Posts Tagged ‘Distribution of Income’

How much inequality is too much?

January 7, 2017
incomedistribuiton2014-5-0

This chart from Vox shows how each $100 in Americans’ income was divided among the five main income groups in 2014, and how their shares have changed since 1989

It’s a bad thing when the rich get richer and the poor get poorer.

But suppose the rich got richer, but the poor didn’t get poorer. What would be wrong with that?

Is the problem with economic inequality in and of itself?   Or would extreme differences between rich and poor be bad even if they poor did have enough—whatever your definition of “enough” happens to be.

New Dealers in the 1930s thought that increased incomes for the poor would be good for everybody, including the rich.  If poor people had more money to spend, that would increase demand for goods and services, and get the economic going.

The “supply-siders” in the 1980s thought that increased incomes for the rich would be good for everybody because that would make more capital available for investment.  That turned out not to be true, for reasons I came to understand later, but suppose it had.  Would that be bad?

I think it would be.  I didn’t always think so, but I think so now.

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The USA, land of multi-millionaires

December 10, 2015

December-Too-Much-infographicSource: Too Much.

If you ambition is to be a millionaire or multi-millionaire, your chances are probably greater here in the United States than they are any place else.  The USA has more of them than any other country, and the number is growing.

The problem is that average and middle-class Americans aren’t doing so well.  According to the current neo-liberal philosophy, that is perfectly okay.  Winners should be rewarded, losers should suffer and rich people are (by definition) winners.

I hold to the older philosophy, which is that rewards should go to entrepreneurs and other successful people only because and only when they create things of value to the rest of us.

The justification for capitalism is that it is not a zero-sum game – that increasing the wealth of the rich does not necessarily make the rest of us poorer.  During the 1950s and 1960s, I thought this plausible – at least for Americans.  I don’t think this justification holds true for the USA today.

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Reflections on Piketty’s inequality argument

June 14, 2014

The novels of Jane Austen, Honore de Balzac or Henry James, in which civilized life was confined to a small percentage of the population and the only way most people could acquire significant wealth was to inherit it or marry it.

According to Thomas Piketty’s Capital in the Twenty-First Century, there is nothing to stop that kind of world from coming back.

1_percent_decomposed_2.png.CROP.promovar-mediumlargePiketty’s basic argument goes as follows:
•    If the rate of return on investment is a higher percentage than the rate of economic growth, which he expresses as r > g,  the owners of investment property will get an ever-larger share of national income.
•    R > g is the normal state of affairs.
•    Ownership of wealth is distributed even more unequally than income.   The higher the share of income that comes from wealth, the more unequal it will be.
•    The larger the amount of wealth you own, the faster it is likely to compound.   So not only do the rich become richer at a faster rate than ordinary people, the super-rich become richer at a faster rate than the ordinary rich.
•    At some point the process levels off, but the leveling-off point may not come until inequality reaches a point that we associate with 18th century Europe or the Third World

The economic prosperity and relative equality during 1945-1975 were made possible by the destruction of capital during the Great Depression and the two World Wars, according to Piketty.   Of course war and depression left everybody worse off, not just rich people, but when economic growth resumed, a lesser share went to the economic elite.

Piketty’s conclusions are backed up by archival research that traces income and wealth distribution in France, Britain and the USA for two centuries and many other countries for shorter periods of time.  That research shows that r > g is the typical state of affairs in most countries and most periods of history for which information is available.

One striking finding is that there is just as much inequality among the elite as there is among the public at large.  In the USA, the top 10 percent have about half the wealth, the top 1 percent have about half the wealth of the top 10 percent, and the top 0.1 percent have about half the wealth of the top 1 percent.

Another finding, based on comparisons of American university endowment funds, is that the larger the amount of wealth you have to invest, the higher your rate of return is likely to be.   This is probably because the richer you are, the better financial managers you can hire, the better able you are to diversify your investments and the better cushion you have when you make high-risk, high-return investments.

chart_2.png.CROP.promovar-mediumlargePiketty proposes to deal with inequality by means of a graduated tax on wealth to go along with graduated taxes on inheritance and income.  But there are other ways.

You could figure out ways to increase the rate of economic growth, for example.  Or you could figure out ways to achieve a wider distribution of wealth, such as through employee stock-ownership plans or worker-owned enterprises.   Or you could strengthen labor unions, increase minimum wage or take other measures to increase the incomes of the middle class, working people and the poor.

It’s important to keep in mind that Piketty only deals with one specific issue, the concentration of income and wealth in a small elite—an important issue, but not the only one.   Piketty does not tell us how to raise people out of dire poverty, nor how to achieve better productivity, or economic growth, or better education, or a cleaner environment, or any other goal.

And taking money away from the economic elite will not in and of itself make anyone any better off.   A lot of financial wealth was destroyed during the Great Depression and and a lot of tangible wealth was destroyed during World War Two, but this did help anybody at the bottom of the economic scale.  Piketty thinks that destruction of wealth cleared the way for the prosperity of the 1950s and 1960s, but I don’t think anybody who lived through the 1930s and 1940s would have said it was worth it.

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Why the rich will probably get richer

April 2, 2014

changingUSwealthc

CAPITAL IN THE TWENTY-FIRST CENTURY by Thomas Piketty (2013) translated by Arthur Goldhammer (2014)

Thomas Piketty of the University of Paris is the world’s foremost authority on income distribution and the super-rich. All the charts you see how income is being redistributed upward to the top 1 percent of income owners are based on work by him and his collaborators. In this new book, based on 20 years’ work, he concluded that it is not an aberration that ever-greater shares of income go to a tiny elite. Piketty said this is the natural working of a market system.

According to Piketty, the higher you go on the income scale, the larger the amount of income comes from investments rather than work. When the economic grows at a higher percentage rate than the average rate of return on investment, income becomes more widely distributed. When the average rate of return on investment is greater than the rate of economic growth, the owners of economic assets gain at the expense of everybody else.

His research is based on 200 years of data on income and wealth distribution in France, the UK, the USA and other countries, which now can be analyzed and processed with computer technology. His book would be a good supplement to David Graeber’s Debt: the First 5,000 Years, whichi is sketchy on precisely the past two centuries.

Piketty concluded that the average rate of economic growth since 1800 is about 1 percent a year for the countries he studied, and the average rate of return on investment is about 4 to 5 percent a year. Unless something happens to change one or the other figures, a wealthy elite will grow richer and richer at the expense of everyone else, until there is nothing left to invest in.

pikettybookcover00Piketty defines “capital” as anything you can own that will generate income. In the late 18th and early 19th centuries, capital (by his definition) consisted mainly of agricultural land and government bonds. Now it consists mainly of housing, industrial machinery and stocks and bonds of private corporations. Few economists would define “capital” in so broad a way, but if all you’re interested in is income distribution, it doesn’t matter what form “capital” takes.

If you read English and French novels set in the early 19th century, the characters consist mainly of members of what Piketty calls the “dominant” class, which are the 1 percent of the population who receive 30 to 60 times the average income, and the “well-to-do”, who consist of the next 9 percent. Characters in Balzac and Jane Austen seek wealth through inheritance, marriage and patronage of wealthier and more powerful people. Nobody in those novels thinks that wealth is acquired through hard work and superior talents. Piketty said there is nothing to prevent a reversion to this kind of world, although the difference between wealth and poverty wouldn’t be quite so extreme.

The reason the history of the 20th century was different, he wrote, is the great destruction of capital during the two world wars and the Great Depression. This cleared the deck for the great surge in prosperity of 1945-1975, which benefited all segments of the population. Since then, according to Piketty, the growth in income has been sucked up by the dominant and well-to-do classes.

Now I don’t think that someone born in 1900 would have thought the prosperity of 1945-1975 justified the catastrophes of 1915-1945. This points to an important limitation of Piketty’s book. It is full of fascinating information, drawn from a wide variety of sources, ranging from centuries of income and property tax records to social history, economic theory, literature and financial

Thomas Piketty

Thomas Piketty

journalism. But when it comes right down to it, he deals with only one subject, the income share of the super-rich. He doesn’t have theories on how to eliminate poverty, promote economic growth, set priorities for public investment or any other important objective. This is not a criticism. It is just a description of what the book is and isn’t about.

His one subject – which is important – is the economic elite and how, short of violent revolution, to prevent from sucking up an undue share of society’s wealth and income. But as the experience of 1915-1945 shows, destroying the power of capital does not, in and of itself, make things better for everyone.

Piketty focuses on data from France and the UK because the United States is, in good and bad ways, exceptional compared to the rest of the world. During the past 200 years, the boundaries of France remained roughly the same and population grew from 30 million to 60 million. During the same period, the United States expanded from a narrow strip along the Atlantic to the Pacific coast, and its population grew from 5 million to 300 million.

Income distribution in the United States historically has been more equal than in Europe, he noted, at least for white men in the Northern states. The chief form of capital in the early United States was agricultural land, and this was very cheap compared to Europe. Early settlers and immigrants brought little wealth with them. What they created was the fruit of their labor. A great deal of the capital for building U.S. factories and railroads came from European investors. The great American hereditary fortunes did not emerge until the dawn of the 20th century.

The South was different from the North because the economic elite possessed enormous capital in the form of enslaved human beings. Piketty estimated that in the 1770-1810 period, the economic value of slaves in the South exceeded the value of all land, housing and other forms of wealth, and also exceeded the total wealth of the North. The result was a high concentration of wealth, and a large gap between rich and poor white people, which persists to this day.

Differences in earned income, while great in all countries, have seldom been as important as differences in income from wealth. The exception is the surge in corporate compensation in the United States and other English-speaking countries in the last generation. Piketty showed, by means of international comparisons, that the current size of executive compensation cannot be justified on the basis of merit or results. It is the result of executives being able to influence their own pay, and the lack of standards as to how much is enough.

The disturbing fact about investment income is that the more you have of it, the higher your rate of return. Piketty compared the returns on endowment funds of American universities, which are a public record, by size categories. The larger the fund category, the higher the percentage return, with Harvard by far outpacing all the rest.

This is because the larger the fund, the more the owner can afford to get expert investment advice, and the better able the owner is to invest small amounts in high risk, high return investments. Also, unlike an individual who has saved for retirement, the super-wealthy person or institution does not have to take out a significant percentage to live on.

The implication is that once you reach a certain level of wealth, your wealth becomes self-sustaining. A Bill Gates or a Steve Jobs can simply coast. He not longer needs the entrepreneurial drive that brought him success in the first place. Piketty’s analysis of the Forbes 400 list indicates that inherited wealth is at least as important as entrepreneurial wealth, and he thinks Forbes vastly underestimates income from passive investments because of lack of access to tax havens.

Piketty’s solution is a tax on capital – which, remember, is by his definition any form of income-producing property – sufficient to bring the average return on investments down to the expected rate of economic growth. He pointed out that some forms of wealth, such as real estate and buildings, already are taxed. In principle, taxing stock portfolios is no different.

Since the average rate of return is greater for greater wealth, his proposed tax would be graduated, with a zero or 0.1 percent rate for fortunes below 1 million euros and perhaps rising as high as 2 percent above 5 million. These don’t seem high, but they are high compared to expected rates of return. He also favors continuation of the graduated income tax and inheritance taxes. His purpose is not to prevent people from getting rich. It is to prevent the rich as a group from getting richer at a faster rate than the economy is growing.

The revenue from the wealth tax should be spent in reducing government debt, which Piketty sees as a transfer of income from taxpayers to wealthy holders of government bonds. It is better to tax the rich than borrow from them, he said.

Piketty’s proposals require much better information about wealth and income than we have now. The first step would be for the international community to require reporting of financial information from places such as Switzerland and the Cayman Islands that act as tax havens.

The 577-page book and the 76 pages of notes are crammed with information of interest even to those who don’t accept his basic argument. It is not written in technical language, which is part of the reason it is so long; Piketty, like the late Isaac Asimov, explains everything from the groun up.  If you don’t have time to read the whole book, his core argument can be found in the Introduction or Conclusion.  Or click on some of the links below.

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A strong economic recovery for 1% of us

September 12, 2013

piketty_saezWith each economic recovery, the top 1 percent of American income earners take a larger share of the national income.  It’s true that they lose more, percentage-wise, in recessions [1], but they make up for it on the upswing.

Unless you have a good argument that the top 1 percent are contributing more to the U.S. economy than ever before, I think you have to admit the system is out of balance.

Some economists say that increased economic inequality is a result of automation and computerization.   To me, that’s a different way of saying that the income gains are going to people who own machines and computers (who are not the same individuals as the inventors of the new automation and computer technology).

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How equal should we be?

September 6, 2012

During the past 30 or 40 years, wealth in the United States has been redistributed upward.  I think this is a bad thing.  But if you ask me how I think wealth should be distributed among income groups, I don’t have a good answer.  In fact, I would rather avoid the question.

For years I thought that inequality, as such, didn’t matter.  I believed there should be a social safety net, and I favored policies to promote a high-wage, full-employment economy, but I wasn’t concerned with the size of the gap between rich and poor.  If I have all I need, and the people on the bottom rungs of the economic ladder have the necessities of life, what difference does it make how much more other people have?  If I have a house to live in, how does it hurt me if someone such as John McCain owns so many houses he can’t remember how many they are?

The philosopher John Rawls, in  A Theory of Justice, acknowledged that a certain degree of inequality of income can benefit everyone, including the worst-off members of society.  It is right (my example, not his) that physicians be paid more than newspaper reporters, because physicians have a scarcer skill, require more years of schooling to learn their job and arguably are more necessary to society.  It is right that entrepreneurs be richly rewarded, because of the high risk and the many entrepreneurs who fail, and because if someone gets rich by creating a business that produces valuable goods and services, there is a good chance the person will use the riches to produce more valuable goods and services.

The theory of the  free enterprise system is that capitalists grow rich when they do a good job of serving the wants and needs of the public, and are thus enable to expand at the expense of competitors who serve the public less well.  When the system works this way, Rawls’ criterion is met.   The problem is in distinguishing the wealth that is acquired from creating value from the wealth that is created from what economist Joseph Stiglitz in The Price of Inequality called “rent-seeking”—leveraging your position in society to extract wealth from others.

I like to see people being richly rewarded for their achievements, such as starting or managing a successful business, or writing a best-selling novel.  I have no objection to people being richly rewarded for success in competition, such as high-stakes poker or trading on the stock market, provided their winnings come from other players and they don’t expect to be bailed out by the public.  I realize that there is always a certain amount of luck in success, but that is all the more reason to reward success.  The winner of a lottery has no more merit than anyone who bet on the lottery, but nobody would participate if the rewards were all equal.

What I have a problem with is the emergence of a privileged class, who are rewarded for attending elite schools, belonging to elite organizations and networking with other members of the elite.  They gain access to top jobs in corporations, government, academia and the so-called non-profit sector.   Christopher Hayes in Twilight of the Elites pointed out members of this class regard themselves as a “meritocracy,” but their merit consists of their credentials, not their achievements or their contributions to society.   I think the average partner in Goldman Sachs is smarter than I am, at least about how to acquire money, but having superior intelligence does not give you a right to manipulate government, commit financial fraud or swindle the so-called “losers.”

What we should be concerned about is not how much money people have (although I doubt the world would be worse off if the fortunes of the world’s richest people were measured in nine figures instead of 11 figures), but how it is acquired.  Instead of trying to redistribute wealth back downward, we should change the rules to reward producers rather than rent-seekers.  I am not concerned about how much can be earned honestly.  By “honestly,” I mean not just technically within the law, but giving actual value in return for value received.

To be clear, I do advocate that federal income taxes on rich people be returned to 1990s levels, but that is in order to cover the expenses of government, not in order to change the distribution of income in society.  Taxes at 1990s rates will not prevent rich people from being rich.  And if certain governmental measures, such as provision of public parks or public libraries, happens to benefit the public more than the upper 1 percent, I regard that as a plus, not a minus.  One of the problems with the emergence of a privileged class is that they have the power to distort the economic and political system so that it serves their desires, which are disconnected from the needs of the general public.

Notice that the top chart in this post deals with the top 20 percent of income owners, while the lower chart is about the top 10 percent.  My real concern is with the top 1 percent and top 1/10th and 1/100th of 1 percent.

Do you have a philosophy of distributive justice?  If so, how do you think wealth should be distributed?