Consequences of growing inequality in wealth, income, and power.

Summary: Part One looked at America’s rising inequality. Today we look at the resulting wide range of ill effects, a major driver building a New America. A rising concentration of income and wealth quickly becomes self-perpetuating as the 1% exploits their control of the government to gain yet more money and power. At some point we will have (or already have) a new political regime.

“In a state which is desirous of being saved from the greatest of all plagues — not faction, but rather distraction. There should exist among the citizens neither extreme poverty, nor, again, excess of wealth, for both are productive of both these evils.”
— Plato’s Laws.

“Avarice, the mother of all wickedness, who, always thirsty for more, opens wide her jaws for gold.”
— Claudianus, De Laudibus Stilichonis (~400 AD).

Fed Survey of Consumer Finance
Fed Survey of Consumer Finance

Contents

  1. Causes of income inequality.
  2. “The Impact of Inequality on Growth”.
  3. Wasting our human resources.
  4. Concentrating political power.
  5. Pushback.
  6. For More Information.
  7. Another perspective.

(1)  Causes of income inequality.

Inequality over the Past Century“, Facundo Alvaredo, Finance & Development, September 2011 — “After declining in the first half of the 20th century, income inequality makes a comeback”. Excerpt:

In the United States, average real incomes grew at a 1.3% annual rate between 1993 and 2008. But if the top 1 percent is excluded, average real income growth is almost halved, to about 0.75% a year. Incomes of the top 1% grew 3.9% a year, capturing more than half of the overall economic growth experienced between 1993 and 2008.

… The new data call into question the standard relationship between economic development and income distribution—that growth and inequality reduction go hand in hand. But that relationship, postulated by economist Simon Kuznets, appears to be less certain — especially in English-speaking countries, which had a period of falling inequality during the first half of the 20th century followed by a reversal of the trend since the 1970s.

Sources of Income of the 1%
IMF’s Finance & Development, September 2011

(2) The cost to America of wasting our human resources.

Becoming a better America paid off after WW2; stopping has cost us dearly: “The Allocation of Talent and U.S. Economic Growth“, Chang-Tai Hsieh et al, 22 February 2013. — Summary:

In 1960, 94% of doctors and lawyers were white men. By 2008, the fraction was just 62%. Similar changes in other highly-skilled occupations have occurred throughout the US economy during the last 50 years. Given that innate talent for these professions is unlikely to differ across groups, the occupational distribution in 1960 suggests that a substantial pool of innately talented black men, black women, and white women were not pursuing their comparative advantage.

This paper measures the macroeconomic consequences of the remarkable convergence in the occupational distribution between 1960 and 2008 through the prism of a Roy model. We find that 15 to 20% of growth in aggregate output per worker over this period may be explained by the improved allocation of talent.

(3)  “The Impact of Inequality on Growth”.

The Impact of Inequality on Growth“, Jared Bernstein, Center for American Progress, December 2013. — Summary:

Among the most important economic challenges facing the United States and some other advanced economies today is the increase in the inequality of economic outcomes. In the case of the United States, the distributions of income, wages, and wealth are more dispersed than ever. Though measurement issues abound, it is widely agreed that U.S. economic inequality is at historically high levels.

This fact, however, has different implications for different observers. Many critics of higher inequality suggest that it violates basic fairness, particularly when considering, for example, the divergence of median compensation and productivity growth. Such trends, these critics hold, are evidence of working people no longer getting their “fair share” of the growth that they are helping to generate.

Others note that inequality serves as a wedge between growth and living standards, funneling income largely to those at the top of the scale and thus making it harder at any given level of economic growth for living standards to grow as they have in more equitable times or for poverty to fall during business cycle expansions. … t so far in this expansion, which officially began in the second half of 2009, the stock market is up 60%, GDP is up 8%, corporate profits as a share of national income are at historic highs, yet median household income is down 5%, with all figures adjusted for inflation.

Another more recent line of argument holds that persistently high levels of inequality are eroding opportunity and mobility for those whose living standards and economic well-being are negatively affected by the wedge dynamic just described. This is a fundamental critique because it is widely held that in America, while we do not aspire to equal economic outcomes, we believe strongly in equal opportunity. If inequality were to thwart the opportunities of the “have-nots,” this would represent a significant violation of a basic American tenet.

… In that regard, the high level of inequality that we have today requires a policy response leading to a more equitable and inclusive economy. Full employment is especially important, and given the persistence of weak labor markets since 2000 — very much predating the last recession—achieving full employment may require public-sector job creation, either directly through public infrastructure projects or indirectly through public subsidies for private jobs. Incentives such as greater union representation, increased minimum wages, a solid safety net, progressive taxation, and sectorial policies that lift productive sectors such as manufacturing can help raise the relative incomes of middle- and low-wage workers.

Also see these slides: “Inequality, Opportunity, and What It Will Take to Get Less of the Former and More of the Latter“,  Jared Bernstein, Center on Budget and Policy Priorities, 12 December 2013.

(4)  The real problem: concentrating political power.

Feed the 1% with income, wealth, and power works like feeding a fire with gasoline. The 1% insatiably grows stronger when fed. The more income and wealth, the more political power. Political power yields yet more wealth and power. Repeat until we have a New America, stable at a new equilibrium.

(a)  Krugman touches upon this in “Inequality As A Defining Challenge“, New York Times, 14 December 2013. Excerpt:

… there’s the political economy aspect, where you can argue that policy failures both before and, perhaps even more crucially, after the crisis were distorted by rising inequality, and the corresponding increase in the political power of the 1%.

Before the crisis, there was an elite consensus in favor of deregulation and financialization that was never justified by the evidence, but aligned closely with the interests of a small but very wealthy minority. After the crisis, there was the sudden turn away from job creation to deficit obsession; polling suggests that this wasn’t at all what the average voter wanted, but that it did reflect the priorities of the wealthy. And the insistence on the importance of cutting entitlements is overwhelmingly a 1% thing.

(b)  Brad DeLong writes at the Washington Center for Equitable Growth. — Excerpt:

And then there are the political consequences of inequality. A more unequal economy is one in which the voice of the rich speak louder in the political debate, and the rich want to keep what is theirs. Before 1975 the U.S. made a uniquely large effort to educate its people, and win the race between education and technology. The result was a middle-class society for white guys (and, alas, for white guys alone).

Then came what Robert Kuttner calls The Revolt of the Haves: the great pulling-up of the ladder of free public higher education. The consequence was another factor pushing for the great widening of income inequality, as America began to lose the race between education and technology. And the consequence was that 0.3%/year of American real economic growth simply vanished as we were no longer making the requisite educational effort to keep our population the best-educated in the world. Over 35 years that failure has made us another 10% poorer –and more unequal to.

(c)  Comment by MIT economist Daron Acemoglu, author of Why Nations Fail (2012, co-written by James Robinson, Prof Government, Harvard). — See a video of his interview here. Excerpt:

I think there’s a lot of debate about the economic impact of income inequality. There’s literature on how greater inequality might slow economic growth because it creates a less conducive environment for consumer demand or credit. But at the end, my view, and that of our book with James Robinson, is that the more pernicious effect of economic inequality comes indirectly through its impact on political inequality.

It’s a general pattern throughout history, and we see around today, that when economic inequality increases, the people who have become economically more powerful will often attempt to use that power in order to gain even more political power. And once they are able to monopolize political power, they will start using that for changing the rules in their favor. And that sort of political inequality is the real danger that’s facing the United States.

(5) Pushback.

(a) From the New Left (aka not-so-Left).

Leftist darling Ezra Klein plays the False Dilemma logical fallacy: “Inequality isn’t ‘the defining challenge of our time’“, bog of the Washington Post, 13 December 2013 — Excerpt:

Income inequality is easy to worry about. It offends our moral intuitions. Its tears into the fabric of the American dream. “That we’re all created equal is the opening line in the American story,” Obama said. “And while we don’t promise equal outcomes, we’ve strived to deliver equal opportunity.”

… But is inequality really the country’s most pressing problem? Imagine you were given a choice between reducing income inequality by 50% and reducing unemployment by 50%. Which would you choose?

Steven Randy Waldman reviews Klein’s article: “It is terrible“.

(b)  About pushback from the Right.

The right’s inequality canard: They botch history and economics“, Sean McElwee, Salon, 14 December 2013 — “With President Obama talking about the scourge of low wages, conservatives are completely confused by the problem”

(6)  For More Information.

(a)  Articles by Martin Gilens (Prof of Politics, Princeton) about inequality of wealth and income driving inequality of power:

  1. Inequality and Democratic Responsiveness“, Russell Sage Foundation, 27 July 2012.
  2. Economic Inequality and Political Power by Martin Gilens — Part one, part two, part three.

(b)  Posts about inequality:

  1. A sad picture of America, important for us to understand, 3 November 2008 — About social mobility.
  2. An opportunity to look in the mirror, to more clearly see America, 10 November 2009.
  3. Graph of the decade, a hidden fracture in the American political regime, 7 March 2010.
  4. America, the land of limited opportunity. We must open our eyes to the truth., 31 March 2010.
  5. Modern America seen in pictures. Graphs, not photos. Facts, not impressions., 13 June 2010.
  6. Jared Bernstein examines the economic impact of raising taxes on high-income households, 30 April 2012.
  7. How clearly do we see the rising inequality in America? How do we feel about it? Much depends on these answers., 27 September 2012.
  8. Ugly truths about income inequality in America, which no politician dares to say, 2 October 2012.
  9. Glimpses of the New America being born now, 18 June 2013.
  10. Why Elizabeth Bennet could not marry Mr. Darcy. Nor could your daughter., 12 July 2013.
  11. For Thanksgiving, Walmart shows us the New America, 19 November 2013.
  12. Back to the future in New America: our new class structure, 27 November 2013.
  13. Learning not to trust each other in America, and not to trust America, 4 December 2013.

(7)  Another perspective on inequality of wealth and income.

Inequality of Wealth and Income
Blog of US News & World Reports, 13 June 2012

17 thoughts on “Consequences of growing inequality in wealth, income, and power.

  1. One consequence is a growing level of conspicuous consumption in the art world.

    This is described in _The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art_

    http://www.amazon.com/The-Million-Stuffed-Shark-Contemporary/dp/0230620590/ref=sr_1_1?ie=UTF8&qid=1387226691&sr=8-1&keywords=million+stuffed+shark

    blurb:

    “Why would a smart New York investment banker pay $12 million for the decaying, stuffed carcass of a shark? By what alchemy does Jackson Pollock’s drip painting No. 5, 1948 sell for $140 million?

    Intriguing and entertaining, The $12 Million Stuffed Shark is a Freakonomics approach to the economics and psychology of the contemporary art world. Why were record prices achieved at auction for works by 131 contemporary artists in 2006 alone, with astonishing new heights reached in 2007? Don Thompson explores the money, lust, and self-aggrandizement of the art world in an attempt to determine what makes a particular work valuable while others are ignored.

    This book is the first to look at the economics and the marketing strategies that enable the modern art market to generate such astronomical prices. Drawing on interviews with past and present executives of auction houses and art dealerships, artists, and the buyers who move the market, Thompson launches the reader on a journey of discovery through the peculiar world of modern art. Surprising, passionate, gossipy, revelatory, The $12 Million Stuffed Shark reveals a great deal that even experienced auction purchasers do not know.”

    1. Duncan,

      That’s an important trend — but I suspect over the short-term (since 2008) more a function of our three rounds of quantitative easing than inequality. Many kinds of asset prices are rising. Financial assets, farmland, artwork, etc.

      But over the long-term this is, I suspect, a function of the increasing wealth of the 1% — pouring their money into a small pool of high-status goods, and so sending their prices skyrocketing.

      Much like the competition to have the best aircraft, the best boat, the best submarine, the best palace. These are all signs of a sickness in our culture — as poverty rises and the middle class dies.

    2. One of many points not just that they are spending a lot money on art, but what that “art” is ( e.g., stuffed sharks.)

      The art world is full of “branded” artists, “branded” collectors, “branded” galleries who lend prestige and an aura to what otherwise would not be so valuable.

      The stuffed shark in question was produced by Damien Hirst, a branded artist.

      “In 2003, under the title A Dead Shark Isn’t Art, the Stuckism International Gallery exhibited a shark which had first been put on public display two years before Hirst’s by Eddie Saunders in his Shoreditch shop, JD Electrical Supplies, and asked, “If Hirst’s shark is recognised as great art, then how come Eddie’s, which was on exhibition for two years beforehand, isn’t? Do we perhaps have here an undiscovered artist of genius, who got there first, or is it that a dead shark isn’t art at all?”[13] The Stuckists suggested that Hirst may have got the idea for his work from Saunders’ shop display.[14]”

      http://en.wikipedia.org/wiki/The_Physical_Impossibility_of_Death_in_the_Mind_of_Someone_Living

      The alternative shark was even offered on sale.

      No takers.

    3. My characterization of this as “conspicuous consumption” was non-arbitrary.

      This book’s takedown on the mores of the financial elite and it’s role in the art world resembles Veblen’s Theory of the Labor Class and has a similar value in dealing with today’s one percent.

      Indeed 100-150 years ago, there were a set of art gallery owners who supplied JP Morgan and his contemporaries much as contemporary branded gallery owners do for today’s 1%. This book discusses this.

    4. The Gilded Age art dealer was Joseph Duveen.

      “His success is famously attributed to noticing that “Europe has a great deal of art, and America has a great deal of money.” He made his fortune by buying works of art from declining European aristocrats and selling them to the millionaires of the United States. Duveen’s clients included Henry Clay Frick, William Randolph Hearst, Henry E. Huntington, J.P. Morgan, Samuel H. Kress, Andrew Mellon, John D. Rockefeller, and a Canadian Frank Porter Wood. The works that Duveen shipped across the Atlantic remain the core collections of many of the United States’ most famous museums. Duveen played an important role in selling to self-made industrialists on the notion that buying art was also buying upper-class status. He greatly expanded the market, especially for Renaissance paintings; with the help of Bernard Berenson, who certified some questionable attributions, but whose ability to put an artistic personality behind paintings helped market them to purchasers whose dim perceptions of art history was as a series of biographies of “masters”.”

      http://en.wikipedia.org/wiki/Joseph_Duveen,_1st_Baron_Duveen

      Today’s equivalents include Larry Gagosian and Jay Jopling. Thompson lists about 20 super dealers at the end of his chapter on them.

      http://en.wikipedia.org/wiki/Larry_Gagosian
      http://en.wikipedia.org/wiki/Jay_Jopling

      (BTW: I trust that the editor of the FM site and FM are one and the same. )

    5. The latest from the NYT:

      http://www.nytimes.com/projects/2013/the-new-collectors/

      “Like their predecessors across history and geography, China’s newly rich have set out to collect the very best the world has to offer: homes, wines, cars and, with a special passion, Chinese art.

      They joust with one another at auction houses, where the fevered bidding has driven up prices to the point that some jades, ceramics, calligraphy and paintings now fetch huge sums. In 2011, for instance, a Ming dynasty vase sold for $140 million at an auction in Macau.

      Partly because of these free-spending bidders, China now possesses the second-largest art market in the world, after the United States.”

    6. http://www.nytimes.com/projects/2013/china-art-fraud/

      Indeed, even as the art world marvels at China’s booming market, a

      six-month review by The New York Times found that many of the sales — transactions reported to have produced as much as a third of the country’s auction revenue in recent years — did not actually take place.

      Just as problematic, the market is flooded with forgeries, often mass-produced, and has become a breeding ground for corruption, as business executives curry favor with officials by bribing them with art.

      Fraud is certainly no stranger to the international art world, but experts warn that the market here is particularly vulnerable because, like many industries in China, it has expanded too fast for regulators to keep pace.

      In fact, few areas of business offer as revealing a view of this socialist society’s lurch toward capitalism as the art market. Like many luxury businesses in China, the explosion of buyers for art here has been fueled by the pent-up consumerism of the newly rich.

  2. Sorry, this is gonna seem very philsophical/goofy

    Although I am no Malthusian, I think he has something to add.

    If memory serves, he said that population growth would outstrip our resources. I dont think he was correct, in the not too distant future, I am cautiosly optimistic that we will be mining asteroids and have fusion energy and find other seeminly fantasy ideas.

    What he should have said was that population would outstrip our needs for human input in converting those resources. The paradox is that the world’s manufacturing infrastructure will likely become increasingly EFFICIENT, thus requiring less and less human capital. Its a vicious cycle, producing more with less humans, but needing more and more consumers for the increased production.

    Ultimately, isnt this conceptually why we have deficit spending globally (nearly all governments)? The worlds productive capacity is bigger than the income’s required to purchase all the goods? We have to create demand? (There is a deflation argument in there i need to think about)

    So what has happened? The system isnt short on resources, its short on consumers. So thats what we are doing, paying consumers to feed the productive beast. But thats were the inequality sets in….we are not creating a society of serfs, we are creating a society of consumers. Sure we need some idea people and inventors, but we need increasingly fewer and they will be increasingly well paid.

    Its easy to point fingers at the 1% or the welfare cheaters or mercantilist countries trying to export their way out of poverty. The boogie man is that everything is designed to make more stuff, and make it cheaper. And thats just human nature and business.

    1. Elliott,

      This is extensively discussed at the posts about automation.

      It’s a form of the paradox of thrift. The 1% save a lot more than everybody else (the poor save nothing; the lower middle class are debtors). As income shifts to their hands, much of it is saved — hence the shortage of demand.

      We have compensated for that by consumer borrowing (hence Wall Street’s cheers at ruinous consumer borrowing) and government deficit spending. Neither is sustainable forever — at least not as we’re doing it (debt that funds investments, on a whole-society basis, can be sustainable).

      From another perspective, increasing productivity can be kept by the asset owners (i.e., the 1% in our society) — or distributed. Both are political decisions. This is, of course, what Marx anticipated in the late 19th C. But most of the developed nations created mechanisms to prove him wrong.

      Those that failed to do so, failed. Such as Argentina and Russia.

  3. Nice to see FM slamming craven toady Ezra Klein for his shameful effort to rationalize out of existence the lethal scourge of economic inequality.

    As FM implies in his article, the fundamental problem with extreme economic inequality is that it destroys democracy. A democratic society cannot exist beyond a certain extreme level of economic inequality. At that point, all the ancient ills of authoritarian governance erupt: an inbred crony-connected elite utterly resistant to outside criticism and thus unable to correct their fatal policy errors; the waste of most of the population’s capacities because they’re locked out of doing anything but scutwork; the devotion of most of the society’s resources to repressing a vast underclass with immense gulags and a savagely punitive system of official injustice; a dark spiral into repression and universal surveillance as the ever-fearful elites grow increasingly paranoid about the vast mass of serfs over whom they preside.

    Ultimately, capitalism depends for its vitality on an open society. Once an authoritarian system replaces a democracy due to extreme economic inequality, the engine of economic growth sputters and goes out. The elites begin to pay for all their luxuries from abroad and stop caring about supporting their own industries, their own scholars, their own civil society. And so the society decays, like Spain after it grew rich from New World gold and became arrogant and ignorant and eventually a closed society that degenerated into endless rounds of Grand Inquisitions.

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