A Discussion of Income Inequality, Between Friends

From: ford
To: Brian Presley
Sent: Wednesday, October 20, 2010 8:19 PM
Subject: Fwd: Income Inequality: Too Big to Ignore

Brian,

There are many studies showing the increasing concentration of wealth in the hands of the most wealthy and the stagnation of middle class and lower class income over the past three decades despite the vast increase in productivity brought on in large part by the extraordinary progress in IT. What it means is that the most wealthy have reaped the entire benefits of productivity increases. CEOs who thirty or 40 years ago were satisfied with an average of 15 or 20 times the income of the average worker are now getting 400 or 500 times the average salary. So that is why I have to laugh when I hear the dark accusations of "class warfare" attributed to Obama's modest tax adjustment plans (or hopes). The real class warfare that has been running unchecked over the past 30 years or so is the concentration of wealth at the very top, as indicated in this article: the share of the top 1 percent of income earners rising from 8.9% in 1976 to 23.5 % in 2007, with the average hourly wage declining in real terms by 7% over the same period.

But I really have to hand it to the Republican politicos, the Limbaugh/Hannity/Beck talk shows and the Tea party movement. They seem to have convinced maybe even a majority of the electorate that we need to do more to protect that top five or ten percent! Well done, fellows! Meanwhile, the third-worldization of the U.S. into a few haves and many have nots continues apace, apparently with the strong support of many of the have-nots!

At least I won a bet this year that the Tampa Bay Rays would beat out the Yankees in the American League East.

Warm regards, differing political perspectives notwithstanding!

Ford

October 16, 2010

Income Inequality: Too Big to Ignore

By ROBERT H. FRANK

PEOPLE often remember the past with exaggerated fondness. Sometimes, however, important aspects of life really were better in the old days.

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

Adam Smith, the father of modern economics, was a professor of moral philosophy at the University of Glasgow. His first book, “A Theory of Moral Sentiments,” was published more than 25 years before his celebrated “Wealth of Nations,” which was itself peppered with trenchant moral analysis.

Some moral philosophers address inequality by invoking principles of justice and fairness. But because they have been unable to forge broad agreement about what these abstract principles mean in practice, they’ve made little progress. The more pragmatic cost-benefit approach favored by Smith has proved more fruitful, for it turns out that rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries.

Recent research on psychological well-being has taught us that beyond a certain point, across-the-board spending increases often do little more than raise the bar for what is considered enough. A C.E.O. may think he needs a 30,000-square-foot mansion, for example, just because each of his peers has one. Although they might all be just as happy in more modest dwellings, few would be willing to downsize on their own.

People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of “expenditure cascades,” whose first step is increased spending by top earners.

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

In a recent working paper based on census data for the 100 most populous counties in the United States, Adam Seth Levine (a postdoctoral researcher in political science at Vanderbilt University), Oege Dijk (an economics Ph.D. student at the European University Institute) and I found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress.

For example, even after controlling for other factors, these counties had the largest increases in bankruptcy filings.

Divorce rates are another reliable indicator of financial distress, as marriage counselors report that a high proportion of couples they see are experiencing significant financial problems. The counties with the biggest increases in inequality also reported the largest increases in divorce rates.

Another footprint of financial distress is long commute times, because families who are short on cash often try to make ends meet by moving to where housing is cheaper — in many cases, farther from work. The counties where long commute times had grown the most were again those with the largest increases in inequality.

The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.

ECONOMISTS who say we should relegate questions about inequality to philosophers often advocate policies, like tax cuts for the wealthy, that increase inequality substantially. That greater inequality causes real harm is beyond doubt.

But are there offsetting benefits?

There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street.

In short, the economist’s cost-benefit approach — itself long an important arrow in the moral philosopher’s quiver — has much to say about the effects of rising inequality. We need not reach agreement on all philosophical principles of fairness to recognize that it has imposed considerable harm across the income scale without generating significant offsetting benefits.

No one dares to argue that rising inequality is required in the name of fairness. So maybe we should just agree that it’s a bad thing — and try to do something about it.

Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.
 
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From: Brian Presley
To: fordcooper
Sent: Thu, Nov 25, 2010 10:03 am
Subject: Re: Income Inequality: Too Big to Ignore

Happy Thanksgiving from your slow -synapse- conservative friend.

We need to discuss this in some depth. Reported income growth for the top quintile grew at twice the rate of the bottom quintile over the past 20 years.

It is not true .however, that purchasing power stagnated. First REPORTED INCOME went up 25% for blacks during that period, somewhere in the very low thirties for Hispanics, the high thirties for whites, and off the charts for Asian techies.

Secondly transfer payments, NOT REPORTED IN THE INCOME STATISTICS, soared for the bottom 40%, to the point that 47% of tax paying "units" don't even pay any payroll tax, after refunds and income credits. Even a turkey stuffed liberal like you would have to admit that those redistributive transfers more than close the kinds of gaps in the paragraph above.

Now to the people MSNBC and the NYT love to hate (except for their overpaid media brethren) You have drunk the KOOL-AID

Of course the top quintile outran the herd- REPORTED INCOME FOR THE MEGA-HAVES IS MADE UP OF AT LEAST FOUR KINDS OF REVENUE, AND IS CHIEFLY NOT PAYROLL. Their reported income is wages;interest,dividends, and capital gains from invested capital; paydown of debt principal on any leverage in their companies(principal paydown is income to the IRS..)

Without the existence of risk taking investors their would be next to no job growth. Don't tell me they could work for governments-they have no money of their own, unless they are monarchies,or empires who confiscate all the means of production.

Nope, you don't gotta be an" ignorant, racist tea bagger" to get that it takes a rich guy to build the plant, buy the tools and inventory, and hire the poor guy and HAVE LAWS THAT PROTECT HIS RIGHT TO THE FRUITS OF HIS LABOR AND CAPITAL Take that away and you have Haiti or ten others your State Dept experience could quickly conjure up.

How do you feel about Soros,Chavez,and Putin and their paths to richdom?----- Give me a Bill and Melinda Gates any day!!!

It's not just pilgrims for whom we should be thankful.

Sincerely,

Brian

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From: fordcooper
To: Brian Presley
Sent: Thursday, December 02, 2010 5:24 PM
Subject: Re: Income Inequality: Too Big to Ignore

Brian,

Thanks for taking the time to do some research to rebut the position I cited that income distribution in the U.S. is dramatically concentrated in the hands of a few, particularly the top 1%, and that this concentration has been growing over the past 30-40 years from where it was in the 1960s-1970s. You have made some valid points, particularly that the raw data in the U.S. census statistics is PRE-TAX and PRE-TRANSFERS and therefore does not accurately reflect the true ratios of income distribution. I came across a study which can be found at the web site http://www.econlib/Enc/Distributionof Income which doesn't seem to be coming up as a web site so I will send it to you separately. That study essentially confirms the existenceof dramatic and growing income distribution disparity but adds a table (Table 2) that shows for one year (2001) the effect of moving to an adjusted definition that includes the estimated effect of capital gains, taxes, the earned income tax credit, and the monetary value of private and government non money benefits. According to this analysis, "The result is a substantial reduction in inequality, with the ratio between incomes in the top and bottom quintiles falling from $14.01:$1.00 to $10.41:$1.00." So I take your point: government policies can and do in fact affect the distribution of income, in this case in the direction of less unequal balance. The analysis asserts (without showing statistics) that a similar post-tax, post-transfer analysis would also in other years show a similar ameliorating effect on income distribution distortions. The article concludes that point, however, by observing that "Even under the adjusted definition, though, the trend toward increasing inequality in the 1980s and 1990s remains, but at a slower pace." I would like to see a study that uses the post-tax, post-transfer concept over the entire period: it would undoubtedly prove the point that, under whatever consistent measurement is used, income concentration in the U.S. has been growing steadily over the past 30-40 years and that government taxes and transfers can and have to some degree ameliorated that process. I would also like to see a comparison not just of deciles or quintiles but of the top 1-5% income earners compared to everyone else. Why should we 95-99% be at an increasing disadvantage compared to the top 1-5%, most of whom apparently depend on the source of their "gains" pay a lesser rate than the middle class?

Now, why is such a trend unhealthy, not just for those on the short end of the stick, but for the nation? This is where political and philosophical differences come into play and where, as you and I seem to agree, honest men can disagree. This is precisely the debate--fruitless to be sure: should the wealthiest among us return to the 39% tax rate on all earned income over $250,000, adding $700 billion to our deficit? Should unemployment be extended for the 2 million who can't find work after 99 weeks at a $19 billion cost to the deficit? What is fair? What works economically? There is strong pressure to undo the ameliorating programs by which government has attempted to redress however marginally the disparities. I have seen how it works in Northern Europe where much highter tax rates prevail but where there are incomparably better income balances, public education, transportation and public services. (They of course are currently having to deal with scaling back because of their own demographics and the flat world). I think a good common position for both the U.S. and Europe should be that neither of us is willing to see our workers reduced to the lease common denominator of Chinese or Burmese coolies through the mechanism of some New World Trade Order. But that seems to be where we are headed.

Brian, I know that you work (and work hard) for a living and don't have time to deal with every liberal in the IYC (on the other hand we are very few)! But thanks for the exchange. I will be separate email send you a couple of other articles or web sites for your information.

Warm regards,
Ford