Summing Up
Are Education And Mobility The Keys To Reaching The Right Amount Of Inequality?
Questions about the right amount of inequality provoked thoughtful comment this month about the nature of the question, definitions, measures, and appropriate actions to ensure that we achieve it, whether inequality is measured in terms of opportunity or the actual accumulation of varying levels of income and wealth.
Inequality is inevitable and perhaps necessary in a free society, according to one line of thought. As Guy Higgins put it, "Inequality in the distribution of wealth is necessary for … progress… perhaps we should be focusing on trying to understand what the incentives should be that support a useful and perhaps better level of inequality." Referring in part to differences in per-capita income distribution among countries, Shadreck Saili said, "I have a strong feeling that productivity flourishes where income disparity exists to a greater extent." Susan Rushworth offered "food for thought" in citing research that led her to conclude that "the faster the economy grew (as measured by GDP), the greater the income gap."
Most expressed the view that increasing inequality, at least in the U.S. and U.K., has positioned those countries in excess of the "right amount." Among those supporting this view were Bob Dillon, who commented that "Greed seems to have overtaken some of us." Doug Gabbard, citing his research, said "… a year-over-year decrease in the Gini Coefficient (increasing equality) is strongly (and linearly) associated with an increase in household income." Steve Scheinkopf agreed, saying "I used to be an Ayn Rand capitalist, but compassion and a better spread of wealth actually works better in business and society."
The right amount of income inequality may be hard to determine, but respondents to this month's column offered up a number of measures, some more straightforward than others. Comments suggesting that right amount included: "the point (at) … which entrepreneurship is depressed …" (Yaron Kaufman); "when motives switch from serving to grabbing" (Gerald Nanninga); "the amount that allows the stakeholders to know 'we're all in this together, and apart from our natural not manmade limitations, we all have just and fair opportunities for similar achievement'" (Dennis Nelson); "the level that … does not allow segments of activity to capture regulators or regulations while also ensuring support for the disadvantaged and those in poverty" (Peter Bowie); one that promotes "… open competition. We reach a point of distorted inequalities when we begin to legislate in favor of consolidation." (Victor Paredes); "The points on the curve which would describe the decline of democracy." (T. Reilly).
There was support for the idea that mobility is one answer to inequality. Wayne Brewer, citing research that concludes that income mobility has not declined in the US, said "This metric of income inequality (ignoring mobility) causes meaningless chasing of rainbows… Folks move up through the quintiles of earning all the time … (therefore mitigating the issue for any one household)." While disputing Brewer's figures, Joe Seydl cited another more basic remedy for inequality. In his words, "The key to improving mobility is to improve educational experiences at the earliest age possible."
This debate gives us something to think about: Are education and mobility the keys to reaching the right amount of inequality? What do you think?
Original Article
The most pervasive theme of 2011 may well have been that of "inequality." The global "occupy" movement provided a constant reminder of the need to at least revisit a timeless issue: the unequal concentration of income and wealth among a country's citizens.
Some view inequality as the natural result of freedom, a free market economy, and capitalism. It appears to work best when those with the wealth create jobs for others. This seems to have been the thinking behind Chile's successful economic revival, for example, where the concentration of wealth is very high.
Others view inequality as a potential drag on the economy, a deterrent to the development of a strong, large middle class, which in turn is considered essential to economic growth and development. This apparently was the thinking in Brazil, where the government has stepped in with the intent of providing an added boost to a remarkable period of economic development by reducing inequality through the distribution of money to one-fourth of that nation's population.
In Brazil, the government maintained a disciplined fiscal and monetary policy, resisting the temptations to which much of the rest of the developed world succumbed. At the same time, it created elements of Bolsa Familia, a "family grant," that provided substantial outright payments to low-income families as well as incentive payments to those willing to do such things as send their children to school and get them vaccinated. For whatever reason, the concentration of wealth is much lower in Brazil than in Chile. But these countries represent two of the few bright spots among the world's economies as well as two very different philosophies regarding economic equality and the role of government in promoting it.
It would be hard to find anyone arguing for the extremes of complete equality (everyone with the same income or wealth) or inequality (with all the income and wealth in the hands of one household), something captured by what is termed the Gini Coefficient which ranges from 0 to 100 for these two extremes. Some inequality may be necessary to incentives for work and investment. But some equality is necessary if markets are to be created that support the investment.
A recent study by Andrew Berg and Jonathan Ostry concluded that the distribution of income is a more important contributor to sustained economic growth than such things as openness to trade, a competitive exchange rate, level of foreign investment, or the quality and stability of a country's political institutions. At the risk of oversimplifying a complex analysis, these economists conclude that "Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin." If we were to graph economic growth vs. the Gini Coefficient, it would probably show some kind of parabola in which the highest rate for sustained economic development exists at values somewhere between the extremes of 0 and 100. But just where is that?
The questions this raises include: Does inequality promote or stunt growth, and at what stage of development? Does the paper raise a red flag, say, for the U.S. where inequality of income has grown at an unprecedented pace in the past thirty years and now resembles that of some lesser-developed economies? Has the U.S. passed over the peak of the parabola of our hypothetical graph? What's the right amount of inequality? What do you think?
To Read More:
Andrew G. Berg and Jonathan D. Ostry, "Inequality and Unsustainable Growth: Two Sides of the Same Coin?," IMF Discussion Note SDN/11/08, International Monetary Fund, International Monetary Fund
In Canada there is good, free healthcare - not unlike the US, where I studied/worked - only it's FREE. The rich should be taxed at higher rates and it's about time America started turning off insular news programs and realizing that higher taxes on uber wealthy corporations should contribute to the whole societ. It is not a wrong or socialistic thing - it's the humane and morally just thing to do.
Additionally, the US should heavily tax it's cigarettes and alcohol to help eliminate its debt, as Canada does - contributing to the whole society. I'll take Canada's "Peace, order and good government" over the US' "Life, Liberty and the Pursuit of Happiness" as it stands. All nations should strive for a systemic view and realize that the world's economies are interconnected, not dependent on simply worshipping almighty corporations, regardless of worsening personal and social peril.
1. I was talking to a top executive of Enron shortly before their collapse. I said that Enron had a reputation for working its employees through insanely brutal hours and pressures--all for a potential shot at insanely high stock options. I asked if they had trouble finding people to put up with such a harsh work environment. I was told that they had lots of applicants, especially from investment bankers.
2. I saw a survey once which asked investment bankers if they would stay in the profession if their insanely high levels of compensation went away and they got more "normal" wage levels. Somewhere around 75 to 80% of the investment bankers said they would leave the profession under those circumstances.
3. I was to interview for a job at one of the largest banks in the US shortly before the banking collapse. The headhunter wanted to pre-screen me because she said the bank had "a particular culture" which is not a good fit for many people. In the course of the pre-screening it became apparent that the "particular culture" was people focused on greed, status and conspicuous consumption.
And of course, Enron, the banking industry and investment banking have since gone into terribly poor situations. As Willie Sutton said, he robbed banks because that was where the money was. In the same way, modern-day "robbers" seek out jobs with obscenely high rewards (where the money is). And they leave destruction in their path.
What you want is people running businesses because they want to run that business. If they are only there for personal gain and really do not care about the profession, then you get the Enron and banking collapses. Pay less and you only get the people who want to be there and want to serve (rather than those who are bribed to be there--and would not otherwise be there).
What is that amount? It varies by person. The idea is to look at when motives switch from serving to grabbing.
Final story: An executive at a company told me they had to pay such high salaries in order to get that caliber of executives. Since I was not impressed by the caliber of his executives, I responded, "Does that mean that if you paid less, you'd get a different--and better--caliber of executives?" I still stand by that statement.
In our system there is no longer any connection between between creating value and compensation. (Witness the bankers that took their companies into bankruptcy and were bailed out by the congress via the taxpayers and collected fat bonuses anyway. (I am so tired of hearing about these naked emperors: blah, blah, blah "we need to hire good people", "their contract states...")
The disincentive to work is also a result of our tax system, and rather than creating equality, our system has created a permanent underclass, that sees no way out, at the expense of an ever expanding government bureaucracy to feed the beast. It is not sustainable to have a system where the 3/10 underclass is "managed" by the 4/10 bureaucracy and paid for by 2/10 working middle class and the "1%".
I see it all around me, the 2/10 are becoming largely unmotivated because they have grown tired of feeding the beast, and the "1%" can afford to continue to lobby on their own behalf. What a monster we have created!
And yes, I am sure the academic community has a much more eloquent and sophisticated perspective on this and charts to explain it all, but I put our current mess squarely at the feet of our leaders in Washington.
So what should we be looking at to attain a stabilized yet growing economy? How about the ability to participate in an economy. With more wealth in fewer hands, fewer people can participate and move the economy forward. Don't give me the false argument that the rich create jobs. IF that was the case, why isn't the economy booming? Also understand that when the wealth distribution goes out of kilter, only revolution or the government can bring it back toward the center.
The other lie is that blaming the government for all our ills is okay. Give me a break. Many of the prosperous companies feed off the government like hogs. Tax breaks, government contracts, regulations favoring business competiveness, free use of GPS, roadways, etc. The list is endless of the public benefits toward business. Do individuals have the right to write off their expenses like a business?
History has shown it will change. The how and when is up to us.
Long before the open revolution is evident, they will begin to work to erode the existing situation covertly from within. Exactly how much more is a certain skill set or amount of experience worth for, say, a CEO versus a line worker in a given situation? Only the amount that allows the stakeholders to know "we're all in this together and, apart from our natural not manmade limitations, we all have just and fair opportunities for similar achievement." There is no "right amount" or "time" for inequality except for those who believe short term gains are worth long term costs or who don't understand that there are long-term costs. The less inequality, the more justice and fairness over time, the greater the rewards for all the stakeholders, and not just economically.
Monopolies use supply side economics to raise prices and become less efficient. Innovation and creativity is thwarted because income inequality offers less access to capital for entrepreneurs who drive economic growth, innovation, and jobs. As large companies become mature, without small business, "creative destruction" (p. 70) becomes inevitable resulting in declining social values (Schumpeter, 1994).
The question one should ask is what can this country do to promote entrepreneurship and overcome the influence of companies "too big to fail." Without the ability to fail, socialism replaces capitalism (Schumpeter, 1994). So why is no one asking?
References
Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893-921. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9103252727&site=bsi-live
Baumol, W. J., Litan, R. E., & Schramm, C. J. (2007). Good capitalism, bad capitalism and economics of growth and prosperity. New Haven, Conn. and London: Yale University Press.
Honig, B., & Dana, L. P. (2008). Communities of disentrepreneurship. Journal of Enterprising Communities: People and Places in the Global Economy, 2(1), 5-20. doi: 10.1108/17506200810861221
Schumpeter, J. A. (1994). Capitalism, Socialism, and Democracy. London, England: Routledge.
1. The real job creators are the consumers of goods and services. If no one buys your goods & services you cannot hire anyone no matter how many factories you build!
2. The market does not come with a level playing field. It may be free, but certainly NOT fair.
3. Incentive to do better is not dependent on inequality. Rather, doing better assumes that the game is NOT rigged and that efforts will indeed be rewarded.
4. Instead of focusing on inequality, the focus should be on fairness. Not having wealth should not automatically create inequality in a country's standard of living.
Quite a bit of data however show that GDP per capita itself is no longer a predictor of standard of living above a certain threshold. I'd much prefer the analysis to be about maximizing standard of living.
Taking an 'extraterrestrial' view: We have this dirt ball here, with seven billion people - human beings - and counting. The total surface of the earth is around 510 million km square (including water); if you divide the population on this surface, each and every one newly born has a 'birth right' to around 13 hectare (which will shrink of course as more are born). Now just take a one km deep layer of this dirt ball and 'calculate' the mineral wealth it contains - including the water. Just the top one km!! Why isn't every newborn a millionaire? Because we are all working for 'ourselves' rather than for humanity. So each (most) individual in the human race 'races' to grab as much of the wealth this dirt ball offers as s/he can. And therein lies the problem ...
Nobody ever asks the simple question: Can American society (the whole population) or even the total human population of the world (now 7 billion) produce what they need? Without any financial system at all?
If we could share resources, make everything we need, why do we need money? And millions of 'been counters', bankers, brokers, government bureaucrats (and all those economists!) who are not adding an iota of goods to the human race? In my estimation (and I'm neither a mathematician nor an economist), if we could get everybody to 'work for humanity', 20 hr/week would be more than sufficient to produce everything humanity needs - and use the rest of the free time anyway they want: education, entertainment, you name it. But everybody would have to put in that 20 hr 'work' - from the Pope, President, to the Preacher on the block. Now this I would call true 'equality'. Every human being being equal, free, and pursue the dreams of a better life, irrespective of class, birth, national origin or color.
Joseph J Jarfas
Just a 'Thinker'
Economic - I think that a healthy economy promotes open competition. We reach a point of distorted inequalities when we begin to legislate in favor of consolidation. We had a healthy and prosperous economy during a world in which there was healthy co-existence between national businesses and local individual businesses. Local individual has all but disappeared.
Social - inequality is never good from a social and human perspective. Now the ideals promoted by our founding documents suggest that equality is a core value of our country. The thing is, those ideals hold true under one basic assumption - a clean start from the same departure point for all people. Unfortunately, that has not been the case for much of history. Therefore, those with an edge, more capital, etc will almost certainly grow and outpace thus creating an inequality gap. So we end up with the option of forceably closing the gap or managing it. Either option will always be resisted by those with the most wealth. Even if you choose to manage it, the ability to do so ends up being limited and subjective. But in short inequality is not good for prosperity. Its not good because folks don't want to feel inferior or live inferior than anyone. If they feel inferior, they isolate themselves (and spend less) or do irresponsible things to feel equal (can we say housi
ng bubble). Plus, inequality is just a terrible human condition that inhibits social and cultural development.
God Bless America.
I used to be an Ayn Rand capitalist, but compassion and a better spread of wealth actually works better in business and society
"We feel instinctively that societies with huge income gaps are somehow going wrong. Richard Wilkinson charts the hard data on economic inequality, and shows what gets worse when rich and poor are too far apart: real effects on health, lifespan, even such basic values as trust."
e wealth for the many. It just skews the economy so that the cycles of disadvantage get more acute and desperate for the many. We here at the other side of the Pacific take steps to support our citizens through hard and good times. Sweden is an example of another economy that does the same. Isn't it time we took an evidence based approach to this question of equality.
If you want a broad middle class, you need to have the same proven principles that created it in the USA: independence, easy access to capital, entrepreneurship, and little government rules/intervention (i.e. low cost of entry into market).
The moves suggested by this article (and by this administration), are exactly the moves practiced by many other socialists (government protects and to do so, must grow, and to grow, it must take more).
Maybe the problem is the focus on inequality. It promotes laziness and blame and finger pointing and brings down ego and self worth.
These questions are somewhat misleading. It doesn't really make sense to speak about income inequality without mentioning economic mobility. Economic mobility simply refers to how easy it is for workers to climb up the income ladder. It is generally accepted by economists that rising income inequality in and of itself is not necessarily problematic for economic growth and social stability if rising income inequality is accompanied by a high degree of economic mobility. That is, as long as workers are constantly shifting into and out of the highest income brackets, a large and growing gap between income brackets is less consequential; because, in this scenario, every worker has a fair shot at one day entering into a higher income bracket. Simply knowing that this fair shot exists, therefore, fosters greater competition in the labor market and increased worker productivity.
Now, the issue is that there is evidence to suggest that economic mobility has declined in recent decades (http://goo.gl/JYUNH). Absolute mobility still remains high, but it is relative mobility that workers are most concerned with, and relative mobility is declining. It used to be that hard work determined labor market outcomes; however, the wealth of one's family has become an increasingly important factor determining labor market outcomes. This is unfortunate, considering that people do not get to choose the family that they are born into.
So I think the better question is, "What's the right amount of inequality, given that economic mobility has declined?" The fact that inequality has increased while mobility has declined is particularly alarming. There are two ways to fix this problem: reduce inequality (redistribute) or boost mobility by providing better access to affordable education and more stable early childhood experiences. I'd choose the latter any day.
It is the responsibility of the State to ensure that while the rich via honourable means thrive, the poor do not die for reasons which could have been controlled.
Right amount of income inequality cannot be determined under any situation because of various dynamic changes taking place every now and then.
will decide the price of any product (service) created in the economy. We assume that there are able and willing consumers with resources (money) to purchase these products. We assume a stable political, regulatory and tax environment. We assume a stable governmental structure. We assume finite (but abundant) natural resources and our economic reach is limited to this world. We assume the natural distribution of wealth in the society is represented by a bell curve (large middle class). We assume opportunities for employment are limited and only the best qualified will get them. We assume education costs money and time. We assume the government will not have any welfare, healthcare and educational assistance programs for the citizens. We assume citizens are free to do as they wish (the government is not in their way in any form). We assume many countries will have similarly capable economies and they will compete to supply the goods and services freely to the markets. We assu
me that all humans have a right to life (sustenance), liberty and pursuit of happiness. We assume that everything has a price.
Now, we may do a sensitivity analysis on each one of the above assumptions for further (more complete) information. We know that the wealth distribution is transforming itself from a natural bell curve to an inverted bell curve (nearly complete) already. So, what is the right amount of income inequality for economic growth? On one hand, we may have to think "slow" on it, given the size of the economic system. On the other hand, if we may think "fast" on it, the right amount of income inequality (minimum income) is as much as (as little as) putting bread (and no butter!) on every human's table: they will beg, borrow and steal to satisfy (their) all other needs (and wants) and the humans will keep the (global) economy growing. However, if their economic backs are broken, they may permanently withdraw to their own world based on a barter economy: beginning a tale of two societies and two worlds with very little interaction (except to beg, borrow and steal fro
m the haves by the have nots). Is it not happening now?
I believe true wealth is created by being value added, such as producing, innovating, and/or building something. Without a "middle class" that produces and is rewarded for their effort the wealth cycle would end. The middle class are the customers and end users of the innovators. "The One percent" of the population can only buy so many cars and houses. A strong viable middle class can be a more stable driver of an economy and insure consistent growth. I personally believe the present trend raises a "Red Flag".
The way income equality is measured assumes that the income for the lowest income earners stays low and the income for the highest income earners grows and the people in those two groups stay the same. This is not the case. Folks move up through the quintiles of earnings all the time, usually with more than 70% of them moving at least two quintiles up within a given 10 year span. Only 3% of all US earners stay in the lowest quintile more than 10 years. More than half of the top quintile earners drop out of the top quintile every year and are replaced by other people. On top of that, these income data do not include government dispersements which make up over half of the lowest quartile true resources they could spend but don't count as income in these statistics, severely understating the true lowest quartile.
I think a little research into the data will show that the reason income inequality (even defined in this flawed way) has gone up in the US for the past thirty years is because income is strongly correlated with age and we have a huge cohort of baby boomers that started earning lower amounts of money in their first jobs about 30 years ago who are now in their peak earning years.
This metric of income inequality causes meaningless chasing of rainbows that I think ultimately hurts economic growth because it portrays a false problem that appears should be fixed through redistribution...which we keep getting more of. This exacerbates the normal tendency for people to base their happiness on comparison to others...they are going to be less happy if they are falsely told they don't earn what their efforts are worth.
I would argue that any redistribution at all is economically inefficient since by definition it has to be arbitrary and in that case would mean that resources are being artificially diverted from higher return activities that could be working to increase the standard of living for everyone...making everyone's tomorrow better than their respective today's.
Can you please provide the source for your relative mobility statistics?
You say: "Only 3% of all US earners stay in the lowest quintile more than 10 years."
This is not consistent with a report published by the U.S. Treasury a few years back (http://goo.gl/ydERd). According to that report, 55 percent of workers starting in the lowest quintile in 1996 remained in the lowest quintile by 2005. We wrote a report - which is currently under consideration for publication in an academic journal, so I do not have the link - using a similar analysis as current as 2009. In our report, using PSID data, we found that 57 percent of workers starting in the lowest quintile in 1999 remained in the lowest quintile by 2009. So our findings were consistent with those of the Treasury. One other point that I would point out is that our findings show that a smaller percentage of workers seem to be making big moves out of the lower quintiles. The Treasury report showed that of those who did make it out of the lowest quintile, a healthy proportion was able to make it into the top quintile. We did not find this to be true in our analysis. Perhaps the 2007
-2009 recession had something to do with this outcome.
As I said before, income inequality is not problematic if mobility is high. But there is evidence to suggest that mobility has weakened, particularly over the past decade.
Best,
Joe
Generative wealth concentrates money in good places where it is redistributed within the capitalist system to partners, associates, and builds investment in ideas and products. Brazil has done wonders here. The US, however, has congested its capital flows. Banks are incented to build pools of reserves without lending, capital markets continue to seek phantom yields instead of production. This has stifled growth and taxes up or down won't help it.
There is a glimmer of hope. Money (I believe) always finds an outlet, greed always falls to revaluation, and the cash on the sidelines will redistribute regardless. What is disturbing in the US, and also the European model, is the belief that the dead end capital trolls are stabilizers, reserve sources to buffer volatility. Stagnating capital invites revolution at every level. It is most disturbing that our situation in the US has no champion. Money lives and breathes and is a dragon that will not be contained. This will be a noisy spring.
I did a little bit of private research myself in India. I found that people's response varied a lot depending upon their age. People less than 35 were far less tolerant of inequality in incomes within their age groups.
On the other hand, elder people (56- 60, since 60- 62 is the retirement age for most people in India) were less tolerant of the higher incomes the younger people are making.
A common refrain was "That at their age, we used to slog like crazy in uncomfortable work places and make a third of what they get. Yet it is us that brought them up. And they spend money on luxuries without sparing a thought for their elders".
btw- the treasury report you cite removes all taxpayers under 25 yrs old to remove the effects of people going from work to school from the income mobility percentages. That's a large impact on the percentages that you are comparing with mine. Education is the greatest accelerator of income mobility so I don't think it should be removed if we're trying to represent reality. Wouldn't you agree since you advocate affordable education to increase income mobility?
regards
Thomas Sowell discusses this topic in several of his books. His book "Basic Economics" does a great job explaining very basic cause/effect relationships in the economy with specific and well known examples.
Robert Carroll also has similar statistics compiled for the 1999 to 2007 timeframe. Both use IRS data for individual taxpayers to map the movement of individuals throughout the the quintiles rather than the quintiles themselves, which can be easily misrepresented in headlines by non-statisticians.
Are you at liberty to share the analysis you've done?
The success of any civilized society depends on informed people working together sharing their REAL WEALTH which "Mother NATURE/father GOD" has already distributed evenly and will continue to do so for the future generation. And that wealth is T I M E - twenty-four hours for every man, woman and child.
The world has used HATRED for generations in the name of distribution and re-distribution but it never worked. We have to look for other new solutions. I am sure HBS students will come up with a few!
Sincerely,
Andrew Mathews
One of the most difficult challenges related to measuring mobility is to control for age effects. It is standard practice to exclude workers under the age of 25, because if you were to include such workers, obviously they would show up initially in a lower quintile and then perhaps jump into a higher quintile as they reach their prime-working age. However, we would not classify this movement as upward mobility; rather, the jump from a lower quintile would be primarily due to age effects and not earnings power per se. So we exclude these cases at the bottom of the age distribution to control for this. Similarly, we exclude cases at the upper end of the age distribution: As workers become elderly and retire, obviously their annual income is going to drop, causing them to fall into a lower quintile. But this is not because of mobility effects; rather, this is because of retirement effects.
In our study, we considered only workers between the ages of 25 and 45. We divided our analysis into 4 cohorts to examine 2 cross-cohort comparisons: (1) 1968 to 1979 vs. 1988 to 1999 and (2) 1972 to 1982 vs. 1999 to 2009. We used a share movement technique whereby we separated our considered households within each cohort (sample size = 2,000+ with PSID data) into five quintiles, based on the total income earned by each household in year one. And then we examined how each income group's share of the total income earned by all income groups changed through time, comparing those changes across cohorts in an effort to reveal trends in relative intra-generational mobility. I would be happy to share the entire paper after it's published. The general finding is that relative intra-generational mobility remained healthy up until about the 1999 to 2009 period. Again, the 2007-2009 recession likely had an effect on mobility.
Have a read of Scott Winship's latest piece in the National Review: http://www.nationalreview.com/articles/282292/mobility-impaired-scott-winship.
The key to improving mobility is to improve educational experiences at the earliest age possible. Those who are born into poor households tend to have weak mobility because they lack guidance, adequate nutrition, and stable early childhood-development experiences.
Sustained economic growth as currently conceived and promoted is not feasible with a plague of people on the planet that has diminishing non-renewable resources per person.
Without little growth, no growth and even de-growth, prosperity will become increasingly dependent upon greater equality in sharing national income.
According to the UN 20 advanced societies already have declining populations reducing the need for investment to replace existing infrastructures. Employment is reduced to result in de-growth. The UN expects this will spread to most countries this century.
In addition, people are living longer to require income support and medical care longer and longer. The percent of productive individuals will decrease even with growth and more so with de-growth.
Increasing poverty and envy in the information age will make gross inequality socially and politically unacceptable.
The only way to share national income without bigger taxes, bigger government and bigger welfare is to make everyone a capitalist to obtain a universal minimum dividend for all citizens.
Reduction in corporate taxes would provide a way to achieve prosperity even with de-growth as described in my 1975 book "Democratising the wealth of nations" available at http://ssrn.com/abstract=1146062. An updating paper on "Sustaining society with ecological capitalism" is available at http://ssrn.com/abstract=1954920 being presented next month to a Danish conference on "Designing and transforming capitalism"
Thanks for the dialog. I do think the recession had to have a big effect on mobility in your study. How could it not? Also, I think your analysis, because it uses household incomes, is biased in a way that affects your conclusions because households have fewer people in them today than in the past...due to increased standards of living (for just one example, think how much a VCR costed in 1979 and how ubiquitous the ability to watch movies on just about any device is today...that's not captured in any numbers or stats that I know of). And it appears that since you are examining groups of data instead of individual households progressing through the quintiles, your conclusions ultimately have the same flaw I mentioned earlier...they can support headlines in line with the media narrative buttressing redistribution, but for real actionable policy recommendations, what, other than trying to help disadvantaged kids get better opportunities (which it doesn't directly point out) do
es it do? I agree with your conclusion, btw. I can see how the experiences of kids relating to nutrition, education, development experiences surely impact these data. But since there is a huge culture component to how kids are raised by their parents, where would the line get drawn before the state decides it needs to raise kids instead of the parents? Are we getting to a point where we're willing to tell parents that their culture is wrong? Sam Harris has some books about this topic and briefly discusses it on a TED talk. It's interesting to think about but I think a scary place to be headed.
The article by Scott Winship is interesting because it elaborates the absolute and relative effects of mobility and looks at mobility from a standpoint of statistical chances of being in different earning quintiles than your parents. I still think it misses the point, though. Its conclusions point out that if your parents are from a lower income quintile, you are likely to be there as an adult, as well. Not everyone can be in the top quintiles by definition, and unfortunately, there are factors that make the ability to contribute to economic growth different for different people...only one of them is opportunity. There is motivation, culture, values, luck (many forms of it) and others. I would argue that there are so many factors involved in those differences that the best way to approach it is to make the rules the same for all and therefore in an absolute sense, have a level playing field based on how the "game" is played. Any other approach starts down the slippe
ry slope of the ends justifying the means, and therefore a race to mediocre economic results.
It seems that just about every issue in politics has a lot to do with the starting point of those involved...whether individuals, groups, countries, etc. This always leads to something being unfair based on comparing results between those entities without their respective starting points being considered. There is a tougher question here that delves into philosophy in a tough-to-define way...what is fair and from whose viewpoint is it measured? In one class I took in B-school we came up with one definition of fair being the "absence of envy". From the standpoint of the discussion we're having on this blog about the question of income inequality, the whole question implies that envy is what we should reduce to increase economic results. Envy, and greed, which many others on this blog have commented about, as well, are two sides of the same coin and neither should be considered when thinking about economic policy, in my opinion. Since we can't eradicate them from huma
nkind without removing what makes us human, let's use them to our greatest advantage. With a truly level playing field for all, let envy drive those with a less fortunate starting point to succeed and greed topple those with a better starting point if they try to increase wealth without increasing value. It's all about making sure risk and reward are coupled so that the most value is created for all. Worrying about how the pie is divided is a far less productive concern than allowing the pie to grow, unless you are a politician. Politicians have different "economic" incentives than citizens. But that is a discussion for a different question from Professor Heskett.
I appreciate your input. You make some good points. As a technical note, the PSID is a panel data survey, so we are in fact examining individual households as they progress through quintiles. The IRS dataset that the Treasury uses is also a panel data set.
I agree that we don't ever want an equal society. That would restrain productivity growth and crimp incentives. And, of course, envy is a useful tool that can be used to motivate workers. But in order for children born into low-income families to envy their wealthy counterparts, there needs to be competition. Educational experiences between lower-income and higher-income children are so different at such a young age that competition between children born into lower-income families and those born into higher-income families is practically nonexistent. In the poorest communities and school districts, all of the children from low-income families are lumped together, while the children from high-income families enjoy all of the resources in the world in the best private and boarding schools. I'm not trying to start a class war here, but where does the envy and thus motivation come from in the classrooms in which low-income students study? They don't even interact with their highe
r-income counterparts. They're not going to have figures to envy when everyone around them is in a challenging socioeconomic situation. Instead, they're more likely to adopt bad habits and get involved with crime and drugs, because that's what everyone else is getting involved with. The point is, in order for envy to motivate those born into lower-income households, such students need to be at least able to "see" and "interact with" their counterparts from more privileged backgrounds.
Rather than assume that income inequality causally affects growth, it is critical to consider that the gross inequality of income we see today is instead the direct outcome of this type of malignant State-sponsored growth which has resulted in the now near total destruction of our middle class.
Of course, the US taxpayers' squandered $15,000 billion debt used, in part, to bailout failed enterprises and financially reward the crooks in charge has something to do with the vast range of incomes we see in the US today. As does the $trillions which the Federal Reserve has counterfeited to inflate our money supply and given to its member banks and the friends of our government. For these reasons, not to mention our self-destructive immigration policies and the essential amnesty of 20 million or more illegal aliens by a federal regime bent on open borders globalization and destruction of our national sovereignty, it is no coincidence that the US now resembles much lesser-developed countries.
Malignant growth such as this therefore generates haves versus have-nots; the Marxist class warfare theme of the US democrat party. By their assuming that capitalism is still operative, their tirades against income inequality are their means of trying to fully discredit and therefore eradicate the last vestiges of capitalism in the US. Then, as according to Marx, only after capitalism has "run its course and destroyed itself" can they bring about their God-Is-The-State workers' paradise.
What is the "right" amount of inequality? By whose standards? That is the question you must answer.
Only an all-powerful State as the US is rapidly becoming - or a truly free market as we once were intended to have been - can set labor prices. There is no third alternative. There are night-and-day consequences as to which does. History has proven countless times that when the State decides, the economy and freedom itself are utterly destroyed. Stand by.
If we believe that the benefit of inequality is that it rewards top producers and punishes the unproductive, we should look for a place on the inequality spectrum where the signals are the strongest; that is, where the signaling effect is distinguished as sharply as possible from the "noise" of random assignment to economic levels.
Following work of Shannon in the 1940s, it seems likely (again, a plausibility, not a calculation) that this point is achieved when economic *level* (not income or wealth) is uniformly distributed --- for instance, where every income interval of fixed length captured the same number of people.
Exploring for patterns, we discovered the single strongest correlation was between rate of GDP growth and income inequality - in other words, the faster the economy grew (as measured by GDP), the greater the income gap.
Food for thought...
I can't imagine anyone deserving an earned-income greater than 50 times the median earned income. My understanding is that it used to be that top-paid executives earned only 35 times that of the lowest-paid. Whatever the ratio was from 1950 to 1990, that seemed to work pretty well. I think that would be a reasonable amount of inequality and anything beyond that should be heavily taxed.
At the same time, I would not deny any individual from accumulating substantial wealth from actual stock ownership (not stock options or other derivatives, which are a facade for boosting income).
The reason this issue is being discussed is because we have leadership in the White house and Congress (and I include many Republicans in this) that have chosen to advance their own political interests by appealing to the the voters' basest instincts of envy and division. The cry "the recession was caused by greedy bankers!" is another example of this behavior.
I am surprised that HBS would stoop to dignify this intentionally divisive issue, but I guess I should not be.
ssues in my opinion is that we think equal outcomes is "good" and the goal. While not poor, there are people making over a 1000x more than I make. My happiness has nothing to do with that. I personally think what makes humanity great and interesting is the great diversity visible in it. We have different interests, definitions of value, resources, and strengths to offer. The marketplace, while not perfect and needing certain regulation and protections, is the most moral way of finding a value equilibrium that promotes the freedom that we can have different values. It's dynamic and supports local differences. We all value different things and government by definition creates a shared value definition and we lose the differences and thus our freedom. We all are willing to sacrifice some for the sake of common values, but I'd argue that government as we know it now and the view of income equality suggests a delegation of personal freedom to a few aristocrats, no diff
erent than kings or totalitarians.
To substantiate my claim, i would argue that in an economy where market is a driving force of growth, due to many factors including population, a reduced disparity of income in ideal to enhance growth, however if inequality is high, that will stunt growth. i have in mind the Chinese model of income distribution visa vis economic growth and population.
On the other hand, equal distribution of income can stunt growth in highly developed economies such as US, Europe where such distribution have the tendency of reducing productivity. I have a strong feeling that productivity flourishes where income disparity exists to a greater extent . As per a capitalist phenomenon, you can only get richer by disadvantaging another. If you can't find the natural disadvantage to take advantage of, create one i.e through acquisition, destabilizing , wars etc
A while ago i was reading an article where the launch of 2011 Ford Ranger Wildtrak done in Europe will be produced in South Africa, Argentina and Thailand and will be offered in more than 180 markets worldwide. I ask my self why South Africa, Argentina and Thailand. Certainly among the reasons is income distribution - disparity -that has to be taken advantage off in production.
If the energy in a system is evenly distributed everywhere, it is impossible for work to be done since there are no energy gradients and no way to put energy to work doing useful things. This is like the Soviet Union in the late 1980's. People pretended to work and the government pretended to pay them. No motivation, no effort.
Like all analogies, this one is suspect, but possibly useful. What is the right level of "inequality." I don't think that there is any way to calculate what that level is -- the system is contains far too many variables and the equations are far too few to yield a "closed form analytic solution" and probably can't even be adequately dealt with through computer simulations.
So, rather than someone (the government) trying to do the impossible here, perhaps we should be focusing on trying to understand what the incentives should be that support a useful and perhaps better level of inequality. Why do certain executives get such lavish salaries and bonuses and why don't they ever seem to lose them, independent of company performance? Seems to me that we need to understand that. I don't think that a free market in corporate leaders would support the kind of compensation packages that now exist -- if I'm right, what are the forces constraining that leader-free-market? I suspect the constraining forces are behavioral and not information-related. There's a topic for a study.
For example, inequalities in a society in the form of different income levels, are fine as long as they are rational. I don't think we can expect a desk assistant with no experience to earn as much as a senior manager or academic based on the tasks, risks and level of education/experience it requires. Wouldn't it be unfair for the latter group who invested in studies and work? In this case inequality is a motivator and works in the favor of individuals and society as a driver for continual improvement.
This inequality, however, is only "positive" when not hindering growth and motivation: universal medical health system, accessible education to all...etc. are a must. Otherwise one maintains (actually increases) the "lower classes" and increases resentment.
However, in the case of footballers, televised singing contest winners and all similar entertainment/sport people, that is a different kettle of fish, that horrifyingly looks like the roman "bread and wine" approach. Let "them" watch something entertaining and they will forget their own squalor. Terrifying. Footballers do not contribute to society to the level (millions), they are paid. On top of which it breads an illusion amongst youngsters of fame and fast money, which works against values of studies, work, long-term efforts...and of course, sustains wider inequality.
This might just be another misconception but, communism tried the "all equal" approach and as far as I know (do tell me if I am wrong) every single one of their practical examples has failed. To me it is like a Marketing Strategy, which overlooked one key given factor: human nature. Great on paper, doesn't survive the practice.
At the end of the day I don't think there is a black and white answer. One of the reasons why bringing it up amongst friends over diner can spoil dessert. However, the most important factor is to keep bringing it up, discuss it, try approaches to always have it mind and try improving.
It may be impossible to state in precise terms where on a parabola the 'right' answer lies: but it doesn't take exactitude to say when something is just plain wrong and needs fixing.
eptitude and shady practices, then to use that money partly to pay themselves grandly for a job not done!
This crony capitalism and government intervention to save the skins of the wealthy elite and the bankers, who caused the problems, is the disgrace and shame that needs to be eradicated. THEN maybe we can ask the question What is the right amount of inequality? when the playing field has been cleared of the cheats and shady characters and slick operators and millionaire incompetents with their hands stuck firmly in the 'government honey pot'.
Economies, and civilisation in general, will prosper when citizens cooperate. Cooperation requires mutual trust. If I see my neighbour gaining hundreds of times more than me from the system then I am less likely to trust and cooperate with him/her. Of course, some degree of inequality is inevitable, and desirable (eg to provide incentives and reward initiative). The question is how much; and developments over the past 20-30 years in the US and UK have pushed inequality too far - hence the manifest reduced social cohesion.
One point missing from these discussions are a trend-based analysis of which class is actually emerging as the "winner" in the growing inequality versus an anecdotal "rich capitalist" assumption. Is it possible the class that benefits primarily from the magnification of government versus is not the Capitalists (as assumed in many of these response), but by the "government in the wings"? And by this, I DO NOT mean government workers, I mean the class who live and profit through the support and propagation of government bureaucracy and legislative spaghetti factories that comprise the Federal government - lobbyists, analysts, "project management", compliance specialists, . . .
In 2011, Washington DC became the "richest region" in the United States, taking that title from Silicon Valley.
http://www.bloomberg.com/news/2011-10-19/beltway-earnings-make-u-s-capital-richer-than-silicon-valley.html
Last year (2011), 280,000 government workers lost their jobs, yet government spending continues to consume our economy unabated. Last Friday (2012-01-13), the President announced the intention of slashing Defense programs - but asserting the overall defense budget would continue to rise.
Perhaps in our rush to create a "more fair" government, we are actually creating an oligarchy reminiscent of the Courtier French Government in the 1750's where the wealthy and powerful perpetuated a disconnected Court-based society that perpetuated and grew wealth among the Courtiers, while placing an unbearable burden on the producers.
Under the guise of promoting equality, it is apparent the results are the exact opposite.
Maybe we truly need a more pragmatic versus idealistic approach to government:
"An idealist is one who, on noticing that a rose smells better than a cabbage, concludes that it will also make better soup." -- H.L.(Henry Lewis) Mencken(1880-1956)
is view about the time it takes to judge the successful realisation of the top-person's long-term vision is valid, then their reward must be held in trust over that period of time, perhaps 10 years or more. Finally, remuneration committees need to comprise representation from all stakeholders to the business not just 'friends of friends' all sitting at each others' tables.