Understanding inequality...

I am disturbed by growing wealth and income inequality, but don't have any really firm conviction what the implications are or what might be dome to mitigate it. Nor do experts seem to have firm answers to choose from either. For example, the common logic that growing inequality leads to revolutions from the have-nots isn't well supported by historical evidence.

In 1904, on the eve of military defeat and the 1905 Revolution, Russian income inequality was middling by the standards of that era, and less severe than inequality has become today in such countries as China, the United States, and Russia itself.  We also note how the interplay of some distinctive fiscal and relative-price features of Imperial Russia might have shaped the now-revealed level of inequality. [More]

And I really have a hard time imagining Americans in mobs with pitchforks, etc. singing some revolutionary anthem, even as we soar to new heights of inequality. Indeed, debate rages about the nature and urgency of the problem.

I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top.  (As an aside, both of these problems contain elements of both “left-wing concerns” and “right-wing concerns,” and both problems are deeper than any particular ideology can solve and they should make virtually everyone rethink their views).Those are the problems and we should try to fix them.If we could fix these problems, that would mean a smaller financial sector, less moral hazard, better allocation of capital, and for most/all income classes rates of income growth comparable to the 1948-1972 period, chop it up as you wish.  Imagine that everyone’s income went up three percent a year, every year, and every generation was about twice as rich as the parents.  Whether there then would be more or less marginal “churn” in the relative income rankings is not a matter of irrelevance but having somewhat more churn should not be viewed as a major social goal per se.  It would depend on the reason for the immobility, and the real focus of our concern would be the reason (e.g., bad schools? some kind of unfairness?), and not the marginal change in the numerical churn per se.Given that background, and those two very real problems, you can in fact create other “problems” by creating and manipulating more complicated statistics, based on the initial problems, and that can lead you to various measures of inequality and immobility.  But not all inequalities are bad, or avoidable, and the same is true for immobilities.  The valid problems, as embedded in the new complicated measures, still will boil down to the two simpler problems mentioned above.  In the meantime, toying around with misleading and less transparent aggregate measures of inequality and immobility will bring confusion as to what is really at stake.Focus on the two very real and fairly simple (as distinct from simple to fix) problems. [More]

Well, here's a new theory about how inequality arises and plays out. It even has a somewhat cryptic, almost hieroglyphic, illustration.

How does growing economic inequality lead to political instability? Partly this correlation reflects a direct, causal connection. High inequality is corrosive of social cooperation and willingness to compromise, and waning cooperation means more discord and political infighting. Perhaps more important, economic inequality is also a symptom of deeper social changes, which have gone largely unnoticed.Increasing inequality leads not only to the growth of top fortunes; it also results in greater numbers of wealth-holders. The “1 percent” becomes “2 percent.” Or even more. There are many more millionaires, multimillionaires and billionaires today compared with 30 years ago, as a proportion of the population.Let’s take households worth $10 million or more (in 1995 dollars). According to the research by economist Edward Wolff, from 1983 to 2010 the number of American households worth at least $10 million grew to 350,000 from 66,000.Rich Americans tend to be more politically active than the rest of the population. They supportcandidates who share their views and values; they sometimes run for office themselves. Yet the supply of political offices has stayed flat (there are still 100 senators and 435 representatives -- the same numbers as in 1970). In technical terms, such a situation is known as “elite overproduction.”...Elite overproduction generally leads to more intra-elite competition that gradually undermines the spirit of cooperation, which is followed by ideological polarization and fragmentation of the political class. This happens because the more contenders there are, the more of them end up on the losing side. A large class of disgruntled elite-wannabes, often well-educated and highly capable, has been denied access to elite positions. [More]

While I'm not sure how much I buy completely into this explanation, it is a novel possibility, and one that seems to have some anecdotal evidence behind it (read the whole article).

But if true, it does have some pretty serious implications for agriculture, as the Battle of the Elites isn't too far from what we see around us right now. It also has considerable knock-on effects as it unfolds.

Tyler Cowen's book, Average Is Over, looks at several aspects of inequality and has provoked considerable debate. In addressing some questions about what the future could look like, I found this nugget.

6. In talks (but not in the book) I have suggested that food production is the best candidate for “what will be most difficult to augment” in an age of smart software.  Food production seems harder to “wall off” and it seems more embedded in local culture (for better or worse, usually for worse) than factory production.  See our MRU video on conditional convergence, which considers the work of Dani Rodrik in this regard.  It would mean that the price run-up for Midwestern farm land in the United States may not be a bubble. [More]

I realize I am biased toward strong land prices, so this could simply be me picking out voices that agree with me. But what if land prices are not simply a function of interest rates and corn prices, but increasingly affected by mechanisms mentioned above, as well as the liquid asset glut, confidence in alternative assets, etc. that are hard to measure and barely covered in ag econ classes?

What if we saw an income squeeze in agriculture and merely slower appreciation in farmland prices? We could simply shift the mix of buyers to favor outside investors, I think.

Exhibit G: Growing inequality...

While there were stark differences in salaries when I was choosing my major (almost 50 years ago), the gap has become truly shocking.

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There are very sound reasons for this, but more to my point is the decreasing number of majors to fill in the middle. These gaps would be OK if not echoed all across our economy, with a clearer and clearer divide between "will-haves" and "will not haves".

Sound reasons also do not seem to mitigate the consequences of vast inequality. Even if justly allocated, do we want to live in a society of rich and poor? More importantly to me, have we damaged many of the ladders that allow not only climbing up the ranks, but provide an avenue of recovery if you slip out of the top brackets. Scarily enough, we are raising the penalties for losing a job, catastrophic illness, and other career interrupting events. If you drop down, I think it is increasingly likely you will stay down.

And so will your children.

Inequality in the blood...  

I have long asserted that the most relevant predictor of your success as a farmer was if your father (or father-in-law) was a successful farmer. While our profession may be an extreme due to the nature of landowning, it is not alone.

The advantages of a privileged background don’t stop at graduation. Tufts economist Linda Loury suggests that half of all jobs in the U.S. are found through family, friends, or acquaintances. Canadian economists Miles Corak and Patrizio Piraino look at how often men end up working at the same company where their father worked, finding that as many as 40 percent have done that at some point. The proportion rises to 70 percent among the top 1 percent in income distribution. This helps to explain why the relationship between the earnings of parent and child is even higher at the top end than it is across the population at large, according to Corak. One-third of successions between chief executive officers in publicly listed companies in the U.S. involves an incoming CEO related by blood or marriage to the old CEO, the founder, or a large shareholder. That’s bad news for the share price, according to Francisco Perez-Gonzalez of the NBER, but clearly good news for the newly appointed relative. [More]

The longer I look at this troubling (to me, anyway) trend the less sure I am if it is correctable (assuming we can agree on what correct looks like). There seems to be a snowball effect that can only be overcome by astonishingly poor choices of the wealthy (NBA stars, for example) or extraordinary rare coincidences of luck and opportunity - usually in a developing economy or entertainment industry.

But wealth inequality feeds income inequality to accelerate the trend. The American economy is already past the peaks we have seen historically.

[Source]

The debate rages, and rightly so, about possible cures or even the advisability of a cure. I don't see our tax system getting radically more progressive anytime soon. More to the point, I don't the the old reliable equalizer, education, packing the same therapeutic power as before as systemic changes in our workforce lower the value of many degrees, and higher education costs spiral beyond the payback threshold.

The biggest question for me is how our economy will look and work after another decade or so of lop-sided growth?

 

Slowly gaining traction...  

The following video has gone viral although it has been around for a while. I'm wondering if this means anything.

 

I have been disturbed by growing inequality of both wealth and income for a long time. Not really so much because of fairness issues (although those are certainly valid) but because our economy can't function well with all the income accruing to an investing - not consuming - class. In short, I think it puts us on a path to lower demand for everything.

But as the video clearly demonstrates, the disparities are not only wider than we imagine, they are wider than we can imagine.

The other big issue for me is the lack of ways to address this short of a revolution - the traditional end to mass extreme inequality. Some of the ideas being floated are things farmers should keep an eye on, I think.

Taxing wealth in addition to income is one way to make sure that the rich contribute more to government coffers. That would essentially be a tax on household assets like property, stocks, bonds, unincorporated businesses, trusts, art and yachts.

The idea is to aim at the wealthiest part of the population, perhaps the top 1 percent, a group that has seen the most significant and consistent accumulation of wealth over the last few decades.

“A wealth tax is an attempt to fill the holes in income tax,” said Douglas A. Shackelford, a tax expert at the University of North Carolina. “The primary hole is unrealized capital gains. That’s behind the big buildup of dynastic wealth.”

COUNTRIES like Canada have a tax on asset appreciation, based on the value of the assets at the time of the owner’s death. The United States does not, and the tax code contains a huge loophole through which to pass wealth to one’s heirs.

Here is how that can work in practice:

A billionaire can borrow against his stocks, art and real estate, and spend that borrowed money without paying tax. All he has to do is pay interest on the loan. When he dies, his heirs can sell the assets to pay off the debt. Under an existing rule known as the “step-up in basis,” no matter how much the assets have appreciated in value, no one will owe income tax on that gain. And the rest of his fortune goes to his heirs without anyone ever paying income taxes on the appreciation in the assets.

Partly to close loopholes like this, Ronald I. McKinnon, an economist at Stanford, advocates a wealth tax in addition to income tax. He outlined his proposal in a recent op-ed article in The Wall Street Journal titled “The Conservative Case for a Wealth Tax.”

Professor McKinnon’s plan would require households to list all domestic and foreign assets annually. There would be a $3 million wealth exemption, which, in his estimation, would exclude more than 95 percent of the population. The remainder would be subject to a flat tax of about 3 percent of household wealth. [More]

The step-up in basis is the big win, IMHO, in the estate tax compromise reached at the beginning of this year. It also is enormously expensive - about $60B per year. This is a target large enough to attract budget hawks and with a small enough constituency to be vulnerable.

In short, I don't think this battle will ever be over as long as wealth continues to pile up in a very, very few hands.

Obesity and entitlement...  

I have grown increasingly concerned about 1) the widening inequality in wealth and income in the US and 2) our slowing economic mobility. These two trends may be connected.

Historically, the United States has enjoyed higher social mobility than Europe, and both left and right have identified this economic openness as an essential source of the nation’s economic vigor. But several recent studies have shown that in America today it is harder to escape the social class of your birth than it is in Europe. The Canadian economist Miles Corak has found that as income inequality increases, social mobility falls — a phenomenon Alan B. Krueger, the chairman of the White House Council of Economic Advisers, has called the Great Gatsby Curve.

Educational attainment, which created the American middle class, is no longer rising. The super-elite lavishes unlimited resources on its children, while public schools are starved of funding. This is the new Serrata. An elite education is increasingly available only to those already at the top. Bill Clinton and Barack Obama enrolled their daughters in an exclusive private school; I’ve done the same with mine. [More well worth reading]

For the most part, there is not much alarm at lower mobility and widening inequality among most Americans. I think that may be just a matter of time. But when we discuss how whether the government should intervene, the politics is pretty clear: the right of "job creators" is supreme while  the fate of the 47% who "feel entitled" is subordinate. This view is poorly informed, both on the idea of "job creators" (more later) and the entitled. However, I think it is especially inaccurate concerning the idea of who feels entitled.

Part of the indifference to these two trends may be ascribed to our own sense of entitlement and why we deserve special consideration when others don't.

EVERYONE FEELS ENTITLED People tend to think that they have justice on their side, whether it comes to making or taking.

For example, millions of homeowners have spent hundreds of thousands of dollars on the premise that the tax deduction for mortgages will be continued. If they support a continuation of that deduction they hardly feel like brigands, even though a bipartisan consensus of economists doubts the efficiency of this tax break.

As years and decades pass, recipients of this deduction and other benefits start to see them as deeply and richly deserved. Furthermore, almost all of us reap one or more of these benefits, so few individuals are consistently opposed to all government transfers.

It becomes difficult for a politician to articulate exactly what is wrong with this arrangement when the audience itself is in on the game and perhaps does not want to hear about its own takings.

A HISTORICAL PERSPECTIVE The Founding Fathers were extremely worried about the threat to society posed by corruption and privilege-seeking.

Drawing on examples going back to antiquity, they understood how unmitigated wealth-taking could create a negative and cumulatively self-reinforcing political dynamic. They also understood that the Constitution — or any constitution — would be an extremely imperfect remedy for this problem.[More from Tyler Cowen]

But my overall point is one problem that obesity complicates is how we view low income citizens. Since the obesity rate is higher for poor people, the image that springs to mind when entitlement is mentioned is not a homeowner, but an obese minority woman. 

Empathy for a rail-thin child or even adult is easy to inspire. We react, I think, instinctively to evidence of hunger. We are not drawn to sympathize with overweight individuals - how can someone so fat be needy?

So when the word "entitlement" is uttered, we see the wrong image, perhaps. What this implies is not clear (to me), but I think if we do get serious about reining in entitlements, there may be some surprises, because the largest group of "takers" may not be who we think.

Why nobody cares...

About inequality. A superb debate-by-short-essay about inequality and its relatively low importance for  most Americans. I think the arguments are capably advanced by all sides, making all the pieces worth the minute or two it takes to read them.

For example, recent research indicates some reasons why we don't care much right now.

First, the expansion of consumer credit in the United States has allowed middle class and poor Americans to live beyond their means, masking their lack of wealth by increasing their debt. We might think that people who have "zero net worth” have nothing. But in fact, having zero net worth increasingly means owning a lot (cars, televisions, even houses) – but also owing a lot. As a result people with zero net worth, and even negative net worth, can still feel that they are living the American dream, doing “better” than their parents did while keeping up with the Joneses.
Second, poorer Americans’ belief in social mobility – despite strong evidence of its rarity – causes negative reactions to policies that would seem to benefit them, like raising taxes on those who earn and own a lot more. Why would the poor oppose taxes on the wealthy? Because many believe that they, or at least their children, will eventually be wealthy, voting for taxes on the rich may feel like voting for taxes on themselves. As a result, even the word “redistribution” has negative connotations. [More]

On the other hand, maybe we just think it's not a problem worth caring about (at least most of us).

Second, a lot of envy is local. People worry about how they are doing compared to their neighbors, their friends, their relatives, their co-workers, and the people they went to high school with. They don’t compare themselves to Michael Bloomberg, unless of course they are also billionaires. When the guy down the hall gets a bigger raise, perhaps by courting the boss, that’s what really bothers us. In other words, envy and resentment are not going away and they also do not stem fundamentally from the contrast between ordinary lives and the lives of the very wealthy.
Third, many Americans draw an important distinction between earned wealth and unearned wealth. If someone has become a billionaire, but he worked hard for it and supplied a good or service of real value (say Mark Zuckerberg of Facebook), for the most part Americans will respect and admire that person.
A lot of wealth today hasn’t been earned fairly, but still a lot of it has been the result of hard work and creativity, even if mixed in with good luck. The United States is still a society of business and a lot of businessmen provide great value to our economy. The weight has not swung to the point where there is more unearned wealth than earned wealth and so Americans identify with business and a business ethic, especially compared to attitudes in Europe. [More]

Regardless of your own persuasion, you will find both reinforcement and challenges in the articles.

FWIW, I have come to realize I think wealth and income inequality is a bigger deal than the vast majority of people, and these insights provided me with clues to my own prejudices as well as how this issue may develop in the next few years.