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Wednesday, August 01, 2012

On Stiglitz (Part One)

I first heard of Joseph Stiglitz's new book, "The Price of Inequality," from a very conservative friend of mine on Facebook. His comment was...

How about stop focusing on making things "fair" and let the chips fall where they may? Kind of like....oh...I don;t know...OLD SCHOOL AMERICA? No, no, better to listen to the liberal commie fuck professor who never worked in the private sector and wants MORE taxes, rules and regulations to make things "fair." Fucking idiot.

Anytime I see this sort of mouth foaming, I know it must be something worth reading!

Over the next few weeks, I'm going to be discussing Stiglitz's book and highlighting the parts of it that I think are important. Each post I put up will more than likely be on one specific point although not always as is the case with this first one.With over 100 pages in sourced information, there is going to be a lot to choose from and I want to make it clear from the outset that there is no way I can get to it all. This would be why I would recommend reading the book for yourself so you can study the full argument from the one who put in all the research that led him to a central and inevitable conclusion: the inequality in this country endangers our future.

Now, before we get started, I want to clear up an issue that came up in comments the last time we talked about inequality. I was tasked to come up with a number of what is too much inequality. As Stiglitz points out in the first chapter in the book, relying solely on a quantitative analysis isn't an accurate way of examining inequality.

On page 23, he discusses the Gini Coefficient and how it is used as a standard measure of inequality. A GC of 0 (in which the bottom 10 percent get 10 percent of the income, the bottom 20 get 20 etc) is the most equal. A GC of one (in which all the income goes to 1 person) would be the most unequal. In between 0 and 1 are where countries are measured. More equal societies have around 0.3 (Sweden, Norway, Germany) and less equal countries have 0.5 or above (African nations and South America). The US stands at .47, up from .4 in 1980. We are more unequal than Iran or Turkey and very much more equal than any country in the EU.

Yet, as Stiglitz notes,

Measures of income inequality don't fully capture critical aspects of inequality. America's inequality may, in fact, be far worse than those number suggest. In other advanced industrial countries, families don't have to worry about how they will pay the doctor's bill, or whether they can afford to pay for their parent's health care. Access to health care is taken as a basic human right. In other countries, the loss of a job is serious, but at least there is a better safety net. In no other country are so many persons worried about the loss of their home. For Americans at the bottom and in the middle, economic insecurity has become a fact of life. It is real, it is important, but it's not captured in these metrics. If it were, the international comparisons would cast what's been happening in America in an even worse light.

So, choosing a number shouldn't be the exclusive focus when you consider the multiple factors (some of which he mentions above) that make each country's economic concerns unique. Obviously, it's a starting point but it needs to be put into context with other, qualitative factors. An example of this would be the current economic situation in the EU. They may have 0 3 on the GC but isn't that equality an illusion considering what they are facing right now?

Further, is the GC even accurate? What are the factors that they use? Why? And why don't they leave out some factors, if any? The answers to these questions illustrate the flaws in focusing on one measure of inequality.

Now that we have gotten that out of the way, let's take a look at the first point Stiglitz makes in Chapter 1: the disparity in income. Stiglitz is quick to point out that he is looking at median, not average income, as that is more of an indicator of how the various income groups are doing. If you look at average income, it might seem like the lower groups are doing well since the upper groups are seeing their wages and wealth rise.

But if you look at median income, you see the following:

Median household income was actually lower in 2010 ($49, 445) than it was in 1997 (adjusted for inflation, $50, 123). Over the longer period (1980-2010), median family income essentially stagnated, growing at an annual rate of only .36 percent. Adjusted for inflation, male median income in 2010 was $32, 137. In 1968, it was $32, 844. (source and source.)

Add in the fact that the top one percent now earns 20 percent of the nation's income with the top 0.1 percent  earning 220 times larger than the average of the bottom 90 percent and the picture of gross inequality is stark and evident.

So, why does this matter? Page 85.

Moving money from the bottom to the top lowers consumption because higher income individuals consume a smaller proportion of their income than do lower income individuals (those at the top save 15 to 25 percent of their income, those at the bottom spend all of their income). The result: until and unless something else happens, such as an increase in investment or exports, total demand in the economy will be less than what the economy is capable of supplying-and that means that there will be unemployment.

Unemployment can be be blamed on a deficiency in aggregate demand; in some sense, the entire shortfall in aggregate demand-and hence the US economy-today can be blamed on the extremes in inequality. 

As we have seen, the top 1 percent earns 20 percent of the national income. If that top 1 percent saves some 20 percent of its income, a shift of just 5 percentage points to the poor or middle who do not save-so the top 1 percent would still get 15 percent of the nation's income-would increase aggregate demand directly by 1 percentage point. But as that money recirculates, output would actually increase by some 1.5 to 2 percentage points.

This kind of shift in income would decrease the unemployment rate from 8.3 percent to 6.3 percent. A broader redistribution, from the top 20 percent to the rest, would have brought down the unemployment further to a more normal 5 or 6 percent. 

This is at the heart of what the president and the Democrats are trying to do because they know it's what must be done in order to get the economy on track. Businesses aren't going to hire more people unless more people start coming through the door and buying their goods and services. We've seen that tax cuts don't spur hiring.

Eventually, the 0.1 percent, the 1 percent, and the top 20 percent are going to realize that if they want to continue to enjoy their wealth in a healthy society, this redistribution is going to have to happen. People like Warren Buffet and Nick Hanauer have already accepted this fact. Whether or not the government "forces" them to do so is irrelevant.

It's no longer a question of "if" but of "when."

Personally, I'd like the wealthy of this country to do it on their own. That way we can leave the sensitivity about the federal government (see: paranoia, hysterical old ladies) behind in the trash heap where it belongs. Obviously, this isn't likely but we have to do it. As Stiglitz puts it,

Countries around the world provide frightening examples of what happens to societies when they reach the level of inequality toward which we are moving. It is not a pretty picture: countries where the rich live in gated communities, waited upon by hordes of low income workers; unstable political systems where populists promise the masses a better life, only to disappoint. Perhaps most importantly, there is an absence of hope. In these countries, the poor know that their prospects of emerging from poverty, let alone making it to the top, are minuscule. This is not something we should be striving for.

5 comments:

juris imprudent said...

Further, is the GC even accurate? What are the factors that they use? Why? And why don't they leave out some factors, if any? The answers to these questions illustrate the flaws in focusing on one measure of inequality.

Excellent questions. Funny how much stock is put into the GC by those who decry our inequality.

Moving money from the bottom to the top

Okay, so how exactly does money move from the bottom to the top? Just by looking at statistics? What is the mechanism? Certainly when some poor redneck buys a Taylor Swift album - that is money going from the less well off to the rich. But is that the thing we are concerned with? If not, what is it that concerns us?

a deficiency in aggregate demand

Pure Keynes. How much does the rest of Stiglitz and your argument depend on that?

First, there are many arguments about why consumption is not what drives economic growth, and second, there are arguments as to why consumption hollows out society. [If you understood irony, you would note that right-wing Christians support the contradictory values of tradition and capitalism's "creative destruction" via market forces.]

This kind of shift in income

How does this shift in income happen?

juris imprudent said...

Perhaps most importantly, there is an absence of hope.

Ah, irony of ironies - but what do progressives constantly whine about the masses in this country? That they don't vote their own self interests - yet here the presumption is that the masses must be allowed aspirations - even if illusory - in order for the system to be stable. And to add insult to injury - people in this country do believe that the opportunity to advance their living standards continues to exist even when progressives tell them it doesn't!

juris imprudent said...

Three new posts and no comments here M? Did I ask some of those unreasonable questions again?

Mark Ward said...

I'd like to respond to this in an actual post rather than in comments.

juris imprudent said...

Fair enough.