Posts Tagged ‘1 percent’

Inequality

The latest IMF Fiscal Monitor, “Tackling Inequality,” is out and it represents a direct challenge to the United States.

It’s not just a rebuke to Donald Trump, who with his allies is pursuing under the guise of “tax reform” a set of policies that will lead to even greater inequality—or, for that matter, Republicans in state governments across the country that have sought to cut back on programs targeted at poor Americans. It also takes to task decades of growing inequality in the United States, under both Democratic and Republican administrations.

As is clear from the chart above, the distribution of both income and wealth in the United States has become increasingly unequal since the mid-1970s. The share of income captured by the top 1 percent has more than doubled (from 10 to 20 percent), while it’s share of total wealth has increased dramatically (from 23 percent to 39 percent). Meanwhile, the share of income of the bottom 50 percent has declined precipitously (from 20 percent to 12.5 percent) and it’s share of wealth, which was never very high (at 0.9 percent), is now nonexistent (at negative 0.1 percent).

And what is the United States doing about it? Absolutely nothing. Over the course of the past four decades it’s done very little to tackle the problem of growing inequality—and what it has done has been spectacularly ineffective. Thus, inequality has grown to obscene levels.

What’s interesting about the IMF report is that it raises—and then challenges—every important argument made by mainstream economists and members of the economic and political elite.

Should we worry just about income inequality? Well, no, since “changes in income inequality are reflected in other inequality dimensions, such as wealth inequality.”

redistribution

Doesn’t the United States take care of the problem by redistribution? Absolutely not, since only Israel does less than the United States in terms of lowering inequality (as measured by the Gini coefficient) through taxes and transfers.

But doesn’t tackling inequality through progressive income taxes lower economic growth? Again, no: “There is not strong empirical evidence showing that progressivity has been harmful for growth.”

taxes

Nor is there any justification for low tax rates on those at the top in terms of social preferences. Most Americans, according to a recent Gallup survey, most believe that the rich and corporations don’t pay their fair share of taxes. In fact, the IMF notes, perhaps thinking about the United States, “societal preferences may not be reflected in actual policy implementation because of the concentration of political power in certain affluent groups.”

Clearly, much more can be done to lower the degree of inequality in the United States.

As a sign of the times, the IMF even chooses to discuss the role a Universal Basic Income might play in decreasing inequality.

Proponents argue that a UBI can be used as a redistributive tool to help address poverty and inequality better than means-­tested programs, which su er from information constraints, high administrative costs, and other obsta­cles that limit benefit take-­up. A UBI could also help address increased income uncertainty resulting from the impact of technology (particularly automation) on jobs.

UBI

According to its calculations, a Universal Basic Income in the United States (calibrated at 25 percent of median per capita income, in addition to existing programs) would cost only 6.5 percent of national income and achieve a remarkable reduction in both inequality (by more than 5 Gini points) and poverty (by more than 10 percentage points).

What puts the United States in stark relief is the contrast between the whole panoply of inequality-reducing policies that are available—from more progressive income taxes and the adoption of wealth taxes to reducing gaps in education and health programs—and the fact that the United States is moving in the opposite direction.

The United States is simply not tackling the problem, with the inevitable result: current levels of economic inequality are—by any measure, and especially in comparison to what could be but isn’t being done—grotesque.

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Special mention

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It’s clear that, for decades now, American workers have been falling further and further behind. And there’s simply no justification for this sorry state of affairs—nothing that can rationalize or excuse the growing gap between the majority of people who work for a living and the tiny group at the top.

But that doesn’t stop mainstream economists from trying.

fredgraph

Look, they say, American workers are clearly better off than they were before. Both real weekly earnings (the blue line in the chart) and the median household income (the red line) are higher than they were thirty years ago.

There’s no denying that, on average, the absolute level of worker pay and household income has gone up. That’s proof, mainstream economists argue, that workers are enjoying the fruits of their labor.

fredgraph (1)

The problem, though, is that the increase in workers’ wages (the blue line, the same as in the previous chart) pales in comparison to the rise in labor productivity (the green line in the chart above): since 1987, real wages have gone up only 8 percent, while productivity has grown by 75 percent.

In other words, American workers are producing more and more but getting only a tiny share of that increase.

fredgraph (2)

It should come as no surprise, then, that the wage share of national income (the purple line in the chart above) has fallen precipitously—by 8 percent since 1987 and by 16.5 percent since 1970.

American workers are in fact experiencing a relative immiseration compared to their employers, who are able to capture the additional amount their workers are producing in the form of increased profits. Moreover, American employers have every interest—and more and more means at their disposal—to continue to widen the gap between themselves and their workers.

1-90

Not surprisingly, the relative immiseration of American workers shows up in growing inequality—with the share of income captured by the top 1 percent (the orange line in the chart) increasing and the share going to the bottom 90 percent (the brown line in the chart) falling. Each is a consequence of the other.

American workers are getting relatively less of what they produce, which means more is available to distribute to those at the top of the distribution of income.

That’s what mainstream economists can’t or won’t understand: that workers may be worse off even as their wages and incomes rise. That problem flies in the face of every attempt to celebrate the existing order by claiming “just deserts.”

There’s nothing just about the relative immiseration and growing inequality faced by American workers. And nothing that can’t be changed by imagining and creating a radically different set of economic institutions.

Income shares

The latest Federal Reserve Board’s triennial Survey of Consumer Finances (pdf) is out and the news is not good—at least for the majority of Americans. They’re falling further and further behind those at the top.

Sure, on the surface, the results for the latest period of recovery from the Second Great Depression appear to be positive. Between 2013 and 2016, real gross domestic product in the United States grew at an annual rate of 2.2 percent, the civilian unemployment rate fell from 7.5 percent to 5 percent, and the annual rate of inflation averaged only 0.8 percent.

However, data from the 2016 Survey also indicate that the shares of income and wealth held by affluent households have reached historically high levels—and, for the bottom 90 percent, they continue to fall.

For example, examining the chart at the top of this post, the share of income captured by the top 1 percent of families, which was 20.3 percent in 2013, rose to 23.8 percent in 2016. The top 1 percent of families now receives nearly as large a share of total income as the next highest 9 percent of families combined (percentiles 91 through 99), who received 26.5 percent of all income—a share that has remained fairly stable over the past quarter of a century. Correspondingly, the rising income share of the top 1 percent mirrors the declining income share of the bottom 90 percent of the distribution, which fell to less than half (49.7 percent) in 2016.

wealth shares

And the degree of inequality in the distribution of wealth is even worse. The share of the top 1 percent climbed from 36.3 percent in 2013 to 38.6 percent in 2016, surpassing the wealth share of the next highest 9 percent of families combined. After rising over the second half of the 1990s and most of the 2000s, the wealth share of the next highest 9 percent of families has actually been falling since 2010, reaching 38.5 percent in 2016. Similar to the situation with income, the wealth share of the bottom 90 percent of families has been decreasing for most of the past 25 years, dropping from 33.2 percent in 1989 to only 22.8 percent in 2016.

net worth

Another way of illustrating the grotesquely unequal distribution of wealth in the United States is in terms of median net worth (as in the table above). As it turns out, the median net worth of the top decile is more than four times the level of the next highest decile group and more than 230 times that of the bottom two deciles—in both cases, even larger than the gaps that existed in 2013.

No one in charge—whether in the government, at the head of large corporations and banks, or in the discipline of economics—has a single idea or policy to offer to fix these growing income and wealth disparities.

And the rest of us? Once again, we’re learning to appreciate the “Feelin’ Bad Blues.”

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Special mention

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wage-inequality

Apologists for mainstream economics (such as Noah Smith) like to claim that things are OK because good empirical research is crowding out bad theory.

I have no doubt about the fact that the theory of mainstream economics has been bad. But is the empirical research any better?

Not, as I see it, in the academy, in the departments that are dominated by mainstream economics. But there is interesting empirical work going on elsewhere, including of all places in the International Monetary Fund (as I have noted before, e.g., here and here).

The latest, from Mai Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian, documents two important facts: the decline in labor’s share of income—in both developed and developing economies—and the relationship between the fall in the labor share and the rise in inequality.

I demonstrate both facts for the United States in the chart above: the labor share (the red line, measured on the left) has been falling since 1970, while the share of income captured by those in the top 1 percent (the blue line, measured on the right) has been rising.

labor shares

Dao et al. make the same argument, both across countries and within countries over time: declining labor shares are associated with rising inequality.

And they’re clearly concerned about these facts, because inequality can fuel social tension and harm economic growth. It can also lead to a backlash against economic integration and outward-looking policies, which the IMF has a clear stake in defending:

the benefits of trade and financial integration to emerging market and developing economies—where they have fostered convergence, raised incomes, expanded access to goods and services, and lifted millions from poverty—are well documented.

But, of course, there are no facts without theories. What is missing from the IMF facts is a theory of how a falling labor share fuels inequality—and, in turn, has created such a reaction against capitalist globalization.

Let me see if I can help them. When the labor share of national income falls—the result of the forces Dao et al. document, such as outsourcing and new labor-saving technologies—the surplus appropriated from those workers rises. Then, when a share of that growing surplus is distributed to those at the top—for example, to those in the top 1 percent, via high salaries and returns on capital ownership—income inequality rises. Moreover, the ability of those at the top to capture the surplus means they are able to shape economic and political decisions that serve to keep workers’ share of national income on its downward slide.

The problem is mainstream economists are not particularly interested in those facts. Or, for that matter, the theory that can make sense of those facts.

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By now, everyone knows that Joel Osteen, the Prosperity Gospel preacher in Houston’s Lakewood Church, initially refused to open the doors to shelter the victims of Tropical Storm Harvey.

That’s certainly a good reason for people to hate Osteen.

Kate Bowler [ht: ji], the author of Blessed: A History of the American Prosperity Gospel, offers three other reasons for hating Osteen:

#1—Osteen represents the Christian 1 percent

From aerial views of his jaw-dropping mansion to the cut of his navy suits, he always looks like a man with a good reason to be smiling. He is a wealthy man who unapologetically preaches that God has blessed him, with the added bonus that God can bless anyone else, too. The promise of the prosperity gospel is that it has found a formula that guarantees that God always blesses the righteous with health, wealth and happiness. For that reason, churchgoers love to see their preachers thrive as living embodiments of their own message. But the inequality that makes Osteen an inspiration is also what makes him an uncomfortable representation of the deep chasms in the land of opportunity between the haves and the have-nots. When the floodwaters rise, no one wants to see him float by on his yacht, as evidenced by the Christian satire website the Babylon Bee’s shot Tuesday at Osteen: “Joel Osteen Sails Luxury Yacht Through Flooded Houston To Pass Out Copies Of ‘Your Best Life Now.’ ”

#2—There is a lingering controversy around prosperity megachurches and their charitable giving

When a church that places enormous theological weight on tithes and offerings is not a leader in charitable giving, the most obvious question is about who is the primary beneficiary of the prosperity gospel? The everyman or the man at the front?

#3—The Prosperity Gospel’s answer to the question about evil in the world is not unlike the one offered by neoclassical economics

Its central claim — “Everyone can be prosperous!”—contains its own conundrum. How do you explain the persistence of suffering? It might be easier to say to someone undergoing a divorce that there is something redemptive about the lessons they learned, but what about a child with cancer? This week, the prosperity gospel came face-to-face with its own theological limits. It was unable to answer the lingering questions around what theologians call “natural evil.” There is a natural curiosity about how someone like Osteen will react in the face of indiscriminate disaster. Is God separating the sheep from the goats? Will only the houses of the ungodly be flooded? The prosperity gospel has not every found a robust way to address tragedy when their own theology touts that “Everything Happens for a Reason.”

For neoclassical economists, everything happens—good and evil, both prosperity and poverty—because of people’s choices.

I have offered my own reasons for questioning the Prosperity Gospel—what I have called the American Hustle—and yet for taking it seriously—especially in terms of support for Donald Trump.