Minding the Gap: A conversation about economic inequality

Arjun Jayadev

On March 13th, I spoke on a panel at MIT with David Autor, Peter Diamond and Frank Levy (all from MIT) on inequality in the U.S.

The two hour discussion on inequality went over a broad range of issues:  the alarming rise in inequality,  the nature of the ‘religion of meritocracy’ that underpins the  notion of the American dream, the role of childhood and early education in reducing inequality and the implications of inequality for distorting the way political decisions are made.

The facts about inequality are better known, due to the rise of the occupy movement as well as more careful work documenting the rise of top-income inequality. In 1980, the top 1 percent of U.S. households earned about 10 percent of the nation’s income; today that top percentile receives about 25 percent of income. The top 10 percent of households accounted for a bit more than 30 percent of income from World War II until about 1980, but now receives 50 percent of all income.

While there are many candidates to explain growing inequality—including skill biased technical change, globalization, the decline in unionization and the like, there is little understanding of the dynamics underlying the growth of the top 10 percent of households, for whom incomes have started to grow most rapidly since 1980. In my talk I focused mostly on the discussion of factor ownership underlying this distinction. For the top households, 70 percent of income stems from returns on capital — the assets they already own — whereas for all households, only 20 percent of income comes from capital, he noted. . Examining the returns to the activity of labor (an important and primary source of income for the vast majority of the population) versus returns to ownership (a more important source of income for the wealthy) provides another lens with which to examine how the benefits of economic growth and the losses from stagnation have been distributed. It is almost certain that some part of the rise in the top 1% can be simply explained by changing returns to factors and as such, it deserves to be considered in the mix of widely known and debated causes.

Watch the panel presentation and join the conversation by commenting below:

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5 Responses to “Minding the Gap: A conversation about economic inequality”

  1. A comment from the other side of the Atlantic
    There is a widespread myth that USA is the country of opportunity; that the success of the individual is in his or her own hands. This was in particular repeated in conjunction with that Barack Obama was elected to President, also by himself in his speeches. We are told that American society is a model for how all can be successful if they just work hard. Perhaps this was true in the nineteenth century when conditions were very different and where there were almost inexhaustible nature resources waiting to be exploited (well, if we don’t consider that Native Americans, salmon and bison already used the space) especially compared to Europe, which was still half feudal. But the growth of the welfare state in Europe and the closing of the frontier in the USA changed this radically. Studies comparing USA, Great Britain on the one hand and Canada, Germany and Scandinavian countries on the other hand, show that social mobility is considerably higher in the Scandinavian countries and Canada and to a lesser extent Germany than in the Great Britain and the USA (Blanden and others 2005).
    This patter coincides with the level of inequality so that the countries with the lower equality show less social mobility. Unfortunately, Americans still seem to believe the opposite and nurture the myth that the only thing that you need in order to get rich is hard work and dedication. Consequently, even if rarely spelled out as clearly, that if you are poor you are yourself to blame. Those who “win” are in some way seen as “better” and therefore they have the moral right to their wealth. Considering that most wealth is just circulated among the already wealthy, this simply gives a moral superiority to those that are already rich.
    (this is an extract from my (forthcoming) book Garden Earth, http://gardenearth.blogspot.se/p/garden-earth.html

  2. Marko says:

    Just a quick comment on the topic of increased tax rates on capital gains ( which I support ) :

    We need to keep in mind that we are likely in for a long period of financial repression , in which the gov’t will try to reduce its debt/gdp burden by issuing bonds at negative net real rates of return. This means that there will be pressure to understate inflation to the greatest possible extent. This will also reduce budget pressures via COLA adjustments to entitlements , public sector wages , etc.

    The wealthy plutocrats , acting through their propaganda machine – think tanks , etc. – are already making claims that CPI overstates inflation.

    We need a mechanism whereby understatement of inflation adversely impacts the capital class the way it does the working class. Changes to taxation of capital gains is one way to do this. Raise the rates , by all means , but allow gains to be adjusted for inflation. This should be easy to do in the computer age , and it will result in at least some pushback from the capital class if it appears that official inflation rates are being artificially suppressed.

  3. Zlati Petrovv says:

    Marko, how do you know that CPI doesn’t overstate inflation?

    The CPI does not account for things like YouTube, Facebook, and blogging, which produce large amounts of utility at no explicit price cost.

    The CPI does not account for the fact that a $300 iPod today can play videos, Skype, instant message, and hold many gigabytes of music vs. a $300 iPod 5 years ago, which could only play music. (although hedonic effects have been incorporated to some extent and big efforts have been made in this direction)

    The CPI does not account for the fact that Netflix not only provides movies at a far lower cost than Blockbuster did, but that it does it via a far more convenient mechanism- online streaming vs. having to drive to the store.

    The quality of life you can have today at a relatively low cost (say $30,000 a year) is incredible. The median wage earner can easily afford to drive a car with a GPS and a CVT gearbox, Skype relatives in another state through his iPhone, network with hundreds of people at no explicit price cost through Facebook, and work from home via a VPN connection.

    Could the median wage earner do that in 1990. 100% the answer is NO.

  4. Marko says:

    What I do know is that understatement of CPI produces benefits that accrue to TPTB , including a government with a debt/gdp reaching dangerous levels.

    To help ensure that the official figures reflect reality , we should have in place mechanisms that cause the adverse effects of understatement ( or overstatement , for that matter ) to be felt by economic actors across the income and wealth spectrum.

    Currently , understatement benefits our indebted gov’t and high-income taxpayers and harms those whose income relies on CPI-based adjustments.

    Inflation-adjusting capital gains is one mechanism to help establish that balance.

    Don’t you find it odd that we don’t already adjust capital gains for inflation ?

    The reason we don’t is that TPTB want to maintain a status quo that works to their benefit , and they’ll attempt to make it work even more to their benefit – coming up soon : Boskin 2 !

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