Enormousgrowthininequality• Especially inUS,andcountries thathavefollowedUSmodel
• Multipledimensions ofinequality• Moremoneyatthetop—especially thevery top• Morepeople inpoverty• Eviscerationofthemiddle• Inequalities inwealthexceed those inincome• Inequality inhealth—especially largeinUS• Inequality inaccesstojustice
Source:ThomasPikettyandEmmanuelSaez,"IncomeInequalityintheUnitedStates,1913-1998"QuarterlyJournalofEconomics,118(1),2003,1-39(LongerupdatedversionpublishedinA.B.AtkinsonandT.Pikettyeds.,OxfordUniversityPress,2007)(TablesandFiguresUpdatedto2013inExcel format,January2015).Seriesbasedonpre-taxcashmarketincomeincluding realizedcapitalgainsandexcludinggovernmenttransfers.
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5
10
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1913
1916
1919
1922
1925
1928
1931
1934
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1943
1946
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1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
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1991
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2012
USTop1%incomeshare-includingcapitalgains
Source:EmmanuelSaez andGabriel Zucman,2014,"Wealth InequalityintheUnitedStatessince1913:Evidence fromCapitalized IncomeTaxData"NBERWorkingPaper,October,reviseandresubmit QuarterlyJournalofEconomics.
Stagnation:U.S.medianhouseholdincome(constant2014US$)
Source:U.S.CensusBureau
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
1975 1980 1985 1990 1995 2000 2005 2010
2014:$53,657
Declineinmedianincomeoffull-timemaleworker
30,000
35,000
40,000
45,000
50,000
55,000
60,000
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
RealMedianIncomeofFull-TimeMaleWorker,1965-2014
U.S.minimumwage,1938-2012
Source:U.S.DepartmentofLabor.http://www.dol.gov/minwage/minwage-gdp-history.htm
Mostinvidiousaspect:inequalityinopportunity
• Notasurprise:systematicrelationshipbetweeninequalityinincomes(outcomes)andinequalityofopportunity
Incomeinequalityandearningsmobility
Source:“UnitedStates,TacklingHighInequalitiesCreatingOpportunitiesforAll”,June2014,OECD.
Globalinequality• AlmostallOECDcountrieshaveseenincreased inequality inlast30years
• Thetrendaroundtheworld issomewhatmixed,butremains aconcernalmosteverywhere
Gini changesinOECD
Source:OECD2015,InItTogether:WhyLessInequalityBenefitsAll,http://www.oecd.org/els/soc/OECD2015-In-It-Together-Chapter1-Overview-Inequality.pdf
Globalinequality:Ginis worseinmanycountries,late2000svs.1980s
Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html
Globalinequality:incomegrowthbypercentile,1988-2008
Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html
Globalinequality:incomegrowthbypercentile• Whatprevious chartmeans isthat,globally:• Veryrich—those atfarrightofgraph—haveseen theirincomesgrowatahighrate
• DevelopingAsianmiddleclass(especially China)hasalsogrownatafastrate.Thisisrepresented bythose inmiddle-left ofthegraph.
• Theincomesoftheworld’sverypoor—those onthefarleftofthechart—have notkeptpace.
• Advancedcountrymiddleclassincomes—those around the80thpercentile—have stagnatedcompletely
• (ThisistheanalysisthatBranko Milanovic hasputforward)
Majorchangesinunderstandingsofinequality• Trickledowneconomicsdoesn’twork• Thereneverwasgoodtheoryorempiricalevidenceinsupport• Inaway,ObamaadministrationandFedtrieditagain:bail-outtobankswassupposedtobenefitall;QEwouldworkbyincreasingstockmarketprices,benefittingmostlythoseattop
• “Repeal”ofKuznets law• WasperiodafterWWII,the“goldenageofcapitalism,”anaberration,theresultofthesocialcohesionbroughtonbythewar?• Withtheeconomynowreturning tothenaturalstateofcapitalism?
• Oristheincreaseininequalityafter1980aresultofachangeinpolicies?
Majorchangesinunderstandingsofinequality• Largedifferences inoutcomes/opportunities amongadvancedcountries• Suggestingthatitispolicies,notinexorable economicforces thatareatplay
• Inequality isachoice• Aresultofhowwestructure theeconomythroughtaxandexpenditure policies, throughourlegalframework,ourinstitutions,even theconductofmonetarypolicy• Allofthese affectmarketpower,bargainingpowerofdifferent
groups• Evenaccesstojobsandabletoparticipate inlabormarket• Resulting indifferentdistributions ofincomeandwealthbeforetaxes
andtransfers
• Beginningaboutathirdofacentury ago,webeganaprocessofrewriting therules• Loweringtaxesandderegulationwassupposed toincreasegrowthandmakeeveryone betteroff
• Infact,onlytheverytopwasbetteroff—incomes ofthereststagnated,performance oftheeconomyasawholeslowed
• Resulting inbasicnecessities ofamiddle classsocietybeingincreasingly outofreachoflargeproportionofpopulation
• Retirement security,educationofone’schildren,abilitytoownahome
Majorchangesinunderstandingsofinequality• “Repeal”ofOkun’s Law• Economieswithlessinequalityandless inequalityofopportunityperformbetter
• Equalityandeconomicperformance arecomplements• Manyreasons forthis
• Lackofopportunitymeansthatwearewastingmostvaluableresource• Macro-economic• Instability:Linkbetweeninequalityandfrequencyofcriseshasbeenshown
byIMFaswellasothers.• Weaker growth• Richestconsumeasmallerproportionoftheirincomesthanthepooror
middle• Greaterequalitywouldstrengthenaggregatedemand• Smallandmedium-sizedbusinesses,buoyedbystrongmiddleclass,are
driversofeconomicgrowth
• Weakergrowth(cont’d)• Politicaleconomy
• Harderfordividedsociety tomakeneeded public investments ininfrastructure,technology,education,etc.
• Asdemocraticprocesses areskewed(e.g.inU.S.),policies thatprotect interestsandrentsofwealthiest replacethosethatsupportbroad-basedgrowth
• Erosionoftrust
Majorchangesinunderstandingsofinequality• Wecanaffordtohavemoreequality• Infact,itwouldhelpoureconomy• Somemuchpoorereconomieshavechosenmoreequalitarianpolicies
• Becauseinequality istheresultofpolicies, itisshapedbypolitics• Economicinequalitygetstranslated intopoliticalinequality• Politicalinequalityleadstoeconomicinequality• Viciouscircle
Broaderconsequences• Undermining democracy
• Dividing society
• Especiallywhen inequalitiesareonracialandethniclines
Alternativeinterpretationsofgrowthininequality1. Marketforces--Basedoncompetitivemarkets--Changes in
supply anddemand fordifferent factorsjustturnedoutbadlyforpoor:
(a)skillbiasedbiased technological change• Overwhelming impactofincreasednumberofeducatedindividuals
Unpersuasive• Skilledworkers’wagesgoingdown• Doesn’texplain gapbetween averageproductivityandaveragewages
• Doesn’texplainwealthinequality
Competitivemarketexplanations(b) Globalization• Predictedbystandardtheory• Evidence thatithasplayedanespecially importantrolesince2000
(c) Intergenerational transmissionofadvantage• Richleavetheir childrenwithmorehumanandfinancialcapital• Equilibriumwealthdistributionreflects balancebetween betweencentrifugalandcentripetal forces
• Increased inequalityreflects increasedintergenerationaltransmission—an upsettingofprevious balance
• Contrarytoprincipleofequalopportunity
Alloftheseareaffectedbypolicy,byrulesofgame• Incentives forskilledbiased technological changevs.resourcesavingtechnological change• Fedpolicy—lowinterestrates—encouragecapitalintensivetechnologies
• Absenceofclimatechangeunderminesincentivesforresourcesavingtechnologicalchange
• Thewaywestructured globalizationencouragedoutsourcingofjobs• Especiallyinabsenceof industrialpolicies
• Andweakenedbargainingpowerofworkers• Justaswewereweakeningunions
• Regressive taxationandweakeningpublicschools leadstoincreasedintergenerational transmission ofadvantage
Alternativeexplanation:increaseinrents• Increasedmonopoly, monopsony powershiftsdistributionofincomeandwealthtothosewiththesepowers
• Butalsootherreasonsforanincreaseofrent—with increasedincomeandwealthtothosewhocontrolassetsgeneratingrents• Landrents• Intellectualproperty rents• Rentextraction fromgovernment• Rentextraction fromconsumers
Oureconomyismarkedbyincreasingrents• Somearesultoftechnology• Networkeffects
• Somearesultofchanges ineconomy• Increasedroleofservices,muchofwhichislocalized,withlimitedcompetition
• Increasedurbanlandrents• Somearesultofpolicies• ChangeinIPRlaws• Deregulation—allowingextractionofmorerentsfromgovernmentandconsumers
• Somearesultofmarket“innovation”• Betterwaysofexploitingconsumers
Piketty’sexplanationisavariantofintergenerationaltransmissionhypothesis• Twoclasses,capitalistssaveeverything, wealth growsatr,returnoncapital• Workers savelittle
• Withr>g,growthofeconomy, ifrdoesnotfall,shareofincomeofcapitalistsgrows
TechnicalcritiqueofPiketty• Savingsrateofcapitalistsfarlessthan1• Returnoncapitalendogenous, andshouldbedecliningascapitalistsaccumulate• Modelsneedtohavemacro-/micro- consistency• IfWwereK(wealthandKweresame), thenlawofdiminishingreturnswouldimplyrwouldfall
• Andwageswouldrise• Infact,virtually allmodels showthatinlongrunsr <g:Piketty’sresultcannothold• Infact,Piketty’smodelhadbeenwell-studied inoldergrowthliterature
WhatPiketty’smodelcannotexplain• Growthinlife-cycle wealth• Gapbetweenaveragewagesandproductivity
• Eveniftechnical change isskill-biased
Failuretoexplainstylizedfacts• Canonlyexplain½to¾ofgrowthinwealth income ratiobynationalsavings
• Wealth“residual”explainedbestbygrowthofrents• Landrents• Exploitation rents(monopolypower,political power)• Intellectual propertyrents
• Wealth cangoupeven if“K”isgoingdown• Andmanyincreases inwealthassociatedwithrents leadtodecreased productivity
Consequencesofinequalityfortheglobaleconomy• Growthin2015weakest sinceGlobalFinancialCrisisandoneofpoorestperformances inrecentdecades; 2016ontrackforbeingequallyweak
• Underlying problem: lackofglobalaggregatedemand
• Oneofreasons: highlevelofinequality
• Inequalityalsoaffects aggregatedemandindirectly
• Increases instability
• Realization ofthiscreatesuncertainty
• Uncertainty leads tolowerinvestment
Newdimensionsofinequality• Inmoderneconomy,keydistinctionisnotsomuchbetween debtorsandcreditors,butbetween lifecyclesaversandinheritedwealth• Differencesinportfoliocomposition
• QEhasbenefitsinheritedwealthatexpenseoflifecyclesavers,contributingtoinequality
• Atsametime,implyingQEmayhavelittleeffectonaggregatedemand—oradverseeffect
• Adverseeffectonconsumption ofelderly
• Adverseeffectonconsumption of thosesavingforretirement (othertargetsavers)
• Mayoutweigh slightpositiveeffectoninvestment
Concludingcomments• Addressing inequality isavitalstepinbringingglobal economybacktohealth
• Incremental changeswillnotsuffice
• There isacomprehensive agendawhichwillsignificantlyreduceinequalityandincreaseequalityofopportunity
• Urgency—decisions todaywillaffectinequality decades later
• Keyisrewritingtherulesonceagain
• Realquestion isnoteconomics: itispolitics