Posts Tagged ‘inequality’


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OK, it’s not a very good chart (the yellow line should be labeled the share of income to the top 1 percent, and the blue line the annual percentage change in state tax revenues). But the argument is, in fact, serious: Standard & Poor’s [pdf] finds a strong correlation between growing income inequality and the fiscal crisis of the states.

The argument is pretty straightforward: rising income inequality since the late 1970s has been accompanied by two trends in the tax revenues received by the various states: a slowing in the rate of growth of tax revenues (from 1980 to 2011, average annual state tax revenue growth fell to 5 percent from 10 percent) and by a growing volatility in state tax revenues (from a standard deviation of 3.55 during 1950-1979 and 1.04 during 1990-1999 to 5.78 from 2000 to 2009).

And the explanation for this relationship?

the higher savings rates of those with high incomes causes aggregate consumer spending to suffer. And since one person’s spending is another person’s income, the result is slower overall personal income growth despite continued strong income gains at the top.

On top of that,

Those at the top obtain more of their income from capital gains, which on the whole, fluctuate much more than income from wages. Tax revenues reflect this — both as a consequence of higher top-end tax rates and because the top end is where the income growth has occurred –- and are, therefore, more volatile.

Thus, we should understand the following: when Standard & Poor’s downgrades the credit rating of one or another state, it’s actually downgrading the rise of income inequality within and across the states.


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Special mention

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Yesterday in class, I was forced to discuss a violation of the university’s Honor Code (which students have to study and sign and which, like most such codes, explains to students they can’t steal one another’s work and they can’t plagiarize other sources, whether in print or from the internet). The students’ view was that the Code was there to protect the credibility of their education in the eyes of others and to serve as an incentive to do their own work.

My own view, which I discussed with them, is a bit different: the Code is a condition of their membership and participation in an intellectual community. Basically, it represents a kind of trust in their fellow students (they’ll discuss and debate issues with one another, inside and outside the classroom, and not violate their mutual trust by stealing from one another) and a trust in the ideas that have been developed and disseminated by others (which should serve as the basis of their own thinking, and be appropriately cited).

I was reminded of that discussion when someone [ht: sm] sent me the link to a new piece of research by Jean M. Twenge, W. Keith Campbell, and Nathan Carter, who found that Americans’ trust in others and confidence in social institutions are at their lowest point in over three decades.

“Compared to Americans in the 1970s-2000s, Americans in the last few years are less likely to say they can trust others, and are less likely to believe that institutions such as government, the press, religious organizations, schools, and large corporations are ‘doing a good job,'” explains psychological scientist and lead researcher Jean M. Twenge of San Diego State University.

Twenge and colleagues W. Keith Campbell and Nathan Carter, both of the University of Georgia, found that as income inequality and poverty rose, public trust declined, indicating that socioeconomic factors may play an important role in driving this downward trend in public trust:

“With the rich getting richer and the poor getting poorer, people trust each other less,” says Twenge. “There’s a growing perception that other people are cheating or taking advantage to get ahead, as evidenced, for example, by the ideas around ‘the 1%’ in the Occupy protests.”

Twenge and colleagues were interested in understanding how cultural change over the last 40 years has affected social capital — the cooperative relationships that are critical for maintaining a democratic society – in which public trust plays an important role.

To examine trust over time, the researchers looked at data from two large, nationally representative surveys of people in the US: the General Social Survey of adults (1972-2012) and the Monitoring the Future survey of 12th graders (1976-2012). Together, the surveys included data from nearly 140,000 participants. Both surveys included questions designed to measure trust in other people and questions intended to gauge confidence in large institutions.

The data showed, for example, that while 46% of adult Americans agreed that “most people can be trusted” in 1972-1974, only 33% agreed in 2010-2012. And this finding was mirrored by data from 12th graders – while 32% agreed that “most people can be trusted” in 1976-1978, only 18% did so in 2010-2012.

Confidence in institutions rose and fell in waves, with respondents in both surveys reporting high confidence in institutions in the late 1980s and again in the early 2000s, with confidence then declining to reach its lowest point in the early 2010s.

This decline in confidence applied across various institutions, including the press/news media, medicine, corporations, universities, and Congress. The notable exception was confidence in the military, which increased in both surveys.

After accounting for the year the survey data were collected, the researchers found that institutional confidence seemed to track rising rates of income inequality and poverty.

Clearly, adhering to an Honor Code in the university is pushing back against a trend of growing inequality and declining trust in the larger society.

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Those in charge are beginning to worry about growing inequality—such as the growing wealth and income gap the Fed has documented in the latest Survey of Consumer Finances.

The share of income received by the top 3 percent of families was 31.4 percent in 2007 but fell to 27.7 percent in 2010 as business and asset income declined particularly sharply in the recession and financial crisis (figure A). Since that time, the income share of the top 3 percent has rebounded, climbing to 30.5 percent in 2013. The share of income received by the next highest 7 percent of the distribution (percentiles 90 through 97) has not changed over the past quarter of a century, sitting slightly below 17 percent in 1989 and 2013. Correspondingly, the rising income share of the top 3 percent mirrors the declining income share of the bottom 90 percent of the distribution, which fell to 52.7 percent in 2013.

Changes in the shares of wealth held by different segments of the wealth distribution have been less cyclical than income. The wealth share of the top 3 percent climbed from 44.8 percent in 1989 to 51.8 percent in 2007 and 54.4 percent in 2013 (figure B). As with income, the shares of wealth held by the next 7 highest percent of families changed very little, hovering between 19 and 22 percent over the past 25 years, and registering 20.9 per- cent in 2013. Similar to the situation with income, the rising wealth share of the top 3 percent of families is mirrored by the declining share of wealth held by the bottom 90 percent. The share of wealth held by the bottom 90 percent fell from 33.2 percent in 1989 to 24.7 percent in 2013.

They’re not worried for the reasons I discussed earlier this year (that this economy, given its wealth, could provide a decent standard of living to everyone—and it doesn’t, and that there is a growing dependence, as both a condition and consequence of inequality, of the vast majority of Americans on the decisions of a tiny group at the top). No, to judge from Gillian Tett’s recent column, they’re worried because growing inequality might just be a cause of secular stagnation and thus lower growth rates for “their” economy.

what is less clear is how – or if – these two trends are linked. Until recently, most business leaders and economists, particularly in the US, presumed inequality was just a byproduct of capitalism. Thus, because it spurs innovation and competition, inequality of outcome was thought to raise growth rates rather than lower them.

Now some economists are disputing this, however. Professor Blinder, for example, argues that since inequality undermines the ability of poor people to invest in education, it hurts overall productivity. Economist Joseph Stiglitz has made similar arguments, as have researchers at Harvard Business School.

Meanwhile, a separate debate is now bubbling in the US Federal Reserve about the impact of inequality on consumer spending. The concern is that, since the rich spend less of their income than the poor, relatively speaking, the economy has been sluggish because the rich are saving their current gains, not spending them.

Then there is the thorny issue of social cohesion and political stability. Economists have not traditionally paid much attention to this in the US. But Standard & Poor’s recently downgraded its forecast for US growth – and specifically cited fears that rising inequality will lead to political gridlock and distrust, and will therefore sap growth.

This is a novel move in the rating agency world. However, it is an argument that would seem to make sense. And other business voices are echoing these concerns, including on the right; Alan Greenspan, the former US Federal Reserve chairman who calls himself a life-long libertarian Republican, has cited inequality as the “most dangerous” trend afflicting America.

I’ll admit, a concern with increasing inequality would, in fact, represent a fundamental shift—from a “take-the-money-and-run” mentality, and let everyone else fall further and further behind (which is the kind of “recovery” we’ve seen in recent years), to worrying that we may have moved too far from what they consider to be a Goldilocks economy (not too equal and not too unequal but just right).

The problem is, the folks in charge really don’t want to make the changes that would move us from here (growing inequality and lower growth) to there (less inequality and higher growth). And, given the resumption of the same unequalizing trends that characterized the run-up to the crash of 2007-08, they’ve lost their legitimacy to even chart that course.

Which just may explain why the best Tett can offer is to complain about the lack of comparative data and thus to encourage those in charge to “talk loudly about data voids and force governments to collect better data around the world.”

But not, it seems, to actually create a more equal economy and society.


Special mention

August 31, 2014 wuc140903-605_605