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The Coincidences of Inequality

I really enjoyed Will Wilkinson's paper on inequality. I consider myself as something of a connoisseur of think tank reports -- it's cheaper than wine -- and this one's an uncommonly good read. But it's also pretty unsatisfying.

One of Will's first arguments is that income inequality is not a good way to think about the issue. The real key is consumption inequality. It's not, in other words, how much money people make, but how much stuff they buy. And "the weight of the evidence shows that the run-up in consumption inequality has been considerably less dramatic than the rise in income inequality."

You'd think the fact that our ears are still ringing from the deafening "pop!" of the consumption bubble would, in some way, impact this analysis. But it doesn't. Nor does the word "debt." But that's how many households have kept their consumption high amid widespread wage stagnation. Indeed, take a look at this chart tracking the rise in inequality:

inequalitygraph.jpg

Now take a look at this chart tracking the rise in household debt:

Fig1DebtoverY.png

The acceleration in inequality and the acceleration in debt mirror each other pretty closely. Both accelerate in the early-80s. Both flatten a bit in the 90s. Both kick back into gear in the early-Oughts. (There's some divergence around the pop of the tech bubble in 2001, but it's obvious why that would temporarily bring down inequality without easing the pressures that were causing middle-class families to borrow). It would be quite a coincidence if the two were unrelated. But I rather doubt it.

My view of inequality is that it's primarily a symptom of a problem rather than a problem in itself. It has a tendency, for instance, to accompany wage stagnation among the middle class. It also has a tendency to predict massive economic crises. The first graph I posted tracks the income share of the top percentile. That chart, released in 2008 by the Center for Budget and Policy Priorities, trumpeted the finding that inequality was at its highest level since 1928. And indeed it was. We all know what happened in 1929, of course. And at this point, we also know what happened in 2008.

Now, it might be a coincidence that the two mega-crashes of the last 100 years were preceded by unparalleled concentrations of domestic wealth. But that seems like a pretty big coincidence.

By Ezra Klein  |  July 15, 2009; 2:28 PM ET
Categories:  Inequality  
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Comments

"My view of inequality is that it's primarily a symptom of a problem rather than a problem in itself."

Yeah, as long as that problem is economic ignorance.

Posted by: whoisjohngaltcom | July 15, 2009 3:19 PM | Report abuse

"My view of inequality is that it's primarily a symptom of a problem rather than a problem in itself."

Which also calls into question the logic of simply trying to redistribute, which is the basis for an easy majority of liberal insanity. Doesn't it, Ezra?

Posted by: whoisjohngaltcom | July 15, 2009 3:26 PM | Report abuse

Alternatively you can see that debt/GDP ratios climb before a big crunch, which is the Minsky instability hypothesis. It's finally getting some attention these days (wonder what prompted it).

See

http://www.debtdeflation.com/blogs/wp-content/uploads/2009/02/KeenDebtwatchNo31February2009_files/image018.gif

for the debt/GDP ratio from 1920 to today - it's an eerie parallel.

Then take a look at economist Steve Keen's blog post (from which the graph is taken) for more detail.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Posted by: alex50 | July 15, 2009 3:34 PM | Report abuse

Income inequality drives debt. Debt drives bubbles. Bubbles drive depression.

Seems pretty clear to me.

Posted by: SteveCA1 | July 15, 2009 4:02 PM | Report abuse

I read this last night and I, too, was disappointed. No numbers, for one thing.

The first analogy, something like "look, if you make $950,000 but you put all but $50,000 in a box, you are pretty much in the same place as if you had made $50,000 to start with" was laughable, and tainted my view of the rest of it.

The whole thing seemed to me a whitewash of the fact that the increase in income of the top 1/10th of 1% dwarfs any rise in median income over the past 8 (or even 30) years. I'm at work so I don't have a link but the actual numbers are fairly astounding.

Regards.

Posted by: luko | July 15, 2009 5:03 PM | Report abuse

Here you go, luko:
"Suppose you made a million dollars last year and put all but $50,000 of it in a shoebox. Now imagine you lose the box. What good did that $950,000 do you? Maybe it purchased some temporary peace of mind. It’s certainly reassuring to know that you have resources at your disposal. But it likely did rather less for your well-being than did the $50,000 you spent on housing, food, entertainment, health care, transportation, gadgets, toys, and so on.
Why do we want income at all? So that we can acquire things we value. The good of income is almost entirely in the good of consumption. We eat bread, not paychecks."

Which part of that is laughable to you? What I find laughable is anybody who doesn't understand that snippet but thinks equality is best measured by income rather than consumption. The whole point of the quote is that it distinguishes income from consumption in the first place.

He's questioning your idiotic premise about incomes, and you're "laughing" because his analysis doesn't respect your premise. In fact, he's right, and the quote shows why.

Posted by: whoisjohngaltcom | July 15, 2009 6:21 PM | Report abuse

Ezra said:
It would be quite a coincidence if the two (i.e., the share of national income earned by the wealthies households and the debt to income ratio) were unrelated. But I rather doubt it.

But I say:
Actually, it wouldn't be a big coincidence at all. They're both time series, and just by eyeballing them, I'd say that they both look non-stationary. That is, when they are above their long-run mean or trend, they don't return quickly. In such situations, time series will often look correlated, even if they are generated purely at random (i.e., in such a way that we know that neither causes the other).

Ezra said:
Now, it might be a coincidence that the two mega-crashes of the last 100 years were preceded by unparalleled concentrations of domestic wealth. But that seems like a pretty big coincidence.

But I say:
How is this a mega-crash? Unemployment is 9.5%, still less than it was at the top of the recession of '82 (10.8%) and just half a point more than it was at its height in '75.

As for the stock market, 22 months into this bear market, the S&P is down about 40%, while 22 months into the bear market of 1973, it was down 45%.

In the Great Depression, oth, unemployment topped out at 25%, and even just 22 months in, the Dow was down 65%.

I challenge anyone to find a significant group of major economic indicators that, today, are signicicantly closer to their values in the Great Depression than they are to what they were during the major receessions of the post-war US.

None of this is to say that this downturn won't eventually far surpass other recessions or even approach the Great Depression, but we aren't even close yet.

Posted by: blsdaniel | July 15, 2009 8:40 PM | Report abuse

For Mr. Galt: Nice explanation. Suppose you made a gazzillion quadrillion dollars and put all of it on a barge except $50,000 and the barge sunk on top of the Mariana Trench. What then?!?? #1 yer an idiot.

Yes, I know what the point was.

I also liked the part where the rich have worse inflation...their mega-yachts and Piaget's increase in price faster than a pair of cheap coulottes at Wal Mart. And this is probably true as income collects more and more at the tippy top the demand for mega-yachts and flawless yellow diamonds has outpaced supply.

Regards.

Posted by: luko | July 15, 2009 9:50 PM | Report abuse

The funny thing is that if everybody was paid what they actually produce, then there would rationally be no limit to how much somebody could make.

But a person who produces nothing will always be paid his full worth at $0.

In other words, in a perfectly functioning economy there is ever-increasing inequality. Which basically means that as long as there is freedom you libs will never run out of things to complain about.

Posted by: whoisjohngaltcom | July 15, 2009 11:00 PM | Report abuse

luko, maybe instead of simply dismissing Wilkinson because he doesn't agree with your premises, perhaps you should explain why we should use income as the benchmark of equality rather than consumption? That would probably be amusing.

It always amazes me how you liberals focus on luxuries like yachts and diamonds. Do you think that's where the rich put most of their money?

Posted by: whoisjohngaltcom | July 15, 2009 11:08 PM | Report abuse

Ezra, have you read the book "Wealth and Democracy"by Kevin Phillips? It's a bit out of date, but it gives a nice historical view of economic inequality in the US.

Posted by: lensch | July 15, 2009 11:32 PM | Report abuse

It's a floorwax and a dessert topping. One of the things income and wealth inequality does, in addition to making some people's lives pleasant and others' miserable, is to allow the people at the top of the distribution to buy more policy than the people in the middle or at the bottom. One of the things they buy, of course, is even more inequality, and the ways they buy it -- well, 1929, 2008.

Posted by: paul314 | July 16, 2009 11:20 AM | Report abuse

"Suppose you made a million dollars last year and put all but $50,000 of it in a shoebox. Now imagine you lose the box. What good did that $950,000 do you? Maybe it purchased some temporary peace of mind. It's certainly reassuring to know that you have resources at your disposal. But it likely did rather less for your well-being than did the $50,000 you spent on housing, food, entertainment, health care, transportation, gadgets, toys, and so on."

He doesn't seem to have realized that that $950,000 represents another 19 years of being able to live on $50,000 per year without having to spend time earning it. That's hardly "some temporary peace of mind". That's a major benefit that is lost when the "box" is lost.

Will also doesn't seem to realize that he has just undercut any objection to massively high tax rates. After all, if that $950,000 is taxed away, instead of being lost, you're no worse off. Indeed, since that $950,000 will pay for government services you can use, you're much better off than you would have been if you had simply lost it.

It's amusing to see his rather blase attitude toward an effective tax rate
of 95 percent, when I am certain that he would object to a much smaller (say, 5 percent) increase in marginal tax rates to those making over, say, $950,000 per year.

Posted by: seagoon | July 16, 2009 8:24 PM | Report abuse

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