Some important limitations of income inequality data

from Jonathan Nitzan

Blair Fix, a PhD student in the Faculty of Environmental Studies at York University in Toronto, points to some important limitations of income inequality data. In a recent posting on capitalaspower.com, Fix shows that, in the case of the U.S., the Top 1% income share correlates not with the share of capitalists in national income (profit and interest), but with the share of corporate dividends in national income. This difference means that income-inequality data of the sort reported by Thomas Piketty and others in the World Top Income Database give a very partial and potentially biased picture of ruling class power, power that is much better proxied by all income rather than dividends alone. Blair Fix’s article: http://www.capitalaspower.com/forum/viewtopic.php?t=427&p=1147#p1147

Decomposing the top decile US income share into 3 groups, 1913-2013

from David Ruccio

The share of total income captured by the top 1 percent actually shrunk in 2013, falling from 21.22 percent to 18.98.

But, as Emmanuel Saez [pdf] explains, that decline is probably a statistical anomaly:

Decomposing the top decile US income share into 3 groups, 1913-2013

from David Ruccio

If shareholders stopped letting CEOs rip them off it would reduce inequality

from Dean Baker

Eduardo Porter has an interesting discussion of inequality, based in large part on the views of M.I.T. Professor Robert Solow. Solow views it as unlikely that it will be possible politically any time soon to have tax and transfer policies that do much to lesson inequality. However he does hold out the hope that changes in corporate practices could lessen before tax inequality.

This is an extremely important point. There is considerable research showing that CEOs and other top management essentially ripoff shareholders, taking advantage of their insider power to give themselves pay that has little to do with their productivity, measured as the return they give to shareholders. (Lucian Bebchuk has a good summary of the issues.) If shareholders can better gain control of their companies, they might cut pay by 50 percent or more, bringing CEO pay in the United States in line with pay in other wealthy countries.

‘Just desert’ and neoclassical income distribution theory

from Lars Syll

Walked-out Harvard economist Greg Mankiw has more than once tried to defend the 0.1 % by invoking Adam Smith’s invisible hand:

[B]y delivering extraordinary performances in hit films, top stars may do more than entertain millions of moviegoers and make themselves rich in the process. They may also contribute many millions in federal taxes, and other millions in state taxes. And those millions help fund schools, police departments and national defense for the rest of us …

[T]he richest 1 percent aren’t motivated by an altruistic desire to advance the public good. But, in most cases, that is precisely their effect.

When reading Mankiw’s articles on the “just desert” of the 0.1 % one gets a strong feeling that Mankiw is really trying to argue that a market economy is some kind of moral free zone where, if left undisturbed, people get what they “deserve.”

Where does this view come from? Most neoclassical economists actually have a more or less Panglossian view on unfettered markets, but maybe Mankiw has also read neoliberal philosophers like Robert Nozick or David Gauthier. The latter writes in his Morals by Agreement:

The rich man may feast on caviar and champagne, while the poor woman starves at his gate. And she may not even take the crumbs from his table, if that would deprive him of his pleasure in feeding them to his birds.

Now, compare that unashamed neoliberal apologetics with what three truly great economists and liberals — John Maynard Keynes, Amartya Sen and Robert Solow — have to say on the issue:

US poverty rate, actual and simulated, 1959 – 2012 (graph)

from David Ruccio

One of the points Thomas Piketty makes in his new book is that mainstream economists enshrined as “laws” of capitalist development certain “facts” that only had relevance during the immediate postwar decades.

More effective remedies for inequality than Piketty’s

from Geoff Davies

I have read only reviews of Thomas Piketty’s Capital in the Twenty-First Century, but clearly it is valuable for documenting the nature and history of inequality over the past century or three, and for highlighting the excessive political power that flows from super-wealth.  Yet he frames it in terms of capital and capitalism and, for all the quality of his diagnosis, his main prescription evidently is just to tax the wealthy, through income and inheritance taxes.

The trouble is, capital and capitalism are very ill-defined.  To speak of capitalism is to invite an un-constructive shouting match.  Capitalism has caused great harm to people and the world!  Yes but capitalism is what has made us rich!

A more useful framing is that there have been, and can be, many ways to structure a market economy.  When one looks into the mechanisms that have operated in market economies, one can readily identify mechanisms that pump wealth from the 99% to the 1%.  One can then think of ways to stop or reverse these flows, so wealth flows more fairly to everyone involved in its generation.  It will be much more effective to fix the problems at the source than just to apply traditional retro-active bandaids like taxes.

In my own book Sack the Economists, I identified seven fairly obvious such mechanisms.  Below is an edited excerpt that summarises mechanisms identified in the course of the book’s analyses.  (Dean Baker has also made lists, short and longer, which are a little more detailed and only partly overlapping with mine.)

Collective bargaining and poverty reduction: OECD data

from Jim Stanford

My union Unifor is currently undertaking an important “Rights at Work” campaign, which involves a national tour of meetings with our officers and local leaders and stewards, followed by a membership canvass and community outreach effort, all aimed at beating back the current attack on fundamental labour rights coming from conservatives at all levels in Canada.  So far the campaign has had a very strong reception.  Ontario will be a key battleground, of course, since the future of the Rand Formula will be decided in the next election (as early as this spring), but similar attacks on labour rights are being experienced at the federal level and in many other provinces.

A key argument in winning this battle will be showing how important unions and collective bargaining are to the health of broader society.  This helps to defeat conservative attempts to portray organized labour as self-interested and removed from the overall workforce.  In our materials and presentations we have been marshalling arguments to show that unions lift up wages, standards, and security for all workers, not just their own members, through their influence on the actions of non-union employers, their influence on policy and politics, and their ability to provide a collective voice for workers’ interests on all issues.

The powerpoint show we are presenting on our leadership tour makes many of these arguments.  In our internal dress rehearsals, however, my colleague Jordan Brennan suggested that a graph comparing poverty or inequality rates across countries, and linking those differences to unionization, might help tell the story.  He was right, and we included a simple scatter plot in our show, which has consequently generated many inquiries.  So I will use this blog entry to describe the data more fully and formally, and consider its implications. 

Technology didn’t kill middle class jobs, public policy did

from Dean Baker

A widely held view in elite circles is that the rapid rise in inequality in the United States over the last three decades is an unfortunate side-effect of technological progress. In this story, technology has had the effect of eliminating tens of millions of middle wage jobs for factor workers, bookkeepers, and similar occupations.

These were jobs where people with limited education used to be able to raise a family with a middle class standard of living. However computers, and now robots and other technological innovations are rapidly reducing the need for such work. As a result, the remaining jobs in these sectors are likely to pay less and many people who would have otherwise worked at middle wage jobs must instead crowd into the lower paying sector of the labor market.

This story is comforting to elites because it means that inequality is something that happened, not something they did. They won out because they had the skills and intelligence to succeed in a dynamic economy, whereas the huge mass of workers that are falling behind did not. In this story the best we can do for the left behinds is empathy and education. We can increase their opportunities to upgrade their skills in the hope that more of them may be able to join the winners.

That’s a nice story, but the evidence doesn’t support it. 

Two American epochs: Growing Together 1947-1979 and Growing Apart 1979-2012 (charts)

from David Ruccio

Business schools and inequailty

from Peter Radford

You may not be aware of the article that has created quite a storm on the New York Times website. It is about inequality at Harvard Business School and the insidious consequences of the emergence of a “class” system there.

Don’t laugh.

If HBS is now afflicted by class issues and the social disaster of inequality, then we can assume the rest of the country is in worse shape. HBS is, of course, partly responsible for the inequality we now suffer from through its relentless production of clever people with great connections who exploit finance and consulting without adding on offsetting social value.

Disclaimer: I graduated from HBS in 1979. Things seem to have changed enormously since I was there. Sure we had our contingent of super privileged kids, but the bulk of our class seemed to me to be from pretty ordinary backgrounds. The obnoxious oppression of class was largely absent. At least we could ignore the super wealthy and the quasi aristocrats because they were too few to have much impact.

Since then things have changed.

Income inequalities in 2007 compared to latest available year in 26 countries

from David Ruccio

source

Note that the U.S. Gini coefficients—starting at 46.3 in 2007 and then rising to 47 in 2010 and 47.7 in 2011—literally don’t fit on the chart.

The kids will be rich, unless Peter Peterson’s kids take their money

from Dean Baker

The Wall Street crew has been in high gear trying to convince the public that our children’s well-being is going to be threatened by their parents’ and grandparents’ Social Security. This story would be laughable except that it is endlessly repeated by people in positions of power and responsibility. For this reason it is worth going over the basic numbers yet again so that everyone knows that the people making these assertions are either ignorant or dishonest.

The basic point is that the economy gets more productive through time. This has been true for hundreds of years and no one has any good stories as to why it should not continue to be true long into the future.

Our measures of productivity growth are not very good for the years prior to World War II, but according to the Bureau of Labor Statistics in the 65 years since 1947 productivity growth has averaged 2.2 percent annually. There have been periods of more and less rapid growth.

In not Of?

from Peter Radford

Today’s New York Times has a reminder of the damage the crisis has done to the economy, and, more importantly, to enduring attitudes towards opportunity. The article summarizes the results of a survey conducted by Rutgers University.

The main thrust of the article is that this crisis was both deep and broad enough to involve almost eighty percent of the population in one way or another. Unemployment and its awful effects were that widely felt. People’s lives were often ruined permanently. The entire trajectory of some people’s lives will be changed forever. The damage is incredible. The downdraft from Wall Street’s extraordinary greed driven stupidity caught almost all Americans and has left enormous psychological as well as material scars.

Yet we still have not dealt with the causes and have not undertaken strong remedial action.

Why not?

In the USA when income grows, who gains? 1976 – 2008 (chart)

from David Ruccio

source

That’s right: 100 percent to the top 10 percent and zero for everyone else.

World map comparing income inequality in the USA to other countries

Source : http://www.theatlantic.com/international/archive/2011/09/map-us-ranks-near-bottom-on-income-inequality/245315/

Global map of income inequality

Source : http://www.theatlantic.com/international/archive/2011/09/map-us-ranks-near-bottom-on-income-inequality/245315/

Percent of income earned by top 0.1 percent of taxpayers – 6 countries – chart

from David Ruccio

Percent of Income Earned by Top 0.1 Percent of Taxpayers

source (missing years reflect lack of current data)

Raising the minimum wage is cheap and easy

from Dean Baker

There are some policies that are pretty much no-brainers. We all agree that the Food and Drug Administration should keep dangerous drugs off the market. We all agree that the government should provide police and fire protection. And, we pretty much all agree that workers should be able to count on at least some minimal pay for a day’s work.

The minimum wage is non-controversial. The vast majority of people across the political spectrum support the minimum wage. In fact, one of the big accomplishments of the Gingrich Congress in 1996 was a 22 percent increase in the minimum wage. The only real issue is how high it should be. There are good reasons for believing that the minimum wage should be considerably higher than it is today.

United States of low wages

from David Ruccio