Posts Tagged ‘inequality’

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Special mention

www.usnews David Simonds Grexit cartoon 14.06.15

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Kansas Gov. Sam Brownback’s “real live experiment” in supply-side economics has failed—and now the poorest in the state have going to have to pay the costs.

In the end, many Kansans will pay more in taxes due to an increase in sales and cigarette taxes, a freeze in income tax rates and limits for itemized deductions.

It’s well known that these tax increases were precipitated by irresponsible, top-heavy tax cuts championed by Gov. Brownback and passed in 2012 and 2013. An ITEP analysis of all Kansas tax changes over the last four years (including this year’s) found that the poorest 20 percent of Kansans, those with an average income of just $13,000, will pay an average of $197 more in taxes in 2015 as a result of the Gov. Brownback tax changes, and, even with the increases Gov. Brownback is expected to sign into law today, the richest 1 percent are still paying about $24,000 less.

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While the policy side of the IMF continues (with the other members of the troika) to push for austerity measures in Greece, its research side (against the grain of much of contemporary mainstream economics) is sounding the death knell of trickle-down economics.

I am referring to the recent report, Causes and Consequences of Income Inequality: A Global Perspective, prepared by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki Tsounta [pdf]. Their main finding (based on an analysis of data for 159 advanced and emerging markets and developing economies) is that there’s an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth.

Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.

To my mind, cross-country studies of this sort should always be taken with at least a few grains of salt (precisely because the causes and consequences of inequality vary across countries, and correlation is not causation). And the specific coefficients (such as the idea that “if the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years”) even more so (because, as I’ve argued before, the underlying data, such as Gini coefficients, mean very different things depending on the countries studied).

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Still, this IMF study does give lie to the idea that the grotesque levels of inequality we’ve been witnessing in recent decades—the dramatic rise in both top-1-percent incomes shares and corporate profits—are a necessary condition for economic growth.

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Most important, the IMF study challenges the idea that everyone eventually shares in whatever economic growth has taken place (which is dramatically illustrated by the growing gap between productivity and wages).

In my view, these should be considered the last nails in the coffin of trickle-down economics.

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According to a new IRS report [pdf], for tax year 2012, the top 0.001 percent of tax returns had an adjusted gross income of $62,068,187 or more. The income threshold for the top 0.001 percent of returns in 2012 was thus close to its highest mark in 2007 of $62,955,875.

This income threshold represents an increase of 47.9 percent—the largest increase of any percentile and year for this group since before 2003—over the previous year when the top 0.001 percent of tax returns had an adjusted gross income of $41,965,258 or more.

The top 0.001 thus managed to capture 21 percent of the income gains of the top 1 percent and accounted for 2.4 percent of total income in 2012.

As David Cay Johnston explains,

Keep in mind that reality is even worse than what the report shows.

Researchers at the IRS Statistics of Income division looked at more than 136 million tax returns. They ignored nine million tax returns filed by dependents, primarily children with jobs or trust funds. That means the IRS analysis understates household incomes at the very top, where trust funds are common.

Also, don’t forget that many of the very richest Americans show little or no income on their annual tax filings because they borrow against their wealth, paying interest at about one tenth of the tax rate on long-term capital gains.

In other words, the tiny group at the top of the distribution of income in the United States continues to obtain a large portion of the surplus produced by everyone else in the economy—and their tax returns only show a portion of those distributions of the surplus.

Just imagine what we could do, then, if that surplus were actually used not to enrich the already-rich top 0.001 percent, but to satisfy the social needs of everyone else.

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Special mention

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Thomas Palley does an admirable job summarizing and discussing the implications of four different stories about the relationship between inequality and the financial crash of 2007-08. The only problem is, he completely overlooks a fifth story about that relationship, one that hinges on the existence and use of the surplus.

According to Palley, there are four major stories of the financial crisis and the role they attribute to income inequality. They are identified with (1) Raghuram Rajan (according to whom inequality has not really been a problem per se but the government responded to populist pressures to do something about growing inequality by extending home mortgages to unwarranted buyers), (2) Michael Kumhoff and Romain Rancière (who developed a model in which worsening income distribution, caused by declining union bargaining power, led to a persistent surge in borrowing as workers tried to maintain their living standards, which rendered the economy fragile to a financial sector shock), (3) Gauti B. Eggertsson and Paul Krugman (who leave out inequality entirely and focus instead on the idea that a financial bubble drove excessive borrowing and leverage in the US economy—which, when the bubble burst in 2007-08, led to a financial crisis and a deep recession, which in turn prompted a wave of deleveraging as borrowers shifted to rebuilding their balance sheets and excess saving that reduced aggregate demand), and (4) Palley himself (who , in his “structural Keynesian” account, focuses on the shift from wage-led growth to neoliberal financialization).

Thus, according to Palley,

Income inequality did not cause the financial crisis. The crisis was caused by the implosion of the asset price and credit bubbles which had been off-setting and obscuring the impact of inequality. However, once the financial bubble burst and financial markets ceased filling the demand gap created by income inequality, the demand effects of inequality came to the fore.

Viewed in that light, stagnation is the joint-product of the long-running credit bubble, the financial crisis and income inequality. The credit bubble left behind a large debt over-hang; the financial crisis destroyed the credit-worthiness of millions; and income inequality has created a “structural” demand shortage.

Palley then proceeds to discuss the implications, for economic policy, of each one of these four stories.

The entire essay is worth a good, careful read. But let me focus here just on the causal stories, and leave for another post the implications of the stories for policy.

While I am sympathetic to Palley’s critique of the other three stories, what’s missing from his own account is the role inequality played in the financial crisis itself.

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Consider, for example, what happened to profits and wages in the long run-up to the crash of 2007-08. What we can see, from 1970 onward, is a steady decline in the wage share of national income and an initially halting and then uneven increase in corporate profits (measured here in terms of “net operating surplus”).* The argument is that the decline in the wage share led to increased profits both directly and indirectly: directly, as wage costs for producing enterprises declined; and indirectly, as some of those corporate profits were recycled through financial enterprises to lend to workers, thereby further boosting the profit share of national income. That combination fueled the housing and asset bubbles that eventually burst in 2007-08.

So, on my account—on my structural class account—inequality played an important role in creating the conditions for the most recent financial crash. And now, during the Second Great Depression, the class inequality that was such an important factor before is on the rise again.

Now, I understand, that’s not a complete story about the relationship between inequality and the crash of 2007-08. But it’s a start. It shows that such a story is possible. And, as I will explain in another post, it has implications for economic policy very different from the other four stories out there.

*My chart doesn’t show all of what I consider to be the economic (class) surplus. To get there, we’d have to transfer some of what is included in wages and salaries (e.g., the salaries of CEOs, which put them in the top 1 percent) to “net operating surplus.” I’m still searching for a good way to do that.

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Paul Krugman is right: there is no clear or unambiguous relationship between inequality and capitalist economic growth.

If there were such a relationship, liberal thinkers could make their case that less inequality would promote more growth and everyone would benefit.

The fact is, however, there are more unequal and less unequal forms and periods of capitalist growth. As a result, there’s no general correlation between inequality and growth within capitalism.

The chart above depicts both inequality (the profit-wage ratio, in blue on the left) and economic growth (nominal GDP growth, in red on the right) for the United States. We can clearly see periods of relatively high economic growth accompanied by growing inequality (e.g., in the late 1970s) and periods of very slow economic growth also accompanied by growing inequality (e.g., since 2009). The converse is also true: high economic growth with falling inequality (in the early 1950s) and slow economic growth with falling inequality (e.g., late 1980s).

What this means, at least for me, is we need to pay attention to the particular conditions for economic growth during each period or phase of capitalist development. In general, capitalism can grow (or not) under both more unequal and less unequal conditions.

That’s not to say, however, that within any given period (more or less) growth and (more or less) inequality are not connected. A plausible story can be told that growing inequality during the 2000s fueled the financial bubble that eventually burst in 2007-08.

We also need to reverse the relationship and look at the relationship from growth to inequality. It’s pretty clear that the nature of the growth that has occurred since 2009 has created more inequality, that is, the particular form of the recovery that has been enacted since the crash of 2007-08 has enhanced corporate profits (and incomes at the very top) and made everyone else (who receive wages to get by) pay the costs.

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Finally, while we’re on the topic, there is one general tendency of capitalist growth we need to point out: the role of profitability. In the end, profitability is what makes capitalism work (or not). As we can see from the chart above (which includes just the corporate profit share and growth), each period of a declining profit share is followed by a recession, after which the profit share rises (at least for a time).

So, to paraphrase the Rolling Stones: capitalists can’t always get what they want. When they don’t (leading up to the most recent financial crash), neither will anyone else. And, even when they do (as they have since 2009), there’s no guarantee anyone else will.