“The costs of inequality:
capitalism & democracy at crosspurposes”
Robert H. Wade
LSE
March 2014
Alternative title
• “From labor Kism to ‘patrimonial
Kism’ & from democratic democracy
to ‘plutocratic democracy’”
• Patrimonial Kism = where Y from capital,
especially inherited capital, dominates
total Y distribution
• Plutocratic democracy = where
preferences of rich dominate public policy
Economists have long ignored
income IN
• Martin Feldstein (Economics, Harvard):
“Income inequality is not a problem in need of
remedy” (1998)
• Robert Lucas (Economics, Harvard, Nobel
laureate): “Of the tendencies that are harmful to
sound economics, the most seductive and …
poisonous is to focus on questions of
distribution” (2004)
• Willem Buiter (chief econ Citigroup, ex- LSE):
“Poverty bothers me. Inequality does not. I just
don’t care” (FT, 2007)
Why have economists ignored
inequality?
• (1) Trade-off b/w “efficiency” (econ growth) and
“equity”.
• (2) Kuznets curve: Gini follows inverted U
trajectory as GDPPC rises
• (3) Technological change is skill-biased. The
more highly skilled righly get higher
remuneration.
• These explanations “set minds at rest”. Imply
that capitalism distributes material benefits
equitably without intervention by the state.
International organizations have
long ignored inequality
• World Bank & IMF
• They consider “inequality” too “political”.
“Poverty”, “efficiency” “a-political”
• G20 ignores inequality
US public unconcerned abt IN
• Recent Gallup poll: “What do you think is the
most important problem facing this country
today?”
• Top of list: federal government (21%)
• “Gap b/w rich & poor” came far down: only 4%.
But, inequality becoming
controverial
• Obama: 4 Dec 2013: growing Y gap is a
“defining challenge of our time”
• Pope Francis
• Recent publications from World Bank,
even IMF
World Economic Forum: Global
Risks 2012 Report
• Respondents to Global Risks Survey
scored economic, environmental,
geopolitical, societal & tech risks over next
10 years by (a) likelihood & (b) impact
• Top 3 (combined score): (1) chronic fiscal
imbalances, (2) severe income disparity
= (2) water supply crises
• BBC News Business headlined its report “Stark
inequality ‘top global risk’”, 12 Jan 2012
My argument: reasons for using
public policy to curb Y IN
• (1) There are powerful built-in forces
producing indefinitely rising income
inequality & concentration
• (2) Higher levels of inequality (within
OECD) associated with higher economic,
social, health, & political costs
But first…
• Overview of inequality trends in OECD
Inequality trends: US, 1913-2006
Inequality trends: US
• Share of increase in national income
accruing to top 1%.
• Clinton years (1990s): 45%.
• Bush years (2000s): 65%. (73%)
• Obama (2009-12):
95%.
IN trends: US, UK, Germany
• Remuneration of CEO/median annual
wage
• US: Fortune 500 companies: 324
• UK: FTSE100:
185
• Germany: DAX30:
90
IN trends: US & Iceland
Iceland: household income,
1993-2010
(top line = top 1%; bottom line = median, including realized K gains)
IN trends: NZ, 1984-2011
IN trends: Scandinavia, 1870-2010
Inequality has risen throughout
OECD (Gini)
• B/w mid 1980s and 2010 Gini coefficient
rose in all OECD countries (except
Greece?).
• NB: We shd give primary attention to
wealth inequality, not income inequality;
but little data
Inequality in OECD by regions
(Gini)
•
•
•
•
•
1. Latinos & Mid East
2. Anglos
3. European Mediterraneans
4. Northwestern Europeans
5. East-Central Europeans
•
Source: OECD Income Distribution and Poverty
http://stats.oecd.org/Index.aspx?DataSetCode=IDD (1 August 2013)
“Americanization” of world Y
concentration
• World-wide the top 10%, and top 1%, have
enjoyed much larger % increases in
income than lower income categories,
over 1988-2008
• 1988-2008 saw biggest 2-decade increase
in global income (& wealth) concentration
during past 200 years.
Conclusion: during neoliberal era
since 1980s…
• Very rich have soared ahead, esp in
Russia & Ukraine, Latin America, EAsia
& Anglo c’ies, leaving behind not only
manual workers (diminishing minority) but
also middle class masses (doctors,
teachers, lawyers, architects, civil
servants, business executives below the
top, most politicians).
Momentum towards higher Y
concentration
• T. Piketty Capital in the Twenty-First
Century, 2014
• Kuznets-curve argument -- Y IN will
eventually stabilize & subside on its own, via
free mkt -- is wrong.
• Causes making for more IN will dominate for
a long time ahead from 2014.
• Western world moving towards “patrimonial
Kism”, in which commanding heights of
economy & polity in hands of those with
inherited wealth.
Piketty’s mechanism
• (1) Private rate of return to owners of capital
(machinery, land, housing, financial instruments,
etc.) grows faster than output & wages.
• (2) Within wages, growing share goes to
executives at top (super-stars & supermanagers)
• (3) So income from capital & super-wages
increasingly dominates total income distribution
Piketty’s mechanism (ctd)
• (4) Profits & super-wages are reinvested, &
generate more profits.
• (5) Inherited wealth grows faster than the economy,
generating higher Y concentration in next
generation.
• (6) Diffusion of knowledge & skills does not offset
• “The past devours the future”, globally (Piketty, 571)
•
(See Eduardo Porter, 2014, “Free market is no remedy for disparity”, INYT, 13 March)
World labor income as share of
world gross output, 1980-2011
UNCTAD TDR 2013
chart 1.4
Terrifying consequences
• Costs of higher income inequality &
concentration:
• (1) Economic growth
• (2) Financial fragility & crises
• (3) Social & health
• (4) Political
Costs of IN: economic growth
• IMF Discussion Note, Feb 2014
• (1) “Lower net IN [after taxes & transfers] is
robustly correlated w faster & more durable
growth, for a given level of redistribution”.
• (2) “Redistribution [via taxes & transfers]
appears generally benign in terms of its
impact on growth” (p.2)
• (3) “It wld be a mistake to focus on growth &
let IN take care of itself….the resulting growth
may be low & unsustainable” (p.25)
•
IMF Staff Discussion Note: J. Ostry, A. Berg, C. Tsangarides, 2014, “Redistribution, inequality & growth”, Feb.
Costs of Y IN: financial fragility &
crises
• See The Flaw (David Sington)
Costs of IN: social & health
• Wilkinson & Pickett, 2009, The Spirit Level: Why
More Equal Societies Almost Always Do Better.
• Sold 250,000+ copies, translated into 27
languages
• See CHARTS
Index of:
• Life expectancy
• Math & Literacy
• Infant mortality
• Homicides
• Imprisonment
• Teenage births
• Trust
• Obesity
• Mental illness
– incl. drug &
alcohol
addiction
• Social mobility
Index of health and social problems
Health and social problems are worse
in more unequal countries
Wilkinson & Pickett, The Spirit Level
www.equalitytrust.org.uk
Index of:
• Life expectancy
• Math & Literacy
• Infant mortality
• Homicides
• Imprisonment
• Teenage births
• Trust
• Obesity
• Mental illness
– incl. drug &
alcohol
addiction
• Social mobility
Index of health and social problems
Neither health nor social problems are
related to national income per head
Wilkinson & Pickett, The Spirit Level
www.equalitytrust.org.uk
Avergage height of adult makes (centimeters)
185
Netherlands
184
Denmark
183
y = -0,2403x + 186,5
R2 = 0,3161
182
181
Czech Republic
Sweden
180
Norway
Germany
Belgium
Canada
179
Finland
Austria
Australia
US
178
Switzerland
France
Italy
177
Spain
UK
176
20
25
30
35
40
Gini index of inequality, various years
45
Inequality & social mobility
• Across countries there is inverse
correlation b/w inequality & rate of
intergenerational social mobility.
• Time series data less clear; but likely that
in any one country IN tends to cumulate
across generations (as Piketty argues)
• Explanation: The greater the gains from being
in elite, the more the elite will fight to ensure
their children stay there (“glass floor”).
Conclusion abt social & health
costs of IN
• Wilkinson & Pickett:
• “If you want to live the American
dream, go to Denmark.”
•
http://www.ted.com/talks/richard_wilkinson
Political effects of income IN
• Little research on political effects
• Standard workhorse model in pol sci &
economics is “median voter” model:
governments are most responsive to
preferences of median voter
• Hence, rising IN does not tend to skew
public policy towards preferences of
wealthy
But, Louis Brandeis (US Supreme
Crt 1916-39)
• “We must make our choice. We may have
democracy or we may have wealth
concentrated in the hands of a few, but we
can’t have both”.
• Who is right, mainstream political
scientists or L. Brandeis?
Political costs: preferences of
rich determine public policy
• M. Gilens, 2005, “Inequality and
democratic responsiveness”, Public
Opinion Quarterly, 69, 5, 778-96.
• B.Page, L. Bartels, J. Seawright, 2013,
“Democracy & the policy preferences of
wealthy Americans”, Perspectives on
Politics, March, v.11, n.1
Page et al conclusions
• Top 1% of Americans are “extremely
active politically and … much more
conservative than the American public as
a whole with respect to important policies
concerning taxation, economic regulation
and especially social welfare programs”
(p.51)
Differences in preferences by
income (Page et al)
• “The legal minimum wage should be high
enough to prevent full-time workers from
being in poverty”
• Agree: wealthy (with annual income of
more than $1 million) = 40%; general
public = 78%
Differences in preferences
• “The government in Washington ought to
see to it that everyone who wants to work
can find a job”
• Agree: wealthy = 19%; general public =
68%
Wealthy agree, general public
disagrees…
• “Minimum wage must not be linked to cost of
living”
• “Capital gains shd not be taxed, or taxed much
less than income”
• “Top economic priority today (since 2008) to cut
budget deficit, not reduce unempt”
• “Cut budget deficit by cutting social spending,
not by raising taxes. If taxes to be raised, sales
taxes, not income or capital gains tax”
Wealthy oppose, public favors…
• Health insurance for everyone
• More spending on public schools
• Regulation of banks which protects public
against predatory lending
What shapes preferences of
wealthy? “Money-empathy gap”
• Research by social psychologists on
consequences of social class (of some
having much more money than others)
• Conclusion: those living high on socioecon ladder are less empathetic, more
selfish, etc. than those lower down (Carnegie, Gates
et al. exceptions)
• Paul Piff, Psychology, Berkeley
Money-empathy gap: US
• (1) Paul Ryan, chair of House Budget
Cttee: “We don’t want to turn the safety
net into a hammock that lulls able-bodied
people to lives of dependency and
complacency”
.
(Krugman, 2013a, emphasis added)
Money-empathy gap: NZ
• NZ PM John Key: “Anyone on a benefit
actually has a lifestyle choice. If one
budgets properly, one can pay one's bills”
(2011)
Whose preferences count? Gilens,
2005
• High “representational bias”:
• “When Americans with different
income levels differ in their policy
preferences, actual policy outcomes
strongly reflect the preferences of the
most affluent but bear virtually no
relationship to the preferences of poor
or middle-class Americans.”
US representational bias (ctd)
• “The vast discrepancy … in government
responsiveness to citizens with different
income levels stands in sharp contrast to
the ideal of political equality that
Americans hold dear….representational
biases of this magnitude call into question
the very democratic character of our
society”. [1] Martin Gilens, 2005, “Inequality and democratic responsiveness”, Public
Opinion Quarterly, 69, 5, 778-96, at 794 and 778, emphasis added.
In USA: “economic policy is made by
the top 1% for the top 1%”.
• Eg national minimum wage fell in real terms by
1/3 in 1975-2011.
• % of private sector wkers in unions: 23% ->
6.6%
• Late Oct 2013, 47 m Americans had food stamp
benefits cut
Conclusions on representational
bias
• (1) As inequality (concentration) increases, the
rich make it harder for non-rich to have voice
in how society is run.
• (2) Wealthy are “super-verting” the state, floating
free from tax & usual obligations of citizenship,
while profiting from privatization/ outsourcing of
public services.
• They remain loyal to national pageantry – flag,
military parades
UK & Europe?
• RHW to Simon Hix, head of Govt Dept,
LSE:
• “What is evidence on ‘representational
bias’ in UK and Europe?”
• SH: “That’s a good question….Sounds like
something I should work on. Thanks for
the idea!”
A French plutocrat celebrates loss of
democracy
• Bernard Arnault, French, 10th richest person
on earth: “Businesses, esp international
ones, have ever greater resources, & in
Europe they have acquired the ability to
compete with states … Politicians’ real
impact on the economic life of a country is
more & more limited. Fortunately.”
(2000, emphasis added,
quoted in Serge Halimi, 2013, “Tyranny of the one per cent”, Le Monde Diplomatique (English), May 1).
• Implies that private sector firms can best
regulate themselves.
Why are middle classes politically
apathetic ?
• Why aren’t middle classes more angry against the superrich? Why can’t Left parties harness middle class anger
at being left behind?
• Gary Runciman: “most people’s lives are governed more
by resentment of narrow inequalities…& the preservation
of small differentials” than by the larger picture of social
injustice.
• Middle classes fearful of loss of middle class status;
more anxious looking down than looking up.
• Lukewarm about “redistribution” = those below them will
be pulled up, threatening their status.
Social democratic (SD) agenda
• In previous “Hard Times” Left gained
electorally
• Not this time. Center-right continues to win
• Mainstream Left has lost its political
narrative. Voters angry at unemployment
& spending cuts go to Hard Left or Far
Right
How to curb “plutocratic democracy” &
“patrimonial Kism”
•
•
•
•
(1) Public financing of electoral efforts
(2) Capital tax
(3) Unconditional basic income (UBI)
(4) From “redistribution” to “predistribution”
(1) Curbing plutocratic democracy:
public electoral financing
• Key: more public financing, less private financing
of electoral campaigns
• Evidence: among 15 developed countries grouped into 5
categories by level of public support, those with less
public support have lower turnout rates & lower public
spending on “personal security”/ GDP (education, health,
pensions). (Jay Mandle, 2004, “The politics of democracy”, Challenge Jan-Feb, 53-63)
• Group 1:US: no public support; lowest turnout (federal);
lowest “personal security”/GDP.
• Group 5: Austria, France, Germany, Italy: highest public
support (parties, campaigns, media); 2nd highest turnout;
highest personal security
(1) Political finance reform (ctd)
• But, cautionary tale: fate of UK Commission
on Standards in Public Life, 2011, “Political party
finance: ending the big donor culture”.
• It was launched with fanfare at Westminster. It
died at the end of the launch.
(2) Capital taxation
• Low hanging fruit: tax unearned income (eg dividends)
and wealth (eg inherited estates) at same tax rate as
ordinary income, not much lower (as in US under Bush).
• Better: progressive annual tax on individuals’ wealth
(net value of assets owned)
• All assets included: real estate, financial, business, at
market value
• Objective: (1) to stop unlimited growth of global wealth
IN, (2) help regulation of financial system, (3) raise
revenue, allowing Y tax rates to be lowered
(2) K taxation (ctd)
• How to do it:
• (1) Everyone must report capital
ownership as condition of property right.
• (2) Financial authorities must share
information
• National tax authorities shd receive all info
to calculate net wealth of every citizen
(3) Unconditional basic Y (UBI)
• UBI high enough for every adult to receive
enough to eat, clothe and house
themselves, unconditionally
• Why? People shd be “free” to chose paid
or unpaid work, rather than constrained to
seek only paid work out of fear for their
survival
(4) Predistribution
• Focusing on taxes & transfers to make “market”
income distribution more equal is like mopping
the floor while the tap still running.
• Need to focus more on making market Y distn
more equal. Why?
• (1) Mkt Y distribution is main determinant of net
Y distribution
• (2) “Tax the wealthy” always leaves SDs
vulnerable to conservatives’ “you want to punish
the wealth-creators & reward the losers”
Predistribution
• Wide range of institutions & policies sold on
grounds of “efficiency” tend to channel income
upwards:
• Eg corporate governance law
• Trade union law
• “Light touch” financial regulation
• Intellectual property rights law
• Central bank priority to “anti-inflation credibility”
has high cost in long-term unemployment
“Inequality assessments”
• Before early 1980s few World Bank
projects had any environmental impact
assessment. After early 1980s all projects
with any kind of environmental impact had
to be subject to professional assessment.
• Social democrats should institute regular
procedures for assessing distributional
consequences of all govt policies
Organizing political support?
• I have emphasised changing the ideas
with which SDs appeal to electorate
• If elite is monolithic with unified vision, little
prospect
• But elite not monolithic; SDs have to
appeal to segments of wealthy
• This top-down strategy has to be
complemented with bottom-up strategy
(“real world utopias”, Erik Ohlin Wright)
References
•
•
•
•
•
•
•
•
•
•
•
•
•
•
R. Wade, 2012, “Why has income inequality remained on the sidelines of public policy for so long?”, Challenge, 55, 3, MayJune, 21-50.
R. Lucas, 2004, “The industrial revolution: past and future”, Annual Report Essay 2003, Federal Reserve Bank of
Minneapolis, May 1.
W. Buiter, 2007, “Economists’ forum”, Financial Times, Feb 14.
Agence France-Presse, 2013, “IMF strongly suggests countries tax the rich to fix deficits”, October 11.
Martin Gilens, 2005, “Inequality and democratic responsiveness”, Public Opinion Quarterly, 69, 5, 778-96, at 794 and 778,
emphasis added.
Paul Krugman, 2013a, “War on the unemployed”, New York Times, June 30.
National Business Review, 2011, “Key stands by ‘some poor make poor choices’ foodbank comment”, Feb 21.
Paul Krugman, 2013b, “Persecuted plutocrats”, IHT, 28-29 Sep, p.7
B. Page, L. Bartels, J. Seawright, 2013, “Democracy and the policy preferences of wealthy Americans”, Perspectives on
Politics 11, 1.
Dean Baker, 2006, The Conservative Nanny State, Washington DC, Center for Economic Policy Research.
Dean Baker, 2011, The End of Loser Liberalism, Washington DC: Center for Economic Policy Research
Josh Bivens, 2012, review of Baker 2011, Challenge, May-June, 129-136
Nicky Hager, 2006, The Hollow Men: A Study in the Politics of Deception, Craig Potton, Nelson, New Zealand
George Monbiot, 2013, “Superversion not subversion is the real threat to the state”, Guardian, 15 October.
Key source:
• Dean Baker, 2006, The Conservative
Nanny State
• Dean Baker, 2011, The End of Loser
Liberalism
• Baker shows that many institutions &
policies sold as “good for efficiency” in fact
are good mainly for chaneling income &
influence up to the top
Global govc needs overhaul
• Oxford Martin Commission for Future
Generations, chaired by Pascal Lamy
• Some of you could form your own
Commission for Future Global
Governance, write a critique/ comment on
the above.
• Eg how to reform G20, IMF, World Bank
My argument
• (1) Income/wealth inequality rising in most
countries over past 30 years. In OECD, Anglo
c’ies have highest income concentration. Most
people’s income stagnant or falling in past 15
yrs. Shall not discuss reasons.
• (2) “Inequality machine” driving democratic
governments in many western countries,
especially Anglo, to allow their democracy to slip
towards “plutocracy”.
My argt (ctd)
• (3) Why? They have become so
dependent on small, affluent minority for
finance.
• (4) If governments or politicians do not
follow preferences of this wealthy minority
– when those preferences differ from
preferences of middle- & low-income
groups -- they are likely to be rendered
ineffective, or toppled.
My argt (ctd)
• (5) So governments enact laws and policies in
line with preferences of wealthy; which boost
the fortunes of the wealthy.
• Result: (1) virtuous circle b/w wealth &
influence from the point of view of wealthy. (2)
Vicious circle from the point of view of everyone
else, whose incomes are squeezed as income
concentration at top rises.
• (6) Implications for “social democratic” agenda?
UK: Thatcher’s “monetarism”
• Alan Budd, 1991: Mrs Thatcher’s government
“never believed for a moment that this [high
interest rate policy & contraction of public
spending] was the correct way to bring down
inflation. They did, however, see that it would be
a very, very good way to raise unemployment,
and raising unemployment was an extremely
desirable way of reducing the strength of the
working classes…. What was engineered …was
a crisis of capitalism which has allowed the
capitalists to make high profits ever since”.
Money-empathy gap: US
• (2) AIG = US insurance giant that played crucial role in
creating global econ crisis; US govt bailed it out.
• Became ward of federal govt, but continued paying giant
bonuses.
• Robert Benmosche, CEO, AIG, compared public anger
at bonuses to lynchings in Deep South; bonus backlash
is “just as bad & just as wrong”
• (3) Stephen Schwarzman, CEO, Blackstone Grp,
criticised proposal to close loophole (which allows
executives to pay only 15% taxes on much of income):
“It’s a war; it’s like when Hitler invaded Poland in 1939”.
(Krugman, 2013b)
Markets & democracy
• Most westerners agree, “democracy” &
“markets” essential to just & prosperous world.
• But, what if “markets” are driving political
systems away from (substantive) democracy?
• “Market forces”  income/wealth concentration
 public policy reflects preferences of wealthy
 erosion of democracy
• What if Brandeis is right?
Examples of govt intervention on
behalf of rich:
• (1) Wall St bailouts in 2008
• UST & Fed gave trillions of $ in subsidized
loans to Wall St banks in 2008. Yet this
government intervention on behalf of
executives, shareholders, bondholders –
who include richest people – not seen as
“intervention in market”.
• Virtually no banker has been subject to
criminal prosecution.
Examples of govt intervention on
behalf of rich:
• (2) banks too big to fail
• Conservatives claim to believe in “free market”.
But few argue against allowing banks to become
“too big to fail”.
• Banks too big to fail obtain finance at below
market rates, because creditors believe they are
protected by govt gttee.
• This enriches executives, shareholders,
bondholders.
• It is NOT free market economics. But
conservatives present it as free mkt economics,
which sounds better than plutocratic economics .
Govt intervention on behalf of
employers
• (3) labor law
• Eg secondary boycotts: If workers in a
restaurant go on strike, & if union of food
delivery drivers refuses to deliver food,
union faces fines & officials face prison.
• This is NOT a free market. This is govt
intervention on behalf of employers.
Govt intervention on behalf of
employers:
• (3) labor law
• Eg govt restricts trade unions and
collective bargaining, partly on grounds
that unions cause econ inefficiency.
• Center-left should emphasise how unions
help to counter-balance business power &
are critical component of democratic
system (while not denying possibility of
harmful impacts).
Govt intervention for the rich
• (4) Stock market & housing market
• SDs should not applaud soaring stock
market and soaring house prices as
indicators of “success”.
• SDs should emphasise (a) bubbles are
followed by “trubbles”; (b) bubbles
increase concentration of income at top
Conclusion
• Capitalist market is driving up Y inequality, esp Y
concentration in many c’ies, esp Anglos.
• Y inequality at Anglo levels has significant costs,
including political costs to democracy.
• Major determinant of after-tax distribution is pretax distribution. So don’t rely on larger taxtransfer system to curb rising inequality
• Knowing how income is distributed before taxes
is first step in formulating policies/laws for
reducing Y inequality, especially Y concentration
Costs of inequality long ignored
• Why?
• “When inequality is the common law of a
society, the greatest inequalities do not
call attention to themselves.”
• Democracy in America, A. de Tocqueville.
Empirical propositions: US
• (1) Rising IN associated with rising pol
polarization & paralysis
• (2) Substantial differences of policy preferences
b/w wealthy and middle- & low-income
respondents
• (3) Policy preferences of wealthy shaped by
“money-empathy gap”
• (4) Public policy reflects preferences of wealthy
World Bank has long ignored
income inquality
• Eg World Development Reports
• Eg World Devt Report 2006: Equity &
Development
• Executive Board said: “Inequality is
political concept. We are a-political
organization. We can talk abt reducing
poverty & about expanding opportunities,
which are both a-political; not about
reducing inequalities.”
G20 ignores inequality
• St Petersburg Summit, Sept 2013,
communique, 12,000 words: no mention of
“income inequality”, one mention of
“income distribution” (para 30)
• 3 mentions of “inclusive growth” or
“inclusive labor markets”
IN trends: NZ, 1921-2009
Explanation of recent concern
about Y concentration
• Only recently has data become available
about Y at the top (Piketty & Saez).
• Clear that “skill-biased technological
change” cannot explain huge
concentration of Y in top 1%.
• Clear that Kuznets curve is not empirically
valid to describe trajectory of countries’
Gini coefft as GDPPC rises
• Occupy Movement?
Political costs: (1) political
paralysis
• Political polarization/paralysis correlates
with income concentration
• US evidence: McCarty, Poole, Rosenthal,
Polarized America, 2006.
US IN – pol polarization/paralysis:
closely correlated
US income distribution & political polarization, 1913-98.
•
Political polarization was measured ingeniously as
follows. An annual sample of votes in House of
Representatives. If 100% of republicans voted yes and
100% of democrats voted no, that vote scored 1. A
fifty/fifty division in both parties would score 0. Scores
averaged for the year.
• Source: Nolan McCarty, Keith Poole, Howard Rosenthal,
Polarized America: The Dance of Ideology and Unequal
Riches, MIT Press, 2006.
But, some recent concern
• Eg WB has recently issued reports on
income distribution, national &
international
• IMF sent shock waves at Annual Meetings (1113 Oct 2013). “Fiscal Monitor: Taxing Times”,
noted steep cuts in top tax rates since early 80s,
said “Scope seems to exist in many advanced
ecies to raise more revenue from the top of the
income distn”. Added that this wld also help to
fight growing income inequality.
What is causing the recent
concern?
• New data on Y concentration (Piketty &
Saez)
• Evidence that Kuznets inverted U is not
valid
• Arguments that causes of IN may continue
to drive IN ever higher (Piketty)
• Evidence on economic, social, health and
political costs of high IN (= Anglo & above)
Differences in preferences
• “The federal government should provide
jobs for everyone able and willing to work
who cannot find a job in private
employment”
• 8% of wealthy agree
• 53% of general public agree
UK & Europe (ctd)
• We wld expect that representational bias
in favor of rich is higher in majoritarian
voting systems (especially US) & lower in
proportional representational systems
(where votes of low-income groups can be
more influential).
• But some evidence suggests that
wealthy’s preferences becoming more
influential in NWEurope (excluding Scandinavia)
OECD: affluence-influence
• Across 18 OECD countries since 1960,
c’ies with largest increases in shares of
income in top 1% have seen largest cuts
in top rate taxes
• Increases in top income share do not
translate into increases in long-term econ
growth
•
T. Piketty, E. Saez, S. Stantcheva, 2011, “Optimal taxation of top labor incomes: a tale of three elasticities”, NBER
working paper 17616
(1) SDs shd avoid characterization
as “pro-state”
• Reject conservatives’ framing: “we are
anti-government/ pro-free market; you
want ever-larger government to protect
interests of disadvantaged
• = we are pro-freedom, you are antifreedom
• Emphasise that conservatives don’t push
for free markets when free mkt policies
would harm interests of wealthy.
(2) SDs shd focus on Y
concentration -- causes & costs
• Don’t just focus on “inequality” (Gini).
Focus on trends in share of top 1%
• Emphasise that, whatever the
technological causes of IN within bottom
99%, income concentration in top 1% is
caused by politics & policies
• Highlight how wide array of institutions,
rules, policies favor the already affluent.
Causes of income concentration
• QE, house booms, stock mkt booms,
distribute income & wealth upwards, b/c
inequality of asset ownership
• Today, central bks convinced that supereasy money the least bad way to stimulate
western economies.
• Y concentration effects ignored: cheap
money is pushing stock mkts & house
mkts to new records.
(Mike Nolan, 2013, “Banks risk getting stuck in ‘Q.E. trap’,
INYT 28 Nov.).
More causes: rigged markets
• Fed’s priority to “anti-inflation credibility” has
high cost in long-term unemployment
• Strong intellectual property laws give govt-gtteed
profits to pharma, software, etc.
• Strong dollar benefits finance, hurts mfg
• Weak financial regulation benefits finance
• Corporate governance law benefits CEOs
• Trade union law benefits employers
Costs of inequality
• Emphasise costs of Y concentration (while
acknowledging benefits). Economic,
social, health, political.
• Use these costs to criticize conservatives
for pursuing an agenda of advancing the
interests of the wealthy. This should be
politically advantageous, given that large
majority have been on stagnant or falling
incomes as income IN soared.
Costs of concentration (ctd)
• Don’t just talk about “improving equality of
opportunities”
• Emphasise how IN today limits intergenerational social mobility tomorrow
(3) Predistribution
• Shift attention from changes in tax/spend
(redistribution) to changes in market
income distribution (predistribution)
Why shift attention to
predistribution?
• (1) Mkt income distribn is main
determinant of disposable income distribn.
• (2) Using taxes to take away income
already earned, then redistributing to
others, always difficult politically.
Conservatives say: “They [SDs] want to
penalize winners & reward losers. We
champion hard work & innovation.”
(4) Present big finance as a
problem, not solution
• Economic textbooks say finance
“lubricates” the economy
• Not true: finance sector lends mainly to
property & financial asset mkts, less for
production of goods & services
• Eg UK, US, Canada, Australia, Holland,
Sweden
• Big finance dominates politics
Epigraph (2): Machiavelli, 1520
• When “only the powerful propose laws, not
for the common liberty but to augment
their own power”, the state is corrupted
and its foundations are undermined.
Epigraph (3): President Truman
• “I could never lend myself to any
transaction, however respectable, that
would commercialize on the prestige and
dignity of the office of the presidency”.
(See
George Packer, The New Yorker.)
Epigraph (4): President Clinton I
• Mr Clinton earned $17 mn in 2012 making
speeches. Common price, $500,000 per
speech. One to a Lagos company for
$700,000.
•
Maureen Dowd, “Money, money, money”, IHT 19 Aug 2013, p.7).
Argument
• Y IN (within-country) likely to keep rising for decades into
future. Eg USA: top 1% currently accrues abt 22%
disposable Y. Strong momentum towards 30+%.
• Higher levels of IN associated with higher economic,
social, health & political costs.
• Strong state & international action could reduce
inequality. But such action blocked by “representational
bias” in (plutocratic) democracies in favor of rich.
• Widespread grassroots activism to democratise political
systems is a necessary condition for reining in IN. What
shd be policy goals of activism?
R Rubin on “too big to fail”
• Rubin, quoted in D Rothkopf, 2012, Power, Inc.
• DR asked RR whether “too big to fail” a problem
• RR: “No, don’t you see? Too big to fail isn’t a
problem with the system. It is the system. You
can’t be a competitive financial institution serving
global corporations of scale without having a
certain scale yourself. The bigger multinationals
get, the bigger financial institutions will have to
get”.
• Implication: big banks must be propped up