comes from work. Their results suggest that lifetime earnings mobility has declined in recent years. ...

U.S. Top One Percent of Income Earners Hit New High in 2015

Emmanuel Saez:

U.S. top one percent of income earners hit new high in 2015 amid strong economic growth: The top 1 percent income earners in the United States hit a new high last year, according to the latest data from the U.S. Internal Revenue Service. ... The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period. ...

After a large decline of 11.6 percent from 2007 to 2009, real incomes of the bottom 99 percent of families registered a negligible 1.1 percent gain from 2009 to 2013, and then grew by 6.0 percent from 2013 to 2015. Hence, a full recovery in income growth for the bottom 99 percent remains elusive. Six years after the end of the Great Recession, those families have recovered only about sixty percent of their income losses due to that severe economic downturn.

In contrast, families at or near the top of the income ladder continued to power ahead. ... The share of income going to the top 10 percent of income earners—those making on average about $300,000 a year—increased to 50.5 percent in 2015 from 50.0 percent in 2014, the highest ever except for 2012. The share of income going to the top 1 percent of families—those earning on average about $1.4 million a year—increased to 22.0 percent in 2015 from 21.4 percent in 2014.

Income inequality in the United States persists at extremely high levels, particularly at the very top of the income ladder. ... This ... is unfortunately on par with a long-term widening of inequality since 1980, when the top 1 percent of families began to capture a disproportionate share of economic growth. ...

Policymakers ... need to grasp whether past efforts to raise taxes on the wealthy—in particular the higher tax rates for top U.S. income earners enacted in 2013 as part of the 2013 federal budget deal struck by Congress and the Obama Administration—are effective at slowing income inequality.

The latest data from the IRS suggests the 2013 reforms proved to be fleeting in terms of reducing income inequality. There was a dip in pre-tax income earned by the top one percent in 2013, yet by 2015 top incomes are once again on the rise—following a pattern of growing income inequality stretching back to the 1970s.

Productivity, Inequality, and Economic Rents

Jason Furman at ProMarket:

Productivity, Inequality, and Economic Rents: Productivity growth—a necessary (though not sufficient) condition for rising incomes in the long run—has slowed since 1973... At the same time, inequality in the United States is higher and, in recent decades, has risen faster than in other major advanced economies. ...

These dual trends ... have many distinct sources, but insofar as they have some causes in common, there is the potential to address these causes in ways that simultaneously improve efficiency and equity. To this end, the evidence that a rise in rents is contributing to both phenomena is important. ...

The good news is that to the degree that the “rents” interpretation is correct, it suggests that it is possible to reduce inequality and promote productivity growth without hurting efficiency by changing how rents are divided—or even that it is possible to do both while increasing efficiency by acting to reduce rents in the economy. Policies that raise the minimum wage and provide greater support for collective bargaining can help level the playing field for workers in negotiations with employers, in turn changing the way that rents are divided. Measures that would rationalize licensing requirements for employment, reduce zoning and other land-use restrictions, appropriately balance intellectual property regimes, and change the incentives that have led to the expansion of the financial sector as a share of the economy would all help curb excessive rents.

Additional measures that would reduce the scope and unequal distribution of economic rents include the promotion of competition through rulemaking and regulations, as well as the elimination of regulatory barriers to competition. ...

The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.

Property Rights, the Income Distribution, and China

Roger Farmer:

Property Rights, the Income Distribution and China: ...why has the distribution of income, in the United States and Europe, tilted towards capital and away from labor over the past few decades? There is growing evidence that this redistribution is connected with the opening of trade with China. Globalization has lifted a billion Chinese workers out of poverty and it has led to huge income gains for Americans and Europeans at the top of the income and wealth distributions. These gains have not been shared with middle class and working class people in the US and Europe. ...

It is ... possible to conceive of alternative forms of democracy that would provide greater rights to workers. Workers councils, for example, have proved to be relatively successful in Germany. 

The concept of private property is contingent on rights that are defined and enforced by national governments. Those rights are constantly evolving. When the US founding fathers signed the Declaration of Independence, it was still possible to buy and sell human beings. The idea that a national government would enforce the property rights of a slave owner is, to today's sensibilities, abhorrent. It is entirely possible that a system of property rights that allows a factory owner to close down a large manufacturing plant without consulting the workers whose livelihoods depend on its continued operation, will, in another two hundred years, appear to be equally abhorrent.

[This is part of a discussion of whether intervention in financial markets necessarily leads to an upward redistribution of income.]

The Growing Size and Incomes of the Upper Middle Class

New report from Stephen Rose at the Urban Institute:

The Growing Size and Incomes of the Upper Middle Class: ... I found that the upper middle class has grown substantially, from 12.9 percent of the population in 1979 to 29.4 percent in 2014. Further, with the exception of the bottom 6 per cent, real growth occurred throughout the income ladder. However, that growth was unevenly distributed in that people with higher incomes had faster growth than those with lower incomes. Consequently, these findings expand the discussion of rising inequality to focus on more than just the top 1 percent. Indeed, a massive shift has occurred in the center of gravity of the economy. In 1979, the middle class controlled a bit more than 46 percent of all income s, and the upper middle class and rich controlled 30 percent. In contrast, in 2014 the rich and upper middle class controlled 63 percent of all incomes ( 52 percent for the upper middle class and 11 percent for the rich); the middle class share had shrunk to 26 percent; and the shares of the lower middle class, poor, and near - poor had declined by half.

Competition Policy and Inclusive Growth

At VoxEU:

Competition policy and inclusive growth, by Fabienne Ilzkovitz and Adriaan Dierx: Firms with greater market power can behave monopolistically, and recent research suggests that declining market competitiveness is driving income inequality. While competition authorities already measure the overall impact of their interventions by using customer savings, these measurements do not account for indirect effects of intervention. This column introduces a DSGE model to model competition policy interventions as a negative mark-up shock. Competition policy has a significant and positive impact on growth and jobs, and impacts richer and poorer households differently. Interventions have important redistributive effects that benefit the poorest in society.

What’s the Right Minimum Wage? Reframing the Debate

At Equitable Growth:

 What’s the right minimum wage? Reframing the debate from ‘no job loss’ to a ‘minimum living wage,’ Working Paper 2016-06, by David Howell, Kea Fiedler, and Stephanie Luce: Abstract The American debate over the proper level of the statutory minimum wage has always reflected the tension between the twin goals of ensuring decent living-wage jobs with maximum job opportunity. The moral and efficiency arguments for a wage floor that can keep a worker above mere subsistence have a long history, dating back at least to Adam Smith. The U.S. federal minimum wage was established by the 1938 Fair Labor Standards Act to ensure a “minimum standard of living necessary for health, efficiency, and general well being of workers” and to do so “without substantially curtailing employment.” In recent years, the best evidence has shown that moderate increases from very low wage floors have no discernible effects on employment, which has strengthened the case for substantial increases in the minimum wage.

But the very strength of this new evidence—research designs that effectively identify employment effects at the level of individual establishments—has contributed to the adoption of a narrow No-Job-Loss (NJL) criterion: that the “right” wage floor is the one that previous research has demonstrated will pose little or no risk of future job loss, anywhere. The economist’s Pareto Criterion—a good policy is one that does no immediate harm to anyone—has replaced the earlier much broader concern with aggregate employment effects, and more generally, with overall net benefits to working families. The explicit moral and efficiency framing of the case for a living wage by earlier generations of economists, advocates, and policy makers has taken a back seat to statistical jousting over which wage floor will pose no risk of job loss (or harm) to anyone.

We think the debate over the proper level of the statutory minimum wage should be reframed from a NJL to a Minimum Living Wage (MLW) standard: the lowest wage a fulltime worker needs for a minimally decent standard of living. This paper illustrates and critiques the recent NJL framing, as well as the usefulness of one metric that has been heavily relied upon for identifying the NJL threshold—the ratio of the wage floor to the average wage (the Kaitz index). We argue that the proper framing of the debate is not over the statistical risk of the loss of some poverty-wage, high-turnover jobs, but rather over the wage floor that establishes a minimally decent standard of living from full-time work for all workers, along with complementary policies that would ensure that any costs of job loss would be more than fully remedied.

Unequal Gains: American Growth and Inequality Since 1700

Peter Lindert and Jeffrey Williamson at VoxEU:

Unequal gains: American growth and inequality since 1700. VoxEU.org: When did America become the world leader in average living standards? There is little disagreement about how American incomes have grown since 1870, thanks to the pioneering work of Simon Kuznets and many others.  Yet income estimates are weak and sparse for the years before 1870.  In spite of that, our history textbooks imply that the road to world income leadership was paved by the institutional wisdom of the Founding Fathers and those who refined it over the two centuries that followed.  While those institutions were well chosen, in a new book we show that British America had attained world leadership in living standards long before the Founding Fathers built their New Republic (Lindert and Williamson 2016). Furthermore, the road to prosperity was far bumpier than the benign textbook tales of American economic progress imply.

Was income ever distributed as unequally between the rich, middle, and poor as it is today?  As we are constantly reminded, the rise in US inequality over the half century since the 1970s has been very steep. The international research team led by Atkinson et al. (2011) has charted the dramatic 20th century fall and rise of top incomes in countries around the world, including the US.  However, until now evidence was not available for before WWI.  Thus, there is still no history of American income inequality for the two centuries before WWI, aside from a few informed guesses. We now supply that distributional evidence back to 1774.

A new approach with new data

Armed with new evidence, we apply a different approach to the historical estimation of what Americans have produced, earned, and consumed.  National income and product accounting reminds us that we should end up with the same number for GDP by assembling its value from any of three sides – the production side, the expenditure side, or the income side. All previous American estimates for the years before 1929 have proceeded on either the production or the expenditure side. 

We work instead on the income side, constructing nominal (current-price) GDP from free labor earnings, property incomes, and (up to 1860) slaves’ retained earnings (that is, slave maintenance or actual consumption). Our social tables build national income aggregates from details on labor and property incomes by occupation and location for the benchmark years 1774, 1800, 1850, 1860 and 1870. No such income estimates were available for any year before 1929 until now. 

Our unique approach leads to big rewards. One reward is the chance to challenge the production-side estimates using very different data and methods.  As we see below, our estimates are often dramatically different. An even bigger reward is that the income approach exposes the distribution of income by socio-economic class, race, and gender, as well as by region and urban-rural location. 

New findings about American income per capita leadership

America actually led Britain and all of Western Europe in purchasing power per capita during colonial times.  Britain’s American colonies were already ahead by 38% in 1700 and by 52% in 1774, just before the Revolution (Figure 1). Angus Maddison’s (2001) claim that American income per capita did not catch up to that of Britain until the start of the twentieth century is off by at least two centuries. 

Figure 1 Real purchasing power per capita: America versus Britain, 1700-2011

Since the 1770s, America’s big income per capita advantage over Britain has not increased.  The only historical moment in which the US soared well above its colonial lead over Britain and the rest of the world came at the end of WWII.  Since then, the American per capita income lead over Britain has fallen back to colonial levels. 

But note the vulnerability of America’s relative income per capita to costly wars. Fighting for independence may have cut American income per capita by as much as 30% between 1774 and 1790.  The causes seem clear – war damage, mortality and morbidity among young adult males, the destruction of loyalist social networks, a collapse of foreign markets for American exports, hyper-inflation, a dysfunctional financial system, and much more. Then, by 1860, the young republic had regained its big income lead, this time by as much as 46%. This was a period of rapid catching up with and overtaking of Western European per capita incomes, including that of Britain. Fast per capita income growth and even faster population growth made the America the second biggest economy in the world by 1860. However, the US lost most of that big lead (again) during the destructive Civil War decade. It gained the lead back once more by 1900, and briefly lost it (again) in the Great Depression of the 1930s.

American colonists probably had the highest fertility rates in the world, and their children probably had the highest survival rates in the world.  Thus, the colonies had much higher child dependency rates, and family sizes, than did Europe – and even higher than the Third World does today. What was true of the colonies was also true of the young Republic.  It follows that America’s early and big lead in income per capita was exceeded by its early lead in income per worker.

New findings about American inequality

Colonial America was the most income-egalitarian rich place on the planet. Among all Americans – slaves included – the richest 1% got only 8.5% of total income in 1774. Among free Americans, the top 1% got only 7.6%. Today, the top 1% in the US gets more than 20% of total income. Colonial America looks even more egalitarian when the comparison is by region – in New England the income Gini co-efficient was 0.37, the Middle Atlantic was 0.38, and the free South 0.34. Today the US income Gini is more than 0.5, before taxes and transfers. Colonial America was also far less unequal than Western Europe. England and Wales in 1759 had an income Gini of 0.52,and in 1802 it was 0.59. Holland in 1732 had an income Gini of 0.61, and the Netherlands in 1909 had 0.56.  Also, if you agree with neo-institutionalists that economic equality fosters political equality, which fosters pro-growth policies and institutions, then America’s huge middle class is certainly consistent with the young republic’s pro-growth Hamiltonian stance from 1790 onwards. That is, the middle 40% of the distribution got fully 52.5% of total income in New England, the cradle of the revolution!

As Figure 2 shows, it did not stay that way. A long steep rise in US inequality took place between 1800 and 1860, matching the widening income gaps we have witnessed since the 1970s. The earlier rise was not dominated by a surge in the property income share, as argued by Piketty (2014). Rather, this first great rise in inequality was broadly based, with widening income gaps throughout the whole income spectrum – rising urban-rural income gaps, skill premiums, gaps between slaves and the free, North-South income gaps, earnings inequality, and even property income inequality.

Figure 2 Income inequality in America, Britain, and the Netherlands, 1732-2010

From 1870 to WWI, American inequality moved along a high plateau with no big secular changes. Rather, the big drama followed afterwards.  Figure 3 documents that the income share captured by the richest 1% fell dramatically between the 1910s and the 1970s, and the share of the bottom half rose, for almost all countries supplying the necessary data. This ‘Great Leveling’ took place for several reasons. Wars and other macro-shocks destroyed private wealth (especially financial wealth) and shifted the political balance toward the left.  The labor force grew more slowly and automation was less rapid, improving the incomes of the less skilled. Rising trade barriers lowered the import of labor-intensive products and the export of skill-intensive products, favoring the less skilled in the lower and middle ranks. And in the US, the financial crash of 1929-1933 was followed by a half century of tight financial regulation, which held down the incomes of those employed in the financial sector and the net returns reaped by rich investors. We stress that this correlation between high finance and inequality is not spurious. Individuals with skilled financial knowledge have been well rewarded during the two inequality booms, and heavily penalized during the one big leveling (or two, if the 1776-1789 years are included).

Figure 3 Income share received by the top 1%, four countries over two centuries

The equality gained in the US during the Great Leveling slipped away after the 1970s.  The rising income gaps were partly due to policy shifts.  The US lost its lead in the quantity of mass education, and its gaps in educational achievement have widened relative to other leading countries. Financial deregulation in the 1980s also contributed powerfully to the rise in the top income shares and also to crises and recessions. A regressive pattern of tax cuts allowed more wealth to be inherited rather than earned. These policy shortfalls are, of course, reversible and without any obvious loss in GDP.

History lessons

American history suggests that inequality is not driven by some fundamental law of capitalist development, but rather by episodic shifts in five basic forces – demography, education policy, trade competition, financial regulation policy, and labor-saving technological change. While some of these forces are clearly exogenous, others – particularly policies regarding education, financial regulation, and inheritance taxation – offer ways to check the rise of inequality while also promoting growth.

References

Atkinson, A B, T Piketty, and E Saez (2011), “Top Incomes in the Long Run of History,” Journal of Economic Literature 49, 1: 3-71

Lindert, P H, and J G Williamson (2016), Unequal Gains: American Growth and Inequality since 1700, Princeton N.J., Princeton University Press

Maddison, A (2001), The World Economy: A Millennial Perspective, Paris, OECD Development Centre Studies

Piketty, T (2014), Capital in the Twenty-First Century, Cambridge Mass., Belknap Press

The Overinflated Fear of Being Priced Out of Housing

Robert Shiller:

The Overinflated Fear of Being Priced Out of Housing: Rising home prices set off fears that real estate will become even more expensive, making it impossible ever to buy a home in a given city.

It’s easy to understand how such worries spread, but the historical record suggests that these fears are generally exaggerated. ...

There is another wrinkle, however. Demand lately has tilted toward homes in central cities, where land is scarce, rather than in more spacious distant suburbs. This creates imbalances. ... While living space is constrained in the heart of large, high-priced cities like New York, builders elsewhere have usually been able to accommodate people’s demands for cheap large homes roughly where they want them. ...

Given these facts, why do people still worry that home prices are getting out of reach? The answer can’t be found in the housing data. Instead, these fears may reflect anxieties about other issues — like income inequality, globalization and the threat of job losses because of robots and artificial intelligence. In prosperous cities, rising prices may connote economic exclusion.

After all, American society is increasingly divided according to educational attainment and income. In some circles, rarefied home prices may set off worries about being unable to live in choice locations shared with successful people. Home prices may, unfortunately, be viewed as a measurement of success in life rather than merely of floor space, and fear of being priced out of housing may well be rooted in deeper broodings about maintaining a position in the social hierarchy.

The Problem With Inequality, According to Adam Smith

Dennis Rasmussen at ​The Atlantic

The Problem With Inequality, According to Adam Smith, by Dennis C. Rasmussen, ​The Atlantic: ...Many a scholar has made a career, in recent decades, by pointing out that this view of Smith is a gross caricature. ...

What has received little attention, even by those who approach Smith’s thought from the contemporary left, is that he also identified some deep problems with economic inequality. ... When people worry about inequality today, they generally worry that it inhibits economic growth, prevents social mobility, impairs democracy, or runs afoul of some standard of fairness. ...

None of these problems, however, were Smith’s chief concern—that economic inequality distorts people’s sympathies, leading them to admire and emulate the very rich and to neglect and even scorn the poor. Smith used the term “sympathy” ... to denote the process of imaginatively projecting oneself into the situation of another person, or of putting oneself into another’s shoes. ... And he claimed that, due to a quirk of human nature, people generally find it easier to sympathize with joy than with sorrow, or at least with what they perceive to be joy and sorrow. ...

What’s more, Smith saw this distortion of people’s sympathies as having profound consequences: It undermines both morality and happiness. First, morality. Smith saw the widespread admiration of the rich as morally problematic because he did not believe that the rich in fact tend to be terribly admirable people. On the contrary, he portrayed the “superior stations” of society as suffused with “vice and folly,” “presumption and vanity,” “flattery and falsehood,” “proud ambition and ostentatious avidity.” In Smith’s view, the reason why the rich generally do not behave admirably is, ironically, that they are widely admired anyway...

Smith also believed that the tendency to sympathize with the rich more easily than the poor makes people less happy. ...Smith’s writings ... associated happiness with tranquility—a lack of internal discord—and insisted not only that money can’t buy happiness but also that the pursuit of riches generally detracts from one’s happiness. ... Happiness consists largely of tranquility, and there is little tranquility to be found in a life of toiling and striving to keep up with the Joneses. ...

[See the full article for more, e.g. Smith's ideas on the alleviation of poverty.]

Study Dispels Myth about Millionaire Migration in the US

From the American Sociological Association

Study dispels myth about millionaire migration in the US., EurekAlert: The view that the rich are highly mobile has gained much political traction in recent years and has become a central argument in debates about whether there should be "millionaire taxes" on top-income earners. But a new study dispels the common myth about the propensity of millionaires in the United States to move from high to low tax states.

"The most striking finding in our study is how little elites seem willing to move to exploit tax advantages across state lines," said Cristobal Young, an assistant professor of sociology at Stanford University and the lead author of the study. ...

In any given year, Young and his fellow researchers found that roughly 500,000 individuals file tax returns reporting incomes of $1 million or more (constant 2005 dollars). From this population, only about 12,000 millionaires change their state each year. The annual millionaire migration rate is 2.4 percent, which is lower than the migration rate of the general population (2.9 percent). The highest rates of migration are seen among low-income tax filers: migration is 4.5 percent among people who earn around $10,000 a year. ...

The study finds that family responsibilities are a key factor that limit migration among top-income earners. "Very affluent people are much more likely to be married and to have school-age children, which makes moving more difficult," Young said. ...

While millionaire migration is extremely limited, there is a grain of truth in the worries about millionaire tax flight, the study finds. "When millionaires do migrate, they are more likely to move to a state with a lower tax rate, and that state is almost always Florida," Young said. ...

"My guess is that if Florida established a 'millionaire tax,' elites would still find Florida appealing because of its climate and geography -- and patterns of elite migration wouldn't really change," Young said. ...

The study also looked at the millionaire population along the borders between states with different tax rates. "In these narrow geographic regions, you would expect millionaires to cluster on the low tax side of the border, but we see very weak evidence of this," Young said.

As for policy implications, Young said "millionaire taxes" result in minimal tax flight among millionaires and help states raise revenue to improve education, infrastructure, and public services, while reducing inequality.

"Our research indicates that 'millionaire taxes' raise a lot of revenue and have very little downside," Young said.

Paul Krugman: Obama’s War on Inequality

Elections matter:

Obama’s War on Inequality, by Paul Krugman, NY Times: There were two big economic policy stories this week that you may have missed... Each tells you a lot about both what President Obama has accomplished and the stakes in this year’s election. ...

Donald Trump... — who has already declared that he will, in fact, slash taxes on the rich... — once again declared his intention to do away with Dodd-Frank... Just for the record, while Mr. Trump is sometimes described as a “populist,” almost every substantive policy he has announced would make the rich richer at workers’ expense.

The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers. ...

Now, America isn’t about to become Denmark... But more has happened than you might think.

Most obviously, Obamacare provides aid and subsidies mainly to lower-income working Americans, and it pays for that aid partly with higher taxes at the top. That makes it an important redistributionist policy — the biggest such policy since the 1960s.

And between those extra Obamacare taxes and the expiration of the high-end Bush tax cuts... the average federal tax rate on the top 1 percent has risen quite a lot. In fact, it’s roughly back to what it was in 1979, pre-Ronald Reagan, something nobody seems to know. ...

Dodd-Frank actually has put a substantial crimp in the ability of Wall Street to make money hand over fist. It doesn’t go far enough, but it’s significant enough to have bankers howling, which is a good sign.

And while the move on overtime comes late in the game, it’s a pretty big deal, and could be the beginning of much broader action.

Again, nothing Mr. Obama has done will put more than a modest dent in American inequality. But his actions aren’t trivial, either.

And even these medium-size steps put the lie to the pessimism and fatalism one hears all too often on this subject. No, America isn’t an oligarchy in which both parties reliably serve the interests of the economic elite. Money talks on both sides of the aisle, but the influence of big donors hasn’t prevented the current president from doing a substantial amount to narrow income gaps — and he would have done much more if he’d faced less opposition in Congress.

And in this as in so much else, it matters hugely whom the nation chooses as his successor.

Worlds of Inequality

Travel day -- will post more later if and when I can.

This is a review of Branko Milanovic's "Global Inequality: A New Approach for the Age of Globalization" by Miles Corak:

Worlds of Inequality, The American Prospect: This book begins by posing a question: “Who has gained from globalization?” Many thoughtful Americans have the confidence to answer in a sentence. The gains have been captured by the top 1 percent. And the book ends with another question: “Will inequality disappear as globalization continues?” Many might be just as quick to answer: Of course not, the rich will get richer! But life is not so simple. Between these two questions Branko Milanovic offers us not just a plethora of facts about income inequality that will surely make his readers think twice. More importantly, he shows us the power of bringing the facts into focus by putting a new lens over these pressing issues—a global perspective. ...

The most striking fact that motivates his book is a graph that the Twittersphere has already termed “the elephant curve.” This is the one-sentence, or rather one-picture, answer to the first question: “The gains from globalization are not evenly distributed.” ...

Clearly evident are the rise of a global middle class, in some important measure reflecting the great march out of poverty in China, and the equally amazing rise in the incomes of the top 1 percent globally. The winners of globalization were many people who three decades ago were dirt-poor, and though a big percentage increase in a very low income still amounts to a rather low income by the standards of the average person in the rich countries, it is a major movement in the right direction. But the great winners of globalization were also a relatively few people in the already-rich countries, a global plutocracy who also experienced income gains of over 50 percent, but from a much higher starting point. Both of these changes are without precedent in the history of humanity.

But the elephant curve also shows that even though some have gained, others have not seen their prospects improve at all—indeed, probably leading lives of more insecurity and more worry, not just about their prospects but also the prospects of their children. The big losers in these global income sweepstakes have been middle- and lower-income people of the rich countries...

The Davos Lie

Kevin O'Rourke:

The Davos lie: ... If there's one thing that people agree about in Davos, it's that globalisation is a Good Thing. ...

As is well known, many Western societies have become more unequal over the past two decades... During the 1980s and 1990s, the consensus was that this growing inequality was due not to international trade, but to technological change that was systematically favouring skilled over unskilled workers. ...

More recently, however, the debate has swung back towards the view that trade is important in explaining rising inequality...

Unfortunately for Davos, globalisation's losers are becoming increasingly hostile to trade (and immigration)..., ordinary people's attitudes towards globalisation are exactly what Heckscher-Ohlin economics would predict. ...

Economists can tut-tut all they want about working-class people refusing to buy into the benefits of globalisation, but as social scientists we surely need to think about the predictable political consequences of economic policies. Too much globalisation, without domestic safety nets and other policies that can adequately protect globalisation's losers, will inevitably invite a political backlash. Indeed, it is already upon us.

Growth of Income and Welfare in the U.S, 1979-2011

From the NBER:

Growth of income and welfare in the U.S, 1979-2011, by John Komlos, NBER Working Paper No. 22211 Issued in April 2016: We estimate growth rates of real incomes in the U.S. by quintiles using the Congressional Budget Office’s (CBO) post-tax, post-transfer data as basis for the period 1979-2011. We improve upon them by including only the present value of earnings that will accrue in retirement and excluding items included in the CBO income estimates such as “corporate taxes borne by labor” that do not increase either current purchasing power or utility. We estimate a high and a low growth rate using two price indexes, the CPI and the Personal Consumption Expenditure index. The major consistent findings include what in the colloquial is referred to as the “hollowing out” of the middle class. According to these estimates, the income of the middle class 2nd and 3rd quintiles increased at a rate of between 0.1% and 0.7% per annum, i.e., barely distinguishable from zero. Even that meager rate was achieved only through substantial transfer payments. In contrast, the income of the top 1% grew at an astronomical rate of between 3.4% and 3.9% per annum during the 32-year period, reaching an average annual value of $918,000, up from $281,000 in 1979 (in 2011 dollars). Hence, the post-tax, post-transfer income of the 1% relative to the 1st quintile increased from a factor of 21 in 1979 to a factor of 51 in 2011. However, income of no other group increased substantially relative to that of the lowest quintile. Oddly, the income of even those in the 96-99 percentiles increased only from a multiple of 8.1 to a multiple of 11.3. We next estimate growth in welfare assuming diminishing marginal utility of income. A logarithmic utility function yields a growth in welfare for the middle class of roughly 0.01% to 0.07% per annum, which is indistinguishable from zero. With interdependent utility functions only the welfare of the 5th quintile experienced meaningful growth while those of the first four quintiles tend to be either negligible or even negative.

[Open link to earlier version.]

Why Wages Aren’t Keeping Up

Robert Solow:

The Future of Work: Why Wages Aren’t Keeping Up: ... The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished. This is not to say that international competition and the biased nature of new technology have no role to play, only that they are not the whole story. Internal social change and the division of rent matter too.

Now I would like to connect this hypothesis with another change taking place in the labor market. Lacking anything more euphonious, I will call it the casualization of labor. The proportion of part-time workers has been rising: both those who prefer it that way and those who would rather have a full-time job. So is the number of temporary workers... So are the numbers of workers on fixed-term contracts and independent contractors, many of whom are doing the same work as they once did as regular employees. These are all good-faith members of the labor force; they are employed but without what used to be thought of as a regular job.

This shift toward more casual labor interacts with the issue of the division of rents. Casual workers have little or no effective claim to the rent component of any firm’s value added. They have little identification with the firm, and they have correspondingly little bargaining power. Unions find them difficult to organize, for obvious reasons. If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.

Paul Krugman: Robber Baron Recessions

Paul Krugman made similar points in 2012, but the part about secular stagnation is new:

Robber Baron Recessions, by Paul Krugman, NY Times: ...In recent years many economists, including people like Larry Summers and yours truly, have  come to the conclusion that growing monopoly power is a big problem for the U.S. economy — and not just because it raises profits at the expense of wages. ...

The argument begins with a seeming paradox about overall corporate behavior. You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology ... hasn’t taken off...

How can this paradox be resolved? Well, suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position I just described...

And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to “secular stagnation” ... But do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies...

The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan.

For Reagan didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement. ...

On Friday the White House issued an executive order directing federal agencies to use whatever authority they have to “promote competition.” What this means in practice isn’t clear... But it may mark a turning point in governing philosophy, which could have large consequences if Democrats hold the presidency.

For we aren’t just living in a second Gilded Age, we’re also living in a second robber baron era. And only one party seems bothered by either of those observations.

Multidimensional Poverty and Race in America

Richard V. Reeves, Edward Rodrigue, and Elizabeth Kneebone at the Brookings Institution:

Multidimensional poverty and race in America: Poverty is typically defined in terms of a lack of adequate income, especially in U.S. policy debates. But the experience of poverty goes well beyond household finances, and can include a lack of education, work, access to healthcare, or distressed neighborhood conditions. These additional dimensions of poverty can be layered on top of income poverty; they can also put those who are not income-poor at a disadvantage.

In a new report published today, we look at poverty across multiple dimensions for adults aged 25 to 61, using the 2014 American Community Survey. We look in particular at differences in how different dimensions of disadvantage overlap, or cluster together for people in different racial categories. We find stark race gaps in the risks of overlapping disadvantage in five dimensions (as this accompanying interactive shows):

1. Low household income (below 150 percent of the federal poverty line)
2. Limited education (less than a high school degree)
3. Lack of health insurance
4. Low income area (PUMA poverty rate exceeds 20 percent)
5. HoHousehold unemployment

Almost half of the U.S. population suffered from at least one of the five disadvantages in 2014. The proportion suffering from many dimensions of poverty is lower—but far from trivial. For instance, there are more than 3 million black adults and 5 million Hispanic adults facing at least three disadvantages:

Most white adults don’t suffer any of the five disadvantages. Most Hispanic and black adults do. Only 38 percent of white adults face at least one disadvantage, versus almost 70 percent for Hispanic and black residents. Furthermore, among the white adults that do experience at least one disadvantage, most don’t experience any additional disadvantages. By contrast, most black and Hispanic adults with at least one disadvantage suffer at least one additional disadvantage. ...

There are important differences between people in different racial categories, however. Black residents are more likely to live in a poor area and/or a jobless family than Hispanics, who are more likely to lack a high school education and/or health insurance ...

Scholars and policy-makers inspired by the capabilities-based approach of Amartya Sen are advancing broader approaches to measures of poverty and well-beinga. Some nations including Mexico have formally adopted a multidimensional measure. Others such as France and England are giving more weight to non-monetary forms of disadvantage. The U.S. has made strides in addressing the many shortcomings of the official poverty measure through the creation of the much more nuanced Supplemental Poverty Measure. But it is still an income-only yardstick.

A A more multifaceted approach to measuring poverty, like the one offered here, reveals some of the insights that can be gained in the U.S. by framing the issue more broadly—from revealing the deep racial and ethnic disparities that exist to shedding light on the differing dimensions of disadvantage experienced from one group to the next.

In our next paper, to be published next week, we examine the geography of multidimensional poverty...

Inequality and Aggregate Demand

Next paper at the conference:

Inequality and Aggregate Demand, by with Adrien Auclert and Mathew Rognile: Abstract: We explore the quantitative effects of transitory and persistent increases in income inequality on equilibrium interest rates and output. Our starting point is a Bewley-Huggett-Aiyagari model featuring rich heterogeneity and earnings dynamics as well as downward nominal wage rigidities. A temporary rise in inequality, if not accommodated by monetary policy, has an immediate effect on output that can be quantified using the empirical covariance between income and marginal propensities to consume. A permanent rise in inequality can lead to a permanent Keynesian recession, which is not fully offset by monetary policy due to a lower bound on interest rates. We show that the magnitude of the real interest rate fall and the severity of the steady-state slump can be approximated by simple formulas involving quantifiable elasticities and shares, together with two parameters that summarize the effect of idiosyncratic uncertainty and real interest rates on aggregate savings. For plausible parametrizations the rise in inequality can push the economy into a liquidity trap and create a deep recession. Capital investment and deficit-financed fiscal policy mitigate the fall in real interest rates and the severity of the slump.

'The Schumpeter Hotel: Income Inequality and Social Mobility'

Branko Milanovic:

The Schumpeter hotel: income inequality and social mobility: In one of his rare discussions of inequality, Joseph Schumpeter illustrated in a metaphor the difference between the inequality we observe at a moment in time and social (or inter-generational) mobility. Suppose, Schumpeter writes, that there is a multiple-story-high hotel with higher floors containing fewer people and having much nicer rooms. At any given moment, there would be lots of people on the ground floor living in cramped small rooms, and just a few people in the nice and comfortable top-floor rooms with a view. But then let the guests move around and change the rooms every night. This  is what, Schumpeter said, social mobility will do: at every given moment of time there are rich and poor but as we extend the time period, today’s rich are yesterday’s poor and vice versa. The guests from the ground floors (or at least their children) have made it to the top, those from the top might have tumbled down to the bottom.

Now, Schumpeter’s metaphor was for a long time a metaphor for US inequality too. It was granted that in the 20^th, and even in the 19^th, century US income inequality might have been greater than inequality in Europe, but it was also held that US society was much more fluid, less class-bound and that there was greater social mobility. (That view of course conveniently overlooked the huge racial divide in the US.) In other words, inequality was the price that America paid for high social mobility.

This was a reassuring  picture consonant with the idea of the American dream.  But was it  true? We actually never knew it, beyond anecdotal evidence of migrants’ lives, since no consistent empirical studies of inter-generational mobility existed until very recently. ...

The comforting picture of high inequality which does not impede mobility between generations turns out to be false. US does not behave any differently than other societies with high inequality. High income inequality today reinforces income differences between the generations and makes social mobility more difficult to achieve. This is also the point of my recent paper with Roy van der Weide. We use US micro data from 1960 to 2010 to show that poor people in US states with higher initial inequality experienced lower income growth in subsequent periods.

This important finding ... two important implications:  (1) American exceptionalism in the matters of income distribution does not have a basis in reality, and (2) we can use, with a good degree of confidence, the easily available data on current inequality as predictors of social mobility. Thus one cannot argue that societies with high inequality in incomes are societies with high equality of opportunity. On the contrary, observed high inequality today implies low equality of opportunity.

The Spiral of Inequality

Interesting to go back nearly 20 years and ask how much things have changed (or not). This is Paul Krugman at the end of 1996:

The Spiral of Inequality, by Paul Krugman,  November/December 1996 Issue, Mother Jones: Ever since the election of Ronald Reagan, right-wing radicals have insisted that they started a revolution in America. They are half right. If by a revolution we mean a change in politics, economics, and society that is so large as to transform the character of the nation, then there is indeed a revolution in progress. The radical right did not make this revolution, although it has done its best to help it along. If anything, we might say that the revolution created the new right. But whatever the cause, it has become urgent that we appreciate the depth and significance of this new American revolution—and try to stop it before it becomes irreversible.

The consequences of the revolution are obvious in cities across the nation. Since I know the area well, let me take you on a walk down University Avenue in Palo Alto, California. ...

You can confirm what your eyes see, in Palo Alto or in any American community, with dozens of statistics. The most straightforward are those on income shares supplied by the Bureau of the Census, whose statistics are among the most rigorously apolitical. In 1970, according to the bureau, the bottom 20 percent of US families received only 5.4 percent of the income, while the top 5 percent received 15.6 percent. By 1994, the bottom fifth had only 4.2 percent, while the top 5 percent had increased its share to 20.1 percent. That means that in 1994, the average income among the top 5 percent of families was more than 19 times that of the bottom 20 percent of families. In 1970, it had been only about 11.5 times as much. (Incidentally, while the change in distribution is most visible at the top and bottom, families in the middle have also lost: The income share of the middle 20 percent of families has fallen from 17.6 to 15.7 percent.) These are not abstract numbers. They are the statistical signature of a seismic shift in the character of our society.

The American notion of what constitutes the middle class has always been a bit strange, because both people who are quite poor and those who are objectively way up the scale tend to think of themselves as being in the middle. But if calling America a middle-class nation means anything, it means that we are a society in which most people live more or less the same kind of life.

In 1970 we were that kind of society. Today we are not, and we become less like one with each passing year. As politicians compete over who really stands for middle-class values, what the public should be asking them is, What middle class? How can we have common "middle-class" values if whole segments of society live in vastly different economic universes?

If this election was really about what the candidates claim, it would be devoted to two questions: Why has America ceased to be a middle-class nation? And, more important, what can be done to make it a middle-class nation again? ...

The Sources of Inequality...

Values, Power, and Wages ...

The Decline of Labor ...

Strategies for the Future ...

Here's a link to the article.

'Make Elites Compete: Why the 1% Earn So Much and What To Do about It'

Jonathan Rothwell at Brookings:

... In his “defense of the one percent,” economist Greg Mankiw argues that elite earnings are based on their higher levels of IQ, skills, and valuable contributions to the economy. The globally-integrated, technologically-powered economy has shifted so that very highly-talented people can generate very high incomes.

It is certainly true that rising relative returns to education have driven up inequality. But as I have written earlier, this is true among the bottom 99 percent. There is no evidence to support the idea that the top 1 percent consists mostly of people of “exceptional talent.” In fact, there is quite a bit of evidence to the contrary.

Drawing on state administrative records for millions of individual Americans and their employers from 1990 to 2011, John Abowd and co-authors have estimated how far individual skills influence earnings in particular industries. They find that people working in the securities industry (which includes investment banks and hedge funds) earn 26 percent more, regardless of skill. Those working in legal services get a 23 percent pay raise. These are among the two industries with the highest levels of “gratuitous pay”—pay in excess of skill (or “rents” in the economics literature). At the other end of the spectrum, people working in eating and drinking establishments earn 40 percent below their skill level. ...

Much more here.

Paul Krugman: On Invincible Ignorance

Republicans are in denial:

On Invincible Ignorance, by Paul Krugman, Commentary, NY Times: Remember Paul Ryan? The speaker of the House... I was interested to read what Mr. Ryan said in a recent interview with John Harwood. What has he learned from recent events?

And the answer is, nothing.

Like just about everyone in the Republican establishment, Mr. Ryan is in denial about the roots of Trumpism, about the extent to which the party deliberately cultivated anger and racial backlash, only to lose control of the monster it created. ...

You might think that Republican thought leaders would be engaged in some soul-searching about their party’s obsession with cutting taxes on the wealthy. ...

But here’s what Mr. Ryan said about all those tax cuts for the top 1 percent: “I do not like the idea of buying into these distributional tables. What you’re talking about is what we call static distribution. It’s a ridiculous notion.”

Aha. The income mobility zombie strikes again.

Ever since income inequality began its sharp rise in the 1980s, one favorite conservative excuse has been that it doesn’t mean anything, ... statistics showing that many people who are in the top 1 percent in any given year are out of that category the next year.

But a closer look at the data shows that there is less to this observation than it seems. These days, it takes an income of around $400,000 a year to put you in the top 1 percent, and most of the fluctuation in incomes we see involves people going from, say, $350,000 to $450,000 or vice versa..., which means that tax cuts that mainly benefit the rich are indeed targeted at a small group of people, not the public at large.

And here’s the thing: This isn’t a new observation. ...

Appalled Republicans may rail against Donald Trump’s arrogant ignorance. But how different, really, are the party’s mainstream leaders? Their blinkered view of the world has the veneer of respectability, may go along with an appearance of thoughtfulness, but in reality it’s just as impervious to evidence — maybe even more so, because it has the power of groupthink behind it. ...

What we’re getting ... is at least the possibility of a cleansing shock — of a period in the political wilderness that will finally force the Republican establishment to rethink its premises. That’s a good thing — or it would be, if it didn’t also come with the risk of President Trump.

'Income Inequality and Income Mobility: New Evidence from OECD Nations'

From VoxEU:

Income inequality and income mobility: New evidence from OECD nations, by Andrea Garnero, Alexander Hijzen , and Sébastien: Summary Some economists argue that income inequality suggests intra-generational mobility in society. This column provides comprehensive evidence across a large number of advanced economies on the importance of intra-generational mobility and its relationship with earnings inequality. The findings do not support the belief that higher earnings inequality necessarily goes hand-in-hand with greater mobility over the working life. Higher inequalities are not systematically compensated by higher mobility opportunities. ...

'How Wage Insurance Could Ease Economic Inequality'

Robert Shiller:

How Wage Insurance Could Ease Economic Inequality: Wage insurance may not be on your radar, but it should be. It helps people who have lost their jobs and cannot find new ones that pay as well. That assistance can reduce economic inequality while providing incentives for unemployed people to go back to work quickly.

What’s more, wage insurance has bipartisan support, at least in its current limited form. We ought to expand it, both through government and in the private sector. ...

The role of government is important in this case because for social insurance, governments have a significant advantage in putting into place big ideas that are difficult to market. That was true for federal Old-Age, Survivors and Disability Insurance in the Social Security system starting in 1935, which was followed by an explosion of additional private pension, life insurance and disability plans. Government is needed again now.

But ultimately, there should be two insurance systems, a government one that is limited to assisting lower-income workers and a private one that allows everyone — including those with higher incomes — to buy insurance against wage loss. ...

Thomas Piketty, Paul Krugman, and Joseph Stiglitz: The Genius of Economics (Video)

'Trade, Trump, and Downward Class Warfare'

This is from Mark Kleiman (via Brad DeLong):

Trade, Trump, and Downward Class Warfare, by Mark Kleiman: A conversation with my Marron Institute colleague Paul Romer yesterday crystallized an idea I’d been toying with for some time. In a nutshell: opponents of taxing the rich have destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.

The Econ-101 case for free trade is straightforward: Trade benefits those who produce exports and those who consume imports (including producers who use imported goods as inputs). It hurts the producers of goods which can be made better or more cheaply abroad. But the gains to the winners exceed the gains to the losers: that is, the winners could make the losers whole and still come out ahead themselves. Therefore, trade passes the Pareto test.

[Yes, this elides a number of issues, including path-dependency in increasing-returns and learning-by-doing markets on the pure-economics side and the salting of actual agreements with provisions that create or protect economic rents on the political-economy side. It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants.]

So when the modern Republican Party (R.I.P), in the name of “small government” and opposition to “class warfare,” set its face against policies to redistribute the gains from economic growth, it destroyed the theoretical basis for thinking that a rising tide would lift all the boats, rather than lifting the yachts and swamping the trawlers. Free trade without redistribution (especially the corrupt version of “free trade” with corporate rent-seeking written into it) is basically class warfare waged downwards. ...

'Nearly Half of American Children Living Near Poverty Line'

"Millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy":

Nearly half of American children living near poverty line, Eurekalert!: Nearly half of children in the United States live dangerously close to the poverty line, according to new research from the National Center for Children in Poverty (NCCP) at Columbia University's Mailman School of Public Health. Basic Facts about Low-Income Children, the center's annual series of profiles on child poverty in America, illustrates the severity of economic instability and poverty conditions faced by more than 31 million children throughout the United States. Using the latest data from the American Community Survey, NCCP researchers found that while the total number of children in the U.S. has remained about the same since 2008, more children today are likely to live in families barely able to afford their most basic needs.

"These data challenge the prevailing beliefs that many still hold about what poverty looks like and which children in this country are most likely to be at risk," said Renée Wilson-Simmons, DrPH, NCCP director. "The fact is, despite the significant gains we've made in expanding nutrition and health insurance programs to reach the children most in need, millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy."

According to NCCP researchers, the number of poor children in the U.S. grew by 18 percent from 2008 to 2014 (the latest available data), and the number of children living in low-income households grew by 10 percent. ...

'Introducing Kuznets Waves: How income Inequality Waxes and Wanes over the Very Long Run '

Branko Milanovic at VoxEU:

Introducing Kuznets waves: How income inequality waxes and wanes over the very long run: In 1955 when Simon Kuznets wrote about the movement of inequality in rich countries (and a couple of poor ones), the US and the UK were in the midst of the most significant decrease of income inequality ever registered in history, coupled with fast growth. It thus seemed eminently reasonable to look at the factors behind the decrease of inequality, and Kuznets famously found them in expanded education, lower inter-sectoral productivity differences (thus the rent component of wages would be equalized), lower return to capital, and political pressure for greater social transfers. He then looked at (or rather imagined) the evolution of inequality during the previous century and thought that, driven by the transfer of labor from agriculture to manufacturing, inequality rose and reached its peak in the rich world sometime around the turn of the 20th century. Thus, he created the famous Kuznets curve.

The Kuznets curve was the main tool used by inequality economists when thinking about the relationship between development or growth and inequality over the past half century. But the Kuznets curve gradually fell out of favor because its prediction of low inequality in very rich societies could not be squared with the sustained increase in income inequality that started in the late 1970s in practically all developed nations (see the long-run graphs for the US and the UK). Many people thus rejected it.

The upswing in current inequality as a second Kuznets curve

In a new book (Milanovic 2016), I argue however that we should see the current upswing in inequality as the second Kuznets curve in the modern times, being driven, like the first, mostly by a technological revolution and the transfer of labor from more homogeneous manufacturing into skill-heterogeneous services (and thus producing a decline in the ability of workers to organize), but also (again like the first) by globalization, which has both led to the famous hollowing out of the middle classes in the west and to a pressure to reduce high tax rates on mobile capital and high-skilled labor. The elements listed here are not new. But putting them together (especially viewing technological progress and globalization as practically indissoluble, even if conceptually different) and viewing this as part of regular Kuznets waves is new. It has obvious implications for the future, not the least that this bout of inequality growth will peak like the previous one and eventually go down. ...

Skipping forward:

Inequality may not be overturned soon

Which leads us to the present. How long will the current upswing of the Kuznets wave continue in the rich world, and when and how will it stop? I am skeptical that it will be overturned soon, at least not in the US where I see four powerful forces that keep on pushing inequality up. I will just list them here (they are, of course, discussed in the book):

• Rising share of capital income which is in all rich countries extremely concentrated among the rich (with a Gini in excess of 90);
• Growing association of high incomes from both capital and labor in the hands of the same people (Atkinson and Lakner 2014);
• Homogamy (the educated and the rich marrying each other); and
• Growing importance of money in politics which allows the rich to write rules favorable to them and thus to maintain the inequality momentum (Gilens 2012).

The peak of inequality in the second Kuznets wave should be lower than in the first (when in the UK, it was equal to the inequality level of today’s South Africa) because the rich societies have in the meantime acquired a number of ‘inequality stabilizers’, from unemployment benefits to state pensions.

The pro-inequality trends will be very hard to overturn during the next generation, but eventually they may be – through a combination of political change, pro-unskilled labor technological innovations (which will become more profitable as skilled labor’s price increases), dissipation of rents acquired during the current bout of technological efflorescence, and possibly greater attempts to equalize ownership of assets (through forms of ‘people’s capitalism’ and workers’ shareholding).   

Now, these are of course the benign factors that, I think, will ultimately set inequality in rich countries on its downward path. But history teaches us too that there are malign factors, notably wars, in turn caused by domestic maldistribution of income and power of the elites (as was the case in the World War I), that can also do the job of income leveling. But they do it at the cost of millions of human lives. One can hope that we have learned something from history and would avoid this destructive path to equality in poverty and death.

A 'Second-Chance' Society

Social programs "need to be refitted for a polarized labor market hard-wired to generate inequalities":

Why Canada should foster a ‘second-chance’ society, by Miles Corak: Canadians should be thumping their chests, after all many others are patting us on the back. When it comes to social mobility we are among the world leaders. Even U.S. President Obama acknowledged that a poor child is more likely to move up in life in Canada than in the United States.

This kind of mobility, the capacity for children to become all that they can be without regard to their starting point in life, is the bedrock of fairness. ...

But ... the ... foundations of fairness are shifting; luck will matter more, meritocracy will be perverted by growing inequality, and our public policies haven’t really changed to prepare for the new reality that is already pressing on young people. ...

Canadians need to build a “second chance” society so that the consequences of bad luck or bad choices don’t matter as much.

There is a whole host of ways our social programs built up in an era of stable and steady job growth need to be refitted for a polarized labor market hard-wired to generate inequalities. ...

He goes on to explain some of the ways this might be accomplished.

'How Did Globalization Affect German Manufacturing Workers?'

From VoxEU:

How did globalization affect the job biographies of German manufacturing workers?, by Wolfgang Dauth, Sebastian Findeisen, and Jens Südekum: What are the labor market effects of globalization? This question dates back, at least, to the seminal work by Stolper and Samuelson (1941), but even today relatively little is known about the micro-level impacts of trade shocks on the job biographies of single workers. How are different individuals affected? Does it depend on their initial sectoral affiliation, location, and personal characteristics? Do they systematically adjust to globalization by moving across industries, regions, or plants to mitigate import shocks or to benefit from export opportunities? Does this endogenous mobility occur smoothly, or does it involve disruptive unemployment spells? And what are the cumulated long-run effects of trade shocks? These are central concerns for policymakers who worry about the distributive consequences of trade liberalizations. ...

Moving forward to the conclusion:

Summing up, our key insight is that German manufacturing workers benefited at large from this particular globalization episode. Yet, there have been winners and losers. Moreover, we find that individuals systematically adjust to globalization, and we discover a notable asymmetry in the individual labor market response to positive and negative shocks.

Trade shocks do not seem to trigger much ‘voluntary’ sorting from import-competing to export-oriented manufacturing industries. The patterns we observe in the data are more consistent with a type of mobility that is ‘forced’ by job displacement and unemployment. The push effects out of import-competing manufacturing industries are not mirrored by comparable pull effects into export-oriented branches. Often, the direction of the move is to the service sector.

We also find strong heterogeneity across different types of workers. Younger and less-skilled individuals, for example, are hit harder by import shocks but also benefit more from export opportunities. Women and men are affected similarly from import penetration, but men seem to materialize the benefits of rising export exposure better than women, thereby fueling the gender-wage gap. The basic upshot is that trade causes strong distributional effects in the German labor market, and our micro-level empirical findings might be informative for policymakers to design targeted policies that aim at those who benefit the least from globalization.

'Does Inequality Cause Financial Distress?'

This is from a Federal Reserve Bank of Philadelphia Working Paper:

Does inequality cause financial distress? Evidence from lottery winners and neighboring bankruptcies Sumit Agarwal, Vyacheslav Mikhed, and Barry Scholnick: Abstract We test the hypothesis that income inequality causes financial distress. To identify the effect of income inequality, we examine lottery prizes of random dollar magnitudes in the context of very small neighborhoods (13 households on average). We find that a C$1,000 increase in the lottery prize causes a 2.4% rise in subsequent bankruptcies among the winners’ close neighbors. We also provide evidence of conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (houses, cars, motorcycles), but not invisible assets (cash and pensions), appearing on the balance sheets of neighboring bankruptcy filers.

Download Full text.

'The Costs of Inequality: When a Fair Shake Isn’t'

The beginning of a relatively long discussion:

The costs of inequality: When a fair shake isn’t, by Alvin Powell, Harvard Staff Writer: It’s a seemingly nondescript chart, buried in a Harvard Business School (HBS) professor’s academic paper.

A rectangle, divided into parts, depicts U.S. wealth for each fifth of the population. But it appears to show only three divisions. The bottom two, representing the accumulated wealth of 124 million people, are so small that they almost don’t even show up.

Other charts in other journals illustrate different aspects of American inequality. They might depict income, housing quality, rates of imprisonment, or levels of political influence, but they all look very much the same.

Perhaps most damning are those that reflect opportunity — whether involving education, health, race, or gender — because the inequity represented there belies our national identity. America, we believe, is a land where everyone gets a fair start and then rises or falls according to his or her own talent and industry. But if you’re poor, if you’re uneducated, if you’re black, if you’re Hispanic, if you’re a woman, there often is no fair start. ...

When Robots Rule the Working World

I haven't had the courage to read the comments:

What happens if robots take all the jobs?, by Mark Thoma: The theme of this year's World Economic Forum (WEF) meeting in Davos, Switzerland, can be summarized as the impact of the fourth industrial revolution on jobs, inequality and the quality of life.

How will digital revolution change our lives? Will robots take most of the good jobs? Are we headed for a future where a few people -- those who are fortunate enough to own the robots and other technology needed to produce goods and services -- receive most of the income, and those who don't struggle to find work that pays enough to feed their families? ...

Real Median Household Income in the US

Paul Krugman: Is Vast Inequality Necessary?

Time to put the Gini back in the bottle:

Is Vast Inequality Necessary?, by Paul Krugman, Commentary, NY Times: How rich do we need the rich to be?

That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.

Now, recent experience has not been kind to the conservative position. ... Is there, however, a longer-term case in favor of vast inequality? ...

I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.

First, we could have huge inequality because individuals vary hugely in their productivity..

Second, we could have huge inequality based largely on luck..., those who hit the jackpot ... just happen to be in the right place at the right time.

Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.

As I said, the real economy contains elements of all three stories. ...

But the real question, in any case, is whether we can redistribute some of the income currently going to the elite few to other purposes without crippling economic progress.

Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.

And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.

In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking...

So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.

Three Ways to Help the Working Class

I have a new column:

Three Ways to Help the Working Class: ... In graduate school, I was once told that “people don’t have marginal products, jobs do.” What does this mean? ...

I wish I would have connected the last part to the Supreme Court case on public unions.

'Who Owns U.S. Business? How Much Tax Do They Pay?'

From the NBER Digest

'Who Owns U.S. Business? How Much Tax Do They Pay?', by Laurent Belsie, NBER Digest:  In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent.

The importance of pass-through business entities has soared in the past three decades. Over the same period, the amount of pass-through business income flowing to the top 1 percent of income earners has increased sharply, according to Business in the United States: Who Owns It and How Much Tax Do They Pay? (NBER Working Paper No. 21651).

"Despite this profound change in the organization of U.S. business activity, we lack clean, clear facts about the consequences of this change for the distribution and taxation of business income," write Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, and Eric Zwick. "This problem is especially severe for partnerships, which constitute the largest, most opaque, and fastest growing type of pass-through."

Pass-through entities — partnerships, tax code subchapter S corporations, and sole proprietorships — are not subject to corporate income tax. Their income passes directly to their owners and is taxed under whatever tax rules those owners face. In contrast, the income of traditional corporations, more specifically subchapter C corporations, is subject to corporate income taxes, and after-tax income distributed from the corporation to its owners is also taxable.

In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent. Over roughly the same period, the income share of the top 1 percent of income earners doubled. Previous research has shown that the two phenomena are linked: The growth of income from pass-through entities accounted for 41 percent of the rise in the income of the top 1 percent. By linking 2011 partnership and S corporation tax returns with federal individual income tax returns, in particular Form 1065 and Form 1120S K-1 returns, the researchers find that over 66 percent of pass-through business income received by individuals goes to the top 1 percent. The concentration of partnership and S corporation income is much greater than the concentration of dividend income (45 percent to the top 1 percent) which proxies for income from C corporations (traditional corporations). While taxpayers in the top 1 percent are eight times as likely to receive dividends as taxpayers in the bottom 50 percent, the ratio for partnerships is more than 50 to 1.

Many partnerships are opaque. A fifth of partnership income was earned by partners that the study's authors were not able to classify into one of several categories, such as a domestic individual or a foreign corporation. In addition, some partnerships are circular, in the sense that they are owned by other partnerships, which could in turn be owned by yet other partnerships.

Pass-through business income faces lower tax rates than traditional corporate income. The tax rate on the income earned by pass-through partnerships is a relatively low 15.9 percent, excluding interest payments and unrepatriated foreign income. That compares with a 31.6 percent rate for C corporations and a 24.9 percent rate for S corporations. Only sole proprietorships have a lower average rate, 13.6 percent. Combining both taxes on corporations and taxes on investors, the researchers calculate that the U.S. business sector as a whole pays an average tax rate of 24.3 percent.

The lower average tax rate for pass-through entities than for traditional corporations translates into reduced federal revenues, the researchers conclude. They estimate that in 2011, if the share of pass-through tax returns had been at its 1980 level, when traditional C corporations and sole proprietorships dominated, the average rate would have been 3.8 percentage points higher and the Treasury would have collected $100 billion more in tax revenue.

One reason partnerships pay such a low average tax rate is that nearly half their income (45 percent) is classified as capital gains and dividend income, which is taxed at preferential rates. Another 15 percent of their income is earned by tax-exempt and foreign entities, for which the effective tax rate is less than five percent. The roughly 30 percent of partnership income that is earned by unidentifiable and circular partnerships is taxed at an estimated 14.7 percent rate.

"A long-standing rationale for the entity-level corporate income tax is that it can serve as a backstop to the personal income tax system," the researchers conclude. "Our inability to unambiguously trace 30 percent of partnership income to either the ultimate owner or the originating partnership underscores the concern that the current U.S. tax code encourages firms to organize opaquely in partnership form in order to minimize tax burdens."

Paul Krugman: Privilege, Pathology and Power

Our "narcisstocracy?":

Privilege, Pathology and Power, by Paul Krugman: Wealth can be bad for your soul. That’s ... a conclusion from serious social science... The affluent are, on average, less likely to exhibit empathy, less likely to respect norms and even laws, more likely to cheat, than those occupying lower rungs on the economic ladder. ...

America is a society in which a growing share of income and wealth is concentrated in the hands of a small number of people,... these people have huge political influence.., and that is surely the biggest problem.

But ... those empowered by money-driven politics include a disproportionate number of spoiled egomaniacs. ...

Donald Trump would probably have been a blowhard and a bully whatever his social station. But his billions have insulated him from the external checks that limit most people’s ability to act out their narcissistic tendencies; nobody has ever been in a position to tell him, “You’re fired!” ...

But Mr. Trump isn’t the only awesomely self-centered billionaire playing an outsized role in the 2016 campaign.

There have been ... reports lately about Sheldon Adelson, the Las Vegas gambling magnate. Mr. Adelson has been involved in ... court proceedings ... around claims of misconduct in his operations in Macau, including links to organized crime and prostitution. ... What was surprising was his behavior in court, ... he refused to answer routine questions and argued with the judge, Elizabeth Gonzales. That, as she rightly pointed out, isn’t something witnesses get to do.

Then Mr. Adelson bought Nevada’s largest newspaper..., reporters ... were told to drop everything and start monitoring ... Ms. Gonzales. And while the paper never published any results..., an attack on Judge Gonzales, with what looks like a fictitious byline, did appear in a small Connecticut newspaper owned by one of Mr. Adelson’s associates.

O.K., but why do we care? Because Mr. Adelson’s political spending has made him a huge player in Republican politics...

Are there other cases? Yes indeed...

Just to be clear, the biggest reason to oppose the power of money in politics is the way it lets the wealthy rig the system and distort policy priorities. ... The fact that some of those buying influence are also horrible people is secondary.

But it’s not trivial. Oligarchy, rule by the few, also tends to become rule by the monstrously self-centered. Narcisstocracy? Jerkigarchy? Anyway, it’s an ugly spectacle, and it’s probably going to get even uglier over the course of the year ahead.

'An Aging Society Is No Problem When Wages Rise'

Dean Baker:

An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.

While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.

We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)

The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.

For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

'The Ambivalent Role of China in Global Income Distribution'

Branko Milanovic:

The ambivalent role of China in global income distribution: It is well known that China’s role in reductions of global poverty and global inequality was crucial. For example, according to Chen and Ravallion, between 1981 and 2005, 98 percent (yes, ninety-eight percent) of reduction of global poverty, calculated using the poverty line $1 per person per day, was due to China. China’s role was similarly impressive when it comes to  reduction of global inequality (income inequality between all individuals in the world). ....      

But the question can be asked next, what happens if China continues growing fast? Will its inequality reducing effects wane, and eventually reverse? ...

Working Paper: The Upward Redistribution of Income: Are Rents the Story?

Dean Baker:

Working Paper: The Upward Redistribution of Income: Are Rents the Story?: In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period.

This paper argues that the bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

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'How Socioeconomic Status Impacts Online Learning'

 Are MOOCs the answer to educational inequality?:

How Socioeconomic Status Impacts Online Learning: The driving force behind the increasing popularity of massive open online courses (MOOCs) is that they provide — as the term defines it — open access to a massive online audience. Anyone with an Internet connection who wants to learn, can. Whether you’re rich or poor, living in a New York City high-rise or a remote Nepalese village, MOOCs promise to level the higher education playing field. The question is: Does reality reflect this ideal?

A new research study by MIT education researcher Justin Reich and Harvard University’s John Hansen seeks the answer. “Democratizing Education? Examining Access and Usage Patterns in Massive Open Online Courses” takes a close look at how socioeconomic resources influence MOOC enrollment and course completion — and whether online learning is truly opening as many doors as anticipated.

“One way we might democratize education would be to provide more widespread access to academic experiences previously reserved for the elite,” explains Reich, who is the executive director of MIT's PK-12 Initiative. “But historically, emerging learning technologies — even free ones — have often benefited people with the social, technical, and financial capital to take advantage of new innovations. As we try to bridge the digital divide, we need to carefully examine how new tools are used by learners from different walks of life.” ...

Reich’s study uses three indicators: parental educational attainment, neighborhood average educational attainment, and neighborhood median income.

The research finds that these indicators are correlated with student enrollment and success in MOOCs, especially among younger students. Young students enrolling in HarvardX and MITx on edX live in neighborhoods where the median income is 38 percent higher than typical American neighborhoods. Among teenagers who register for a HarvardX course, those with a college-educated parent have nearly twice the odds of finishing the course compared to students whose parents did not complete college. At exactly the ages where online learning could offer a new pathway into higher education, already affluent students are more likely to enroll in a course and succeed.

The takeaway is that MOOCs have not yet solved SES-related disparities in educational outcomes, and Reich believes it’s critical to turn these learnings into actions in order to narrow the gaps between MOOC perception and reality.

“MOOCs and other forms of online learning don’t yet live up to their promise to democratize education,” he says. “Closing this digital divide is exactly the kind of grand challenge that the world’s greatest universities should be tackling head on.”

'Offshoring and Unskilled Labor Demand: Evidence That Trade Matters'

From Vox EU:

Offshoring and unskilled labour demand: Evidence that trade matters, by Juan Carluccio, Alejandro Cuñat, Harald Fadinger, and Christian Fons-Rosen: ... Conclusions The empirical evidence suggesting that globalisation is indeed affecting the income distribution in industrialised countries is much stronger than initially thought, at least as far as the manufacturing industry is concerned. In fact, the productivity gains from having access to cheaper inputs through offshoring are not being distributed equally between different economic actors in our rich societies. Consequently, political resistance to free trade by certain groups has a clear rationale as long as the effects discussed above are not addressed through more effective redistribution policies.

'Is Balanced Growth Really the Answer?'

Jared Bernstein:

Is balanced growth really the answer?: A recent must-read article by journalist Alec MacGillis documents a phenomenon that he suggests must “give Democrats the willies:” the increasing political opposition to safety net programs, even among those who’ve been helped by them. ...

MacGillis argues that this outcome is in part driven by resentments of those who believe they’ve pulled themselves up by their bootstraps (even if the government helped them pull) against those they view as milking public support without trying to improve their lot. Such sentiments are amped up by prominent conservatives like House Speaker Paul D. Ryan...

It’s an argument as old as poverty itself (see, e.g., English Poor Laws of 1601). I recall similar polemics during the welfare reform debate of the 1990s...

MacGillis believes that shared growth would go a long way toward altering these political dynamics in favor of a necessary role for policy in the list of areas just noted:

“The best way to reduce resentment … would be to bring about true economic growth in the areas where the use of government benefits is on the rise … if fewer people need the safety net to get by, the stigma will fade, and low-income citizens will be more likely to re-engage in their communities — not least by turning out to vote.”

By “true economic growth,” he means growth that reaches far beyond Wall Street, and even Main Street, to the hollows of Appalachia; growth that would fill the growing black hole in heart of coal country, where opportunity is fading and downward mobility is upon the land. ...

I'm not sure I agree. Growth of this type would be good, but is the problem production or distribution? If the problem is distribution, for example unequal bargaining power leading to low, stagnant wages that do not respond to increased productivity -- instead those gains flow upward -- then more growth will simply lead to even more inequality. So I don't think growth alone will necessarily be enough, we also need to change the institutions and economic incentives that determine how income is divided up within firms.

This is a way of avoiding calls for "redistribution," which implies taking something one person has earned and giving it to someone who has not. But as I've said many times, if the distribution of income is determined by something other than productivity, as it appears to be -- if income that was not earned through higher productivity flows to those at the top of firms due to unequal bargaining power or other forces -- then returning that income to those who did earn it is not taking something unjustly (taking the normative position that people should earn their contribution to national output), instead it is restoring justice. The trick is to get people to understand that.

Anyway, I think it's necessary to think about distribution, not just growth, if we want to solve the inequality problem.

There is this, I suppose:

...there’s some evidence that more growth reaching more people would lead to greater support for progressive policies. Political science provides cross-country evidence that voter turnout falls as inequality rises (though the correlation for the U.S. is weak) and today’s non-voters support notably more progressive agendas than voters. And it does seem that especially given the rising share of non-whites, unmarried women and millennials — the so-called Rising American Electorate — favorable outcomes for Democrats are increasingly dependent on robust turnout. ...

Which reinforces the need to think about changes beyond just growth (I'm sure Jared gets this, just want to reinforce the point).