Posts Tagged ‘inequality’

Chart of the day

Posted: 17 November 2017 in Uncategorized
Tags: , , ,

pyramid

On Wednesday, I referred to the wealth pyramid in the United States. But I didn’t really represent that pyramid in the chart I provided.

Here it is, above, with the wealth share of the bottom 50 percent (in red), the middle 40 percent (in blue), and the top 10 percent (in green)—a wealth pyramid for each year, from 1962 to 2014.

wealth-pyramid-2014

Or, here’s another, if you prefer a three-dimensional version of the latest year for which data are available. In 2014, the wealth share of the top 10 percent was 73 percent, while the middle 40 percent had 27 percent of net personal wealth. And the bottom 50 percent? It was exactly zero.

Now that is a real wealth pyramid!

wealth shares

Yesterday, I looked at the enormous wealth of U.S. billionaires and the growing gap between them and the rest of the American people.

Today, I want to examine what’s happened in recent years at the bottom of the wealth pyramid.

We know that, for decades, the share of net personal wealth owned by the bottom 90 percent has been declining. It peaked at 38.5 percent in the mid-1980s and, by 2014, it had fallen to 27 percent—more or less where it started in the early 1960s.

As is clear from the chart above, most of the change occurred for the middle 40 percent (the blue area), since the bottom 50 percent in the United States has owned very little personal wealth. Its share (the red area), which reached a peak in 1987 (2.4 percent), has since fallen below zero (-0.1 percent, in 2014).

Clearly, the small and declining share of wealth owned by the vast majority of Americans challenges the fundamental presumptions and promises of the country and its economic institutions—that American workers should and would share in the nation’s growing wealth. They haven’t and, if current trends continue, they won’t.

In fact, as it turns out, there is only one dimension of American society where wealth inequality is actually decreasing: the racial wealth gap among low-income households. And that’s only because, since the onset of the Second Great Depression, the median net worth of low-income whites has been cut by nearly half—while the median net worth of low-income blacks and Hispanics has remained relatively stable.

According to an analysis conducted by the Pew Research Center of the data contained in the most recent Survey of Consumer Finances by the Board of Governors of the Federal Reserve System, there is a large gap between the median net worth of white families ($171 thousand) and both black ($17.6 thousand) and Hispanic ($20.7 thousand) families—a gap that increased between 2013 and 2016. The white-black gap grew from $132,800 to $153,500 while the white-Hispanic gap increased from $132,200 to $150,300.

FT_17.10.30_Wealth-Gap_gains

The gap between whites and both blacks and Hispanics also increased for middle-income Americans (those with incomes between two-thirds and twice the national median size-adjusted income). Thus, for example, white households in the middle-income tier had a median net worth of $154,400 in 2016, compared with $38,300 for middle-income blacks and $46,000 for middle-income Hispanics.

But for low-income Americans (those with size-adjusted household incomes less than two-thirds the median), the racial gap, while still large, has shrunk considerably since 2007, the year the most recent crash began. In that year, the white-black gap was 5 to 1 and the white-Hispanic gap almost 10 to 1. In 2016, those wealth gaps had fallen to less than 3 to 1 and 5 to 1, respectively.

As is clear from the chart above, the major reason for the decline in the racial wealth gap is the fact that the median wealth of low-income whites fell by more than half between 2007 and 2013, while the median wealth of both blacks and Hispanics decreased by much less (around 19 percent).

The cause of both the racial gaps and the decline in white wealth has to do with homeownership, the only major form of wealth held by low-income Americans. In 2007, 56 percent of low-income whites were homeowners, compared with 32 percent each for low-income blacks and Hispanics. The homeownership rate among low-income whites has trended downward since then, falling to 49 percent by 2016, but the rate for blacks and Hispanics is largely unchanged. The decline in low-income white wealth was caused by the crash of the housing market, leading to a fall in housing prices and a decline in the rate of homeownership.

Economically, then, the crash and the uneven recovery moved low-income Americans—white, black, and Hispanic—much closer together at the bottom of the U.S. wealth pyramid. Politically, those changes created losses and resentments that affected the outcome of the presidential election of 2016, which in turn have made it difficult to challenge the conditions and consequences of the Second Gilded Age.

monopoly_crop-1152x648

Wealth inequality in the United States has reached such extreme levels it is almost impossible to put it into perspective.

But the folks at the Institute for Policy Studies (pdf) have found a novel way, by comparing the fortunes of the 400 wealthiest Americans to the meager assets of everyone else.

Forbes

Here’s what they found:

  • The three wealthiest people in the United States—Bill Gates, Jeff Bezos, and Warren Buffett—now own more wealth than the entire bottom half of the American population combined, a total of 160 million people or 63 million households.
  • America’s top 25 billionaires—a group the size of a major league baseball team’s active roster—together hold $1 trillion in wealth. These 25 have as much wealth as 56 percent of the population, a total 178 million people or 70 million households.
  • The billionaires who make up the full Forbes 400 list now own more wealth than the bottom 64 percent of the U.S. population, an estimated 80 million households or 204 million people—more people than the populations of Canada and Mexico combined.

wealth

Here’s another way: the average wealth of the top 10 billionaires (from the Forbes 2017 list) is $61 billion. In 2014 (the last year for which data are available), the average wealth for the United States as a whole (the blue line in the chart above) was only $297 thousand, while the average wealth owned by the middle 40 percent (the green line) was even less, $202 thousand. As for the top 1 percent, their average wealth (the red line) was $1.15 million—clearly far more than most other Americans but not even close to the extraordinary level of wealth that has been accumulated by the tiny group at the very top.

As the authors of the report explain,

The elite ranks of our billionaire class continue to pull apart from the rest of us. We have not witnessed such extreme levels of concentrated wealth and power since the first Gilded Age a century ago. Such staggering levels of wealth inequality threaten our democracy, compound racial and class divisions, undermine social cohesion, and destabilize our economy.

The problem is, while mainstream economists look the other way, politicians in Washington continue to allow the Monopoly men to pass Go, collect their additional billions in wealth, and win the game.

 

*”Monopoly men” are not just men: there are 50 women on the 2017 Forbes 400 list, who are worth a combined $305 billion. (An additional five women who built and share fortunes with their husbands also made the list.) They include Alice Walton (with a net worth of $38.2 billion), Jacqueline Mars ($25.5 billion), Laurene Powell Jobs ($19.4 billion), Abigail Johnson ($16 billion), and Blair Parry-Okeden ($12 billion).

productivity

Everyone, it seems, now agrees that there’s a fundamental problem concerning wages and productivity in the United States: since the 1970s, productivity growth has far outpaced the growth in workers’ wages.*

Even Larry Summers—who, along with his coauthor Anna Stansbury, presented an analysis of the relationship between pay and productivity last Thursday at a conference on the “Policy Implications of Sustained Low Productivity Growth” sponsored by the Peterson Institute for International Economics.

Thus, Summers and Stansbury (pdf) concur with the emerging consensus,

After growing in tandem for nearly 30 years after the second world war, since 1973 an increasing gap has opened between the compensation of the average American worker and her/his average labor productivity.

The fact that the relationship between wages and productivity has been severed in recent decades presents a fundamental problem, both for U.S. capitalism and for mainstream economic theory. It calls into question the presumption of “just deserts” within U.S. economic institutions as well as within the theory of distribution created and disseminated by mainstream economists.

It means, in short, that much of what American workers are produced is not being distributed to them, but instead is being captured to their employers and wealthy individuals at the top, and that mainstream economic theory operates to obscure this growing problem.

It should therefore come as no surprise that Summers and Stansbury, while admitting the growing wage-productivity gap, will do whatever they can to save both current economic institutions and mainstream economic theory.

First, Summers and Stansbury conjure up a conceptual distinction between a “delinkage view,” according to which increases in productivity growth no long systematically translate into additional growth in workers’ compensation, and a “linkage view,” such that productivity growth does not translate into pay, but only because “other factors have been putting downward pressure on workers’ compensation even as productivity growth has been acting to lift it.” The latter—linkage—view maintains mainstream economists’ theory that wages correspond to workers’ productivity and that, in terms of the economy system, increasing productivity will raise workers’ wages.

Second, Summers and Stansbury compare changes in labor productivity and various time-dependent and lagged measures of the typical worker’s compensation—average compensation, median compensation, and the compensation of production and nonsupervisory workers—and find that, while compensation consistently grows more slowly than productivity since the 1970s, the series (both of them in log form) move largely together.

Their conclusion, not surprisingly, is that there is considerable evidence supporting the “linkage” view, according to which productivity growth is translated into increases in workers’ compensation and hence improving living standards throughout the postwar period. Thus, in their view, it’s not necessary—and perhaps even counter-productive—to shift attention from growth to solving the problem of inequality.

ButSummers and Stansbury are still unable to dismiss the existence of an increasing wedge between productivity and compensation, which has two components: mean and median labor compensation have diverged and, at the same time, there’s been a falling labor share in the United States.

That’s where they stumble. They look for, but can’t find, a link between productivity and those two measures of growing inequality. There simply isn’t one.

What there is is a growing gap between productivity and compensation in recent decades, which has result in both a falling labor share and higher growth of labor compensation at the top. That is, more surplus is being extracted from workers and some of that surplus is in turn distributed to those at the top (e.g., industrial CEOs and financial executives).

Moreover, one can argue, in a manner not even envisioned by Summers and Stansbury, that the increasing gap between productivity and workers’ compensation is at least in part responsible for the productivity slowdown. Changes in the U.S. economy that emphasize capturing an increasing share of the surplus from around the world have translated into slower productivity growth in the United States.

The only conclusion, contra Summers and Stansbury, is that even if productivity growth accelerates, there is no evidence that suggests “the likely impact will be increased pay growth for the typical worker.”

More likely, at least for the foreseeable future, is the increasing inequality and the (relative) immiseration of American workers. Those are the problems neither existing economic institutions nor mainstream economic theory are prepared to acknowledge or solve.

 

*Actually, the argument is about productivity and compensation, not wages. In fact, Summers and Stansbury assert that “the definition of ‘compensation’ should incorporate both wages and non-wage benefits such as health insurance.” Their view is that, since the share of compensation provided in non-wage benefits significantly rose over the postwar period, comparing productivity against wages alone exaggerates the divergence between pay and productivity. An alternative approach distinguishes what employers have to pay to workers, wages (the value of labor power, in the Marxian tradition), from what employers have to pay to others, such as health insurance companies, in the form of non-wage benefits (which, again in the Marxian tradition, is a distribution of surplus-value).

Last year, I was honored to deliver the 9th Annual Wheelright Memorial Lecture at the University of Sydney.

A couple of weeks ago, my longtime friend and collaborator Katherine Gibson presented the 2017 Wheelright Memorial Lecture, “Manufacturing the Future: Cultures of Production for the Anthropocene.”

her work has consistently challenged orthodox and heterodox economics’ primary focus upon the operation of ‘Big-C’ Capitalism. Instead, Gibson has crafted a unique methodological framework she terms ‘participatory action research’, which looks to the diversity of existing community economic arrangements by engaging directly with local subjects.

The method engages with local communities to shed light upon the idiosyncrasies and often non-commercial nature of local modes of provisioning. Rather than accepting the ‘tragedy of the commons’ – the notion of the inevitable degradation of commonly used land and resources – Gibson’s work has revealed the importance of the commons to many existing developmentally diverse communities. She thereby challenges the core tenet of orthodox economics, which prioritises the optimisation of the allocation of scarce resources through facilitating smoothly functioning markets.

profits abroad

Thanks to the release of the so-called Paradise Papers, and the additional research conducted by Gabriel Zucman, Thomas Tørsløv, and Ludvig Wier, we know that a large share of the surplus captured by corporations is artificially shifted to tax havens all over the world. This, of course, is on top of the conspicuous tax evasion practiced by the individual holders of a large portion of the world’s wealth.

Thus, for example, U.S. multinational corporations now claim to generate 63 percent of all their foreign profits in six tax havens, the most prominent being the Netherlands, Bermuda and the Caribbean, and Ireland. This is 20 points more than in 2006.*

What this means is that, in the tax havens themselves, low tax rates can generate large tax revenues relative to the size of the economies. But it also means large multinational corporations can play off one tax have against others, and shift their profits to those with the most generous laws and regulations—as Apple has recently done, by relocating tens of billions of dollars from Ireland to the small island of Jersey (which typically does not tax corporate income and is largely exempt from European Union tax regulations).

tax loss

It also means that the putative home countries of the multinational corporations lose potential tax revenues, which means a larger tax burden is imposed on others, especially individuals and small businesses.

In the case of the United States, Zucman and his colleagues estimate that the United States loses almost 60 billion euros to tax havens (about three quarters from European Union tax havens and the rest from tax havens elsewhere), which amounts to about 25 percent of the corporate tax revenue it currently collects.

As Zucman explains,

Tax havens are a key driver of global inequality, because the main beneficiaries are the shareholders of the companies that use them to dodge taxes.

Clearly, the existing rules are such that large multinational corporations win twice: first, by capturing more and more surplus from their workers, whose wages have barely budged in recent decades; and second, by using tax havens to avoid paying taxes on a large portion of that surplus, thus shifting the tax burden onto workers at home.

 

*I created the charts in this post based on data that have been made publicly available by Zucman, Tørsløv, and Wier.

paradisepapers

The release of the so-called Paradise Papers confirms, with additional names and more salacious details, what we already knew from the Panama Papers and other sources: the world’s wealthy increasingly use offshore tax havens to engage in conspicuous tax evasion.

That’s on top of their participation in conspicuous consumption, conspicuous philanthropy, and conspicuous productivity.

According to Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman, in a study published before the release of the Paradise Papers, the equivalent of 10 percent of world GDP is held in tax havens globally—and that’s only counting bank deposits, not the portfolios of equities, bonds, and mutual fund shares that wealthy individuals entrust to offshore banks.

And, as it turns out, offshore wealth is extremely concentrated: the top 0.1 percent of richest households own about 80 percent of it, while the top 0.01 percent own about 50 percent of offshore wealth.

So, how does it work? There is a great deal of evidence that the vast majority of offshore wealth, both legal and illegal, is not reported on tax returns. That’s because offshore wealth is done “by combining trusts, foundations, and holding companies, so as to disconnect assets from their beneficial owners.” Thus, tax authorities won’t be able to observe or collect taxes on either the wealth or investment income earned or reported offshore, except in rare circumstances (e.g., a taxable and properly declared inter-generational transfer of assets).

That means the tax burden is shifted onto the rest of us who don’t hold offshore wealth and aren’t able to—or choose not to—engage in conspicuous tax evasion.

wealth-no offshore

Not surprisingly, accounting for offshore assets increases the top 0.01 percent wealth share substantially. However, the magnitude of the effect varies a lot across countries.

wealth-offshore

In Scandinavia (Norway, Sweden, and Denmark, the blue lines in the charts above), which does not use tax havens extensively, the top 0.01 percent wealth share rises from about 4 percent to around 5 percent. Offshore holdings have a much larger effect on wealth inequality in Europe (the United Kingdom, France, and Spain, the red lines), where by the estimates of Alstadsæter et al. 30-40 percent of the wealth of the 0.01 percent of richest households is held abroad.

In the United States (the green lines in the charts), offshore wealth also increases inequality but the effect is much more muted than in Europe. That’s only because the U.S. top wealth share is already very high—9.9 percent, without offshore wealth in 2010, compared to 11.1 percent when offshore wealth is included.

Clearly, the world’s wealthiest individuals—including those who call Scandinavia, Europe, and the United States home—have plenty of opportunities via their offshore paradises to engage in conspicuous tax evasion.