Why inequality is bad for all

Joseph E. Stiglitz has an interesting piece in Vanity Fair called The 1 Percent’s Problem. He writes:

Consider the Walton family: the six heirs to the Walmart empire possess a combined wealth of some $90 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society. (Many at the bottom have zero or negative net worth, especially after the housing debacle.) Warren Buffett put the matter correctly when he said, “There’s been class warfare going on for the last 20 years and my class has won.”

Stiglitz argues that inequality is bad for all, including those at the top. He suggests that it would be in the interest of the "1%" to reduce inequality.

Recommended reading.

Has the USA exceeded the optimum level of inequality

Richard B. Freeman in Optimal inequality for economic growth, stability, and shared prosperity: the economics behind the Wall Street Occupiers Protest? looks at the level of inequality in the USA and argues that too much inequality reduces peak economic output.

The reason for the Occupy Wall Street crackdown?

Charlie Stross in More news from our Martian Invaders quotes from a Naomi Wolf op-ed The shocking truth about the crackdown on Occupy. Naomi Wolf describes three main wants of the Occupy movement:

1. Get the money out of politics.
2. Reform the banking system, and in particular, bring back the Glass-Steagall Act.
3. Close the loophole that "currently allows members of Congress to pass legislation affecting Delaware-based corporations in which they themselves are investors".

They both then note that it was the Department of Homeland Security that coordinated the Occupy crackdown:

OWS had become a direct threat to the personal prosperity of the members of the House homeland security subcommittee (to whom DHS is answerable). If allowed to gather momentum and turn into an independent third party, why, OWS might actually put an end to the corruption. Certainly they're pointing at the right targets.

Police tactics on Occupy protesters

Alexis Madrigal in Why I Feel Bad for the Pepper-Spraying Policeman, Lt. John Pike looks at how Police in the USA have changed their tactics in dealing with protesters.

Bernard Keane also comments on Police tactics in Occupy crackdowns perfectly illustrate the movement's claims.

Some great charts on what's motivating the Occupy movement

In CHARTS: Here's What The Wall Street Protesters Are So Angry About... Henry Blodget produces some very interesting charts that look at US employment and unemployment statistics, wages growth over the last 20 and 50 years (average production worker wages have increased by 4% since 1990, CEO pays has increased by 300%, real average hourly earnings have hardly increased at all in the last 50 years and dropped since the early seventies).

Edit 20/11: A map showing the Gini coefficient of national income distribution around the world.

According to Wikipedia:

The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality. It has found application in the study of inequalities in disciplines as diverse as sociology, economics, health science, ecology, chemistry, engineering and agriculture.

It is commonly used as a measure of inequality of income or wealth. Worldwide, Gini coefficients for income range from approximately 0.23 (Sweden) to 0.70 (Namibia) although not every country has been assessed.

Is trickle-down economics a myth

Since the Occupy Wall Street movement started there has been a lot written about the growing inequality in wealth and income, particularly in the USA. Saul Eslake in Why some incomes are just gross writes:

According to data published in the Paris School of Economics' World Top Incomes Database, the share of total household income accruing to the top 10 per cent of the income distribution in the US rose from 34.6 per cent in 1980 to 48.2 per cent in 2008 - an increase of 13.6 percentage points.

Put simply, the top 10 per cent of Americans control almost half the country's household wealth.

Over the same period the share accruing to the top 1 per cent of the income distribution more than doubled, from 10 per cent to 21 per cent; while the share accruing to the top 0.01 per cent of US households ranked by income increased almost fourfold, from 1.3 per cent to 5 per cent.

Indeed, from 1980 to 2008 the average gross income of the richest 1 per cent of American households rose by 172 per cent in real terms.

Over the same period the average real incomes of the bottom 90 per cent of American households rose by just 2 per cent.

Quite staggeringly, the average gross income of households in the bottom 90 per cent of the income distribution was, in real terms, lower in 2008 than it had been in the early 1970s.

He also states:

An increasingly polarised distribution of income and wealth can have adverse consequences for economic performance.

and:

But there's absolutely no guarantee that the distribution of income and wealth produced by markets will be socially desirable, or politically sustainable; indeed, there's plenty of evidence to suggest that more often than not, it won't be.

Thus, if there's to be less government intervention in the means by which incomes are generated by the operation of market forces, based on the belief that the result will be a higher aggregate level of income, there may well need to be more government intervention in the way in which that higher level of income is distributed, in order that the end result is socially and politically sustainable.

To quote Wikipedia:

"Trickle-down economics" and "the trickle-down theory" are terms used in United States politics to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole. The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy." The term is considered pejorative by some proponents of tax cuts.

Proponents of these policies claim that if the top income earners are taxed less that they will invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals.[citation needed] Proponents argue that economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. However, others have argued that "trickle-down" policies generally do not work, and that the trickle-down effect may be very slim, if indeed it even exists at all.

So, the idea is that the more income available to the wealthy, the more money will flow to everyone else. Yet the reality, as seen in the statistics quoted by Saul Eslake above, seems to suggest that this is not the case.

Edit 03/11: Jessica Irvine is of the opinion that Top bosses' riches are undeserved. Dan Ariely, Professor of Behavioural Economics at Duke University, looks at level of executive compensation, particularly in the financial sector in Better (and more) Social Bonuses. He has a great graph comparing the pay of the leaders of the world's top banks to their market capitalisation. For example, James Dimon of JPMorgan earns $19,651,560. JPMorgan has a market capitalisation of $158.6 billion. Jiang Jianqing of ICBC earns $235,700 while ICBC has a market capitalisation of $250.2 billion.

Edit 20/11: Bruce Guthrie writes that They're not the messiahs, just very overpaid and wonders if executive salaries should be capped at 10 times the Prime Minister's salary. Of course that would mean a significant pay cut for many CEOs.

Edit 21/11: Tony Webber on Why executives are worth their fat salaries.

Good inequality and bad inequality

Jessica Irvine in Like cholesterol, inequality cuts both ways looks at one of the major motivators for the Occupy Wall Street movement, inequality in income and wealth, and how there's good inequality and bad inequality. She writes:

Milanovic argues the global financial crisis is a direct result of this kind of ''bad'' inequality taking hold in the US. An excessive build-up of wealth and income in the hands of the financial elite meant they soon ran out of ways to consume it in caviar and champagne, meaning it needed to be invested in ever riskier vehicles. Meanwhile, US politicians sought to hide the uncomfortable truth of declining middle and lower class wealth by turning a blind eye to a massive loosening of credit standards, which enabled people to borrow and feel rich, even as their incomes stagnated. A more equitable path of development ''would have spared the United States and the world an unnecessary crisis''.

Tea Party vs Occupy Wall Street

In Tea Partiers: The self-hating 99 per cent Heather Digby Parton compares the Occupy Wall Street movement to the Tea Party movement. It's an interesting read if you take an interest in US politics.