Posts Tagged ‘wealth’

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 that was the case using survey data—a top 1-percent income share that is more than double for 2007-08.

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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.

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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.

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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.

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wealth

One of the most pernicious myths in the United States is that higher education successfully levels the playing field across students with different backgrounds and therefore reduces wealth inequality.

The reality is quite different—for the population as a whole and, especially, for racial and ethnic minorities.

As is clear from the chart above, the share of wealth owned by the top 1 percent has risen dramatically since the mid-1970s, rising from 22.9 percent in 1976 to 38.6 percent in 2014. Meanwhile, the share owned by the bottom 90 percent has declined, falling from 34.2 percent to 27 percent. And that of the bottom 50 percent? It has remained virtually unchanged at a negligible amount, falling from 0.9 percent to zero.

During that same period, according to the U.S. Census Bureau (pdf), the proportion of Americans aged 25 to 29 with a bachelor’s degree or higher rose from 24 percent to 36 percent. (For the entire population 25 and older, the percentage with that level of education rose from 15 to 33.)

So, no, higher education has not leveled the playing field or reduced wealth inequality. In fact, it seems, quite the opposite appears to be the case.

And that’s true, too, for racial and ethnic disparities in wealth. As William R. Emmons and Lowell R. Ricketts (pdf) of the Federal Reserve Bank of St. Louis have concluded,

Despite generations of generally rising college-graduation rates, higher education’s promise of significantly reducing income and wealth disparities across all races and ethnicities remains largely unfulfilled. . .rather than promoting economic equality across all races and ethnicities, higher education unintentionally has become an engine for growing disparities.

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Thus, for example, median Hispanic and black wealth levels decline relative to similarly educated whites as education increases until the very top. Moreover, only about 7 percent of black families and 5 percent of Hispanic families have postgraduate degrees, and wealth disparities remain large even there.

Darrick Hamilton and William A. Darity, Jr. (pdf), who participated in the same symposium, go even further. According to them, the United States has a fundamental problem in discussing wealth disparities according to race and ethnicity:

Much of the framing around wealth disparity, including the use of alternative financial service products, focuses on the poor financial choices and decisionmaking on the part of largely Black, Latino, and poor borrowers, which is often tied to a culture of poverty thesis regarding an undervaluing and low acquisition of education.

Thus, while they agree that a college degree is positively associated with wealth within racial and ethnic groups, it is still the case that it does little to address the massive wealth gap across such groups.

And yet the myth persists. American elites and policymakers still to choose to emphasize the economic returns to education as the panacea to address socially established wealth disparities and structural barriers of racial and ethnic economic inclusion.

The question is, why?

According to Hamilton and Darity, such a view

follows from a neoliberal perspective, where the free market, as long as individual agents are properly incentivized, is supposed to be the solution to all our problems, economic or otherwise. The transcendence of Barack Obama becomes the ideal symbolism and spokesperson of this political perspective. His ascendency becomes an allegory of hard work, merit, efficiency, social mobility, freedom and fairness, individual agency, and personal responsibility. The neoliberal ideology is not limited to race. It more generally places the onus on individual actions, and more broadly leads to deficiency narratives for low achievement, but this is especially the case when considering race and other stigmatized workers. Perhaps the greatest rhetorical victory of this paradigm is convincing the masses that implicit in unfettered markets is the “American Dream”—the hope that, even if your lot in life is subpar, with patience and individual hard work, you can turn your proverbial “rags into riches.”

And so the myth of college and the American Dream is perpetuated, while the unequal distribution of wealth—across the entire population, and especially with respect to ethnic and racial minorities—which has been growing for decades, continues unabated.

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Most of us pay the taxes we’re required to pay. That’s because there aren’t many ways to avoid them. Sales, property, payroll, or income—the tax is paid at the time of the purchase, the amount is deducted from our paychecks, or the records go directly to the government. There’s no real way around them. And we pay those taxes out of wages and salaries more or less willingly, since that’s how government services are financed.

Not so for those who are able to capture the surplus. Large corporations and wealthy individuals pay far less than their fair share of taxes. Their ability to evade taxes is only matched by their insistent demand that their tax rates be lowered even more.

We’ve known for a long time that large corporations use a variety of mechanisms—from claiming tax deductions and using loopholes to stashing profits in tax havens abroad—to lower their effective tax burden.

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Thus, for example, according to Oxfam America (pdf), between 2008 to 2014, the top 50 companies in the United States paid an effective tax rate (to the federal government as well as to states, localities, and foreign governments) of just 26.5 percent overall, 8.5 percent points lower than the statutory rate of 35 percent and just under the average of 27.7 percent paid by other developed countries. And then they use their tax savings to lobby for even more tax advantages.

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One of the results of corporate tax evasion is, I’ve argued before, the tax burden has been shifted from corporations to individuals.

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But not to wealthy individuals. As new research by Annette Alstadsaeter, Niels Johannsen, and Gabriel Zucman has shown (pdf), the top 0.01 percent of the wealth distribution—a group that includes households with more than $40 million in net wealth—evades about 30 percent of its personal income and wealth taxes. This is an order of magnitude more than the average evasion rate of about 3 percent.

The main reason those at the very top of the wealth distribution are able to evade a large portion of their tax burden is because they’ve managed to use their cut of the surplus to accumulate personal wealth—and then to hide that wealth offshore.

Ownership of wealth is, of course, extremely concentrated. Offshore wealth even more so. According to Alstadsaeter et al., the top 0.01 percent of the distribution owns about 50 percent of offshore wealth, which means the top 0.01 percent manage to hide about one quarter of their true wealth.

We now have an economy in which more and more surplus is captured by a small number of large corporations and wealth individuals, who in turn manage to evade a larger and larger portion of their fair share of taxes by hiding the surplus.

Oxfam’s view is that

Rather than engaging in a mutually destructive race to the bottom, the US should stake out a leadership role in addressing structural problems in the global tax system. The US should push for a truly inclusive process where all governments are able to build mutually beneficial tax rules that improve information sharing, transparency and accountability globally.

Until that happens, the rest of us—who are not members of the boards of directors of large corporations or wealthy individuals—will continue to be forced to shoulder the burden of paying taxes to finance government services. And the distribution of income and wealth will become, year by year, increasingly unequal.

Greg Kahn

I am quite willing to admit that, based on last Friday’s job report, the Second Great Depression is now over.

As regular readers know, I have been using the analogy to the Great Depression of the 1930s to characterize the situation in the United States since late 2007. Then as now, it was not a recession but, instead, a depression.

As I explain to my students in A Tale of Two Depressions, the National Bureau of Economic Research doesn’t have any official criteria for distinguishing an economic depression from a recession. What I offer them as an alternative are two criteria: (a) being down (as against going down) and (b) the normal rules are suspended (as, e.g., in the case of the “zero lower bound” and the election of Donald Trump).

By those criteria, the United States experienced a second Great Depression starting in December 2007 and continuing through April 2017. That’s almost a decade of being down and suspending the normal rules!

Now, with the official unemployment rate having fallen to 4.4 percent, equal to the low it had reached in May 2007, we can safely say the Second Great Depression has come to an end.

However, that doesn’t mean we’re out of the woods, or that we can forget about the effects of the most recent depression on American workers.*

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For example, while Gross Domestic Product per capita in the United States is higher now than it was at the end of 2007 ($51,860 versus $49,586, in chained 2009 dollars, or 4.6 percent), it is still much lower than it would have been had the previous trend continued (which can be seen in the chart above, where I extend the 2000-2007 trend line forward to 2017). All that lost output—not to mention the accompanying jobs, homes, communities, and so on—represents one of the lingering effects of the Second Great Depression.

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And we can’t forget that young workers face elevated rates of underemployment—11.9 percent for young college graduates and much higher, 30.9 percent, for young high-school graduates. As the Economic Policy Institute observes,

This suggests that young graduates face less desirable employment options than they used to in response to the recent labor market weakness for young workers.

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Finally, the previous trend of growing inequality—in terms of both income and wealth—has continued during the Second Great Depression. And there are no indications from the economy or economic policy that suggest that trend will be reversed anytime soon.

So, here we are at the end of the Second Great Depression—no longer down and with the normal rules back in place—and yet the effects from the longest and most severe downturn since the 1930s will be felt for generations to come.

 

*As if often the case, readers’ comments on newspaper articles tell a different story from the articles themselves. Here are two, on the New York Times article about the latest employment data:

John Schmidt—

Any discussion about “full employment”, when there are so many people who’ve essentially given up looking for work or who’re working in low-skill or unskilled labor positions, seems like the fiscal equivalent of rearranging deck chairs on the Titanic. Based on data from the Fed and the World Bank, GDP per capita has doubled since 1993, while median household income has risen ~10%. Most of the newly-generated wealth and gains from productivity increases are being funneled upward, such that the average worker very rarely sees any sort of pay increase. Are we expected to believe that this will change now that we’ve [arguably] passed some arbitrary threshold? Why should we pat ourselves on the back for reaching “full employment”? Shouldn’t we be seeking *fulfilling* employment for everyone, instead, at least inasmuch as that’s possible? Shouldn’t we care that the relentless drive for profit at the expense of everything else is creating a toxic environment where the only way to ensure a raise is to hop from job to job, eroding any sense of two-way loyalty between companies and their employees?

I’m not sure what the solution is, but I know enough to see there’s a problem. Inequality of this sort is not sustainable, and it’s not going to magically disappear without some serious policy changes.

David Dennis—

There is a critical parameter missing from full employment data. very critical. Here in Pontiac, Michigan before the collapse of American manufacturing, full employment meant 10, 000 jobs working at GM factories and Pontiac Motors making above the mean wages with excellent health insurance as well as retirement pensions. You can not compare full employment at McDonalds and Walmart with the jobs that preceded them. The full employment measure doesn’t mean much if it isn’t correlated with a index that compares that employment with a standard of living as it relates to a set basket of goods, services, and benefits.

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Skellington is right: in my post on Tuesday, I did not separate out people at the very top from the rest of those at the top. That’s because, in the data I presented, those in the top 0.1 percent were included in the top 1 percent.

Unfortunately, I don’t have the same kind of breakdown in the composition of incomes as I used in those charts. What I do have are data on the shares of income and wealth for the top 0.1 percent versus the remainder of the top 1 percent (so, top 1 percent to but not including the top 0. 1 percent).

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Clearly, income within the top 1 percent is unequally distributed—and has gotten more unequal over time. While the top 0.1 percent (approximately 326.5 thousand individuals) captured about 9.3 of pre-tax income in 2014 (up from 3.9 percent in 1979), the remainder of the top 1 percent (and thus about 2.9 million individuals) took home about 10.9 percent of pre-tax income in 2014 (up from 7.3 percent in 1979). Over time (from 1979 to 2014), the top 0.1 percent has increased its share of the income going to the top 1 percent from a bit more than a third (35 percent) to almost half (46 percent).

wealth

The distribution of wealth within the top 1 percent is even more unequally distributed than the distribution of income—and it, too, has become more unequal over time. While the top 0.1 percent owned about 19.1 percent of total household wealth in 2014 (up from 7.2 percent in 1979), the remainder of the top 1 percent owned about 18. 2 percent of household wealth in 2014 (up from 15.2 percent in 1979). Thus, over time, the top 0.1 percent has increased its share of household wealth owned by the top 1 percent from about one third (32 percent) to over half (51.3 percent).

The conclusions, then, are straightforward: For decades now, those at the top have managed to pull away—in terms of both income and wealth—from everyone else in the United States. And, by the same token, those at the very top have been distancing themselves from everyone else at the top.

No matter how much they do battle over their respective shares, the one thing that ties together those at the top and those at the very top is that their income and accumulated wealth derive from the surplus created by the bottom 90 percent.