Posts Tagged ‘inequality’

2000-2012

While median household incomes in the United States have fallen since the economic recovery began (down almost 6 percent since 2009), incomes at the top (as documented in the chart above) have soared.

The question is, how much of that inequality can be blamed on monetary policy—in particular, on quantitative easing?

As I see it, Richard Barwell, Senior European Economist at the Royal Bank of Scotland and former Senior Economist of the Bank of England, offers the correct answer:

“Given an unequal distribution of income and wealth it is always likely to be the case that a policy which generates a robust and sustained recovery will benefit those at the top more than those at the bottom.”

Of course. Concentrate incomes and wealth in the hands of a tiny minority at the top and a recovery that restores corporate profits and equity share prices will per force lead to more inequality in the distribution of income and wealth.

The issue Barwell and others simply don’t want to address, however, is: has the resumption of the pre-crisis inequality trend, which is a condition and consequence of quantitative easing during the past five years, itself undermined the possibility of a “robust and sustained recovery” going forward?

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The other day, I reported that Fed chair Janet Yellen said a great deal about existing levels of economic inequality at the Conference on Economic Opportunity and Inequality in Boston.

Neil Irwin [ht: ra] reminds us there’s a great deal Yellen didn’t say. She didn’t, for example, say anything about the aspects of the inequality puzzle that have a close tie-in to the policies of the Federal Reserve.

there is a growing body of evidence — far from proven, but certainly gaining traction — that income inequality could be a significant force behind disappointing overall economic growth over the last 15 years.

The story goes like this: The wealthy tend to save a large proportion of their income, whereas middle and lower-income people spend almost all of what they earn. Because a rising share of income is going to the wealthy, spending — and hence aggregate demand — is rising more slowly than it would if there were more even distribution of income. Skyrocketing debt levels papered over this disconnect in the mid-2000s, but now we could be feeling its effect.

If true, this would help account for why the economy has notched mediocre growth since the turn of the century, with the exception being a brief period of the housing bubble.

Yellen also didn’t have anything to say about the economic opportunities that have allowed the gains of a tiny minority at the top to be captured in the first place. Top 1 percent incomes and corporate profits have to come from somewhere. They’re created during the course of producing goods and services—in the United States and around the world. But the workers who did all that producing only get to keep part of the value they create, in the form of wages and salaries; the rest—call it the surplus—is appropriated by their employers, who keep some in the form of corporate profits and then distribute the rest to their owners and top managers. Those employers, owners, and managers spend some of that income and plow the rest into the ownership of various forms of wealth. It’s no wonder, then, that—given the economic opportunities they’ve been provided within current economic arrangements—the distribution of both income and wealth has been getting more and more unequal.

That’s what Janet Yellen didn’t say.

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The growing gap between a tiny minority at the top and everyone else is now so obvious even the Federal Reserve chair, Janet Yellen, has openly recognized it as a problem.

The distribution of income and wealth in the United States has been widening more or less steadily for several decades, to a greater extent than in most advanced countries. This trend paused during the Great Recession because of larger wealth losses for those at the top of the distribution and because increased safety-net spending helped offset some income losses for those below the top. But widening inequality resumed in the recovery, as the stock market rebounded, wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.

The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then. It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority.

r > g

Posted: 16 October 2014 in Uncategorized
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No, the so-called expert opinion reported in the survey by the University of Chicago’s Initiative on Global Markets does not invalidate Thomas Piketty’s claim that r > g (that is, the rate of return on wealth being greater than the growth rate of output) is “the most powerful force pushing towards greater wealth inequality” in the United States.

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As Jordan Weissmann explains, that was never Piketty’s claim in the first place:

I found myself wondering: How would Piketty himself weigh in?

“Well,” he told me in an email this morning, “I think the book makes pretty clear that the powerful force behind rising income and wealth inequality in the US since the 1970s is the rise of the inequality of labor earnings, itself due to a mixture of rising inequality in access to skills and higher education, and of exploding top managerial compensation (itself probably stimulated by large cuts in top tax rates), So this indeed has little to do with r>g.”

Let’s put it a different way: when more surplus is being pumped out of the direct producers, which is then distributed to a tiny minority at the top of the distribution of income, we can expect to see rising inequality in the distribution of income. Then, when that tiny minority that has managed to capture and keep a large portion of the surplus uses some portion of their income to purchase assets, as against the rest of the population that barely gets by on their wages and salaries, we can expect to see a more and more unequal distribution of wealth.

I can only imagine what the so-called experts would opine about that explanation. . .

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This chart contains some of the data on economic inequality from the report of a recent conference organized by the Washington Center for Equitable Growth.

From Emmanuel Saez:

In the United States today, the share of total pre-tax income accruing to the top 1 percent has more than doubled over the past five decades. The wealthy among us (families with incomes above $400,000) pulled in 22 percent of pre-tax income in 2012, the last year for which complete data are available, compared to less than 10 percent in the 1970s. What’s more, by 2012 the top 1 percent income earners had regained almost all the ground lost during the Great Recession of 2007-2009. In contrast, the remaining 99 percent experienced stagnated real income growth—after factoring in inflation—after the Great Recession.

Another less documented but equally alarming trend has been the surge in wealth inequality in the United States since the 1970s. In a new working paper published by the National Bureau of Economic Research, Gabriel Zucman at the London School of Economics and I examined information on capital income from individual tax return data to construct measures of U.S. wealth concentration since 1913. We find that the share of total household wealth accrued by the top 1 percent of families— those with wealth of more than $4 million in 2012—increased to almost 42 percent in 2012 from less than 25 percent in the late 1970s. Almost all of this increase is due to gains among the top 0 .1 percent of families with wealth of more than $20 million in 2012. The wealth of these families surged to 22 percent of total household wealth in the United States in 2012 from around 7.5 percent in the late 1970s.

The flip side of such rising wealth concentration is the stagnation in middle-class wealth. Although average wealth per family grew by about 60 percent between 1986 and 2012, the average wealth of families in the bottom 90 percent essentially stagnated. In particu­lar, the Great Recession reduced their average family wealth to $85,000 in 2009 from $130,000 in 2006. By 2012, average family wealth for the bottom 90 percent was still only $83,000. In contrast, wealth among the top 1 percent increased substantially over the same period, regaining most of the wealth lost during the Great Recession.

For both wealth and income, then, there is a very uneven recovery from the losses of the Great Recession, with almost no gains for the bottom 90 percent, and all the gains concentrated among the top 10 percent, and especially the top 1 percent.

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Special mention

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It seems, on first glance, that American Exceptionalism is alive and well.

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Judging from a recent survey by the Pew Research Center, Americans still believe that individual initiative and hard work—and not forces outside their control—determine success in life. It’s a view that was born out of a long period (beginning in the nineteenth century and lasting until the mid-1970s) during which people’s standards of living increased within and across generations as, decade after decade, wages roughly kept pace with productivity increases.

Of course, things have changed dramatically over the course of the past four decades, as the gap between wages and productivity has continued to grow.

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But, by and large, the majority of Americans still don’t think inequality is a big problem and continue to express their support for a “free-market system.”

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Yet, Americans do believe that high taxes would do more than low taxes to reduce the gap between rich and poor. And, perhaps most worrisome from the perspective of American Exceptionalism, many more people (65 compared 30 percent) expect that the next generation will be financially worse off than the current generation.

Not only are they correct. As it turns out, there’s nothing particularly exceptional in that view, since the majority of people in the advanced economies share the same dire prospect about the future.

And they should—unless and until fundamental changes are made in the way the economies of their countries are fundamentally transformed and reorganized.