Article 43

 

Friday, June 08, 2012

Inequality and Recovery

inequality.jpg

Assessing Inequality, Mobility, and Opportunity

By Sarah Anderson, Global Economy Project Director
Institute for Policy Studies
February 9, 2012

A century ago, during the original “Gilded Age,” we experienced extremely high levels of inequality, levels comparable to those we are seeing today. Over the span of several decades, policymakers, backed by strong labor unions and other social movements, turned that inequality around. Through fair taxation and effective social programs and standards, we had achieved much lower levels of inequality by the middle of the twentieth century. We had laid the foundation for a strong and stable economy and put in place a middle class that was broader than any the world had ever seen. There is much to learn from that experience.

Read her 2/9/2012 testimony to Congress HERE or HERE.

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Welcome to the 1% Recovery

By Michael Konczal
New Deal 2.0
March 5, 2012

As the 1% reap 93 percent of the income gains from the recovery, were rapidly returning to pre-New Deal levels of inequality.

There was a brief debate focused on the following question: would the gains of the economy continue to accrue to the top 1% once the recovery started, or would they have a weak post-recession showing in terms of raw income growth as well as income share of the economy? The top 1% had a rough Great Recession. They absorbed 50 percent of the income losses, and their share of income dropped from 23.5 percent to 18.1 percent. Was this a new state of affairs, or would the 1% bounce back in 2010?

We finally have the estimated data for 2010 by income percentile, and it turns out that the top 1% had a fantastic year. The data is in the WORLD TOP INCOME DATABASE, as well as Emmanuel Saez’s updated STRIKING IT RICHER: THE EVOLUTION OF TOP INCOMES IN THE UNITED STATES (as well as the excel spreadsheet on his webpage). Timothy Noah has a first set of responses here. The takeaway quote from Saez is, ”the top 1% captured 93% of the income gains in the first year of recovery.”

First off, lets get some absolute numbers here. HERE is income by important percentiles, as well as the change from 2009-2010. I include the change with and without capital gains to make it clear that this is a phenomenon both in and independent of a strong stock market.

The bottom 90 percent of Americans lost $127, the bottom 99 percent of Americans gained $80, and the top 1% gained $105,637. The bottom 99 percent is net positive for the year due to around $125 in average capital gains. They can take comfort in efforts by the right to set the capital gains tax to 0 percent, which would have netted them an additional couple dozen bucks.

(Also, just to show the top 1% captured 93% of the income gains in the first year of recovery isn’t some sort of stats juke, you can take $105,637 and divide it by the the number you get when you add $80 times 99 to $105,637 times 1. That number is 93 percent, which is the share of income gains the 1% took home.)

And if this wasn’t obvious, you can see the gains become quite high the farther you walk up the inequality ladder. When we discuss things like the BUFFET RULE or taxing capital gains as ordinary income, it is important to see how top-heavy that capital gains distribution actually is.

This should also be put in the historical frame of looking at 2002 onward. I’m going to normalize some percentiles by their average income in 2002 and show how they have moved going into and out of the recession. This takes the income distribution in 2002 as granted and any movements from there on out reflect changes from that income. Iӗm going to exclude capital gains for THIS CHART to show its a deeper phenomenon than the stock market, though the effects are the same in either case.

The Great Recession dropped income for the bottom 99 percent by 11.6 percent, completely wiping out the meager gains of the Bush years. And crucially, while 2010 was a year of continued stagnation for the economy as a whole, the 1% began to show strong gains even when capital gains are excluded.

As you can imagine, this has increased the percentage of the economic pie that the top 1% takes home. As Saez notes, “excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007.”

There are two things worth mentioning. There’s an interesting debate within left-liberal circles about whether or not elite economic interests benefit from a weak recovery, BENEFIT more from a strong recovery, are vaguely INDIFFERENT to the United States economy, are IMPOTENT during the recession, or are more interested in pursuing OTHER AGENDAS during the instability caused by mass unemployment. These numbers are certainly a point for the argument that the rich are doing just fine, and to whatever extent they’d be doing better with more robust growth and employment, it isn’t putting a damper on their earnings.

Its also worth mentioning that, pre-recession, inequality hadn’t been that high since the Great Depression, and we are quickly returning to that state. Its important to remember that a series of choices were made during the New Deal to react to runaway inequality, including changes to progressive taxation, financial regulation, monetary policy, labor unionization, and the provisioning of public goods and guaranteed social insurance. A battle will be fought over the next decade - its already been fought for the past three years - on all these fronts. The subsequent resolution will determine how broadly shared prosperity is going forward and whether our economy will continue to be as unstable as it has been.

Mike Konczal is a Fellow at the Roosevelt Institute.

SOURCE

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The Price of Inequality

By Joseph E. Stiglitz
Project Syndicate
June 5, 2012

America likes to think of itself as a land of opportunity, and others view it in much the same light. But, while we can all think of examples of Americans who rose to the top on their own, what really matters are the statistics: to what extent do an individuals life chances depend on the income and education of his or her parents?

Nowadays, these numbers show that the American dream is a myth. There is less equality of opportunity in the United States today than there is in Europe - or, indeed, in any advanced industrial country for which there are data.

This is one of the reasons that America has the highest level of inequality of any of the advanced countries and its gap with the rest has been widening. In the “recovery of 2009-2010,” the top 1% of US income earners captured 93% of the income growth. Other inequality indicators - like wealth, health, and life expectancy are as bad or even worse. The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

It would be one thing if the high incomes of those at the top were the result of greater contributions to society, but the Great Recession showed otherwise: even bankers who had led the global economy, as well as their own firms, to the brink of ruin, received outsize bonuses.

A closer look at those at the top reveals a disproportionate role for rent-seeking: some have obtained their wealth by exercising monopoly power; others are CEOs who have taken advantage of deficiencies in corporate governance to extract for themselves an excessive share of corporate earnings; and still others have used political connections to benefit from government munificence ֖ either excessively high prices for what the government buys (drugs), or excessively low prices for what the government sells (mineral rights).

Likewise, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices. Those at the top, in such cases, are enriched at the direct expense of those at the bottom.

It might not be so bad if there were even a grain of truth to trickle-down economics the quaint notion that everyone benefits from enriching those at the top. But most Americans today are worse off - with lower real (inflation-adjusted) incomes than they were in 1997, a decade and a half ago. All of the benefits of growth have gone to the top.

Defenders of America’s inequality argue that the poor and those in the middle shouldn’t complain. While they may be getting a smaller share of the pie than they did in the past, the pie is growing so much, thanks to the contributions of the rich and superrich, that the size of their slice is actually larger. The evidence, again, flatly contradicts this. Indeed, America grew far faster in the decades after World War II, when it was growing together, than it has since 1980, when it began growing apart.

This shouldn’t come as a surprise, once one understands the sources of inequality. Rent-seeking distorts the economy. Market forces, of course, play a role, too, but markets are shaped by politics; and, in America, with its quasi-corrupt system of campaign finance and its revolving doors between government and industry, politics is shaped by money.

For example, a bankruptcy law that privileges derivatives over all else, but does not allow the discharge of student debt, no matter how inadequate the education provided, enriches bankers and impoverishes many at the bottom. In a country where money trumps democracy, such legislation has become predictably frequent.

But growing inequality is not inevitable. There are market economies that are doing better, both in terms of both GDP growth and rising living standards for most citizens. Some are even reducing inequalities.

America is paying a high price for continuing in the opposite direction. Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset its people - is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.

The Great Recession has exacerbated inequality, with cutbacks in basic social expenditures and with high unemployment putting downward pressure on wages. Moreover, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, investigating the causes of the Great Recession, and the International Monetary Fund have both warned that inequality leads to economic instability.

But, most importantly, America’s inequality is undermining its values and identity. With inequality reaching such extremes, it is not surprising that its effects are manifest in every public decision, from the conduct of monetary policy to budgetary allocations. America has become a country not “with justice for all,” but rather with favoritism for the rich and justice for those who can afford it - so evident in the foreclosure crisis, in which the big banks believed that they were too big not only to fail, but also to be held accountable.

America can no longer regard itself as the land of opportunity that it once was. But it does not have to be this way: it is not too late for the American dream to be restored.

SOURCE

Posted by Elvis on 06/08/12 •
Section Dying America
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