Whimsley

Inequality II: Consequences

Following on from the previous post, here are two other places where they talk about the consequences of inequality:

Mark Thoma, yet again, brings us a piece from the New York Times which discusses what can happen in a city when the middle ranges of income leaves, so that only the rich and poor are left. Basically, the two become separate cultures.

With a dwindling middle class, rich and poor become more separate. Alan Berube, an author of the Brookings study, said a two-tiered marketplace can develop: Whole Foods for the upper classes, bodegas for the lower, with no competition from stores courting the middle...

“This trend toward living and interacting with people who are like you is intensifying a lot,” said Professor Gyourko, who lives in the affluent suburb of Swarthmore, Pa. “I do not meet the full range of incomes and social classes within my neighborhood. Well, think about what happens if metropolitan areas like New York, San Francisco and the like turn into my suburb. You’ll have even less interaction. The most interesting and potentially foreboding implication of this sorting is that it changes the way we view life.”

And Matthew Kahn asks When the rich get richer, what happens to the poor? and answers

It depends. If the super-rich use some of their $ to finance nice musuems and art galleries and Buffett-Gates their money to solve public health challenges then society could be improved along some dimensions.

Alternatively if this crew uses their money to purchase 100,000 square foot homes in desirable areas then the price of land will skyrocket and the middle class will be squeezed out.

Inequality I: Changes

The studies of Piketty and Saez seem to be becoming the standard for the description of inequality within the USA. Every now and then they update their figures, and recently they published an updated set that described what happened to American Inequality in 2004. There has been a rush of comments about the numbers on some economic weblogs. So I'll collect them together here - I don't have anything to add myself: it's fascinating to see this kind of real-world issue being debated among experts in public.

First, the update itself is in an Excel spreadsheet here, at the web site of Emmanual Saez.

Paul Krugman (in the New York Times, but reposted in part by Mark Thoma here) describes the main feature as follows:

Thomas Piketty and Emmanuel Saez, whose long-term estimates of income equality have become the gold standard for research on this topic ... show that even if you exclude capital gains from a rising stock market, in 2004 the real income of the richest 1 percent of Americans surged by almost 12.5 percent. Meanwhile, the average real income of the bottom 99 percent of the population rose only 1.5 percent. In other words, a relative handful of people received most of the benefits of growth.

There are a couple of additional revelations in the 2004 data. One is that growth didn’t just bypass the poor and the lower middle class, it bypassed the upper middle class too. Even people at the 95th percentile of the income distribution — that is, people richer than 19 out of 20 Americans — gained only modestly. ...

The other revelation is that being highly educated was no guarantee of sharing in the benefits of economic growth. There’s a persistent myth, perpetuated by economists who should know better ... that rising inequality ... is mainly a matter of a rising gap between those with a lot of education and those without. But census data show that the real earnings of the typical college graduate actually fell in 2004.

Greg Mankiw, another prominent economist who was also high up in the Bush administration until recently, saw things differently here:

Here is what I see: After rising substantially from 1986 to 2000, income inequality is essentially the same in 2004 (the most recent year of data) as it was in 2000.

In a separate post, Mankiw also challenges Krugman's sentence about "a persistent myth, perpetuated by eonomists who should know better...that rising inequality...is mainly a matter of a rising gap between those with a lof of education and those without". While Krugman claims that the big story is the growth of income at the very top of the scale, Mankiw reasserts the role of a more broadly based change:

My understanding is that there is a widespread consensus that the returns to education have risen substantially over the past few decades. But the education wage premium is not the whole story, as wage inequality within education categories has also increased substantially.

...part of the increase in inequality is measurement error, and part of the increase is attributable to the fact that the labor force is older and more educated--characteristics that are associated with higher residual variance.

Brad DeLong takes up the thread, weighing in on Krugman's side:

The big rise in inequality in the U.S. since 1980 has been overwhelmingly concentrated among the top 1% of income earners: their share has risen from 8% in 1980 to 16% in 2004. By contrast, the share of the next 4% of income earners has only risen from 13% to 15%, and the share of the next 5% of income earners has stuck at 12%. The top 1% have gone from 8 to 16 times average income, the next 4% have gone from 3.2 to 3.7 times average income, and the next 5% have been stuck at 3 times average income.

It's hard to attribute this pattern to a rise in the premium salary earned by the well-educated by virtue of the skills their formal education taught them.

But Greg Mankiw is not convinced:

I would guess that the top 1 percent of income earners (those earning more than $276,945) are disproportionately very well educated--doctors, lawyers, MBAs, etc. So the rise in the income of the top 1 percent could well represent in large part a higher education premium.

What might well be true is that the returns to education have become increasingly non-linear: The most educated are now getting a bigger return from a marginal year of education than those with moderate amounts of education. In other words, two years getting an MBA from Harvard Business School may increase a person's income more in percentage terms than does two years getting an Associate Degree from Mass Bay Community College. My understanding from my labor economist friends is that some evidence favors this hypothesis of increasing nonlinearity.

And Mark Thoma adds his two cents:

We can debate what has happened the last few years and whether this year or that year had special circumstances such as the problems Brad notes with using 2000 as a base year. But in doing so, we shouldn't lose sight of the overall upward trend in inequality.

Top Decile Income Share

Top 0.01% Income Share

Average Real Income of bottom 99% and top 1%

The little dip at the end is what the fuss is all about. But even if Greg's claim holds up to the types of qualifications Brad talks about, and there are good reasons to worry about using 2000 as a base year, the upward trend in income inequality since the 1970s is undeniable. And in any case, as the last graph shows, real income for the bottom 99% of the distribution has been flat since the early 1970s despite large gains in productivity.

Meanwhile, in keeping with Thoma's theme of focusing on the bigger picture, Brad Delong reminds us that

Real wages for low-paid workers aren't rising at all. It's not the well-paid benefit "most." It's that only the well-paid are, as a group, benefitting at all.

The Evolution of Top Incomes

Yet more from Mark Thoma, who seems to collect interesting information like I collect  collecty things.  He posts a series of graphs from the latest Piketty and Saez paper on trends in incomes -- in this case particularly incomes at the very top. In short, the income share of the top 1% took a slight dip between 2000 and 2002 but it looks like a brief post-dot-com interruption in the general trend of increasing inequality starting in the 1970s.

This paper summarizes the main findings of the recent studies that have constructed top income and wealth shares series over the century for a number of countries using tax statistics. Most countries experience a dramatic drop in top income shares in the first part of the century due to a precipitous drop in large wealth holdings during the wars and depression shocks. Top income shares do not recover in the immediate post war decades. However, over the last 30 years, top income shares have increased substantially in English speaking countries but not at all in continental Europe countries or Japan. This increase is due to an unprecedented surge in top wage incomes starting in the 1970s and accelerating in the 1990s.

Oddly, the trend seems to be limited to English speaking countries. Why on earth would that be? There are some speculations both at Thoma's Economist's View and at Brad DeLong's site.

Link: Economist's View: The Evolution of Top Incomes.

Who shops with an eye to the big picture?

Two-thirds of the way down the oddly-named Lionel Shriver's column "Nativity scenes are out, carols are banned, and don't dare wish anyone merry Christmas: the festive season, US-style" is some interesting stuff about how freely-made consumer choices takes us to places we don't want to be. She writes it well, as you would expect from the author of "We Need to Talk About Kevin".

Books make good gifts this year, since discounts offered by UK chains are now as drastic as 50%. But don't imagine that high-street behemoths alone are sacrificing for the affordability of your winter presents. Publishers are out of pocket, as are authors like me. Discount deals in trade for volume are not yet as unsustainable as in the dairy industry; the 17p per litre that supermarkets pay for milk is often less than it costs to produce. But publishing has become less profitable, and so has writing books.

I don't know what the answer is. Wal-Mart-writ-large seems the natural end point of capitalism, which thrives on economies of scale. With the clout to demand rock-bottom prices from suppliers and pass the savings to customers, big fish eat little fish until the commercial ocean floats only a few whales. Hence the local greengrocer gives way to Sainsbury's, the family-owned hardware store to Home Depot, the independent bookseller to Waterstone's (now mounting a take-over bid for Ottakar's). Alan Bennett's appeal to buy his book from independents is laudable but unrealistic. I can't ask prospective buyers of my own novels to pay full-price, when I purchase most books on Amazon myself. Aside from a few toffs who spurn the ambience of the cut-rate, we're all going to buy our milk, nails, and hardbacks where they're cheapest.

In the big picture, everyone is the poorer when producers and employees are low-balled, and thus pump less money into the economy. But who shops with an eye to the big picture? In the short-term, Wal-mart employees are so poorly paid that the only place they can afford to shop is Wal-mart.

This is pretty much exactly the argument I make in Chapter 1. If we don't want to end up with nothing but Wal-Marts, we need to take collective action, not individual action.

We'll Have to Do Something About the Rich

An excellent piece by Jonathan Friedland in tomorrow's Guardian (hey, it's before midnight where I am) about the growing gap between rich and poor in the UK. (Link: Guardian Unlimited | Columnists | It may be beyond passe - but we'll have to do something about the rich.)

The phenomenon of growing inequality is present in Canada too. Increasing wealth and income at the top, flat or declining wealth and income at the bottom (in absolute as well as relative terms) and as a result changes like this:

When Margaret Thatcher came to power in 1979, just under 6% of national income went to the top 1%. That figure stood at 9% a decade later, but under Tony Blair it has risen to at least 13%: a tiny group taking nearly an eighth of our collective wealth.

The hook is a paragraph about London bankers ordering the most expensive cocktail they could concoct -- which came to £333 a glass. "The bankers ordered two rounds for their table of eight. Their final bill for the night: £15,000." Does this matter? Friedland asks. Yes, he answers himself, even though it is unfashionable to say so...

... the story about the £333 cocktails emerged in the same week as Shelter reported that children were being forced to sleep in kitchens, dining rooms and hallways because of cramped housing affecting 500,000 families in England alone. Of these, three in four said that the lack of space was damaging their children's education or development; many spoke of depression and anxiety. And the scale of the problem has remained unchanged since 1997

He finishes up by predicting that "this issue's coming back. Just watch". I agree -- left to itself the inequality spiral continues, and at some point it is going to lead to big social unrest. Sooner or later, we'll have to do something about the rich.