Rising Inequality in an Era of Austerity: The Case of the USAPresented at Special Session on:The Big Thinkers & The Big Five in one day 51st Annual ERSA CongressBarcelona, SpainAugust 31, 2011___________ Mark Partridge and Amanda Weinstein The Ohio State University Swank Program in Rural-Urban Policy
Introduction • We look in the future to what we see as an emerging US crisis. • Most of the world is fixated on surviving the Great Recession and the subsequent “recovery.” • We argue the Great Recession covered up some structural trends. • Before the Great Recession, American families had become increasingly vulnerable. Incomes for the vast majority of Americans had stagnated, and American cities are being globally challenged as leaders in innovation. • Rising inequality is a cause of many of these long-term problems and its decades-long increase is reaching a tipping point that will cause significant problems unless it is addressed. • Inequality is good until it goes to far, but we believe we are pushing too far. • We argue the rising trend in inequality is unsustainable. • Unsustainable trends either end the easy way or the hard way.
Macroeconomic Context—The Old Institutions Matter Argument • The great strength of the US economy in the latter 25 years of the 20th Century was job creation! Conventional Wisdom: Flexible U.S. labor markets allow less skilled workers to obtain work even if income inequality grew. “Inflexible” European labor markets did not having rising inequality but had very little job creation and high unemployment rates. • Nickell (1997); Blanchard & Wolfers (2000); Bertola, Blau & Kahn (2001) • The flip side: Since 1973, the US economy has not performed well in generating wealth for most Americans. • Since 2000, the US job machine has broken down.
US-EU* Annual Employment Growth Comparison * EU includes the EU15 plus the Czech Republic, Hungary, Iceland, Norway, Poland, Slovak Republic, Switzerland, Turkey
Macroeconomic Context—The Old Institutions Matter Argument • While the U.S. experienced greater inequality, this may have promoted growth as it reflected greater incentives— • US states with more inequality had greater income growth. • Partridge (1997, 2005); Frank (2009); Hasanov and Izraeli (2011) have a more nuanced view • Metro areas (especially large ones) have a positive inequality-growth link. Fallah and Partridge (2007) argue more growth occurs where there are economic incentives for innovation and new market ideas—i.e. inequality (incentives) enhances agglomeration economies in promoting growth. • Inequality induces people to acquire more skills, as well as be innovative and entrepreneurial because success has greater rewards – Welch (1999). • Inequality promoted American cities as global leaders in innovation.
Macroeconomic Context • Moral: Inequality is Good! (Welch, 1999) • BUT, has US inequality grown too much for this optimistic assessment? Is inequality still good? • Inequality is linked to more poverty, crime, poor health outcomes—perhaps less social cohesion and equity concerns (Noah, 2010). So there are tradeoffs. • Greater income mobility would offset normative worries about inequality. • Gottschalk and Moffit (2009) argue that mobility has declined. • Kopczuk et al. (2010) show the income mobility is remarkably stable since 1953 (less for men offset by more mobility for woman). • In either event, mobility has not increased, meaning more Americans are relatively falling behind.
U.S. Median and Mean Household Income • The distribution of income is becoming more skewed
U.S. Regional Inequality Trends • Regional variation in inequality tends to reflect different trends of “good” incentives and those that reflect breakdown of social cohesion.
Median and Mean Household Income by Major U.S. Region • The distribution of incomes are more skewed in the Northeast and West
Metropolitan Areas with the Lowest 2009 Gini Coefficients are fairly wealthy
How growing inequality reduces growth? • Partridge (1997, 2005) found that a greater middle-class income share (Q3) is associated with greater income growth—Middle Class consensus. • But Q3 is falling—suggesting less future growth. • Welch (1999) noted that inequality has adverse effects when people believe that hard work and good ideas do not matter—i.e., the system is rigged against them. • Greater inequality may cause social instability and more political turmoil (Perotti, 1996; Persson and Tabellini, 1994) . • Inequality may produce greater credit market constraints. Large shares of the population cannot afford to fund their education (reducing growth) or fund capital accumulation (Galor and Zeira, 1993; Aghion and Bolton, 1997). • The last three have been thought to be not applicable to the US. Will this remain true with the rises in inequality we have seen?
Inequality since 1990 • Since 1980, growth in inequality is more at the very top—top 1% or even top 0.1%. • That underlies our concern that if only such a small subset are benefiting from growth, rising inequality does not promote growth. • US levels are reaching levels that are seen in plutocracies.
Consequences of Poverty • As inequality increases, the US makes remarkably little progress in reducing poverty or in providing basic necessities such as healthcare.
What should the US do? • The causes of rising US inequality are: • Skill-biased technological change; immigration; declining unionization; tax policy that is very favorable to the wealthy; falling real value of the minimum wage; globalization (tournament/star powerá la Lazear and Rosen, 1981; Rosen, 1981), off-shore sourcing, etc. • Our preferred cause is political concentration of power in the wealthy and corporations—how else can we explain the top 1% benefitting. We can’t argue they are computer geeks? • All of the above except skill-biased technical change are ultimately political decisions (Hacker and Pierson, 2010; Noah, 2010; Atkinson et al., 2011).
What should the US do?—cont. • What about political economy causes? • US political campaigns are drawn out. Not the short parliamentary elections found elsewhere. The US system has less attachment to political party. Each campaign has added importance. • Together, this produces a race for political contributions to fund lengthy expensive “modern” campaigns that require TV ads to be competitive. • Today there are very few limitations on contributions or expenditures on elections by special interests. • Wealthy actors that make large contributions have disproportionate influence.
What should the US do?—cont. • Hence—we argue the US needs major political institutional change before it will make the policies to address rising income inequality. • Other “economic” changes in an age of “austerity”— • Reform the way U.S. corporate executives are paid. • Better education—especially for low income groups and early childhood education. (Haskins and Sawhill, 2009). • Reform U.S. tax structure to make it more balanced across economic groups. • While other structural changes would be “nice”, they will not matter or happen until political reform is undertaken.
What should the US do?—cont. • A ray of hope is that the US “robber baron” era ended with the Progressive era at the turn of the 20th Century, followed by the New Deal. While we can debate the success of the economic reforms, there were major political reforms despite similar headwinds. • E.g., woman gained the right to vote, direct election of Senators, referendum, initiative, and recall in many states. • Thus, while the US faces challenges, there is a precedent for being able to adapt.
Conclusion • Inequality is good for providing the incentives to promote skill development, enhance innovation, and it promotes entrepreneurship and risk taking. • Fallah and Partridge (2007) argue that inequality facilitates/enhances the effects of agglomeration economies. Helps build global cities. • Inequality becomes a negative when social cohesion breaks down and people no longer believe that hard work and good ideas are rewarded.
Conclusion • As the growth in U.S. inequality has shifted away from the broad upper income groups (say top 25%) to just the top 1%, we argue that its positive effects in promoting growth and facilitating global US cities has waned. • We worry that current trends in inequality are unsustainable and that it will increasingly cause reduced growth and hurt the development of American cities. • We conclude that only political institutional change will make a tangible difference.
THANK YOU! Email: Partridge.email@example.com for slides or download from: