Bridging the Income Gap

Economic Thinker Paul Krugman’s Lonely Crusade for Liberalism

Via New York Magazine, a long, fascinating article: Economic Thinker Paul Krugman’s Lonely Crusade for Liberalism. Excerpt:

From 1979 to 2004, the income of the richest one percent of Americans grew by 176 percent, that of the richest one fifth of the country by 69 percent, and that of everyone else by less than 25 percent. 

Working through the numbers, Krugman came to believe that “only a fraction” of the change was compelled by global forces, which had been the standard explanation. The rest, he concluded, was political. 

It was Krugman’s Princeton colleague Larry Bartels who made the critical connection, in research Krugman devoured and still cites. Perhaps the most important influence on income inequality, Bartels argued, was something economists had not ­emphasized: whether a Democrat or a Republican was in the White House. 

Since World War II, Bartels found, wealthy families in the 95th percentile in income had seen identical income growth under both parties. But for families in the 20th percentile, the difference was astonishing: Under Democratic presidents, their income grew at six times the rate it did under Republican ones. 

There was, for Krugman, a kind of radicalization implied in this.

Warning! Inequality May Be Hazardous to Your Growth

Income inequality is getting more attention these days. Now, via The IMF Blog: Warning! Inequality May Be Hazardous to Your Growth. Excerpt, with the authors' bolding:

Some time ago, we became interested in long periods of high growth (“growth spells”) and what keeps them going. The initial thought was that sometimes crises happen when a “growth spell” comes to an end, as perhaps occurred with Japan in the 1990s. 

We approached the problem as a medical researcher might think of life expectancy, looking at age, weight, gender, smoking habits, etc. We do something similar, looking for what might bring long “growth spells” to an end by focusing on factors like political institutions, health and education, macroeconomic instability, debt, trade openness, and so on. 

Somewhat to our surprise, income inequality stood out in our analysis as a key driver of the duration of “growth spells”. 

We found that high “growth spells” were much more likely to end in countries with less equal income distributions. The effect is large. 

For example, we estimate that closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a “growth spell”. Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a “growth spell”.

Inequality is of course not the only thing that matters but, from our analysis, it clearly belongs in the “pantheon” of well-established growth factors such as the quality of political institutions or trade openness. 

While income distribution within a given country is pretty stable most of the time, it sometimes moves a lot. In addition to the United States in recent decades, we’ve also seen changes in China and many other countries. Brazil reduced inequality significantly from the early 1990s through a focused set of transfer programs that have become a model for many around the world. 

A reduction of the magnitude achieved by Brazil could—albeit with uncertainty about the precise effect—increase the expected length of a typical “growth spell” by about 50 percent. 

The upshot? It is a big mistake to separate analyses of growth and income distribution. A rising tide is still critical to lifting all boats. The implication of our analysis is that helping to raise the lowest boats may actually help to keep the tide rising!

20 facts about US inequality

Via The Stanford Center for the Study of Poverty and Inequality: 20 Facts About U.S. Inequality that Everyone Should Know. It's a set of 20 graphs and charts that vividly demonstrate the scale of the problem.

Stiglitz on income inequality

In Vanity Fair, Joseph E. Stiglitz writes: Of the 1%, by the 1%, for the 1%. It's a good article, but I don't see anything about the health and psychological impacts of inequality. Excerpt:

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. 

Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. 

That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. 

All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. 

While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.