Rising Inequality Spooking the 0.0001%

Contributors to this blog–and CCPA experts–have been warning about the negative economic and social consequences of rising inequality for decades.  

Now the even the 0.0001% are getting concerned.   Experts polled for the Global Risks Report for this month’s meetings of the World Economic Forum in Davos –one of the most eleite gatherings of the powerful in the world — selected severe income inequality as the most likely global risk to manifest in the next ten years. 

The report notes that “shrinking tax revenues have deteriorated the fiscal position of governments and reduced their ability to ease social hardship with welfare and counter-cyclical spending”.  It acknowledges that the “growing sense that wealth and power are becoming more entrenched in the hands of political and financial elites”.  It warns that a lack of social mobility and hope, especially for youth, could feed more social unrest as we’ve experienced from the U.S. to the Middle East.  If not addressed, it could feed a vicious cycle and “potential slide into dystopia”.

Scary prospects prospects indeed, even for the elite–including Prime Minister Stephen Harper–gathered in the rarified confines of Davos.

In Washington, Alan Krueger, Chairman of Obama’s Council of Economic Advisors delivered a  speech yesterday highlighting the real problems of the Rise and Consequences of Inequality in the United States. 

There’s some interesting material there: he makes the strong point that rising inequality has hampered economic growth.  He says “there’s no sign.. that the tax increases in the early 1990s had an adverse impact on growth” and “there is little empirical support for the claim that reducing the progressivity of the tax code has spurred income growth, business formation or job growth.” 

He cites studies showing that “a more fair distribution of wages would be good for business because it would raise morale and productivity”.    Krueger also highlights some of the excellent work by Ottawa professor Miles Corak and his “Great Gatsby Curve” showing that rising inequality is associated with lower intergenerational mobility.    Horatio Alger no more.

These issues and concerns certainly aren’t new to Krueger, who did ground-breaking work on the impacts of minimum wages, but they may start to spook the Davos crowd.   The question is: what are they going to do about it? 

Krueger has some decent though modest suggestions aligned with his his boss’s policies.   The solutions suggested for Davos are even more self-serving and far out to sea: “equipping youths with the skills  to succeed and enable them to move to where their labour labour is most needed through safe well-managed migration channels” (!) 

Time for them to man the lifeboats!

9 comments

  • The solutions to inequality proposed, yet more supply-side employability clichés, is why I’m pretty skeptical of the supposed concern of the élite for inequality. When they start proposing higher corporate and personal income taxes, higher minimum wage, easier access to unionisation, and job creation programs, then I’ll believe it. Until that time it’s just the élite co-opting our language as far as I’m concerned.

  • Training is actually the official OECD prescription as you can see at:

    (http://www.oecd.org/document/40/0,3746,en_21571361_44315115_49166760_1_1_1_1,00.html)

    Two excerpts:

    “The main driver behind rising income gaps has been greater inequality in wages and salaries, as the high-skilled have benefitted more from technological progress than the low-skilled.”

    “Our report clearly indicates that upskilling of the workforce is by far the most powerful instrument to counter rising income inequality.”

    So it’s not surprising that Krueger would suggest skills training – the OECD position is that increases in income inequality are mainly a consequence of skills inequality, although there may be other factors at work as well…

  • RCP, if you go over and read through Krugman you will see that the skills thesis has been debunked. Differences in education and skills are not the main drivers of inequality.

  • Travis, I was not endorsing the OECD position – just pointing out that one of “the Davos crowd” echoing the OECD position was not surprising. It’s a much more congenial position for them than “we are the evil 0.0001%”.

    In Canada, my personal belief (I’m willing to be corrected) is that increases in income inequality (as measured by the Gini) in the last 25 years or so have been driven primarily by freer trade (and attendant greater capital mobility) and technological change (in particular, communications and computing costs have fallen through the floor). Add a dash of changes in family structure and some assortative mating: although they clearly exist, I don’t think they’re primary.

    What do you think are the main drivers of increased income inequality in Canada over that period?

  • Sorry, I misread you.

    I would agree with your list but add: decreasing returns to human capital (education); an increasingly regressive tax system; changes in corporate governance (from long to short term) and the continual weakening of union bargaining power and density. On the last I would note that in many respects the federal and provincial governments have been leaders so it is not totally about capital mobility.

    The thing is that in the majority of OECD nations there has been a trend toward increasing income inequality and for the most part that inequality has been driven by changes in the primary distribution of income (as between profits and wages). In some cases this has been exacerbated by a decrease in the redistributive effort of the state (the Canadian case and others).

    The US is of course hyper trending towards greater inequality. Krugman had a great post on this:

    http://krugman.blogs.nytimes.com/2012/01/15/the-great-gatsby-curve/

  • Travis, Paul Krugman has written some interesting things, but he tends to be very U.S.-centric (lately with a big side-order of What To Do About Europe) and not focused on Canada.

    Based on Figure 1 in this paper:

    (http://ftp.iza.org/dp4814.pdf)

    perhaps he should be saying “Go north, young non-gender-specific person, go north!”.

    When you say “increasingly regressive tax system”, do you mean the reductions in corporate tax rates since 2000? I may be too Ontario-centric, but the individual top marginal rate here has been stuck in the 47%-53% range since David Peterson days, I think – a couple of decades – so it seems like it would be a stretch to use the variation to explain an increase in income inequality.

    I agree on short-term governance – the idea that stock options align executives with shareholder interests doesn’t hold up under scrutiny. Extending a low-interest loan and requiring them to buy stock with it would work a lot better.

  • The OECD report in fact highlights regressive changes to the tax/transfer system as a major cause of rising inequality in Canada, and also kind of call for higher top income tax rates.

  • Andrew, if you look at the OECD country notes for Canada, available at:

    (http://www.oecd.org/dataoecd/50/52/49177689.pdf)

    you can see that they say:

    “The rise in inequality was largely due to widening disparities in labor earnings between high and low-paid workers, but also to less redistribution.”

    They then go on to say:

    “Prior to the mid-1990s, the Canadian tax-benefit system was as effective as those in the Nordic countries in stabilising inequality, offsetting more than 70% of the rise in market income inequality. The effect of redistribution has declined since then: taxes and benefits only offset less than 40% of the rise in inequality.

    This downward trend in redistribution was largely driven by the reduced role of means-tested transfers: benefit rates fell and benefits became less targeted. Changes in income tax rates played less of a role.”

    So the OECD is identifying changes in labour income and the transfer system as the main drivers in increased income inequality over the period that they analyze.

    The first graph in the Canada country notes is also pretty interesting – the sharpest increase in income inequality is over the period 1995-2000 and it’s pretty flat since then. Looks to me like it’s kind of Paul Martin/Mike Harris related.

    The call for consideration of higher income tax rates is generic (included under the heading “Key policy recommendations for OECD countries from Divided We Stand”) and is not specific to Canada:

    “The growing share of income going to top earners means that this group now has a greater capacity to pay taxes. In this context governments may re-examine the redistributive role of taxation to ensure that wealthier individuals contribute their fair share of the tax burden.”

  • From today’s Globe and Mail ROB:

    Why even the 1 per cent should be in favour of greater equality
    CHRISTOPHER SWANN
    Reuters Breakingviews
    Published Sunday, Feb. 12, 2012 8:00PM EST

    Political strife and inequality go hand in hand. But the growing gulf between the very rich and the rest – which in the United States is approaching levels last seen in the 1920s – could also be a menace to economic growth and financial stability, recent International Monetary Fund research shows. If so, it’s not just the 99 per cent that have an interest in narrowing the wealth gap.

    America’s rising inequality has so far been seen as largely a political menace, threatening a rise in populist politics, protests or social disorder. And some economists have viewed chunky differences in income as a spur to growth by giving the less well-off a greater incentive to work hard and take risks. The IMF research department has devoted intellectual firepower to examining the economic perils of yawning wealth gaps. Their finding is that the less equal a society becomes, the harder it is to sustain bursts of growth.

    For a start, unequal societies are less flexible in dealing with economic setbacks. Resolving even minor fiscal problems, for example, gets harder amid simmering resentments between the rich and the rest. Unequal nations are more likely to squander human capital, running short of skilled labour faster when growth accelerates. In addition, glimpsing the lifestyles of top earners appears to encourage more modest earners to run up excessive debts. Recent research from the University of Chicago, hardly a hotbed of socialism, suggested that middle-class families were more likely to get into financial trouble when they lived close to the super-rich. Politicians in those areas were also more likely to promote policies that made credit easier to obtain.

    On a global level, the IMF economists posit that if more polarized countries, such as those in Latin America, could halve the inequality gap with more egalitarian Asian tigers, then periods of economic expansion would last twice as long. Indeed, income gaps, the fund’s research suggests, may have a more powerful impact on growth than free trade, a competitive exchange rate or foreign investment.

    For all its economic advantages, including flexibility, the United States can ill afford to become complacent. The financial instability and political paralysis of recent years hint that the world’s largest economy is already starting to succumb to some of the symptoms of inequality. This should worry the richest 1 per cent almost as much as the rest.

    Christopher Swann

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