“The costs of inequality: capitalism & democracy at cross-purposes”

1. “The costs of inequality: capitalism & democracy at cross-purposes” Robert H. Wade LSE March 2014

2. Alternative title • “From labor Kism to ‘patrimonial Kism’ & from democratic democracy to ‘plutocratic democracy’” • Patrimonial Kism = where Y from capital, especially inherited capital, dominates total Y distribution • Plutocratic democracy = where preferences of rich dominate public policy

3. Economists have long ignored income IN Martin Feldstein (Economics, Harvard): “Income inequality is not a problem in need of remedy” (1998) Robert Lucas (Economics, Harvard, Nobel laureate): “Of the tendencies that are harmful to sound economics, the most seductive and … poisonous is to focus on questions of distribution” (2004) Willem Buiter (chief econ Citigroup, ex- LSE): “Poverty bothers me. Inequality does not. I just don’t care” (FT, 2007)

4. Why have economists ignored inequality? (1) Trade-off b/w “efficiency” (econ growth) and “equity”. (2) Kuznets curve: Gini follows inverted U trajectory as GDPPC rises (3) Technological change is skill-biased. The more highly skilled righly get higher remuneration. These explanations “set minds at rest”. Imply that capitalism distributes material benefits equitably without intervention by the state.

5. International organizations have long ignored inequality World Bank & IMF They consider “inequality” too “political”. “Poverty”, “efficiency” “a-political” G20 ignores inequality

6. US public unconcerned abt IN • Recent Gallup poll: “What do you think is the most important problem facing this country today?” • Top of list: federal government (21%) • “Gap b/w rich & poor” came far down: only 4%.

7. But, inequality becoming controverial Obama: 4 Dec 2013: growing Y gap is a “defining challenge of our time” Pope Francis Recent publications from World Bank, even IMF

8. World Economic Forum: Global Risks 2012 Report Respondents to Global Risks Survey scored economic, environmental, geopolitical, societal & tech risks over next 10 years by (a) likelihood & (b) impact Top 3 (combined score): (1) chronic fiscal imbalances, (2) severe income disparity = (2) water supply crises BBC News Business headlined its report “Stark inequality ‘top global risk’”, 12 Jan 2012

9. My argument: reasons for using public policy to curb Y IN (1) There are powerful built-in forces producing indefinitely rising income inequality & concentration (2) Higher levels of inequality (within OECD) associated with higher economic, social, health, & political costs

10. But first… • Overview of inequality trends in OECD

11. Inequality trends: US, 1913-2006

12. Inequality trends: US • Share of increase in national income accruing to top 1%. • Clinton years (1990s): 45%. • Bush years (2000s): 65%. (73%) • Obama (2009-12): 95%.

13. IN trends: US, UK, Germany • Remuneration of CEO/median annual wage • US: Fortune 500 companies: 324 • UK: FTSE100: 185 • Germany: DAX30: 90

14. IN trends: US & Iceland

15. Iceland: household income, 1993-2010 (top line = top 1%; bottom line = median, including realized K gains)

16. IN trends: NZ, 1984-2011

17. IN trends: Scandinavia, 1870-2010

18. Inequality has risen throughout OECD (Gini) • B/w mid 1980s and 2010 Gini coefficient rose in all OECD countries (except Greece?). • NB: We shd give primary attention to wealth inequality, not income inequality; but little data

19. Inequality in OECD by regions (Gini) • 1. Latinos & Mid East • 2. Anglos • 3. European Mediterraneans • 4. Northwestern Europeans • 5. East-Central Europeans • Source: OECD Income Distribution and Povertyhttp://stats.oecd.org/Index.aspx?DataSetCode=IDD (1 August 2013)

20. “Americanization” of world Y concentration • World-wide the top 10%, and top 1%, have enjoyed much larger % increases in income than lower income categories, over 1988-2008 • 1988-2008 saw biggest 2-decade increase in global income (& wealth) concentration during past 200 years.

21. Conclusion: during neoliberal era since 1980s… • Very rich have soared ahead, esp in Russia & Ukraine, Latin America, EAsia & Anglo c’ies, leaving behind not only manual workers (diminishing minority) but also middle class masses (doctors, teachers, lawyers, architects, civil servants, business executives below the top, most politicians).

22. Momentum towards higher Y concentration • T. Piketty Capital in the Twenty-First Century, 2014 • Kuznets-curve argument -- Y IN will eventually stabilize & subside on its own, via free mkt -- is wrong. • Causes making for more IN will dominate for a long time ahead from 2014. • Western world moving towards “patrimonial Kism”, in which commanding heights of economy & polity in hands of those with inherited wealth.

23. Piketty’s mechanism • (1) Private rate of return to owners of capital (machinery, land, housing, financial instruments, etc.) grows faster than output & wages. • (2) Within wages, growing share goes to executives at top (super-stars & super-managers) • (3) So income from capital & super-wages increasingly dominates total income distribution

24. Piketty’s mechanism (ctd) • (4) Profits & super-wages are reinvested, & generate more profits. • (5) Inherited wealth grows faster than the economy, generating higher Y concentration in next generation. • (6) Diffusion of knowledge & skills does not offset • “The past devours the future”, globally (Piketty, 571) • (See Eduardo Porter, 2014, “Free market is no remedy for disparity”, INYT, 13 March)

25. World labor income as share of world gross output, 1980-2011 UNCTAD TDR 2013 chart 1.4

26. Terrifying consequences • Costs of higher income inequality & concentration: • (1) Economic growth • (2) Financial fragility & crises • (3) Social & health • (4) Political

27. Costs of IN: economic growth • IMF Discussion Note, Feb 2014 • (1) “Lower net IN [after taxes & transfers] is robustly correlated w faster & more durable growth, for a given level of redistribution”. • (2) “Redistribution [via taxes & transfers] appears generally benign in terms of its impact on growth” (p.2) • (3) “It wld be a mistake to focus on growth & let IN take care of itself….the resulting growth may be low & unsustainable” (p.25) • IMF Staff Discussion Note: J. Ostry, A. Berg, C. Tsangarides, 2014, “Redistribution, inequality & growth”, Feb.

28. Costs of Y IN: financial fragility & crises • See The Flaw (David Sington)

29. Costs of IN: social & health • Wilkinson & Pickett, 2009, The Spirit Level: Why More Equal Societies Almost Always Do Better. • Sold 250,000+ copies, translated into 27 languages • See CHARTS

30. Health and social problems are worse in more unequal countries www.equalitytrust.org.uk Index of: • Life expectancy • Math & Literacy • Infant mortality • Homicides • Imprisonment • Teenage births • Trust • Obesity • Mental illness – incl. drug & alcohol addiction • Social mobility Index of health and social problems Wilkinson & Pickett, The Spirit Level

31. Neither health nor social problems are related to national income per head Index of: • Life expectancy • Math & Literacy • Infant mortality • Homicides • Imprisonment • Teenage births • Trust • Obesity • Mental illness – incl. drug & alcohol addiction • Social mobility Index of health and social problems Wilkinson & Pickett, The Spirit Level www.equalitytrust.org.uk

33. Inequality & social mobility • Across countries there is inverse correlation b/w inequality & rate of intergenerational social mobility. • Time series data less clear; but likely that in any one country IN tends to cumulate across generations (as Piketty argues) • Explanation: The greater the gains from being in elite, the more the elite will fight to ensure their children stay there (“glass floor”).

34. Conclusion abt social & health costs of IN • Wilkinson & Pickett: • “If you want to live the American dream, go to Denmark.” • http://www.ted.com/talks/richard_wilkinson

35. Political effects of income IN • Little research on political effects • Standard workhorse model in pol sci & economics is “median voter” model: governments are most responsive to preferences of median voter • Hence, rising IN does not tend to skew public policy towards preferences of wealthy

36. But, Louis Brandeis (US Supreme Crt 1916-39) “We must make our choice. We may have democracy or we may have wealth concentrated in the hands of a few, but we can’t have both”.  Who is right, mainstream political scientists or L. Brandeis?

37. Political costs: preferences of rich determine public policy • M. Gilens, 2005, “Inequality and democratic responsiveness”, Public Opinion Quarterly, 69, 5, 778-96. • B.Page, L. Bartels, J. Seawright, 2013, “Democracy & the policy preferences of wealthy Americans”, Perspectives on Politics, March, v.11, n.1

38. Page et al conclusions • Top 1% of Americans are “extremely active politically and … much more conservative than the American public as a whole with respect to important policies concerning taxation, economic regulation and especially social welfare programs” (p.51)

39. Differences in preferences by income (Page et al) • “The legal minimum wage should be high enough to prevent full-time workers from being in poverty” • Agree: wealthy (with annual income of more than $1 million) = 40%; general public = 78%

40. Differences in preferences • “The government in Washington ought to see to it that everyone who wants to work can find a job” • Agree: wealthy = 19%; general public = 68%

41. Wealthy agree, general public disagrees… • “Minimum wage must not be linked to cost of living” • “Capital gains shd not be taxed, or taxed much less than income” • “Top economic priority today (since 2008) to cut budget deficit, not reduce unempt” • “Cut budget deficit by cutting social spending, not by raising taxes. If taxes to be raised, sales taxes, not income or capital gains tax”

42. Wealthy oppose, public favors… • Health insurance for everyone • More spending on public schools • Regulation of banks which protects public against predatory lending

43. What shapes preferences of wealthy? “Money-empathy gap” • Research by social psychologists on consequences of social class (of some having much more money than others) • Conclusion: those living high on socio-econ ladder are less empathetic, more selfish, etc. than those lower down (Carnegie, Gates et al. exceptions) • Paul Piff, Psychology, Berkeley

44. Money-empathy gap: US • (1) Paul Ryan, chair of House Budget Cttee: “We don’t want to turn the safety net into a hammockthat lulls able-bodied people to lives of dependency and complacency” (Krugman, 2013a, emphasis added).

45. Money-empathy gap: NZ • NZ PM John Key: “Anyone on a benefit actually has a lifestyle choice. If one budgets properly, one can pay one's bills” (2011)

46. Whose preferences count? Gilens, 2005 • High “representational bias”: • “When Americans with different income levels differ in their policy preferences, actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of poor or middle-class Americans.”

47. US representational bias (ctd) • “The vast discrepancy … in government responsiveness to citizens with different income levels stands in sharp contrast to the ideal of political equality that Americans hold dear….representational biases of this magnitude call into question the very democratic character of our society”. [1] Martin Gilens, 2005, “Inequality and democratic responsiveness”, Public Opinion Quarterly, 69, 5, 778-96, at 794 and 778, emphasis added.

48. In USA: “economic policy is made by the top 1% for the top 1%”. • Eg national minimum wage fell in real terms by 1/3 in 1975-2011. • % of private sector wkers in unions: 23% -> 6.6% • Late Oct 2013, 47 m Americans had food stamp benefits cut

49. Conclusions on representational bias • (1) As inequality (concentration) increases, the rich make it harder for non-rich to have voice in how society is run. • (2) Wealthy are “super-verting” the state, floating free from tax & usual obligations of citizenship, while profiting from privatization/ outsourcing of public services. • They remain loyal to national pageantry – flag, military parades

50. UK & Europe? • RHW to Simon Hix, head of Govt Dept, LSE: • “What is evidence on ‘representational bias’ in UK and Europe?” • SH: “That’s a good question….Sounds like something I should work on.  Thanks for the idea!”