INSTABILITY IMPLICATIONS OF
INCREASING INEQUALITY :
EVIDENCE FROM NORTH AMERICA
Lars Osberg
Economics Department
Dalhousie University
Center for Wealth and Inequality Workshop
COLUMBIA UNIVERSITY
APRIL 25, 2013
World Economic Forum - Global Risks Report 2012 –
Risks of Inequality & Instability highlighted
Top 5 Risks in terms of Impact
Top 5 Risks in terms of Likelihood
• Severe income disparity
• Chronic fiscal imbalances
•
•
•
Rising greenhouse gas emissions
Cyber attacks
Water supply crises
• Major systemic financial failure
•
•
Water supply crises
Food shortage crises
• Chronic fiscal imbalances
• Extreme volatility in energy
and agriculture prices
Which of the following do you think is the biggest
threat to the global economy?
Q. Which of the following do you think is the biggest threat to the global economy?
EKOS Poll - February 2012 2,891 Canadians
36
Growing debt crisis in advanced economies
An extreme and growing concentration of
wealth in the richest 1% of the population
An aging population
32
11
A lack of innovation and productivity
5
Climate change
5
9
Other
3
DK/NR
0
10
20
30
40
50
60
BASE: Canadians; January 27 – February 8, 2012 (n=2,891)
Increasing Inequality implies Instability
• U.S. & Canada
• Increasing Inequality  Unbalanced Growth by Income class
• U.S. & CANADA – unbalanced Market Income growth 1987-2007:
Top 1 % @ 4%; Bottom 80% @ 0.5%
Canada – 1995+ shift to less redistribution by government
• Increasing inequality cannot be a steady state
• SO WHERE ARE WE GOING? HOW DOES THIS STORY END?
• Interacting Instabilities of Imbalances
• Changing income shares => changing consumption / savings flows
• Flows → Stocks, ↑ Financial Assets => ↑ Financial Liabilities =>↑ Debt Fragility
• No Automatic Economic Tendency to Uniform Income Growth is obvious
Unbalanced Growth  Increasing Inequality
• Steady State Equilibrium = Special Case of Balanced Growth
• Happy Accident of growth 1963 -1980 => Economics Paradigm shift to Rep. Agent
• Unbalanced Growth => Linked Instabilities
• Mexico since mid 1990s – declining inequality
• Structural changes + Social transfers (Progresa)
• Similar to U.S. & Canada post 1940 ?
Structural Changes of Economic Development can grow low incomes, once
Political Economy of Social Policy – if / when Elites feel credible threat
• Can Political Economy produce a new balanced growth path in US/Canada?
• 1930s: U.S. New Deal stabilized system for 50+ years – can it be renewed?
Not in this talk……
Cross-Sectional Steady State
Comparisons
Micro-data Analysis of Shifting
Fortunes of “Middle 90%”
• Many papers on minimum wage,
• LIS + ISSP + WVS + OECD +WDI
• Many cross-country comparisons
of implications of levels of
economic inequality
unions & other institutional
changes, female LF participation,
homogamy, changing returns to
education, skill bias tech change,
globalization, demography, etc.
• GDP Growth
• Health
• Survey micro-data – thin tails
• Happiness
• Crime
• Democratic process
• Net changes in middle income
shares have been relatively small
• 10% ↑ ≈ 2.5* (share of bottom 20%) !
How Different are we? - 2009
CANADA
MEXICO
U.S.
33.7
34,600
107.4
12,500
307.0
41,700
Tertiary level education: ages 25-64
Female 15+ Labour Force Participation 2010
47%
62%
15.4%
44%
39.5%
58%
Life expectancy at birth, total (years)
Agriculture (% of total employment)
81.2
2.5
75.3
13.5
78.7
1.4
Crude Birth Rate Change (1980-2009)
-3.9
-15.8
-2.1
Population - (millions)
GDP per capita
(PPP 2005 $)
Differing Trends
in Inequality
Canada
Rising since 1995
USA
Rising since early 1980s
Gini Index of Inequality:
Equivalent After-Tax Money Income
Divided We Stand: Why Inequality Keeps Rising - © OECD 2011
0.5500
0.5000
0.4500
0.4000
0.3500
0.3000
Mexico
Increasing until mid 90s
Declining since 1996
0.2500
0.2000
1984 1989 1992
CAN 0.296 0.283 0.292
MEX 0.452 0.495 0.511
USA 0.337 0.348 0.352
1994
0.286
0.518
0.365
1996
0.297
0.504
0.362
CAN
1998
0.308
0.513
0.357
2000
0.318
0.506
0.356
MEX
2002
0.318
0.487
0.376
USA
2004
0.322
0.473
0.360
2005
0.317
0.486
0.380
2006
0.319
0.470
0.383
2008
0.323
0.475
0.378
Canada – nil real growth for most
120000
Total Income of Canadian Family Units:
1976-2009
100000
60000
40000
20000
20th percentile
40th percentile
median
60th percentile
80th percentile
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
0
1976
2009 Dollars
80000
U.S. – real growth only at top
25
1913
1915
1917
1919
1921
1923
1925
1927
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Long Swing in Top 1% Share
TOP 1% INCOME SHARE:
U.S. & CANADA
20
15
10
5
0
US
CANADA
Top 1%, Top 0.1% & Top 0.01% Share: Canada & USA
TopIncomeSharesinCanada:recenttrendsandpolicyimplications MikeVeall,CanadianJournalofEconomicsNovember2012
Income Share = Ratio
• Income Share of Top 1% =
Incomes of Top 1%
Incomes of 99% + Incomes top 1%
• Increase / Decrease in a Ratio can occur either because
• Numerator grows faster / slower
OR
• Denominator grows slower / faster
• So where has the action been in Income Shares?
• Numerator (Incomes of top 1%) ?
• Denominator (Incomes of Bottom 99%) ?
Balanced Growth – only for 60s & 70s
The World Top Incomes Database: Average income per tax unit not including capital gains;; Tax units are families; accessed 21-04-2013
0.12
0.1
REAL INCOME GROWTH RATES: USA
TOP 1%, BOTTOM 99% & 90%
0.08
10 YEAR COMPOUND ANNUAL RATE
0.06
0.04
0.02
-0.02
1913
1915
1917
1919
1921
1923
1925
1927
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
-0.04
-0.06
TOP 1%
BOTTOM 99%
BOTTOM 90%
Differences in Rates of
Growth Drive
Changing Income
Shares
1940-1973 – strong
growth in bottom 99%
incomes + slow growth
for top 1% = declining
share for top 1%
1980-2012 – income
stagnancy for bottom
99% + strong growth for
top 1% = rising income
share for top 1%
T. Piketty and E. Saez “Income and Wage Inequality in the United
Staes, 1913-2002,” Chapter 5 in The Oxford Handbook of
Economic Inequality, edited by Wiemer Salverda, Brian Nolan, and
Tim Smeeding, Oxford University Press, Oxford, 2009, page 174
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Canada: Longer Balanced Growth Episode
0.1
0.08
REAL INCOME GROWTH RATES: CANADA
TOP 1%, BOTTOM 90%
10 YEAR COMPOUND ANNUAL RATE
0.06
0.04
0.02
0
-0.02
-0.04
-0.06
TOP 1%
BOTTOM 90%
Much Higher Real Income Growth @ Top
6.00%
Real Income: Compound Annual Growth Rate
1987 - 2007
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Canada
USA
P20
0.40%
0.37%
P40
0.31%
0.44%
P50
0.35%
0.49%
P60
0.40%
0.52%
P80
0.71%
0.85%
P90
0.71%
0.85%
P95
1.00%
1.34%
P99
1.95%
2.50%
Percentile Points of Income Distribution
P99.5
2.44%
2.81%
P99.9
3.79%
3.97%
P99.99
5.20%
5.49%
Average Real Income
Compound Annual Growth Rate: 1984-2010
0.05
0.04
0.03
0.02
0.01
0
-0.01
Canada
USA
bottom 90%
0.19%
-0.11%
90 to 95%
0.69%
0.94%
95 to 99%
1.08%
1.50%
Canada
99 to 99.5%
1.58%
2.30%
USA
99.5 to 99.9%
2.08%
2.82%
99.9+
3.23%
4.45%
1200000
1000000
1913
1915
1917
1919
1921
1923
1925
1927
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Is there an upper bound to top Incomes?
Average Real Income of Top 1%
USA and CANADA
800000
600000
400000
200000
0
US TOP 1%
CANADA TOP 1%
Stable Inequality  Balanced Growth
IFF Same Rate Income Increase @ Top & @ Bottom
• BUT U.S.: Annual Income growth 1987-2007:
• Top 1 % = 4% ; Bottom 80% = 0.5%
• What chances now for bottom quintiles incomes to grow @ 4%?
• U.S. Continuing High Unemployment; Poverty still near peak;
• Canada & US: Unions weak; Low-wage competition strong; small marginal
returns to HK investment & structural change
• Why would Income Growth @ Top slow?
• High Incomes => Wealth => Capital Income
• “Winner Take All” Positional Rents = f(global market size)
• Control over CEO compensation process undiminished
Income & Wealth Accounting
• Income = Consumption + Savings
• Income Increases @ top => increase Savings => Increase Loanable Funds
• Macro Balance in Real Expenditure requires ↑ Savings of top 1% = ↑ spending rest
• PLUS: Escalating Consumption Norms – set @ top and ripple down
• “Expenditure Cascades” => ↑ consumption norms for stagnant middle
• U.S. & Canada : ↑ inequality of consumption < ↑ inequality of income ?
• DEBATE: If true: mitigates short run welfare implications of greater inequality
• IGNORED: If true: implies changing distribution of assets and liabilities
• Financial Assets = Financial Liabilities
• Financial Instrument: Asset for Holder = Liability for Issuer
• Net Savings @ top imply Increased Debts @ bottom
• Financial Fragility => Crises => Recessions => Counter-cyclical stimulus => Debt
The Power of Accounting Identities
Dt = (1 + rt)* Dt-1 - PBt
Dt = Debt in period t
rt = average rate of interest in period t
PBt = Primary Balance in period t
= (Receiptst – Program Expenditurest)
∆ (D/Y)t = (rt - gt)*(Dt-1/Yt ) - (PBt / Yt)
Yt = GDP
gt = growth rate of GDP
∆ (D/Y)t = change in Debt/GDP ratio
Will rt < gt forever?
Debt Instability
– not just a Public Sector Problem !
∆ (D/Y)t = (rt - gt)*(Dt-1/Yt ) - (PBt / Yt)
• The compounding of debt overhang
• rt > gt
• Accumulated Deficits => ↑ Debt/GDP => ↑ Deficit => ↑ Debt => etc.
• Anti-Inflation Monetary Policy increases (rt - gt) at both ends
• What chances for rt < gt in long-term ? What problems created?
Mexico: Structural Changes imply Faster growth @
bottom – hence declining inequality
Mexico: “One-time” Changes & Growth
• 1995: recession => un(der)employment
• PLUS Structural Changes with Major Income Impacts for families
1. High % agriculture => rural out-migration => big wage gains
1. Mexico: 2 step process: rural poverty → informal urban → formal urban
2.
3.
4.
5.
Low % employed women => big impact of increase female jobs
Low % complete primary & secondary => high marginal HK returns
Capital deepening => increased MPL
Large decline birth rate => large (educated) demographic bulge
• Political economy of social policy & ‘Progresa’ (1995)
• 1994/5: NAFTA + Recession + ↓ PRI + Chiapas – Zapatista insurrection
• Credible local ‘hard left’ political option => “threat effect” for elites
Canada: 1990s fiscal crisis decreased redistribution
- rising Change
market
inequality
reinforced
in Gini Index of Equivalent Individual Income
Canada 1976 to 2009
0
-0.02
-0.04
-0.06
-0.08
-0.1
-0.12
-0.14
-0.16
Impact of Transfers
Impact of Taxes
Impact of Taxes & Transfers
Canada: what chances for stabilizing policies?
• Majority Governments can shift directions BUT expansion of
Recycling role of state not likely soon
• “Kinder & Gentler?” – a relatively recent national narrative
• “Colder & Harder” until early 1970s
• History of Hard Left Threat: Essentially Zero
• 200 year civil violence death toll less than Mexico City 1968
• 2013: Electoral Politics: Split on ‘Left’ => Conservative Majority
• Zero Concern for Poverty & Inequality + Philosophically opposed to
unions/regulation + Obsessed with ‘tax competiveness”
• No near term prospect of a political economy of redistribution
and stabilization
USA: What chance for a New “New Deal” ?
• 1930s: FDR & “New Deal”
• U.S. Policy Innovation Stabilized Growth & Inequality
• Cyclical: Public Works Stimulus
• + Structural Reforms saved Capitalism from Itself:
• Bank Regulation + NLRB + Social Security + Progressive Tax
• U.S.: Systemically stabilized for 50+ years
• Restraint of top end income growth + recycling of top end incomes
• BUT eroded in stages since early 1980s
• Decline in top marginal tax rates => decrease income recycling
USA: Conflicted attitudes + $ politics
• Bimodal distribution → small
• BUT short terms + division
powers + courts => gridlock +
soon tips back
1.4
1.2
1
Relative frequency
migration tips majority
balance
Preferences for Leveling
in the United States 1987-1999
0.8
0.6
• “Deeper Pockets”
• Increased economic Inequality
=> Increased Inequality of
Political Influence
0.4
0.2
0
U.S.
19…
The unsustainable does not last
– but what follows?
• Unbalanced Income Growth  Ever Increasing Inequality
• Cannot be a steady state equilibrium
• Produces Interacting Instabilities – with cumulative impacts
• U.S. & Canada: Parallels with 1930s but many structural changes
• No Automatic Economic Tendency to self-correction is apparent
• Political Economy of Adaptation to Systemic Instability:
• Europe in 1930s: both disastrous choices and enduring successes
• Political choices matter
Q.
In the next federal election, would you be more likely to
support a party that promised to NOT raise taxes or a party
that promised to raise taxes on the rich?
10
A party that promised to raise
taxes on the rich
30
A party that promised not to
raise taxes
60
DK/NR
BASE: Canadians; February 21-28, 2012 (n=3,699)
Australia: Top 1% surge is only 1987+
0.100
0.080
REAL INCOME GROWTH RATES: AUSTRALIA
TOP 1% & BOTTOM 99%
Compound 10 year Annual rate
0.060
0.040
0.020
0.000
-0.020
-0.040
-0.060
-0.080
-0.100
top 1%
bottom 99%
-0.080
TOP 1%
-0.020
-0.040
-0.060
BOTTOM 90%
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
0.060
1961
1959
1957
1955
1953
1951
1949
1947
1945
1943
1941
1939
1937
1935
1933
1931
1929
1927
1925
0.080
REAL INCOME GROWTH RATES: FRANCE
TOP 1%, BOTTOM 90%
10 YEAR COMPOUND ANNUAL RATE
0.040
0.020
0.000