The Depressing Rise of Income Inequality
The Depressing Rise of Income Inequality
There’s a fascinating series being written on the Slate website called The United States of Inequality. The first article explains how, statistically, the income gap in the US has grown dramatically over the past 40 years:
It's generally understood that we live in a time of growing income inequality, but "the ordinary person is not really aware of how big it is," [Nobel Prize winning economist Paul] Krugman told [the author, Timothy Noah]. During the late 1980s and the late 1990s, the United States experienced two unprecedentedly long periods of sustained economic growth—the "seven fat years" and the " long boom." Yet from 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent. Economic growth was more sluggish in the aughts, but the decade saw productivity increase by about 20 percent. Yet virtually none of the increase translated into wage growth at middle and lower incomes, an outcome that left many economists scratching their heads.
The rest of the series, which will be completed during the coming week, posits a number of theories as to why the income gap is growing. So far, the author has ruled out race and gender and concluded that immigration is only a minor contributor, if at all.
Politics, one would think, has to play a part. But surely the biggest contributor has to be globalisation. The influx of billions of Chinese and Indian workers into the global economy over the past two decades hasn’t done anything to depress the wages of investment bankers, lawyers, doctors and dentists. But it has put enormous pressure on the wages of millions of middle- and low- income Americans, from manufacturers and automobile makers to computer programmers.
Perhaps Noah will cover this over the next few days. Whatever the cause, it's a sad state of affairs for the vast majority of the US population.
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Steve
Agreed.
In Australia too, the return on capital seems to have far outweighed the return on labour.The rich have got richer and the poor stayed poor. From an investment viewpoint I would not want to rely on this continuing forever as systems seem to have a way of rebalancing when least expected.
I was trying to find some equivalent stats on Oz without much luck. Does anyone have numbers on this?
I would guess that our mining boom has meant the discrepancy hasn't been quite as wide?
Funnily enough, about three months ago, I read a research note from the SocGen strategist Albert Edwards on this topic.
Then about two months ago, I read a couple of books by the centre-left economist, Robert Frank, being "The Economic Naturalist" and the imaginitively titled sequel "The Return of the Economic Naturalist" which discussed US income inequality and falling social mobility at length.
Then about one month ago, there was a cover story in the Weekend FT magazine that discussed the same thing.
Now it is Bristlemouth/Slate.
I haven't been seeking these articles out, they have found me through my regular reading channels.
Accordingly, I can't help but get the feeling that this is an issue that is very rapidly moving towards the forefront of the American zeitgeist.
On these articles in Slate that attempt to explain the phenomenon, my guess is that like most things, the causes are probably multivariate, and so any attempt to isolate a single cause is probably doomed to failure.
However, one variable that Slate hasn't picked up on when it said "I'll try to answer that question by looking at all potential explanations—race, gender, the computer revolution, immigration, trade, government policies, the decline of labor, compensation policies on Wall Street and in executive suites, and education" is monetary policy.
Given that the super-doves Greenspan and Bernanke have the idea that it is their responsibility to stave off depression at all costs by keeping asset prices (both stocks and real-estate) at permanently inflated levels by keeping the monetary pedal firmly to the floor, they are effectively transferring wealth to the existing, entrenched owners of real investment assets and fixed income assets (i.e., stockholders, property owners and bond holders) at the expense of those holders of nominal investment assets that have variable coupons (i.e., bank account holders, life-insurance policyholders etc.).
I don't think for a moment that monetary policy could explain all of income inequality in the US, but I do think that it is a contributing factor.
I believe it is the Banks (including the Reserve Bank) that are the major cause of this in Australia. As Shum as mentioned the Reserve Bank will do anything to stave off recession, effectively pouring money into the economy via lower interest rates and therefore transferring more wealth to those with already established investments, while the middle income earner who is struggling to pay his mortgage remains on struggle street.
The banks throw around these huge salaries to their executives and make billion dollar profits without any thought for the struggling person.
Until the government introduces a super profits for the banking sector (& the mining sector) and distribute this income to the strugglers, nothing will change.
Unfortunately the only way I believe this will change is if we introduce a barter type system for goods & services (pretty much like a communist society I guess, (which I am not suggesting should or will happen by the way)
So I guess the which will keep getting richer and the rest of us, well, no government cares)
Governments champion and/or feed 'economic growth' through variuous expansionary policies - one of which amounts to the debasement of currencies. Economic growth is championed on the basis that it leads to prosperity for all - yet debasement of currency amounts to theft from most. Huh?
I guess this is the problem with democracies - the PERCEPTION of economic growth is more important than the reality. And so a supposed belief in markets can co-exist with centrally planned economic expansion. Which ofcourse leads to busts which requires central planning to fix. And round and round we go.
Those who are ideologically opposed to command economies somehow see no inconstency with the notion of a reserve bank - or for that matter choose to believe that the Chinese economic miracle will run for ever.
Perception is a wonderful thing isn't it.
With continual economic contraction (or negative growth) comes recession and in my own experiences, during time of recessions the strugglers are actually better off (as long as they can keep their jobs & home) as businesses lower prices & governments throw money around to "rescue the economy"
What is so bad about a recession anyway. You only have to mention the word & all & sundry think the world is about to collapse.
Maybe if the commercial bank's shareholders and Directors had unlimited liability and the Government or their intermediaries didn't guarantee all deposits we would get proper market forces to assess risk. This would be one significant step in stopping the boom and bust cycle. Unfortunately this has about zero chance of being palatable in our society.
The boom & bust cycle I don't believe is the problem. In boom times, prices and as a result, profits, go through the roof. This results in the rich getting richer once again.
I don't believe that there is an answer that society or government would have success in implementing as it would require a very large shift in policy and thought that I don't believe most people are capable of
We tend to think that globalisation is a new phenomenon and the next big thing and use it to explain things. But after I've read Alan Beattie's False Economy, I start to realise there is nothing new. Intercontinental tradings have been with us for centuries. In 1800's, jobs in the agricultural sector in Europe lost their competitiveness to their counterpart in North America, The New World. This is similar to the present situation jobs in manufacturing are all moved to China. But some countries like Britain prospered and led the industrial revolution.
Globalisation is playing it's part. For many decades manufacturing has shifted to 'cheapshore' locations. Sure, the affected workforce had a choice of moving to growing, well-paid knowledge-based industries. However, now that much of the knowledge-based industry is also moving to 'cheapshore', what well-paid industry is left ? Can we all become miners, doctors & CEOs ? How many globalisation-affected workers will have to take lower paid jobs ? And what will be the long-term effect on tax revenue, & on company profits when many of their customers can no longer afford their products ? Ironically, the NBN will accelerate the movement of jobs overseas - jobs such as education, accounting & legal. The IT industry has been shifting work overseas for many years now, & shows no sign of slowing down. Bottom line is: as long as there is a large difference between foreign wages & local (all else being equal), the 'cheapshore' process will grind on.
"All else being equal" - that's the key isn't it. I think things rarely are.
All corporate lemmings tend to over react. They all got on the 'outsource to India' bandwagon, as they get on every other bandwagon - but I think after a while it was realised that not everything benefits from outsourcing, and then we got to a happier median.
It's easy to see doom and gloom - but the reality is that, as you say, these shifts have been happening for ever. We survived the growth of Japan and South Korea.
I don't see why we shouldn't survive India & China, and others.
Agree Mars. Perception & reality can vary considerably. But the 'perceived' pot of gold at the end of the rainbow beckons seductively. In my experience, offshoring has hit many potholes, & will hit many more. But there is much determination & incentive to overcome them.
Steve,
For figures on income inequality in Australia, try this for starters:
http://www.abs.gov.au/AUSSTATS/abs@.nsf/Previousproducts/5206.0Main%20Fe...
and
http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6523.0Main+Features12007-...
I came across it this morning as I was investigating Christopher Joye's (IMO, dubious) claim (see Business Spectator website) that houses in Australia are not expensive (but that's a different topic!)
The issue of income inequality has apparently also been raised by Paolo Pellegrini as a reason for his bearish views of the US market and consequently returning money to investors in his hedge fund, PSQR Capital.
He contends that the share of GDP going to American workers has shrunk significantly since 2001 (from 58% to 53%) and that this was disguised until recently by a huge increase in household borrowings. Until the workers share of GDP rises, there will be a lack of aggregate demand in the US, which will prevent or prolong the recovery.
No doubt there are multiple causes for this (Pellegrini cites globalisation and technological advances), but your point about politics, and Shum's point about monetary policy transferring wealth to asset owners are undoubtably significant contributors as well.
Not sure what role the mining boom has played here, though.
Having lived in a compound in Port Moresby, holidayed in Johannesburg staying at a B&B inside a gated/fenced suburb, and driven from one end of P street in Washington DC to the other (from the NW quarter to the NE), the evidence of the problems of income inequality is stark.
Like Shum, I think this is a growing issue, only amplified by government/corporate responses to the GFC. For example, from an anecdotal perspective, there is still notable anger in some parts of UK society about how the financial/banking sector in London contributed to the recession and was then 'bailed out'.
There's only a depressing rise in inequality when we look with nationalistic blinkers on. On a global basis, income inequality is dropping.
You raise a good point about reserve banks and plowing money into the economy (or printing money for an economy so to speak). But, this is far from fool proof and this has been noted in recent weeks in America, as they are beleived to be in a liquidity trap, this link may help to explain;
http://krugman.blogs.nytimes.com/2010/03/17/how-much-of-the-world-is-in-...
Having said that, reserve banks are always working hand in hand with Govt., so when monetary policy becomes ineffective (ie in a liquidity trap), then it is the responsibility of the Govt. to provide a fiscal response. The schools building program is a great example of this where money was injected into the construction industry which would have been looking down the proverbial barrel had the stimulus not been made.
the lack of fair distribution of wealth in the U.S is a direct result of the suppression of unions and the lack of a centrelised wage fixing system, also the U.S equivelent of howards 457 visas and reagans trickle down economic system and the results of globalization have destroyed the U.S. economy, thats why the housing and mortgage system has collapsed, and there can be no upswing in the U.S. till the whole wages and income system is made fairer, so people can buy,its not rocket science, but corporate greed will fight it to the end, their end, the idiots.
the best thing australia can do to prevent it sliding into a U.S style economy is keep the conservatives and their workchoice type systems out, otherwise in a few years wealth inequality here will be the same as the U.S.with the same results.
Since the fall of the Berlin Wall and the demise of the communist bloc, free market capitalism really became the only show in town. Accordingly, individuals and governments have been increasingly seduced down this path in a belief that free market economics could deliver equitable social outcomes. It is not rational economics but the delusional ideology of our time. Free markets inevitably serve to concentrate wealth. Like all things in life, moderation is the key!
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