Redistribute wealth for stability?

In It's time to focus on the redistribution of wealth to poorer workers Greg Jericho writes that "The former World Bank chief economist says that protectionism against globalisation is not the answer to the labour crisis – inclusive growth is".

Globalisation is not about to stop, and neither are the concerns of workers – especially as we are seeing in Australia a time of flat real wage growth and declining share of income going to workers.

This does not mean we need to cower and put up trade barriers which will only exacerbate the problems. But neither does this mean we can carry on still thinking only of GDP growth. To both improve our economy and also dampen the nationalistic xenophobia that quickly turns to racism, governments must adopt policy more targeted to inclusive growth. They must realise that with the greater flexibility of labour comes the need for greater emphasis on redistribution of income.

Failure to do so will only see inequality increase and the fires of nationalism – and all the dangerous sparks associated with it – burn hotter.

Inequality and health - Dr Norman Swan interviews Sir Michael Marmot

In this video Dr Norman Swan interviews Sir Michael Marmot about the impact of inequality on health outcomes.

Has neoliberal capitalism had its day?

In Developed economies are not suffering from the consequences of a financial crash, but from a structural crisis of neoliberal capitalism, an extract from his book, David M. Kotz writes that the current global economic slowdown in developed economies is due to a structural crisis of the "neoliberal form of capitalism".

What explains the current malaise in developed economies across the world? In my book, The Rise and Fall of Neoliberal Capitalism, I analyse the roots of the economic crisis that began in 2008 and the free-market, or ‘neoliberal’, form of capitalism from which the crisis emerged. I argue that the stubborn stagnation afflicting many of the developed economies cannot be understood simply as the fallout of a severe financial crash or as an unusually severe ‘Great Recession’, but instead is a structural crisis of the neoliberal form of capitalism. This means that the continuing stagnation cannot be resolved by policy measures alone within the constraints of neoliberal capitalism. Rather, a resolution requires major institutional restructuring.

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I argue that both theoretical considerations and historical precedents indicate that the neoliberal form of capitalism can no longer give rise to sustained economic growth. The stagnation will put increasing pressure on all the affected groups in society to find an alternative route to resuming normal economic growth. I suggest that a return to a statist economy is the likely outcome, although that can take different forms, ranging from a right-wing nationalist version to a new round of social democracy or even a shift away from capitalism toward socialism. While the neoliberal form of capitalism is unlikely to survive, which statist form will replace it cannot be predicted in advance and will depend on the outcome of economic and political battles among various groups and classes in the coming years.

Growing concensus that we now need active government

In A shift in political thinking is giving Labor a sense of purpose Lenore Taylor argues that there's a new wave of thinking in economics and politics stating the old open model is now reducing growth because of rising inequality.

Australian thinkers, and political parties, have been grappling with a growing wave of thought that the economic challenges of the 2010s cannot be solved by the old 1980s political consensus – the consensus that said economic growth is best achieved by market deregulation and lower taxes and lower spending that generate growth, and allow “all boats to rise” by providing the revenue for governments to pay for social programs and do something or other about poverty.

The rethinking has been going on for quite a while internationally, from Thomas Piketty through to the major international economic institutions. And it turns the old consensus on its head – arguing that rising inequality harms growth, that smart social spending is not the kindly thing governments do after they raise the revenue, but rather a first order revenue-boosting exercise in itself, and asserting that governments need to intervene more to get their economies through this economic transition.

The IMF now says income distribution matters for growth. “Specifically, if the income share of the top 20% (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth,” an IMF discussion paper said.

NIMBYism leading to increased inequality

In Inequality is growing in our own backyards Michael Pascoe looks at an article in The Economist by Matthew Rognlie who argues that a major cause of growing inequality is the growing cost of housing.

Pascoe posits that house owners, keen to "preserve its character", actively campaign against changes that would result in more efficient and higher density housing. This not only leads to a shortage of supply, but may also rob the owners of heritage listed buildings of dubious value the opportunity to reap the maximum returns from the value of their land.

In many of the trendier suburbs, you may well be a Green or Labor supporter who rails against inequality but also rabidly supports the imposition of heritage orders to freeze often dreary and inefficient architecture and, heaven forbid, limit or ban higher density housing for the masses.

But it's you who is creating the inequality gap.

He concludes:

But that's only part of the solution to the housing problem. If any government took that problem seriously and could ignore the rent seekers, medium density should be the default option for cities like Sydney. Anyone with a suitably sized block of land or any group of willing neighbours should be able to build a fashionable row of terraces instead of their isolated boxes, if they so wish.

Those who prefer their own quarter acre would, of course, be welcome to it, and the land tax that it would incur in a rational nation interested in sensible tax reform.

So put your hand up if you're genuinely interested in a fairer society, in preventing increasing inequality, in making housing more affordable for your children, in living in a more efficient, greener city with better infrastructure, and, effectively, freezing housing prices and restoring individual property rights?

I think I just lost the owner-occupier and NIMBY vote.

I think Pascoe has nailed one of the main reasons for the high cost of housing in Australia.

Gittins on inequality

Ross Gittins in Abbott and Hockey: Why poor people don't matter quotes former Treasurer Wayne Swan and IMF head Christine Lagarde on why increasing inequality is not good.

“Many would argue, however, that we should ultimately care about equality of opportunity, not equality of outcome.” As it happens, Hockey has defended his budget’s unfairness with just that argument.

“The problem is that opportunities are not equal. Money will always buy better-quality education and health care, for example. But due to current levels of inequality, too many people in too many countries have only the most basic access to these services, if at all. The evidence also shows that social mobility is more stunted in less equal societies.”

Disparity also brings division, she said. “The principles of solidarity and reciprocity that bind societies together are more likely to erode in excessively unequal societies. History also teaches us that democracy begins to fray at the edges once political battles separate the haves against the have-nots.”

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“It is therefore not surprising that IMF research - which looked at 173 countries over the past 50 years - found that more unequal countries tend to have lower and less durable economic growth,”  Legarde also said.

Get that? Until now, the conventional wisdom among economists has been that efforts to reduce inequality come at the expense of economic growth. Now a pillar of economic orthodoxy, the IMF, has found it works the other way round: rising inequality - as is occurring in Australia, the US and almost all advanced economies - seems to lead to slower growth.

Lagarde said other IMF research had found that, in general, budgetary policies had a good record of reducing social disparities. Social security benefits and income taxes “have been able to reduce inequality by about a third, on average, among the advanced economies”.

What can we do? “Some potentially beneficial options can include making income tax systems more progressive without being excessive; making greater use of property taxes; expanding access to education and health; and relying more on active labour market programs and in-work social benefits.”

Stiglitz compares Australia to the US

Joseph Stiglitz compares Australia to the US in Inequality: Why Australia must not follow the US.

The combination of unequal education opportunities and access to healthcare and inadequate systems of social protection translates into poor average performance of our children - well below the average of the advanced countries in standardised tests, in contrast to Australia, whose children perform well above average. Contrary to what some in Australia’s government have suggested, support for poor families is not only a moral imperative, it is an investment in the country’s future.

Two big lessons of economic research over the past 10 years are that inequality is not the result of inexorable laws of economics but rather of policy; and that countries that adopt policies that lead to high inequality pay a high price - inequality not only leads to a divided society and undermines democracy, but it weakens economic performance. Hopefully, as Australia debates its new government’s budget and economic “reforms,” it bears this in mind.

Stiglitz on Australia

In Tony Abbott's changes to universities and health 'a crime, absurd', says Nobel Prize winning economist Joseph Stiglitz Peter Martin writes:

Asked by Fairfax Media to nominate the two biggest mistakes the government could make that would take it down the American path of widening inequality and economic stagnation, Professor Stiglitz chose the budget changes to university fees and Medicare. Each would make Australia more like the US.

"Countries that imitate the American model are kidding themselves," he said. "It seems that some people here would like to emulate the American model. I don't fully understand the logic."

In the lead-up to the budget Education Minister Christopher Pyne said Australia had much to learn about universities from overseas, "not least … from our friends in the United States".

Professor Stiglitz said Australia had "a system that is really a model for the rest of the world", and deregulating fees would move the entire system in the wrong direction.

"Trying to pretend that universities are like private markets is absurd. The worst-functioning part of the US educational market at the tertiary level is the private for-profit system,'' he said. ''It is a disaster. It excels in one area, exploiting poor children.

"If you're rich your parents can pay the fees, but if you are poor you are going to worry about how much debt you're undertaking.

"It is a way of closing off opportunity and that's why the US doesn't have educational opportunity.

"While we in the US are trying to re-regulate universities, you are talking about deregulating them. It really is a crime."

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Asked what Australia had done right that the US had not, he said: "unions".

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The elite, the top one per cent are not too concerned. When you have so much inequality those at the top say: I don't need public transportation, I have a helicopter, I don't need public schools, I don't need all these other public services and so the result of that is - you look at America today we have some of the best universities, but our average education performance is mediocre.”

Do we really want to be like the US?

Warwick Smith in Are we witnessing the emergence of the United States of Australia fears that we are going down to far the US path.

Hockey and Abbott have made their choice. They want us to follow further down the US path. They believe that if you want something, you should pay for it yourself. If you can’t afford it then you don’t deserve to have it because you haven’t worked hard enough or tried hard enough. Their ideology doesn’t recognise the reality; in the kind of society they want us to have if you can’t afford something you probably weren’t born to rich enough parents.

If we consider the wellbeing of all Australians to be important then the Scandinavian model is the clear winner. We can and should increase the proportion of GDP taken in tax and use it to provide the best opportunities to our young people and the best quality of life we can to society’s vulnerable, regardless of where or to whom they were born. This means first class universal education and healthcare and the guarantee of a decent standard of living. If these are not our aims then what is the point of economic progress?

Not all boats rise

Mark Triffitt in Trickle-down theory all washed up now writes that many economists are now arguing that rising inequality leads to reduced economic growth.

Thomas Piketty interviewed on his book and rising inequality

In The rise and fall and rise again of inequality: an interview with Thomas Piketty Jonathan Derbyshire talks to Thomas Piketty about his book Capital in the Twenty-First Century and the causes of rising inequality.

IMF warns that income inequality can reduce economic growth

In IMF Issues Income Inequality Warning, Suggests Ways To Slow It Christopher S. Rugaber reports that:

The International Monetary Fund warned Thursday that wide income inequality can slow economic growth and is proposing ways to reduce it.

Its recommendations include: Raising property taxes. Taxing the rich more than others. Raising the eligibility age for government retirement programs.

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Government tax and spending policies can be effective in reducing inequality, the report said. Such policies have lowered the income gap by an average of one-third in advanced economies, mostly because of money transferred to the poorest households.

Last month, an IMF research paper concluded that countries with steep income inequality were more likely to have briefer and weaker periods of economic growth. It also argued that efforts to redistribute income don't necessarily hinder economic expansion.

Increasing inequality may be inevitable

In A Relentless Widening of Disparity in Wealth Eduardo Porter looks at the work of Thomas Piketty who argues that our economic system will see a rise in inequality and increasing concentration of wealth in the hands of a few.

Mr. Piketty’s is based on data. He just has much more: centuries’ worth, from dozens of countries. He distills from them a simple historical regularity. The rate of return to capital — understood broadly to include machinery, land, financial instruments, housing and everything else — is usually higher than economic growth.
This was particularly true before the Industrial Revolution, when economies didn’t really grow, but it prevailed even after economic growth took off in the 19th century.
This means that the income from wealth usually grows faster than wages. As returns from capital are reinvested, inherited wealth will grow faster than the economy, concentrating more and more into the hands of few. This will go on until capital owners decide to consume most of their income and stop reinvesting as much.

Is there a solution?

Is there a politically feasible antidote? Professor Piketty notes that the standard recipe — education for all — is no match against the powerful forces driving inherited wealth ever higher.
Taxes are, of course, the most feasible counterweight. Progressive wealth taxes could reduce the after-tax return to capital so that it equaled the rate of economic growth.

More inequality, more guards

In One Nation Under Guard Samuel Bowles and Arjun Jayadev highlight the correlation between inequality and the number of guards employed.

The world's richest 85 people have as much wealth as the bottom half of the world's population

Oxfam has released a report on inequality titled Working for the few: Political capture and economic inequality. In the report they point out the following:

• Almost half of the world’s wealth is now owned by just one percent of the population.

• The wealth of the one percent richest people in the world amounts to $110 trillion.That’s 65 times the total wealth of the bottom half of the world’s population.

• The bottom half of the world’s population owns the same as the richest 85 people in the world.

• Seven out of ten people live in countries where economic inequality has increased in the last 30 years.

• The richest one percent increased their share of income in 24 out of 26 countries for which we have data between 1980 and 2012.

• In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer.

They also have the following graph:

Could higher unemployment be helping corporate profits?

Paul Krugman in The Fear Economy writes:

The economic recovery has, as I said, been weak and inadequate, but all the burden of that weakness is being borne by workers. Corporate profits plunged during the financial crisis, but quickly bounced back, and they continued to soar. Indeed, at this point, after-tax profits are more than 60 percent higher than they were in 2007, before the recession began. We don’t know how much of this profit surge can be explained by the fear factor — the ability to squeeze workers who know that they have no place to go. But it must be at least part of the explanation. In fact, it’s possible (although by no means certain) that corporate interests are actually doing better in a somewhat depressed economy than they would if we had full employment.

What’s more, I don’t think it’s too much of a stretch to suggest that this reality helps explain why our political system has turned its backs on the unemployed. No, I don’t believe that there’s a secret cabal of C.E.O.’s plotting to keep the economy weak. But I do think that a major reason why reducing unemployment isn’t a political priority is that the economy may be lousy for workers, but corporate America is doing just fine. 

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Weak labor markets are a main reason workers are losing ground, and the excessive power of corporations and the wealthy is a main reason we aren’t doing anything about jobs.

Too many Americans currently live in a climate of economic fear. There are many steps that we can take to end that state of affairs, but the most important is to put jobs back on the agenda.

Household income distribution

Matt Cowgill posted this table of working age population household income distribution to Twitter:

Higher taxes for the 1% might be a good idea

Chrystia Freeland in Putting the magnifying glass on the one percent writes about economic research on growing income inequality and the 1%.

One of the most striking findings will probably give comfort to the plutocrats: In contrast to previous generations, the super-rich today tend to have earned their fortunes rather than inherited them.

Steven Kaplan of the University of Chicago and Joshua Rauh of Stanford University in California studied Forbes magazine’s annual list of the 400 richest Americans. They found that in 1982 just 40 percent of these plutocrats had built their own businesses. By 2011, the super-rich had gotten much richer — the combined wealth of the Forbes 400 was $92 billion in 1982 and had surged to $1.53 trillion by 2011 — and many more of them had, as the meme of the 2012 U.S. presidential election campaign had it, built it themselves: 69 percent.

“This isn’t the ‘Downton Abbey’ rentier class,” explained Van Reenen, who has found a similar trend in Britain. “These incomes come from the labor market. You can say it is a triumph of the human capitalists over the physical capitalists.”

Interestingly it seems that these researchers are calling for higher taxes for the very rich:

Among economists who study the surge in pay at the top, it is pretty much a truth universally acknowledged that taxes should rise at the summit, too. “Economics would suggest that when you have big increases in inequality, the top tax rate should rise,” Van Reenen said. “That seems very right and very reasonable.”

The impact and the structure of higher taxes for the rich are a more complicated and controversial issue. Timothy Besley and Maitreesh Ghatak, both of the London School of Economics, make a robust case for higher taxes on bankers’ bonuses. Their work is theoretical, but beyond the campus green what may be particularly interesting is the way they frame the wider debate.

“Little undermines the case for a market economy more than the perception that there is injustice in the rewards that it generates,” they argue in a recent paper. “The greatest clamor for reform should come from those who support the market system.”

“We have shown that some form of bonus taxation in the financial sector is optimal above and beyond standard progressive income taxation,” they conclude. “We have identified a form of taxation that we believe makes the market system both fairer and more efficient.”

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Emmanuel Saez, an economist at the University of California, Berkeley, who is one of the pioneering students of incomes at the very top, has offered an even more provocative suggestion. At the American Economic Association meeting, he argued that when tax rates at the top are low, “top earners extract more pay at the expense of the 99 percent.” Higher tax rates for the rich, he suggested, “reduce the pretax income gap without hurting economic growth.”

Graph of weekly ordinary time cash earnings distribution

Matt Cowgill posted the graph below to Twitter with the caption: 'One for the "$150k is a lot of money" file'. From https://twitter.com/MattCowgill/status/309089483612098560/photo/1

Video showing wealth inequality in the US

This video is apparently going viral: Video on Wealth Inequality in the U.S.