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What’s so bad about more inequality?

What’s so bad about more inequality?. Lars Osberg Economics Department Dalhousie University ACADEMY OF THE SOCIAL SCIENCES IN AUSTRALIA – 2013 ANNUAL SYMPOSIUM Canberra , Australia November 12, 2013. “More Inequality” .

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What’s so bad about more inequality?

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  1. What’s so bad about more inequality? Lars Osberg Economics Department Dalhousie University ACADEMY OF THE SOCIAL SCIENCES IN AUSTRALIA – 2013 ANNUAL SYMPOSIUM Canberra, Australia November 12, 2013

  2. “More Inequality” • Cross-national level comparisons @ point in time (e.g. U.S.t > Aus.t) • Menu of choices? Causes ∆ health, happiness, crime, social mobility ? • Stability assumed – steady state  Equal Growth rate @ all percentiles • Over-time for same society – e.g. US2013 > US1983 • U.S., Australia, Canada – 30 years of Unbalanced Growth • Increasing Inequality  Differential in growth rates: Top 1% >> Bottom 99% • Why expect big slowing of top 1% growth OR big acceleration of 99% growth? • Continued differential in income growth rates plausible – compounds to ever larger gaps • Income = Consume + Save: Implications of continued growth differentials? • Save:↑ Financial Assets => ↑ Financial Liabilities =>↑ Debt Fragility=> Real Crises • Spend: => ↑ Extravagance; ↑ Advertising Luxuries; ↑ political & social advantages • Increasing Inequality cannot be a steady state • Interacting Instabilities of Imbalances – but what next?

  3. “More Inequality” – U.S.t > CanadatCross – national comparisons of levels • Reliable cross-national data on inequality only since 1970s • Now a large literature on income measurement, equivalence scales, etc. Socially important “Possibility Proof” • Market Economies have widely varying levels of income inequality while competing successfully in global markets. • i.e. There Are Alternatives – different choices in different places

  4. A menu of choices?

  5. What would more equality imply ? • More Equality causes more • health • life expectancy • trust • social mobility • educational performance AND LESS • infant mortality • Violence • obesity • mental illness • teen births • homicides • Imprisonment • Wilkinson & Pickett: The Spirit Level: Why Equality is Better for Everyone (+ many articles) • Method: Cross-national correlations & scatterplots, primate & workplace studies • H0: ↑inequality =>↑ stress of social interaction • Is Inequality Guilty of all this? • Can Inequality be proved Guilty? • Onus of proof ? • 95% Prob (harmless) OR 95% Prob (Harmful) • Level of certainty ? • “Balance of Probabilities” or “Beyond Any Doubt”

  6. “too many theories for the number of available data points” - Leigh et al (2009:399) • Multiple Plausible Indicators of Complex Concepts • e.g. “Health” & “Inequality”; => ambiguity of estimates • Causation – very hard to prove: formal econometrics not feasible • Outliers – weird or very informative ? • Onus of proof – required proof: “harmful” or “harmless” ? • Most Convincing evidence: • Intergenerational Social Mobility & Inequality of Opportunity • Also – more inequality => more unhappiness & social conflict

  7. Robust association – inequality of outcome & inequality of opportunityBrunori, Ferreira, Peragrine (2013:27) Variety of Social Mobility Measures Intergenerational - Correlation Education - Earnings elasticity - Decile transitions - All are lower where inequality of income is greater

  8. Equality of Opportunity? • Parents choose Human Capital Investment for own Children subject to Income Constraint • Becker/Tomes: parental altruism model • Max U0 = u0(C0,u1(C1, U2)) • s.t.Yi = Ci + HKBi + Ki • Yi= Wi + rhi HKBi-1+ rkKi-1. Market Society Implies: • Inequality of Outcome in one generation begets Inequality of Opportunity in next generation • Pure Market Economy is Dynastic Society • (subject to random variation in rhi and rk) Not a new insight – Marshall & many others

  9. Assumed: No scarcity of top slots • Human Capital Model assumes no rationing of access to top slots • Harvard admits all applicants who can pay; All hard-working MBAs become CEO • Strong Assumption: There is nothing competitive about life. • success by others does not affect probability (success by self) • BUT in a competitive race, only top few can win • Scarcity of top slots => own prob (success) decreases when others prob (success) increases • Intergenerational mobility in social rank: trading ranks - when some go up, others must go down • Implications of Rationing of Access + Increased Payoff to top slots? • “rat-race” model → greater over-investment in effort to increase own Prob (promotion) • Increasing stakes in early school success imply more pressurized childhood ? • Real “Equality of Opportunity” has greater costs to affluent parents • Greater “drop from top” implies less support by affluent for public spending to equalize opportunity (which would decrease chances of own kids’ success)

  10. Cross-National Comparisons – Stability of Inequality level is assumed • Steady State Inequality  Equal Growth rate @ all percentiles • Happy Accident of 1953 -1980 • Not our current problem • “More Inequality”- U.S. & Canada & Australia • Increasing Inequality over time  Unbalanced Growth by Income class • Increasing inequality cannot be a steady state • Unbalanced Growth => Interacting Instabilities of Imbalances

  11. No stable level of Gini Index Canada Rising – esp. since 1990s 2000+ ↓ middle offset ↑ top Top-coding survey data USA Rising since early 1980s Australia Trending up

  12. Alvaredo, Atkinson, Piketty, Saez(2013) “most of the action has been at the very top” U.S. & Canada – lower percentiles show little change in real income 1980 -2012 Australia: resource boom => ↑ earnings => change in bottom 99%

  13. Income Share = Ratio • Income Share of Top 1% = Incomes of Top 1% Incomes of 99% + Incomes top 1% • So where has the action been in Income Shares? • Numerator (Real Incomes of top 1%) ? • Denominator (Real Incomes of Bottom 99%) ?

  14. Increasingly higher long-run growth rates at top U.S.& Canada – little growth in bottom deciles Australia – significant earnings growth for 90% Top /Bottom Differential In income growth rates was similar Focus on Top 1% - approximation to ↑ growth rate

  15. Top 1% Income - No Natural Upper Bound Real Average Income Top 1% - Cyclical Fluctuations - Upward trend -slow 1935-1980 - accelerates 1985+ CCPC income not included in Canadian data

  16. U.S.Balanced Growth = atypical episode 1965-1980 equal growth rates for top 1% & bottom 99% - 1940 – 1964 higher growth rates at bottom – especially 1940s - 1980 + Much higher growth rates for top 1%

  17. Canada:Longer balancedgrowth period Mid 1950s-mid 1980s: bottom 90% growth rate slightly higher than top 1% (but roughly balanced) Pre-1950s & post 1985: Significant differences in income growth rates Pre-1950 – compression Post 1986 – top-end growth much faster

  18. “Once-only” & Income Growth 1940-1970 • Recovery from Mass Unemployment of Depression + WWII controls • Structural Changes with Major Income Impacts • High % agriculture => rural out-migration => big wage gains • Low % employed women => big impact of increase female jobs • Low % complete post-secondary => high marginal HK returns • Capital deepening => increased MPL post WWII • “Baby Boom” => demographic bulge • Unionization; increased bargaining power until late 1950s • Political economy of social policy ? • Credible ‘hard left’ political option => “threat effect” for elites

  19. AustraliaUnequal growth – normal event Not same pattern as U.S. & Canada pre 1980s 35 years of compression 1951-1986 1986 + similar differential in growth rates

  20. Suppose Past U.S. Trends Continue ? 1984-2011: Annual growth rate differential ~ 2.84% No Big Deal if 2-3 years Compounds to very large $ differentials & ratios over 20+ years Too Large to Believe? Why would income growth rates change?

  21. Framing the question ? • Increasing Level of Income Inequality ? OR • Differential in long term income growth rates ? • Top 1% income growth rate (3.14%) >> Bottom 99% growth rate (0.3%) • Different words for same reality BUT • Differential Growth Rates perspective suggests: • Why did growth rates differ ? • Why would growth rates equalize ? • Substantial Slowing of Top 1% ? • Big Acceleration of 99% ? • One-time level changes cannot explain long-term trend differentials • E.g. need series of tax cuts & continual ↑ labour supply

  22. Auto-equilibrating Market Mechanisms ? • Top 1% Income: Not a Capital / Labour Factor Shares story • Large % income of top 1% = Labour compensation • Why might top 1% growth slow? • Labour Market Story needed – could it be ↑ Supply (Effort) <= Tax cuts ? • Could Top 1% run out of steam ? (i.e. @ max. possible effort) ? • “Effort” = (Hours per year)*(Work Intensity per hour) • Max (Annual Hours) = 6,000 ?? (16*365=5,840) ; Intensity has some upper bound • BUT were the elite of 1982 really that slack ? [top 0.1% 1982 = 0.326 top 0.1%2011)] + timing does not fit + Labour/leisure choice is levels model & => backward-bending SSL

  23. H0: Segmented Labour Markets ? • “Globals and their peers” • Top corporate teams share in monopolistically competitive profits • Rents to hierarchical rank increase with rank • Profits = f (firm size <= scale of market) • Post 1980 – ↓trade barriers, ↑ firm growth rate <= global market growth; • Sets benchmarks for top positions in national firms & non-profit sector • U.S. leads Anglo wage contours, with slow filter to other national top ends • “Locals” • Long run growth rate hourly wage ≤ labour productivity growth + Share of Resource sector rents if unions or rapid development; - ∆ wage <= slack labour markets (if Ut> U*) • Implication: Differential in Income growth rates persists

  24. What plausible alternative model implies likely:- substantial slowing of top 1% or- big acceleration of rest ? • Could more education sufficiently accelerate the long-run growth rate of average 99% income? • U.S., Canada, Australia – already well educated • Diminishing returns at successively smaller margin • Equalization within 99% does not imply acceleration of average 99% • Educational reform – inherently long lags to pay off • 25-64 Tertiary Education : 51% Canada > 42% U.S. > 38% Australia • No evidence of convergent middle class incomes in Canada

  25. Stable Inequality  Balanced Growth IFF Same Rate Income Increase @ all income percentiles • BUT U.S.: Annual Income growth rate 1984-2011: • Top 1 % = 3.14% = r1 ; Median household = 0.3 % = rm • Income Levels diverging @ r1 - rm= 2.8% • Short-run chances for rm = 3%? • Unions weak; Low-wage competition strong; slack labour demand • Why would Income Setting @ Top change & long run r1 ↓ ? • What are implications of continued Unbalanced Growth ?

  26. Income = Savings + Consumption • Income Increases @ top => Increase Savings => Increase Loanable Funds • Macro Real Expenditure Balance requires: Increased Savings top 1% = increased spending rest • Save => purchase of financial asset • Financial Assets = Financial Liabilities • Financial Instrument: Asset for Holder = Liability for Issuer

  27. Differential Flows accumulate to Stocks DEBATE : ↑ inequality of consumption < ↑ inequality of income ? If true: mitigates short run utility implications of greater inequality • IGNORED: If true: implies changing distribution of assets and liabilities • ↑ Net Savings @ top imply Accumulating Debts @ bottom • Savings & debts grow @ r1 but median income grows @ rm=> ↑ leverage • Financial Fragility => Financial Crises => Real Recessions (Kumhof &Ranciere) • Recessions => Counter-cyclical stimulus => ↑ Public Debt / GDP => unpleasant choices for continued monetization or austerity / contraction

  28. Debt Stability Dt= (1 + rt)* Dt-1 - PBt Dt = Debt in period t rt = average rate of interest in period t PBt = Primary Balancein period t = (Receiptst – Expenditurest) ∆ (D/Y)t = (rt - gt)*(Dt-1/Yt ) - (PBt / Yt) Yt= GDP for nation; Household Income for families gt= growth rate ∆ (D/Y)t = change in Debt/Income ratio Will rt< gt forever?

  29. Debt Instability – not just a Public Sector Problem ! ∆ (D/Y)t = (rt - gt)*(Dt-1/Yt ) - (PBt / Yt) • Debt overhang compounds if / when:rt > gt • Accumulated Deficits => ↑ Debt/GDP => Deficit => ↑ Debt => etc. • Can & Aus: low rt to maintain demand enables ↑ household leverage • Unpalatable Choices: • Anti-Inflation Monetary Policy increases (rt- gt) at both ends • Can rt < gt for long-term ? How to unwind rising household leverage?

  30. Instability <= Increasing Consumption? • Macro: Extravagant Elite Consumption does recycle Income • “Downton Abbey” – high & stable inequality • Norms of consumption & deference built up over many decades • In time, habituation → ”natural order of things” for both servants & served • IncreasingIncome gaps imply Increasingly Extravagant Elite Consumption required for Macro balance • norms of luxury → increasingly distant from median • Veblen: “conspicuous consumption” = the main point of great wealth • “if you’ve got it, flaunt it” lifestyles are resented by some • Gaps Increasing over time @ r1 - rm

  31. The Increasing Advertising of Envy • Increasing top 1% share = Increasing market for luxury goods • Increasing % of advertising for luxury / status goods • Status goods – a pointless purchase if nobody else thinks it’s “special / desirable / exclusive” • => Advertising must increasingly emphasize exclusivity / luxury / privilege • Increasingly remind 99% of what only 1% can afford (& 99.9 of 0.1% ) • Increasing Inequality increases Market Incentives to manufacture envy.

  32. Externalities of top 1% spending ? • Increasingly distant top incomes imply: • Increasing market for infrastructure of exclusivity • Separate world of resorts, gated communities, restaurants, etc. • Increasingly difficult to socialize across income classes • Escalating Consumption Norms? – set @ top & ripple down ? (Frank) • => Increased middle class debts & increased financial fragility • BUT: Why not just ignore (& tax) the top 1% ?

  33. Externality 1 – political influence • Top 1% refuse to be ignored politically • U.S. evidence: • political & social preferences of top 1% quite different from 99% • Top 1% much more active politically than the 99% • campaign funding depends heavily on major donors • legislation heavily influenced by the policy priorities of top 1% • Political influence: More for 1% implies less for 99% • “Deeper Pockets” & Meaningful Democracy ?

  34. Externality 2: Advantages for kids • Increasingly affluent families buy increasingly more advantages for their children • “Income effect” of rising real incomes (Normal good) PLUS • “Price effect” – Increasing “drop from top” implies ever greater incentives to prevent downward social mobility for own children • Top 1% / Median ratio increasing over time => ↑ cost of move from top to median • When top 1% avoid downward mobility of their own kids, decreases the chances of upward mobility for 99% • Maintaining belief in “equality of opportunity” becomes ever harder

  35. If markets will not auto-equilibrate, can political economy stabilize ?USA: What chance for a New “New Deal” ? • 1930s: FDR & “New Deal” • U.S. Policy Innovation Stabilized Growth & Inequality • Cyclical Stimulus + Structural Reforms + Progressive Taxation + Social Security • Restraint top end income growth + fiscal recycling + financial market regulation + unions => ↓ inequality + period of balanced growth • “Tax & Spend” can in principle stabilize the distribution of post-fisc income for any given trend in market income. – but how likely is that?

  36. The unsustainable does not last – but what follows? • Unbalanced Income Growth  Ever Increasing Inequality • Cannot be a steady state equilibrium • Produces Interacting Instabilities – with cumulative impacts • Parallels with 1930s but many structural changes since • No Automatic Economic self-correction Tendency is apparent • Political Economy of Adaptation to Systemic Instability: • Europe in 1930s: both disastrous choices and enduring successes • Political choices matter

  37. Comments very much appreciated:lars.osberg@dal.ca

  38. Differences in Rates of Growth Drive Changing Income Shares 1940-1973 – strong growth in bottom 99% incomes + slow growth for top 1% = declining share for top 1% 1980-2012 – income stagnancy for bottom 99% + strong growth for top 1% = rising income share for top 1% T. Piketty and E. Saez “Income and Wage Inequality in the United Staes, 1913-2002,” Chapter 5 in The Oxford Handbook of Economic Inequality, edited by WiemerSalverda, Brian Nolan, and Tim Smeeding, Oxford University Press, Oxford, 2009, page 174

  39. Canada – nil real growth for most

  40. U.S. – real growth only at top

  41. USA: Conflicted attitudes + $ politics • Bimodal distribution → small migration tips majority balance • BUT short terms + division powers + courts => gridlock + soon tips back • “Deeper Pockets” • Increased economic Inequality => Increased Inequality of Political Influence

  42. Q. In the next federal election, would you be more likely to support a party that promised to NOT raise taxes or a party that promised to raise taxes on the rich? BASE: Canadians; February 21-28, 2012 (n=3,699)

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