Thomas Piketty and his colleagues Emmanuel Saez and Gabriel Zucman have come up with more evidence about inequality in the United States, which is summarized in a New York Times article by Jeremy Ashkenas. The bottom line is that the labor income of the bottom 50% of Americans has weakened drastically in the last 40 years. They argue that redistributive policies are limited in what they can do to reduce this inequality, and instead argue for policies such as improved education and job training to increase the primary work income. However, as suggested by our simulations such an approach is unlikely to have a major effect, and there is little evidence that it has worked in the past. We must wake up to the fact that the present economic system naturally pushes toward massive wealth inequality, and only massive attempts to redistribute wealth will ever have a lasting effect.
Historic Origins of Inequality
[Guest author: Tanush Jagdish, Kalamazoo College ’18]
“Those who don’t know history are destined to repeat it,” Edmund Burke once famously said. I thought this post might be a nice opportunity to think about what, historically, has caused the extreme wealth inequality we see today. Of course, given the results Tobochnik et al’s models, a more appropriate question might be — what, historically, has the government failed to do that lead the national wealth distribution to its inevitably skewed form?
Thomas Piketty, a French economist, laid down a lengthy answer to this question in his book Capital in the Twenty-First Century. In the March 2014 issue of the New Yorker, John Cassidy provided a brilliant summary of Piketty’s arguments.
Cassidy looks at four points:
1. Inequality reached a high during the roaring twenties but dropped during the next four decades. However, starting in the late eighties, inequality took a sharp upward turn, and we are back today wealth-distribution wise where we were in the 20’s!
2. The top 1% hasn’t actually taken up a much greater share of income than it did in the 20’s. Instead, much of the extra wealth for the super-rich comes from interests and dividends from pre-owned capital. A self-sufficient cycle, in some sense.
3. Rising inequality is not limited to the United States. As shown in Tobochnik et al’s model, wealth inequality is an inexorable result in any random transaction-based system. Canada, Australia, India, Indonesia, South Africa…the gap between the rich and the poor continues to increase everywhere.
4. Pure capitalism doesn’t work because, according to Piketty, capitalism tends to increase its agents’ profits at a faster rate than the general wage income. Or, as Cassidy puts it, “when the rate of return on capital exceeds the rate of economic growth, inequality tends to rise”.
Cassidy’s explanation of Piketty’s rather complicated arguments are elegant and well organized. Definitely worth multiple reads!
Politicians Don’t Understand Why There is Inequality
Robert Samuelson writes in a recent Washington Post column about the ambivalence among the public about ending poverty and how the current talk about inequality is mainly focused on the so called middle class.
Yes, politicians have given up on the poor, and only care about the so called middle class because they vote.
But all this talk about inequality misses one key point — inequality is built into our economic system, and direct intervention in the form of redistribution of wealth will make a real lasting difference.
Why not simply distribute wealth collected from taxes equally? Why not give everybody a debit card with a certain amount of money on it each month which can only be used for basic necessities and useful goods such as food, clothing, books, household items, utilities, etc. If every family got this then some of the complaints about handouts would be muted. It would certainly help everybody have a minimum quality of life and at the same time have some control over their lives.
– Jan Tobochnik
Unions Create Equality
The Economic Policy Institute published this graph showing a direct relationship between the levels of union membership and equality in the U.S.:
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On his Facebook page, liberal economist Robert Reich explains the correlation:
“As union membership has fallen over the last few decades, the share of income going to the top 10 percent has steadily increased. (Union membership fell to 11.1 percent in 2014, where it remained in 2015, not shown in the figure below. The share of income going to the top 10 percent, meanwhile, hit 47.2 percent in 2014—only slightly lower than 47.8 percent in 2012, the highest it has been since 1917, the earliest year data are available). When union membership was at its peak in 1945 (33.4 percent of the workforce), the share of income going to the top 10 percent was only 32.6 percent.
When workers are unionized, they have more bargaining power to get a larger share of the economic gains; when they’re less organized, they have less. To boost wages and rebuild the working middle class, have to strengthen workers’ rights to negotiate together for better wages and benefits.
Do you agree with Reich? Do unions promote equality? And if so, why or why not?
Inequality Even Among the Poor
According to $2.00 a Day: Living on Almost Nothing in America, a new book by Kathryn J. Edin and H. Luke Shaefer, inequality in the U.S. is now so extreme that there’s even inequality among the poor:
In $2.00 a Day: Living on Almost Nothing in America, Kathryn Edin and Luke Shaefer argue that what they call “extreme” poverty roughly doubled between 1996 and 2012. If they are right—and I think they are—the reader might wonder how I can still claim that poor families’ living standards have risen. The answer is that inequality has risen even among the poor. Half of today’s officially poor families are doing better than those we counted as poor in the 1960s, but as I learned from reading $2.00 a Day (and have spent many hours verifying), the poorest of the poor are also worse off today than they were in 1969. $2.00 a Day is a vivid account of how such families live. It also makes a strong case for blaming their misery on deliberate political choices at both the federal and state levels….
The most obvious explanation for the increase in extreme poverty between 1996 and 2011 is that jobs were harder to find in 2011, but that is only half the story. Until 1996 single mothers with no income were eligible for Aid to Families with Dependent Children (AFDC). Edin and Shaefer argue that extreme poverty rose after 1996 because Congress replaced AFDC with an even less generous welfare program called Temporary Assistance for Needy Families (TANF). Because TANF benefits are much harder to get than AFDC benefits were, parents who cannot find a job are more likely to find themselves penniless.
$2.00/day in the U.S.? It boggles the mind. Do you agree with the listed reasons, and what do you think some solutions might be?