Of inequality, Yglesias writes:
Normally talk about the growth in inequality begins and ends with a discussion of whether or not it’s a problem and should we try to “spread the wealth around” or just not worry. But completely aside from whether or not it’s substantively a problem, it’s a political problem for conservatives. That top ten percent is, in an important way, the base of the conservative coalition — providing loyal votes, campaign and institutional funding, etc. And as the economic circumstances of the top ten percent become more and more different from the economic circumstances of the rest of the country, it becomes harder and harder to articulate a policy agenda that speaks to the concerns of both the top ten and also the broad middle.
Did Matt not look at the exit polls? Did he not notice that Obama dominated in fundraising among really, really rich people? Here’s a bet for Matt. Take the group that voted for Obama and the group that voted for McCain. Calculate the Gini coefficient for each of those two groups. I’ll bet $1000 dollars that income inequality is higher in the Obama-voting group. If Matt doesn’t want to take this bet, then he needs to explain why divergence in material circumstances poses more of a political problem for Republican coalition-building than it does for the Democrats–the more economically unequal coalition. If rich Democrats, who are now roughly as numerous as rich Republicans, tend to favor progressively redistributive policies, which they do, then in what sense does material divergence pose an in-principle problem for successful cross-income-class coalition politics? If rich Republicans are just greedy, self-dealing, anti-downward-redistribution thugs, then that poses a problem when it comes to teaming up with the “broad middle,” if the broad middle demands transfers. But that has nothing to do with differences in economic circumstance.
Here’s something people haven’t been talking about. How much has the recent runup in income inequality reversed due to the financial collapse and general economic slowdown? If it turns out to be a lot, will Democrats (and Republican inequality hawks like Jim Manzi) accept that the grounds for redistribution have weakened? If, like Paul Krugman, you thought rising inequality threatened our democracy, will you credit Alan Greenspan, Chris Cox, and Phil Gramm (or whomever you found convenient to blame) for saving it? For your consideration….
Good point about the Gini coefficient w/in the group of Obama voters.
Not so much about the inequality point, though.
In other news, you don't resemble any elf I've ever encountered.
“explain why divergence in material circumstances poses more of a political problem for Republican coalition-building than it does for the Democrats–the more economically unequal coalition”
The rich Democrats whop vote against their material interests can better afford to do so than the poor Republicans who do the same. The more unequal the wealth distribution becomes, the stronger this effect.
The presumption is that the only way to decrease income inequality is to crash the economy. Which along with the “For your consideration….” is a bit insulting. The evidence of history in our country and in others is clear that such a presumption is unfounded.
From the 40's to the 70's inequality was decreasing and economic growth was as good as ever.
Man is this debate on inequality getting old. Especially considering the data.
“explain why divergence in material circumstances poses more of a political problem for Republican coalition-building than it does for the Democrats–the more economically unequal coalition”
Because policy matters…. one policy leads to divergence and economic collapse and one leads to shared prosperity and better actual economic performance over all.
Why on Earth would some one choose policies that create the lower overall yet more inequitable growth as consistently seen in Republican administrations?
Do you need more data? Give me 8 years.
Whoa. Commenters took you to the woodshed on this one Will.
Oh?
Yeah, they did, Will. I am taking a hit on my taxes because I didn't see Republicanism as a reasonable substitute for basic competency in governance.
And the tone of libertarian bloggers confirms that practically all libertarians are Functional Republicans. The mere *promise* (just lip service!) – the mere promise of lower taxes completely buys off almost all libertarians.
All the libertarians bloggers that I read, I can expect nothing but parsing and qualifying for eight years?
[The alternative: reasoned analysis for less government intervention. The words "The Second New Deal" does not make everyone wet the bed, so just repeating those words over and over is not sufficient, BTW.]
No one understands me.
Will,
I've put up some quick reaction comments to this post:
http://theamericanscene.com/2008/11/07/re-inequ…
All the best,
Jim Manzi
I do, Will.
Muirgeo is a troll. Don't mind it. It stands by false corollaries that it cannot explain to support positions it doesn't understand.
I don't believe that Will is advocating financial collapse as a remedy to inequality.
Rather, I believe he means to say that much of the recent wealth gains at the top have been built upon debt. In the near term, and possibly well into the future, the easy credit of old will be available to none – even the wealthy.
This is not just an American phenomenon as inequality has increased worldwide based upon the same over leveraged environment.
In this new environment, we are likely to see much slower wealth gains at the top in the US and Europe and fewer newly minted Chinese and Indian billionaires.
Regrettably, this does not bode well for a quick economic recovery.
The global economy has been a fraud based upon ever increasing levels of debt.
The era of easy financing is over and all countries will have to find a way to deal with this new reality.
Will, I think what Matt is saying is not that increasing income equality is a problem for cross-income-class coalitions in general, but specifically for the Republican version, which establishes a direct causal link between the personal economic concerns of the super-rich and the personal economic concerns of everybody else. That's what's becoming hard to articulate.
Whose fault is that?
Excellent post, Will.
The weakening economy-lessening inequality argument makes sense to me for this reason: in good economic times, where everyone fares better (another debate altogether), we generally seen more inequality. Given the choice, I'll take the latter. Now of course it isn;t that simple, but we our efforts are better focused on growing the ecomony.
That said, Manzi makes good points as well. Enjoyed the discussion.
intrigued by the the first half, amused by the second. A fun provocative blog post. Don't let the haters get ya down.
I would argue that income inequality holds economies back and increases the “real” tax rate on the wealthy whether its resolved through Government redistributive policies or not. At the end of the day, the United States has to maintain a vast prison system and huge police and military to enforce the law and protect property. The more inequality there is (especially if there is a large class that is lacking the ability to meet minimum basic needs) the larger the police and judicial system needs to be to cope with the externalities. That cost is a tax on wealth just as surely as a tax used to ammelerioate the condition.
Secondarily, inequality of means can be destructive to a democracy. I have never heard the words the poor and powerful used together while I have certainly heard rich and powerful. In some sense being rich means being powerful! Democracy however, is about the equality of power if not the equality of resources. At many points in human society
As I'm sure you've considered, there are things other than income distribution that increase pressure for wealth redistribution. IMO, support for redistributive policies is driven less by levels of income inequality than by people's sense of economic security and their hopefulness about the future.
IMO, the hopefulness factor is a really important one. Among low-income earners with libertarian or fiscally conservative sensibilities, higher levels of income inequality don't usually mean more pressure for redistribution. Low income workers who feel empowered and expect to move up don't want or need handouts.
OTOH, as economic uncertainty increases, I'm with Manzi in his warning that “Hordes of violent men are always outside the city gates ready to sack it, and those inside always threaten to turn into a mob and destroy it from within.”
If rich Democrats, who are now roughly as numerous as rich Republicans, tend to favor progressively redistributive policies, which they do, then in what sense does material divergence pose an in-principle problem for successful cross-income-class coalition politics?
I think the answer here is that these “rich Democrats” have yet to see the impact on their wealth by the redistributionist policies that will shortly be adopted. Many will then have the experience of actually having voted against their own interests rather than merely living the concept. To use an overused phrase that is all to apt, Reality Bites.
Give credit to muirgeo for actually posting empirical evidence to support his positions. I think they're worth some response. Going off of Bartels's commentary, I would make two points.
One: the minimum wage increases more under Democrats than under Republicans. Card and Krueger aside, See: http://www.house.gov/jec/cost-gov/regs/minimum/…
I believe those who are left jobless whouldn't even be included on a graph of income percentiles. When we take into account structural unemployment, is the effect as great?
Second: Bartels states that inflation is a concern under Republican presidents. Keeping inflation in check prevents wealth from eroding. Bartels's graph looks at income. Wealth is accumulated income. It may be that the effect of Republicans on wealth, rather than income, is significantly improved relative to Democrats.
Any thoughts?
Inequality is more than a political problem. It produces financial crises like the one we are seeing now. The reason why is simple. The *value* of the economy’s assets is proportional to the economy’s output. Since this output has to be bought (otherwise it would not be produced) it is directly related to the income of the broad middle class consumer. Rising inequality means the rich (those who spend a small fraction of their income on consumption) have more money to invest relative to the value of things in which to invest.
This means that the market valuation of assets must rise as inequality rises. Such a process will eventually lead to a financial bubble whose collapses produces a financial crisis. The spacing of major crises in the pre-New Deal era (1819, 1837, 1857, 1873, 1893, 1907, 1932-3) suggests it takes a couple of decades to build up enough of a bubble to get a full-scale crisis. The first big bubble in the post-New Deal era was the stock market bubble of 2000, which happened 19 years after the start of Reaganomics, right on schedule.
Anyways, as long as high levels of inequality remain, we will get bubbles and crises. And since the authorities are doing everything possible to prevent the depression that normally follows a crisis, it is likely that the “recharge rate” will be a lot less than 20 years. That is, if the authorities are successful in staving off disaster (as I think they will be) we will be right back in this situation within a decade.
Frequent crises will pose a political problem for whichever party is most opposed to redistribution. Sooner of later somebody will implement redistributive policies and the economic results will make it difficult for anti-redistributive policy to make a comeback.
Mike,
You've got an interesting point, but I've got a few issues with it. First, as I posted earlier, as long as people earn “enough” and have hope that the future will be bright, inequality won't be a driving political issue. Second, the extra savings that funded this latest bubble came predominantly from abroad so your redistribution would have to be scoped globally to blunt it. Finally, I'd submit that your premise of a fixed supply of investment opportunities is flawed.
Each society allocates its income to some combination of current consumption and future consumption (investment). In the short run, investment demand can get ahead of the supply of good opportunities and manias can ensue (Internet bubble, credit bubble). However, a significant cultural and structural asset of US society is its enormous capacity to successfully absorb investment and turn it into innovation that results in higher living standards.
Perhaps I'm too much of an optimist (and maybe nationalist), but I still believe that the US economy has a structural advantage in this regard.
Only a slight tangent, looking at wealth equality and growth:
Since I haven't found any studies directly addressing it, I took a cross-country look (for developed countries) at wealth equality vis-a-vis growth in gdp per capita, using the best wealth data sets currently available.
http://trueconservative.typepad.com/trueconserv…
Short story, wealth inequality seems to correlate with short-term growth. But wealth *equality* correlates with long-term growth. For growth periods >25 years, correlation with growth is a profound R of .58-.67.
This is a simple, single-variable correlation; it doesn't correct for any other variables (for instance the most obvious, starting gdp/cap, a.k.a. the “catch-up” effect). Given the limited data sets, though, it would be difficult to achieve robust results with too many independent variables included.
To add my commentary, in addition to the data in the previous post:
1. I agree wholeheartedly with Muirgeo that this discussion is depressingly on the wrong topic. “Does greater inequality make it politically more difficult for Republicans to implement policies that result in greater inequality?” Uh…yes…. Does that seem to be Republicans'/Libertarians' only concern regarding inequality? For many, yes…
2. Both Will and Jim are using (or surmising) numbers in very weird ways. More-unequal states seem to elect Democrats more. Ergo, the Democratic electorate is more unequal? Sorry, that simply doesn't follow. Even if it is true, it doesn't support the barely-hidden implication: that Democrats are hypocrites who rant about equality but don't practice it. It just speaks to the constituents of the Democratic coalition: poorer people, and very rich people.
3. Re: The idea that rich Democrats are voting against their own self-interests. Equally likely: they realize that this is true in the short term, but that in the longer term their interests (and everyone else's) are best served by pro-growth progressive policies.
If the definition of 'rich' is 'top 10% of the income distribution', then I fall into that category. In addition to Manzi's dark story (with which I entirely concur) me explain give at least one upside reason that policies which increase equality seems to me to be in my self-interest.
My business (I'm an upper-tier employee on the engineering side) ultimately depends on how many widgets people buy. My widgets are discretionary items, and people can't reasonably use more than one or two of them. Increasing inequality means fewer people who can afford widgets. And while I'm quite comfortable with my abilities and capacity to produce a competitive widget, lower demand is bad for my business.
It seems to me that increasing equality will stabilize my income growth, and solidify my wealth.
It further seems to me that the only people who are indifferent to inequality, and who resist policies that try to 'spread the wealth', are people who know they are personally uncompetitive.
The premise was a fixed *ratio* of investment opportunities to consumer incomes. This is necessarily true because investment opportunities only exist to the extent that they produce output that consumers can buy. Investments producing output that is not bought are worthless.
By *definition* inequality means that the pool of investable money grows relative to consumer income, that is relative to the pool of good investments. Both money and investments are growing, its just that the former grows faster.
It's simply a mass balance argument.
When inequality was high prior to the New Deal, bubbles, panics and the depressions that followed them happened regularly. After inequality plummeted during WW II, bubbles and panics became a thing of the past, until the return of high levels of inequality at the end of the 20th century.
The tax structures around the world followed the Anglo-American model adopted in 1981. The money driving our bubble does indirectly reflect US policy. Were taxes to go up here, it is likely other countries would eventually pick up on that. I don't think the Chinese government is all that solvent, couldn't they use the revenue higher taxes would bring? I know the Japanese have a national debt that dwarfs ours.
“It seems to me that increasing equality will stabilize my income growth, and solidify my wealth. ” Not necessarily if you are taxed more to achieve the redistribution. If your money is used to buy your products then you can't be better off. It only works if other people's money is used. But seriously, if the level of taxation does not affect investment in production then redistribution can't make us worse off. The tricky thing is realising that investment in production includes people's effort at work, it's harder to quantify what level of tax impacts on that.
Manzi wants to eat and keep his cake if he wants to minimise inequality without redistributive taxes.
The answer to the original question is that policies that favour the middle without significant tax and spend are still good and saleable policies. The middle class understands that ultimately people need to rely on and do it for themselves and their families.
There is evidence that higher tax rates do not adversely impact productive investment (see linked article). In the article I plot private nonresidential investment as a percent of GDP and top tax rate over time. Investment rose over the 1960's and 1970's, fell during the 1980's, rose during the 1990's and fell during the 2000's. Taxes moved in the opposite direction. On the other hand, growth rate is total credit market debt grew more quickly when taxes were lower than when they were higher. Apparently, lower taxes on interest encourage more lending (investment in debt-based securities).
It would seem that lower taxes on investment income does stimulate investment, just not the sort of investment that boosts productivity or creates jobs.
And then there is the record of actual GDP/worker growth, which over the 1937-81 period was 50% faster than in either the post-1981 period or the 1860-1937 period. (Dates chosen are business cycle peaks, so as to assess trend rates without influence of partial business cycles.)
As for the effect of taxes on worker effectiveness we are talking about the highest paid employees. A good example to consider is corporate CEOs. Like a sports team, a CEO's job is to beat the competition. And like a sports team, the median CEO is going to always have the exact same performance, they beat the competition 50% of the time and lose 50% of the time.
This means that the effectiveness of the average CEO is constant over time. CEOs should be paid the same relative to other workers today as they were in the past, if pay has any relation to performance. In fact, since tax rates are lower today, CEO pay should be somewhat lower today than 40-60 years ago. Yet this is not the case.
Now I haven't considered the possibility that the *absolute* performance of American business today is much better than it was 40-60 years ago. If GDP were growing today at much faster rates than was in the decades after the New Deal, then higher incomes for CEOs as a group might be part of the explanation. But this fast growth is not happening, growth is actually slower.
The data suggests that CEO incomes could be slashed by 80% and there would be no impact on the results obtained from their labor.
There is one problem I see with increasing taxes only on the top 5% or so. Obama, for example, claims that his new healthcare plan can be funded by “asking” the top 5% to pay a little more.
I claim it's destructive to advocate new programs paid for by a minority. It encourages the majority to think that the program is free. A new program may be worth its cost, but it should not be evaluated by most voters as if it were free. Even if you believe that a particular program can be paid for by the wealthy and that that's a moral way to fund it, it displaces some other worthy program that could have been paid for by soaking the rich.
-dk
There is one problem I see with increasing taxes only on the top 5% or so. Obama, for example, claims that his new healthcare plan can be funded by “asking” the top 5% to pay a little more.
I claim it's destructive to advocate new programs paid for by a minority. It encourages the majority to think that the program is free. A new program may be worth its cost, but it should not be evaluated by most voters as if it were free. Even if you believe that a particular program can be paid for by the wealthy and that that's a moral way to fund it, it displaces some other worthy program that could have been paid for by soaking the rich.
-dk