Why Inequality Throws Us Off Balance Post author By Philip Lane Post date September 12, 2011 The latest issue of Finance&Development is now available online – inequality is a main theme for this issue. Categories In Uncategorized 32 Comments on Why Inequality Throws Us Off Balance ← Buiter and Rahbari on the Future of the Eurozone → Ireland Debates the Limits of Austerity 32 replies on “Why Inequality Throws Us Off Balance” I don’t expect too many comments on this thread. Inequality isn’t what exercises most of the commenters on this blog. However, I’d like to thank you Philip for posting this. There’s some interesting material there. I would also like to include the link that Paul Quigley posted, which is directly pertinent to this thread and is an excellent read. http://www.interfluidity.com/posts/1256656346.shtml rising inequality is just not true, just look at the first graph of the cited link. US is stable since 1993, Brazil has come down, substantially. this endless lie doesnt become true, not matter how often it is repeated. Same goes for Germany. Kevin Callinan, the deputy general secretary of IMPACT, the main public sector trade union, shakes his head at the idea of further pay cuts. “There’s a view out there on the right that if the money isn’t there you have to have job cuts, you have to have pay cuts. That’s an okay view until you have to run a country,” he said And if your central bank won’t let you print it the alternative is……? That comment fron Kevin C of IMPACT is typical of people who have been briefed about how Keynes teaches you that running a country is different from running a country, but who have failed to grasp that Ireland cannot borrow more or print. “I would have little to no confidence that these inefficiencies could be ironed out,” the doctor says. “No matter how good the politicians are, the labour unions are just too strong and the politicians are too afraid to take them on.” Quite. that is “running a country is different from running a company” . I think you’re in the wrong thread grumpy. @ genauer. Did you look at the second graph in the same link? How about Chart 3? You know the one with the tall guy who looks like he could squash all the little guys beside him? @Minister Richard Bruton (lets ignore that promise [for the mo] that members of ALL state boards would be requested to resign within 6 monts of taking office) Those American text-books you once read in Oxford are obsolete – and your present labour market policies are non-sense, economic nonsense, as they are only suited to very large economies. They will increase inequality and lead to a further bifurcated society. You are kicking the lower orders of labour further down into penury, while ignoring the gougers at the upper-echelons of the non-productive labour market. There is more than sufficient empirical evidence here that your present policy is the wrong one ….. and may I humbly suggest that you get with Minister Quinn for a little light reading of this evidence here. @Minister Rory Quinn Kids are leaving primary education who cannot read, write, add, subtract, divide or multiply. Plenty of evidence here that this can be better addressed with a reversal of present labour market policy. Kids who are well nourished tend to learn more easily and I’m sure you are aware of the empirical fact that the two main determinants of educational outcomes in Ireland are Ability and Class – and class is the main predictor @Minister Joan Burton Might as well form a Troika. You are three reasonably intelligent people – now you have power – Use it. http://www.imf.org/external/pubs/ft/fandd/2011/09/index.htm @ disgruntled I look at the quantitative “chart 1” 2 lines underneath your chart 3, it says that also wolrdwide Gini has come down. So, this “rising inequality” is just a socialist lie. Btw, income distributions have been the same in 1913 in the US and DE, within the limits of comparability (social security, health care, family size) @ genauer: The income distributation data: I would be interested in the reference sources. Thanks. Brian Snr. @Philip Lane (or anyone .. Question: Chart 1 in “Unequal = Indebted” paper by Michael Kumhof and Romain Rancière Where might one place Ireland here [x ; y] Guesstimates OK @genauer Globally, the improvement in the Gini is, in large part, due to Communist China; and that is neither a socialist lie nor a truth – but a fact. Now, if you take off those PD/Tea_Party specs, and look out the window locally, you will observe an increase in local inequality. If we can’t agree on the data and what it is showing this thread will fizzle out in short order, but there should be enough evidence to demonstrate that in most developed economies – and in particular those of an Anglo-Saxon bent – labour’s share of income was been in secular decline over the last 30 years. It should be seen as the revenge of the wealthy and powerful for the financial repression that preceeded it for the previous 30 years. But the pendelum has swung too far. Romain Ranciere is one of the brightest young French economists – and rapidly making his name internationally. It is good that he is tackling this issue in such a precise, scientific and disciplined manner. But what we need are many more economists to devote attention to this and to get it on to the policy agenda. But the wealthy and the powerful finance the think tanks that generate the policy ideas and finance the political factions that form the governments that implement policies favourable to them and that fund the universities where many of the economists reside. You won’t find many economists rushing to develop the insights Ranciere is exploring; they know what side their bread is buttered on. So we’ll end up with this valuable analysis being exploited and twisted by the left. And this will allow the wealthy and powerful (and their ‘useful idiot’ economists) to dismiss the analysis out of hand. @DO’D: “You are three reasonably intelligent people – now you have power – Use it.” Intelligent, probably. Power? – questionable. I’d say it was quite restricted. Using what they have? Depends on whether they are ‘permitted’, or have the intestinal fortitude, or that they even want to, (will it get me more votes?). The issue of primary education is a very hazardous (political) area to wander into. My experience of some elements of the current primary syllabi, is they have been constructed by fundamentalists, who are either institutionalized robots or crafty knaves. I would opine to the former. You need to possess superior intelligence to be a successful knave! Little evidence of intelligence on display. All children (other than those with some specific learning disabilities) MUST be able to read fluently – in English, by age 7. Failure here assures future failure. As for the maths. Its an insane mess. Too many chefs, no cooks! The school books (inc workbooks) are so poor its a miracle that some kids actually achieve in mathematical (sums, algebra, geometry, stats) subjects. Genetically endowed perhaps. Inequality starts at birth. Our schooling ‘system’ perpetuates. What to do? Brian Snr. The view from the inside of the insiders’ tent in Ireland is not of two unequal workforces and I guess that’s how a sense of entitlement can blur an image. In the US, most of the increase in corporate profits in the past decade have come from falls in the share of earnings, which is at a 50-year low. There is a lot of interesting data which the World Bank economist doesn’t provide. Many US consumers are flat on their backs but a small number account for almost 40% of consumer spending and outlays. @ David O’Donnell On education, it all depends on the minister; no need for the comrades to change without years of bargaining on what they will trade any change for. @genauer I think you might enjoy Wilkinson and Picketts “The Spirit Level: Why More Equal Societies Almost Always Do Better”. It is a heavily referenced and tightly argued work and after a few half failed attempts at a coherent rebuttal of its principal thesis the political right has more or less decided to pretend it does not exist. Do not worry, it is an easy read. The evidence points to a considerable lessening of income inequality in Ireland in the new century compared with the 1980s. See http://www.indexmundi.com/ireland/distribution_of_family_income_gini_index.html The evidence is also favourable regarding the impact of transfers in kind on income distribution: To quote from a recent article by Brian Nolan: http://www.esr.ie/Vol40_1/ESRI%2040-1-3.pdf “Non-cash benefits can have substantial effects on the distribution of economic welfare. Standard approaches, however, have failed to take adequate account of the pattern of needs associated with the greater use of health and education services. Our results, for Ireland in the year 2000, show that it is possible to derive more appropriate measures of total resources than have been derived using standard methods. The results indicate that, as far as health, education and imputed rent are concerned the overall pattern of redistribution is “pro-poor” “. It is true that Ireland bucked the trend in this respect over the last 15 years, but the fiscal austerity being demanded – and more precisely the manner in which it is being implemented and it is proposed to implement it – is almost certain to reverse these gains. Unfortunately most of these gains were generated on the back of the double bubble. But what a difference it would make if the cost of living were cut by 13% – with a steeper cut for those on lower incomes. It could be done within 6 months. All it would need is the political will. But does it exist? Apologies for posing such a stupid question. Shay – thanks for the tip on the Spirit Level Actually Shay the academic response to the Spirit Level has been mostly critical and not just or particularly the right (unless you define right wing as anyone who criticizes an egalitarian argument). The science is not that convincing. Shay, Sadly Kevin is right. Hopefully someone will prove it with some good science one day. @disgruntled observer looks like you were correct – very few comments – and not a single guesstimate to me [x, y] [?, ?] … what are we paying all these ekonomists for? now i’m disgruntled @kevin denny ‘The science is not that convincing.’ Bit like economics, assuming that economics is some class of science. Me lived hermeneutic scandinavian experience suggests that The Spirit Level is “plausible”. New York Times today Soaring Poverty Casts Spotlight on ‘Lost Decade’ WASHINGTON — Another 2.6 million people slipped into poverty in the United States last year, the Census Bureau reported Tuesday, and the number of Americans living below the official poverty line, 46.2 million people, was the highest number in the 52 years the bureau has been publishing figures on it. http://www.nytimes.com/2011/09/14/us/14census.html?_r=1&nl=todaysheadlines&emc=tha2 Its hammering time. @kevin denny Actually Shay the academic response to the Spirit Level has been mostly critical and not just or particularly the right It would be just terrific if you could come up with a reference or two to a thorough critique of the Spirit Level from a source that is not a right wing think tank, a right of centre school of economics/sociology or some minor contrarian looking to make their name. I will give the paper a read, I promise. However if all I read is a thinly upholstered version of “correlation is not causation” I will be disappointed and condemn you to the ranks of those who for years attacked research on the link between cancer and cigarettes as the science “just was not there”. The last response to some wing nut attack on the Spirit Level from Richard Wilkinson was so crushing it actually made me sorry for the would be debunkers. @john o’brien Sadly Kevin is right. Hopefully someone will prove it with some good science one day. “Sadly” John? Really? Just to ease my mind on whether your use of the word “Sadly” is the usual disingenuous whine from a crypto-libertarian looking to justify their lack of interest in improving the well being of their fellow human being where would you place yourself on the political spectrum? @Shay, What Wilkinson and Pickett describe is irrefutable. This has given the neocons, their centre-right acolytes and some of their ‘useful idiot’ economists a major headache. So the counter-attack has been on what they assert. And because what they assert is derived directly from the evidence, and not using the nostrums and techniques of the narrow canon of neoclassical microeconomics, the ‘useful idiots’ believe they are justified in dismissing the assertions. How dare two mere epidemiologists spurn the sacred and arcane truths and rituals of the received wisdom of microeconomics and make these assertions. It isn’t a dialogue of the deaf because the deafness is just on one side. But it is a wilful, deliberate – but generally well-rewarded – decision to be deaf and blind to the evidence. @ Shay Begorrah & Paul Hunt, I think you both might enjoy this: http://www.nakedcapitalism.com/2011/09/david-graeber-on-the-invention-of-money-%E2%80%93-notes-on-sex-adventure-monomaniacal-sociopathy-and-the-true-function-of-economics.html A couple of choice quotes: one from near the beginning, and one from near the end. “We are not, in other words, dealing with a work of scholarship. However, in the blogsphere, the quality or even intention of an argument often doesn’t matter. I have to assume Murphy was aware that all he had to do was to write something—anything really—and claim it rebutted me, and the piece would be instantly snatched up by a right-wing echo chamber, mirrored on half a dozen websites and that followers of those websites would then dutifully begin appearing across the web declaring to everyone willing to listen that my work had been rebutted. The fact that I instantly appeared on the Von Mises web page to offer a detailed response, and that Murphy has since effectively conceded, writing an elaborate climb-down saying that he had no intention to cast doubt on my argument as a whole at all, only to note that I had not definitively disproved Menger’s, has done nothing to change this. Indeed, on both US and UK Amazon, I have seen fans of Austrian economics appear to inform potential buyers that I am an economic ignoramus whose work has been entirely discredited.” “Economists always ask us to ‘imagine’ how things must have worked before the advent of money. What such examples bring home more than anything else is just how limited their imaginations really are. When one is dealing with a world unfamiliar with money and markets, even on those rare occasions when strangers did meet explicitly in order to exchange goods, they are rarely thinking exclusively about the value of the goods. This not only demonstrates that the Homo Oeconomicus which lies at the basis of all the theorems and equations that purports to render economics a science, is not only an almost impossibly boring person—basically, a monomaniacal sociopath who can wander through an orgy thinking only about marginal rates of return—but that what economists are basically doing in telling the myth of barter, is taking a kind of behavior that is only really possible after the invention of money and markets and then projecting it backwards as the purported reason for the invention of money and markets themselves. Logically, this makes about as much sense as saying that the game of chess was invented to allow people to fulfill a pre-existing desire to checkmate their opponent’s king.” @disguntled, I’ll buy the first, but not the second 🙂 The difference between the right and the left is that the former hanker after some utopia in the past that never was while the left hanker after some utopia in the future that will never be. The cruel irony, of course, is that the neocons have proved damnably successful at reproducing key features of the robber baron era of the late 19th century in modern times. @Paul Hunt How dare two mere epidemiologists spurn the sacred and arcane truths and rituals of the received wisdom of microeconomics and make these assertions. What is a poor old public choice theorist supposed to do when confronted with so much dirty real world data? Wilkinson and Pickett are simply truing to highlight that in developed societies there are real observable social and economic costs for policies that increase income inequality. I always presume that the opposition to the thesis comes from those who are committed to defending privilege, either because the idea appeals to them (disciples of Rand, Hayek and Mises) or because they are neo-feudalists entwined in the network of social and economic patronage of our current financial elite (the entire staff of The Economist). Obviously I could be wrong, perhaps even horribly skewed economic growth is good. Perhaps after chewing over a few of the apparently numerous academic critiques I will see the error of my ways. Those critiques have got to be there, right? Someone on the Internets said so. p.s. Wilkinson and Pickett have a couple of enjoyably mean responses to critics of TSL on the Equality Trust Website (http://www.equalitytrust.org.uk/resources/response-to-questions). @Shay, The opposition is based on fear – pure and simple. It is the fear that enough people will open their eyes to the extent to which the Neocon hegemony has subverted markets and suborned government to advance the interests of a global elite at the expense of everyone else and thet they will seek to do something about it. And in the modern era it’s enough to say that something has been refuted, without any evidence, and it will be endlessly repeated (pace Disgruntled’s example). Most people will only learn about what is being asserted in a report that it has been refuted. When I read comments that what Wilkinson and Pickett say is irrefutable, I sense religion rather than reasoned argument. That anyone who doubts it must be right wing and lying according to one poster leaves little room for reasoned debate on what the data might mean. @ Paul, I don’t think David Graeber is really a leftie in the sense that you’re talking about. If he considered himself anything at all it would be an associate professor of anthropology at Yale. I did take both of his quotes in isolation mind you, so I can understand why you might come to the conclusion you did. In fact, what he points out in the article, which though long is highly illuminating, and more than a little fascinating, is that since Adam Smith originated the idea that barter pre-existed money it has been adopted by both the left and the right, from both Marx to Hayek and everyone in between. The idea being that man spontaneously hopped from barter to monetary exchange through some rational calculation of value equivalence of commodities (my wording, but same idea I think). It’s asserted in text books that 100% of all societies everywhere developed from a barter society to a monetary society. What he outlines is that when anthropologists spread throughout the world looking for these barter societies, they found none, zilch, zero. It’s well worth a read, whether you’re on the left or the right, and at times is highly amusing. His funk at the Austrians in particular is because, being the nuts that they are, decided they’d rather not learn anything and instead go and attack his claims and his work, without having any evidence whatsoever, nor having read the book about which he was first interviewed. It’s actually the second time he’s appeared on Naked Capitalism, the first being the spur for the nutjob Austrians where he speaks about the origins of debt. http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html It was our own fellow Austrians attempted tarring of Wilkinson and Pickett made me offer this. Think of it as exhibit B of a certain type of mind. @john o’brien When I read comments that what Wilkinson and Pickett say is irrefutable, I sense religion rather than reasoned argument. How about we just agree that their arguments have not been refuted by anyone of any serious scientific or moral stature and leave it at that? I honestly remain open to reading any critical review of TSL where the authors of the have previously published peer reviewed work on sociology, macroeconomics, epidemiology or cross disciplinary work on the effects/non effects of income inequality. If you can find such research send it on. If you can not find such research then perhaps you might think twice before accusing anyone else of religious fervour? Pot, kettle, cooking utensil…. @John O’ Brien, Wiljinson’s and Pickett’s assertions are not irrefutable. From a purely scientific method perspective no one’s assertions are – or should be. Even their most swivel-eyed critics would be prepared to accept that inequality imposes costs, but would continue to assert that the benefits generated by the economic system that also generates this inequality outweigh any costs incurred. And they would go on to assert that modifying inequality would result in a reduced ability to generate economic benefits, that this reduction in benefits would outweigh any benefits gained from reducing inequality and that everyone would be worse off. On the other side the primary assertion is that the relentless drive for economic growth increases inequality and imposes costs that outweigh any benefits generated. It is fundamentally an empirical question, but we don’t have laboratory conditions. So the ideologues on both sides tend to get stuck in – and more heat than light is generated. My instinct is to call a plague on both of these ideological houses. The right uses the narrow canon of neoclassical microeconomic to argue for the unfettered markets that inevitably generate unequality as a by-product of the superior economic performance they provide. The left seeks to supplant market outcomes or to control and influence the outcomes of markets they can’t supplant to minimise inequality. What makes the debate so surreal is that the right loathes and detests markets because, when they work properly, they threaten the invested capital of inefficient or unresponsive firms – even to the point of bankruptcy. So firms of any size or heft, with the full support of the right, will seek to subvert and rig markets and to suborn governments to maximise the ‘social welfare’ they can secure. The left, blinded by their unswerving faith in the benevolence of the ‘state’ and its ability to intervene to achieve beneficial outcomes, fails to recognise that efficient competitive markets, subject to effective regulation, are in the interests of all citizens. as always, reason struggles to avoid succumbing to ideology. @ Shay, Paul, John, An interesting graphic: hat tip Naked Capitalism (yet again – amazing resource) http://www.tobinproject.org/conference_economic/papers/BankFailures_ChartwithComments_Moss.pdf It may well be that correlation does not equal causation, but I’d just note the striking overlay between deregulation, inequality and financial crisis in the US. What’s not on that graphic, but would have an almost perfect inverse correlation would be the top marginal tax rate. I’ll leave you to draw your own conclusions In those sectors where de-regulation meant no effective regulation the outcomes were disastrous. The graphic demonstrates this quite well. But in those sectors where de-regulation meant the emergence of regulated markets and where market power and political meddling were either banished or neutralised, the outcomes benefitted (and continue to benefit) citizens and consumers. The US gas industry provides one of the best examples. Most other sectors fall between these extremes. But the institutional arrangements underpinning this spectrum from the very, very good to the horrid are alien to Europe. Some countries manage to have some effective parliamentary control over government (and the government machine); but others fail miserably. All employ a huge array of fixes and fiddles that protect insiders but impose excessive costs on final consumers and most citizens (or, in the case of Germany, squeeze labour’s share of national income). The damage that is done tends to vary inversely with the extent of parliamentary control over government. The more control the less the damage; the less control the more the damage. Ireland is a good example of the latter. It all comes back to how the inevitable major conflicts in an economy and society are resolved – those between owners/managers and workers, between parliament and government and between large firms and final consumers. Comments are closed.