Posts Tagged ‘income’

income  wealth

Inequality in the United States is now so obscene that it’s impossible, even for mainstream economists, to avoid the issue of surplus.

Consider the two charts at the top of the post. On the left, income inequality is illustrated by the shares of pre-tax national income going to the top 1 percent (the blue line) and the bottom 90 percent (the red line). Between 1976 and 2014 (the last year for which data are available), the share of income at the top soared, from 10.4 percent to 20.2 percent, while for most everyone else the share has dropped precipitously, from 53.6 percent to 39.7 percent.

The distribution of wealth in the United States is even more unequal, as illustrated in the chart on the right. From 1976 to 2014, the share of wealth owned by the top 1 percent (the purple line) rose dramatically, from 22.9 percent to 38.6 percent, while that of the bottom 90 percent (the green line) tumbled from 34.2 percent to only 27 percent.

The obvious explanation, at least for some of us, is surplus-value. More surplus has been squeezed out of workers, which has been appropriated by their employers and then distributed to those at the top. They, in turn, have managed to use their ability to capture a share of the growing surplus to purchase more wealth, which has generated returns that lead to even more income and wealth—while the shares of income and wealth of those at the bottom have continued to decline.

But the idea of surplus-value is anathema to mainstream economists. They literally can’t see it, because they assume (at least within free markets) workers are paid according to their productivity. Mainstream economic theory excludes any distinction between labor and labor power. Therefore, in their view, the only thing that matters is the price of labor and, in their models, workers are paid their full value. Mainstream economists assume we live in the land of freedom, equality, and just deserts. Thus, everyone gets what they deserve.

Even if mainstream economists can’t see surplus-value, they’re still haunted by the idea of surplus. Their cherished models of perfect competition simply can’t generate the grotesque levels of inequality in the distribution of income and wealth we are seeing in the United States.

That’s why in recent years some of them have turned to the idea of rent-seeking behavior, which is associated with exceptions to perfect competition. They may not be able to conceptualize surplus-value but they can see—at least some of them—the existence of surplus wealth.

The latest is Mordecai Kurz, who has shown that modern information technology—the “source of most improvements in our living standards”—has also been the “cause of rising income and wealth inequality” since the 1970s.

For Kurz, it’s all about monopoly power. High-tech firms, characterized by highly concentrated ownership, have managed to use technical innovations and debt to erect barriers to entry and, once created, to restrain competition.

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Thus, in his view, a small group of U.S. corporations have accumulated “surplus wealth”—defined as the difference between wealth created (measured as the market value of the firm’s ownership securities) and their capital (measured as the market value of assets employed by the firm in production)—totaling $24 trillion in 2015.

Here’s Kurz’s explanation:

One part of the answer is that rising monopoly power increased corporate profits and sharply boosted stock prices, which produced gains that were enjoyed by a small population of stockholders and corporate management. . .

Since the 1980s, IT innovations have largely been software-based, giving young innovators an advantage. Additionally, “proof of concept” studies are typically inexpensive for software innovations (except in pharmaceuticals); with modest capital, IT innovators can test ideas without surrendering a major share of their stock. As a result, successful IT innovations have concentrated wealth in fewer – and often younger – hands.

In the end, Kurz wants to tell a story about wealth accumulation based on the rapid rise of individual wealth enabled by information-based innovations (together with the rapid decline of wealth created in older industries such as railroads, automobiles, and steel), which differs from Thomas Piketty’s view of wealth accumulation as taking place through a lengthy intergenerational process where the rate of return on family assets exceeds the growth rate of the economy.

The problem is, neither Kurz nor Piketty can tell a convincing story about where that surplus comes from in the first place, before it is captured by monopoly firms and transformed into the wealth of families.

Kurz, Piketty, and an increasing number of mainstream economists are concerned about obscene and still-growing levels of inequality, and thus remained haunted by the idea of a surplus. But they can’t see—or choose not to see—the surplus-value that is created in the process of extracting labor from labor power.

In other words, mainstream economists don’t see the surplus that arises, in language uniquely appropriate for Halloween, from capitalists’ “vampire thirst for the living blood of labour.”

SAfr

The world joined most South Africans in cheering when Nelson Mandela was finally released from prison, the apartheid regime was largely dismantled, and multiracial elections were eventually held.

Then, of course, the really hard work of restorative justice began, under the aegis of the Truth and Reconciliation Commission. To avoid victor’s justice, no side was exempt from appearing before the commission, which heard reports of human rights violations and considered amnesty applications from all sides. In the end, the commission granted only 849 amnesties out of the 7,112 applications.

The problem is, while the commission exposed human rights abuses, it never took up the issue of economic abuses. And, as is clear from the chart above, the high levels of inequality that characterized South African capitalism under apartheid have only gotten worse.

The share of income captured by the top 1 percent (the blue line in the chart) rose from 10.3 percent in 1993 to 19.2 percent in 2012, while the share captured by the top 10 percent (the red line) was 65 percent.*

It should come as no surprise that the distribution of wealth is even more unequal than the distribution of income. Anna Orthofer (pdf) has surveyed the available data and calculated that the top 1 percent own at least half of all wealth in the country and the 10 percent something like 90 to 95 percent.

That’s why Peter Goodman correctly observes that

In the history of civil rights, South Africa lays claim to a momentous achievement — the demolition of apartheid and the construction of a democracy. But for black South Africans, who account for three-fourths of this nation of roughly 55 million people, political liberation has yet to translate into broad material gains.

Apartheid has essentially persisted in economic form.

Thus far, the existing economic system has been granted a full amnesty.

The day awaits for a new Truth and Reconciliation Commission to be formed, to carry out the project of finding restorative justice with respect to the abuses of the economic system—both during and now after apartheid.

 

*For purposes of comparison, the top 1-percent share in the United States in 2012 was 20.3 percent and that of the top 10 percent was 47.6 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.

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.”

WP

Everyone’s seen the screaming headlines: the middle-class is back!

The statistic backing up those headlines is median household income (as reported by the Census Bureau), which in 2016 was $59,039.

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After years of decline, following the crash of 2000-01 and then again in 2007-08, real median household income (in 2016 dollars) has finally surpassed its previous high—of $58,665 in 1999.

But that’s not the whole story.

First, consider the fact that it took real incomes more than a decade and a half to recover from the collapse. The “good news” is not much consolation for people who endured almost two decades of zero growth in what they took home: their incomes, pensions, and wealth are permanently damaged and likely won’t be repaired within their lifetimes.

Second, the Census Bureau data show that the bulk of the gains in real income in 2016 was explained by one factor: higher employment. In other words, hours worked rose but wages did not. The members of American median households are working harder at more jobs to finally get an increase in incomes.

mean-median

Finally, consider what is measured in those headline numbers. The median, as folks might remember from a statistics course (or just a teacher’s explanation of how they grade), is the “middle” value: half above, and half below. But we can also calculate the mean (or “average” value) and compare the two. As is clear from the chart, while both the median and mean values (the green and red lines in the chart, measured on the left, respectively) have reached all-time highs, the gap between them—the “skew” in the distribution—has also grown over time. In fact, the ratio of the mean and median incomes (the blue line, measured on the right) has increased—from 1.23 in 1980 to 1.41 in 2016.

This is a clear indication that, while median household incomes in the United States have finally recovered from the crises of recent years, the middle-class itself is falling further and further behind those at the top.

Wouldn’t it be useful if those income statistics were reported in the headlines!

R-top1

Russia is back in the news again in the United States, with the ongoing investigation of Russian interference in the U.S. presidential election as well as a growing set of links between a variety of figures (including Cabinet and family members) associated with Donald Trump and the regime of Vladimir Putin.

This year is also the hundredth anniversary of the October Revolution, which sought to create the conditions for a transition to communism in the midst of a society characterized by various forms of feudalism, peasant communism, and capitalism. But we shouldn’t forget that, in addition, the Red Century has clearly left its mark on the political economy of the West, including the United States—both in the early years, when the “communist threat” undoubtedly led to reforms associated with a more equal distribution of income, and later, when the Fall of the Wall reinforced the neoliberal turn to privatization and deregulation.

Now we have a third reason to think about Russia, which happens to intersect with the first two concerns. A new study of income and wealth data by Filip Novokmet, Thomas Piketty, Gabriel Zucman reveals just how much has changed in Russia from the time of the tsarist oligarchy through the Soviet Union to rise of the new oligarchy during and after the “shock therapy” that served to create a new form of private capitalism under Putin.

As is clear from the chart, income inequality was extremely high in Tsarist Russia, then dropped to very low levels during the Soviet period, and finally rose back to very high levels after the fall of the Soviet Union. Thus, for example, the top 1-percent income share was somewhat close to 20 percent in 1905, dropped to as little as 4-5 percent during the Soviet period, and rose spectacularly to 20-25 percent in recent decades.

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The data sets used by Novokmet et al. reveal a level of inequality under the new oligarchs that is much higher than was apparent using survey data—a top 1-percent income share that is more than double for 2007-08.

R-shares

Novokmet et al. also show that the income shares of the top 10 percent and the bottom 50 percent moved in exactly opposite directions after the privatization of Russian state capitalism in the early 1990s. While the top 10-percent income share rose from less than 25 percent in 1990-1991 to more than 45 percent in 1996, the share of the bottom 50 percent collapsed, dropping from about 30 percent of total income in 1990-1991 to less than 10 percent in 1996, before gradually returning to 15 percent by 1998 and about 18 percent by 2015.

comparison

In comparison to other countries, Russia was much more equal during the Soviet period and, by 2015, had approached a level of inequality higher than that of France and comparable only to that of the United States.

billionaires

Finally, Novokmet et al. have been able to estimate the enormous growth of private wealth under the new oligarchy, especially the wealth that was captured by a tiny group at the very top and is now owned by Russia’s billionaires. As the authors explain,

The number of Russian billionaires—as registered in international rankings such as the Forbes list—is extremely high by international standards. According to Forbes, total billionaire wealth was very small in Russia in the 1990s, increased enormously in the early 2000s, and stabilized around 25-40% of national income between 2005 and 2015 (with large variations due to the international crisis and the sharp fall of the Russian stock market after 2008). This is much larger than the corresponding numbers in Western countries: Total billionaire wealth represents between 5% and 15% of national income in the United States, Germany and France in 2005-2015 according to Forbes, despite the fact that average income and average wealth are much higher than in Russia. This clearly suggests that wealth concentration at the very top is significantly higher in Russia than in other countries.

Clearly, there is nothing “natural” about the distribution of income and the ownership of wealth. This new study demonstrates that different economic structures and political events create fundamentally different levels of inequality in both income and wealth, both within and between countries.

The Russian experience is a perfect example how inequality can fall and then, later, be reversed with radical economic and political transformations—thus creating a new oligarchy that dominates the national political economy and seeks to intervene in other countries.

Not unlike the United States.

decade

Narayana Kocherlakota, professor of economics at the University of Rochester and past president of the Federal Reserve Bank of Minneapolis, is right: in some ways, the 2007-08 was worse than the Great Depression.

It certainly has been worse for average households in the United States. Real median household income (the red line in the chart above) is still below what it was in 2007—and lower still from what it was even earlier, in 1999.

But it hasn’t been a lost decade for the members of the top 1 percent. Their share of income (the blue line in the chart above), which was already an obscene 19 percent in 2007, is today even higher, at 19.6 percent.*

Still, Kocherlakota’s warning is appropriate:

financial crises and the responses to them can have highly persistent adverse effects on economic potential. The risk of such large costs means that policy makers must have better safeguards in place, and be willing to respond vigorously through monetary and fiscal stimulus when crises nonetheless happen.

So what’s happening along these lines? The Trump administration’s nominee to be vice chair of supervision and regulation at the Federal Reserve wants to make the big banks’ stress tests less stringent — and that’ll make a financial crisis more, not less, likely. . .

In short, I see little evidence that policymakers have learned the lessons of the last decade. I hope that situation will change before another crisis occurs.

 

*Both of the data series represented in the chart above end in 2014. That’s because the series on the share of income captured by the top 1 percent ends in that year. Median household income in 2015, the last year for which those data are available, was still below what it was in 2007.

We don’t have comparable data series for the first Great Depression.

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What we do know is that the share of income of the bottom 90 percent, which was 52.4 percent in 1928, hovered at roughly the same level throughout the 1930s, ending the decade at 52.5 percent, and then rose dramatically beginning in 1940. Meanwhile, the share of income captured by the top 1 percent, which stood at 21.2 percent in 1928, never managed to rise to that level during the 1930s and, by 1948, it had fallen to 15.6 percent.