causes of income inequality, economics, equality

The Causes of Wealth Inequality (32): How Inheritance Not Only Perpetuates But Also Aggravates Inequality

Inherited wealth – the value of all assets (real estate + financial assets - financial liabilities) transmitted at death or through inter-vivos gifts - has become more important over time. Thomas Piketty estimates that

the annual inheritance flow was about 20%-25% of national income around 1900-1910. It then gradually fell to less than 10% in the 1920s-1930s, and to less than 5% in the 1950s. It has been rising regularly since then, with an acceleration of the trend during the past 20 years, and according to the latest data point (2008), it is now close to 15%. (source, source)

The drop between the 1920s and 1950s was caused by the Great Depression and WWII, two events that destroyed a lot of wealth.

Inheritance has always been an important cause of the persistence of wealth inequality. I guess that goes without saying. Capital is unevenly distributed in most populations, and will remain so to the extent that it can stay in the same families. It’s more interesting to look at the mechanisms through which inheritance could, under some circumstances, aggravate inequality. What are those circumstances? Here are some:

  1. Birth rates. People in developed countries have fewer children than they used to, and the children they have survive into adulthood at higher rates. As a result, those children inherit a larger part of their parents wealth. If numerous siblings no longer have to split their inheritance among themselves, the effect of inheritance on wealth inequality becomes stronger. Piketty as well has made this point in a recent talk.
  2. Higher house prices. Housing has become more expensive. This incites people to save more so as to allow their children to buy a house, which has a ripple effect across generations: the biggest savers are those who enjoyed an inheritance because if you’ve inherited a house or the money to buy one it’s easier to save than when you have to rent or pay a mortgage. And if you can save, your children will inherit. And so on.
  3. Inheritance taxes have been reduced in most countries.
  4. Slow economic growth in most developed countries means that the wealth produced in those countries is smaller compared to the wealth inherited.

Not all of these circumstances can be brought under human control. Perhaps an inheritance tax – the dreaded “death tax” – is a realistic option. I mean, if even Nozick could get behind that, you would need to be an outright fundamentalist about property rights  in order to oppose it.

For increases in the inheritance tax to happen, however, we will need to start thinking differently. When David Cameron, for instance, promised to raise the threshold for inheritance tax to £1m he did so because he believes that people who work hard, save money, and bequeath it to their offspring are somehow doing the noble thing. But while it may be noble to work hard and save, it’s far from noble to live off of an inheritance and its often huge returns. Hard work for one results in an unproductive lifestyle for its beneficiaries. If you want to promote work and productivity, by all means impose a death tax. And if you want the best for your children, it may be tempting to give them cash or other assets, but beware that this will be self-defeating beyond a certain amount.

More posts in this series are here.

Standard
economics, equality, income inequality

Income Inequality (30): A Primer on Inequality and Economic Growth

Countries that are more equal in income terms are also richer:

income inequality and gdp

(source)

But how about the relationship between inequality and economic growth? The classic causal story, based on work by Simon Kuznets,

Kuznets curve

Kuznets curve

maintains that there’s an inverted U-shaped relationship over long periods of economic development. As emerging economies grow they initially become less equal as the few with high financial endowments profit off of their ownership of key productive resources, like land. Then, as industrialization evolves, much more of the population has the chance to participate in higher value-added work which reduces inequality. (source)

In this argument, growth determines inequality: first growth drives inequality up, and then it gradually reduces it.

However, this Kuznetsian view has come under fire recently. Thomas Piketty for instance, in his “Capital in the Twenty-First Century“, has criticized Kuznets’ view that inequality will eventually stabilize and subside on its own given increasing growth. According to Piketty, increasing wealth concentration is a likely outcome for the foreseeable future. Kuznets findings were based on a historical anomaly. And indeed, the lines in this graph do not turn downwards to form an inverted U-shape:

gdp-vs-gini

(source)

Which is why it’s perhaps better to look at the causation in another way: maybe inequality or equality determine growth rather than vice versa. For example, there’s this study arguing that high income inequality is likely to inhibit growth, especially in developing countries:

gdp per capita growth and gini developing countries

gdp per capita growth and gini rich countries

(source)

Inequality inhibits growth, especially in developing countries, because

high income inequality can discourage the evolution of the economic and political institutions associated with accountable government (which in turn enable a market environment conducive to investment and growth); and … high income inequality can undermine the civic and social life that sustains effective collective decision-making, especially in multi-ethnic settings. (source)

This study comes to a similar conclusion. It argues that, in general, more inequality endangers the sustainability of growth. Long consistent spells of economic growth are correlated with low levels of income inequality:

income inequality and gdp growth

(source)

A growth spell in this graph is a period of at least five years that begins with an unusual increase in the growth rate and ends with an unusual drop in growth.

It may seem counterintuitive that inequality is strongly associated with less sustained growth. After all, some inequality is essential to the effective functioning of a market economy and the incentives needed for investment and growth … But too much inequality might be destructive to growth. Beyond the risk that inequality may amplify the potential for financial crisis, it may also bring political instability, which can discourage investment. Inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis. Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity. … [S]ocieties with more equal income distributions have more durable growth. … [A] 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. (source)

Some additional support for this view: redistributive policies – which are anti-inequality policies – don’t actually harm growth:

inequality

(source, source)

Redistribution doesn’t help either, according to this graph, but maybe it counteracts the negative effect of inequality on growth given that it counteracts inequality. In that sense, it does help.

More posts on income inequality are here.

Standard
art, equality, ethics of human rights, justice

The Ethics of Human Rights (88): Justice and Proportionality

disproportionate_world_by_astridle-d541ace

(source)

The notion of proportionality is central to many theories of justice:

But why should “things” be proportional? Perhaps it’s some kind of esthetic ideal: a beautiful body is a proportional one; a tasty dish is one with the right proportions of ingredients. So maybe justice is merely about beauty and taste. The world is just if things are not out of proportion, because if they were that would insult our esthetic taste. The word “fair” in “fairness” – often a synonym for justice – also means beautiful.

But I find that hard to believe. People want justice for other reasons than a desire for beauty, and demands of proportionality are about something more than esthetics. But whatever the reasons, proportionality has it’s place in theories of justice, and it would be illusory to try and get rid of it. The notion seems deeply engrained in moral intuitions.

However, while we should in general accept that proportionality plays a role in justice, we should also criticize some uses of proportionality. It’s hard to deny that more serious crimes should be met with more serious punishments, but it’s equally hard to deny that there should be an upper limit to this (you can’t execute Hitler 6 million times) and that criminal punishment should also serve other goals than people’s desire to have things in proportion. Punishment is used in order to protect the public against the criminal, and if a non-proportional punishment serves this goal then maybe we shouldn’t insist on proportionality for proportionality’s sake.

It’s also possible to criticize the use of proportionality in discussions about economic rewards, redistribution, poverty relief etc. If you want to argue that people who are more deserving have a claim to more compensation – and that undeserving people should receive less or nothing – then you need a good account of desert. However, such an account is elusive if not outright impossible. Effort and skill may not be signs of desert but rather the product of undeserved genetic inheritance. Difficult to know, and very intrusive if you want to find out. Proportional distribution as a method of realizing an idea of justice based on desert depends on desert being a good basis of justice. If it isn’t, proportionality may lead to injustice rather than justice because it may leave the poor to starve.

There’s a third case in which proportionality can undermine justice instead of promoting it. Governments may want to limit certain rights because they believe that this is necessary for a public good such as protection against terrorism, in which case they often make claims about proportionality. The possible consequences of terrorism are supposedly so severe that limitations of people’s right to privacy or right not to be tortured are proportional responses, even if these limitations are far-reaching. You can’t lift a heavy rock with an elastic band. The tool should be proportional to the end you want to achieve, and a world without terrorism requires some heavy tools. But again, proportionality as a method to achieve justice – a just world is a world without terrorists killing innocent people – may achieve the opposite. The harm caused by limitations of rights is often greater than the harm of terrorism (some numbers here about the relative harm imposed by terrorism).

A final example of the way in which proportionality can lead us astray when thinking about justice. Many of us tend to believe that we owe more to those close to us and that justice is in the first instance something between members of the nation state. And it is indeed common to see concerns about human rights violations diminish in proportion to the distance between those who are concerned and those whose rights are violated. However, if ideas about closeness are overemphasized in thinking about justice – and they often are since patriotism, nationalism, racism and other forms of in-group bias are quite common – then proportionality will again cause injustice rather than justice.

The point of all this is not to criticize proportionality as such but the manner in which it is used. Proportionality is one method to achieve justice, and can, given some prerequisites, help us to achieve justice. You can’t fight terrorism with good will alone. You shouldn’t impose life sentences for traffic violations. And you shouldn’t give everyone equal economic rewards. But let’s not overemphasize one very peculiar method to achieve justice, a method moreover that is often based on shaky assumptions such as desert, the moral relevance of closeness or the effectiveness and necessity of certain policies.

More posts in this series are here.

Standard
human rights images, lgbt rights, photography and journalism

Homophobia, A Collection of Images (2)

This may seem like a good time to publish some illustrated commentary about homophobia. It used to be the case that in most countries of the world, homophobia meant outright legal prohibition of homosexuality. And that’s still the case today in some countries. The often grotesque punishments make it even worse. Uganda is now in the spotlight for it’s recent anti-homosexuality legislation. The risk of vigilante violence against Ugandan gays is not unreal when you have newspaper headlines like this:

The Red Pepper tabloid is one of Uganda's biggest selling newspapers

the faces were not pixelated in the original

This is the Red Pepper tabloid, one of Uganda’s biggest selling newspapers:

A Ugandan tabloid has named the country’s “200 top homosexuals”, a day after President Yoweri Museveni signed into law a bill toughening penalties for gay people.

Red Pepper’s list appeared under the headline: “Exposed”, raising concerns of a witch-hunt against gay people. … Homosexual acts were already illegal in Uganda, but the new law bans the promotion of homosexuality and covers lesbians for the first time. (source)

Another Ugandan newspaper also openly called for the persecution of homosexuals a few years ago:

uganda_2

One of those listed in the now defunct Rolling Stone, David Kato, was subsequently murdered.

Homophobia is also on the rise on Russia lately. Putin has masterminded a series of laws discriminating against homosexuals, which have resulted in this amusing protest:

putin gay

A poster of Russian President Vladimir Putin sporting makeup is carried during the Vancouver Pride Parade in Vancouver, on Sunday August 4, 2013. Foreign Affairs Minister John Baird says he’s concerned about what Russia’s new anti-gay law will mean for Canadian athletes and spectators at the Winter Games in Sochi. THE CANADIAN PRESS/Darryl Dyck

Of course, there’s homophobia even in countries that don’t make homosexuality or the promotion of homosexuality a crime. And it doesn’t have to be less painful. For example, there’s been the infamous Matthew Shepard murder in the US, somewhat of a cause célèbre of homophobic hate crime:

matthew shepard

However, some doubts have been raised as to the nature of the crime. Perhaps it wasn’t a hate crime after all. Whether or not it was, there have been numerous other cases that most definitely were. Here’s an example:

A Charlotte couple says they were attacked and beaten on the street, left bloody and bruised. And they say – it’s all because they’re gay. Mark Little and his partner, Dustin Martin, visited Asheville a few weekends ago. The couple say they were walking down the street when people in a passing car began harassing them. Little told WBTV, when they asked the people to stop, a passenger jumped from the car and attacked them. Little says he and his partner are concerned police aren’t taking the crime seriously. Asheville Police are still searching for suspects. If they are caught, they could be charged with simple assault. North Carolina’s hate crimes law does not cover sexual orientation.

A Charlotte couple says they were attacked and beaten on the street, left bloody and bruised. And they say – it’s all because they’re gay. Mark Little and his partner, Dustin Martin, visited Asheville a few weekends ago. The couple say they were walking down the street when people in a passing car began harassing them.
Little told WBTV, when they asked the people to stop, a passenger jumped from the car and attacked them. Little says he and his partner are concerned police aren’t taking the crime seriously. Asheville Police are still searching for suspects. If they are caught, they could be charged with simple assault.
North Carolina’s hate crimes law does not cover sexual orientation.

More on homophobia here and here.

Standard
causes of income inequality, economics, equality, work

The Causes of Wealth Inequality (31): Automation and the Hollowing Out of the Labor Market

Conventional wisdom has it that automation comes at the expense of low-skilled jobs and aggravates income inequality because of labor displacement at the bottom of the income distribution. It turns out that this is a bit too conventional, and not only because it runs afoul of the lump of labor fallacy (machines need to be built and people can go on and do other things). Mid-level jobs are also hit by automation, and perhaps even more than jobs at the bottom of the skill continuum. This has been called the “hollowing out” of the labor market:

hollowing out

(source)

This hollowing out, caused in part by automation, in turns causes an increase in income inequality. This is mere arithmetic: if the middle drops, then the extremes become relatively more important and inequality rises. Ryan Avent puts it well:

Work published in 2006 by David Autor, Lawrence Katz, and Melissa Kearney argued that employment and wage growth in America have “polarised” in recent decades, a conclusion that has been reinforced by subsequent research. Employment in high- and low-skill positions has risen substantially relative to middle-skill jobs. The resulting employment distribution generates a distribution of wages that is similarly polarised and more unequal than that which prevailed prior to this period. (source)

Why does technological automation focus mainly on middle skill levels?

Daron Acemoglu and Mr Autor pioneered a “task approach” to labour markets. Tasks can be completed by either labour or capital. The more routine a task is, the more susceptible it is to automation. But whether or not a task is automated depends upon the relative supply—and the real wage—of workers of various skill levels. Subsequent work has shown that automation and trade are responsible for displacement of routine tasks previously done by middle-skill workers, in both manufacturing and clerical or service activities, leading to polarisation of local and national labour markets.  (source)

Technological automation focuses mainly on middle skill levels because it’s relatively easy at that level, easier sometimes than at the extremes of high and low skilled tasks. “Easier” here means both technologically easier and more cost effective. Highly skilled tasks, such as teaching a philosophy course, are difficult for machines to do because they are complex (although we do sometimes see high-skilled jobs being automated, such as legal research for example). In the case of low-skilled tasks, some of these are surprisingly hard to automate, as in the case of truck driving or toilet cleaning. Even low-skilled jobs that aren’t technically hard to automate aren’t always automated because the pay-off may be too low – people doing those jobs are poorly paid so developing expensive machines to do it for them isn’t worth the trouble.

Henry Ford

Henry Ford

And then there’s the added worry that displacement of many low-skilled workers would create a permanent underclass unable to participate in the economy – unable, in other words, to buy the goods and services produced by machines. There’s a famous anecdote about Henry Ford mocking a labor union president in one of his factories, saying it wouldn’t be easy to get the robots to pay their union dues. To which the union president responded that Ford wasn’t going to get the robots to buy his cars.

The hollowing out of the labor market, driven by mid-level automation, has therefore a direct effect on income inequality, but it also a few indirect effects. For example, automation means lower production costs, and the savings or the added value go primarily to shareholders through capital gains and stock appreciation. Since stock ownership and capital income are concentrated among those already better off, income inequality is further increased.

If technology decreases the relative importance of human labor in a particular production process, the owners of capital equipment will be able to capture a bigger share of income from the goods and services produced. (source)

Another indirect effect: increasing automation of manufacturing jobs pushes unionization rates down, which in turn decreases bargaining power among low-skilled workers. This, in the end, aggravates inequality yet again.

More posts in this series are here.

Standard
discrimination, equality, health, moral dilemmas

Moral Dilemma (24): Gender, Longevity and Healthcare

old couple

(source)

Given equal healthcare, women on average tend to live longer than men. You can see this as an injustice. Living a long and healthy life is clearly something that is generally considered to be good. Men have not chosen to be born as men. And neither have women. So why should men be burdened with such an unearned disadvantage? Compare this to a disability: people born with disability rightly have a claim to compensation or remediation. Hence, wouldn’t it be right to give men more medical attention than women to counteract – as far as possible – the natural masculine handicap? Or would giving women less medical attention than men be a case of discrimination?

Thanks for voting. By the way, I have some other dilemmas here for which I also would appreciate your vote. I repeat my promise that one day I’ll publish an analysis of the results of the votes for all those dilemmas. Just waiting for a bit more response.

More moral dilemmas are here.

Standard
causes of income inequality, economics, equality

The Causes of Wealth Inequality (30): Assortative Mating

out-of-your-league

(source)

Intuitively, it seems obvious that assortative mating leads to higher wealth and income inequality. If rich people marry each other and poor people marry each other, then family incomes will be more unequal than when people routinely marry across class divides. Hence, recent increases in inequality may be due to higher rates of assortative mating, at least in the US:

Data from the United States Census Bureau suggests there has been a rise in assortative mating. Additionally, assortative mating affects household income inequality. In particular, if matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller. (source, source)

Now, obviously we should prefer a world in which wealthy men have the opportunity to marry high earning and educated women, because such a world is one in which women have more equal opportunities. It’s also a good thing that wealthy women continue working after marriage. In addition, we shouldn’t try to manage people’s marriages, no matter how strong we feel about income inequality. I guess that goes without saying. However, what we could do is modify the tax system so that wealthy individuals do not receive additional benefits when they marry. Or we could tax them more.

Before we do anything we should be realistic about the causal effects that we try to neutralize. There are many causes of inequality, and I think – but can’t prove – that assortative mating isn’t as important as is claimed in the quote above (the authors of the cited study compare the real world to a world in which mating is random, and such a world is inconceivable). A big part of rising inequality is due to the top 1% of the income scale. The people in that bracket probably also look for partners similar to themselves, but assortative mating can’t explain the enormous income gains that they have seen over the last decades:

BfGI-JDIUAA_ysH

(source)

More posts in this series are here.

Standard
equality, gender discrimination, human rights images, photography and journalism

Female Emancipation, A Collection of Images

“Female emancipation” has become a somewhat old-fashioned term. Like “women’s lib”. “Gender equality” and “women’s rights” are probably better. However, for history’s sake, here’s a short illustrated guide to the early days of what used to be called female emancipation.

The bicycle has become somewhat of an icon in the history of gender equality. A century ago, Alice Hawkins, a suffragette, cycled around Leicester promoting the women’s rights movement, causing outrage by being one of the first ladies to wear pantaloons in the city. During the fight to win the vote the bicycle became not only a tool but also a symbol for the emancipation of women.

1912_suffragettes_winston

Emancipation wasn’t just about the right to vote. The right to work and to choose an occupation was equally important. Here’s a clipping from the Caledonian Mercury, February 5th, 1814:

Caledonian Mercury 5 Feb 1814

This is “Wendy the Welder” at a boat-and-sub-building yard, adjusting her goggles before resuming work in Groton, CT, 1943:

'Wendy the Welder' at a boat-and-sub-building yard adjusts her goggles before resuming work. Groton, CT, 1943

Communist regimes – the “workers’ paradise” – always made a big deal of gender equality, at least in their propaganda messages:

“DOWN WITH KITCHEN SLAVERY!”, G. SHEGAL, 1931

“DOWN WITH KITCHEN SLAVERY!”, G. SHEGAL, 1931

Female parachuters appear often on Chinese communist posters, to show the emancipation of women and the role of the People's Liberation Army in their liberation

Female parachuters appear often on Chinese communist posters, to show the emancipation of women and the role of the People’s Liberation Army in their liberation

Obviously, emancipation had a private meaning as well. Traditional gender roles within the family had to be challenged:

if you want breakfast in bed

One rather strange manifestation of female anticipation was called the “Torches of Freedom”. The point was to encourage women to smoke. Cigarettes were described as symbols of emancipation and equality with men. The term was first used by psychoanalyst A. A. Brill when describing the “natural” desire for women to smoke and was used by Edward Bernays to encourage women to smoke in public despite social taboos. Bernays hired women to march while smoking their “torches of freedom” in the Easter Sunday Parade of 1929 which was a significant moment for fighting social barriers for women smokers (source).

torches of freedom

Needless to say, the movement for women’s rights hasn’t completely fulfilled its mission. Here’s a contemporary example:

Dana Bakdounes,

Dana Bakdounes, holding a sign that read, “I am with the uprising of women in the Arab world because for 20 years I wasn’t allowed to feel the wind in my hair and on my body.” Bakdounes also held open her passport, showing a photo of her wearing a veil.

Dana Bakdounes posted this image in 2012 on a Facebook page called Uprising of Women in the Arab World.

Facebook suspended the account of several people behind the Uprising of Women in the Arab World page Wednesday over an issue stemming from a photo of an unveiled woman.

More than 61,000 people like the page, which shares hundreds of images of women (who were variably veiled, unveiled, or wearing a niqab) and men who support women’s rights in the Middle East. The photos typically depict those people holding up signs explaining why they support the “human rights, freedom, and independence of women in the Arab world.”

Facebook deleted the photo, apparently over complaints that it was “insulting,” and suspended an admin for 24 hours. Other reports suggested the image was reported for nudity and one of the admins, Farah Barqawi, told German site Detektor.fm that it was pulled due to “mysogenists and extremists.” (source)

Standard
causes of income inequality, economics, equality, trade, work

The Causes of Wealth Inequality (29): The Declining Share of National Income Going to Labor

capitalist-democracy-illustrated1

(source)

Rest assured: this post is going to be more nuanced than the image above. As usual, what I want to do here is look at a possible cause of increasing income inequality, namely the relative shares of labor and capital income. Your labor income is your wage, your pension, your bonus, your company health insurance etc. Most people have a labor income. You only have capital income if you receive dividend payments, capital gains, interest payments on savings etc.

During the last decades, the share of labor compensation in total national income has declined, and this has been a global phenomenon, occurring in most countries:

labor share in national income

labor share in national income

(source)

Can we blame this decline for the increase in income inequality during the same period? Only in part, I think, because there has also been a divergence within labor in the sense that some people, mostly high earners, have seen their labor income rise much faster than others. Income inequality is indeed, to some extent, wage inequality. The growth of the finance sector, where people are well-paid, is part of the explanation for the increasing wage inequality, at least in some countries. Tax policy, declining bargaining power among the low earners and wage competition from poorer countries – again affecting mainly low-end workers – may be other explanations for rising wage inequality, also depending on the country (unionization rates, for example, haven’t evolved in the same manner everywhere).

But I guess it’s true that not all of income inequality is wage inequality and that incomes from capital, such as profits, dividends, stock options etc. also explain something. Capital income is, compared to labor income, unevenly distributed across a population, and concentrated among the wealthy:

capital income and wage income

(source)

If capital income is more concentrated among the wealthy then a rise in capital income leads to a rise in income inequality. Part of this is just arithmetical: the flip-side of a lower share of national income coming from labor is a higher share of income coming from capital. Capital income needn’t be higher in absolute terms in order to get a larger share. If there’s widespread wage stagnation – perhaps due to international wage competition, trade and outsourcing – then capital income may rise relatively, if not absolutely. However, in some countries we also see an absolute rise of capital income. Here’s the US:

tax-rate-change-impact-capital-gains-realized

(source)

sources of income

(source)

More on capital gains here. More posts in this series are here.

Standard
causes of income inequality, economics, equality

The Causes of Wealth Inequality (28): Political Capture and Deregulation

red tape

(source)

Does income inequality result from “political capture” by the rich? Political capture is the process by which wealth buys policies that are favorable to the wealthy, who in turn become more wealthy. Through campaign contributions, lobbying, the monopolization of discourse etc. the wealthy may be able to convince politicians to approve policies such as deregulation, non-progressive tax rates, tax loopholes, weakened social safety nets, IP etc. Policies aimed at undermining the regulation of the role of money in politics also fit the list, in a meta sort of way. “One dollar one vote” rather than “one person one vote” would obviously be a perversion of democracy, but I’ll now focus on the purely economic effects of political capture, and more specifically on how wealth-backed deregulation affects the distribution of income.

In theory, political capture doesn’t necessarily aggravate income inequality because the economy isn’t always zero sum: policies favorable to the rich, and pushed by the rich, can also have benefits for the rest. Some types of deregulation may be an example. The word “deregulation” summons images of large companies being allowed to pollute, to pay their workers below subsistence wages etc. However, deregulation can also mean getting rid of occupational licensing which often serves no other purpose than to protect incumbents and frustrate enterprising low-income individuals. Deregulation more generally – again in theory – may lead to increased competition and therefore lower prices, something that also benefits the poor.

However, in practice we see that the wave of deregulation during the last decades, especially in the financial and banking sector, has coincided with increasing income inequality, at least in the US:

financial deregulation and income inequality

(source)

This graph also makes the link:

bank regulation and inequality

(source, click image to enlarge)

It’s not just the total level of inequality that is correlated with deregulation; more specifically, wages in the finance sector show the same trend:

overbanked

(source)

Of course, correlation is not causation as people like to say on the internet. Deregulation may not have been the product of political capture, or not entirely, and may not have been an important cause of rising inequality. But the correlations shown in the graphs above do put the burden of proof on those who deny causation.

But also if you accept the possibility of causation, you’ll need a convincing story. It’s true, I think, that deregulation has increased the number of activities that financial companies can engage in, and has therefore led to a rising demand for higher skilled workers and to more performance related compensation. Financial professionals made up almost twice as much of the top 1 percent of the US income distribution in 2005 as they did in 1979. However, deregulation is only part of the explanation of the disproportionate rise in compensation in the finance sector. Stock options and tax policy are also to blame. Of course, tax policy can also result from political capture, but that just goes to show that any explanation of inequality needs to look at a variety of factors. Inequality isn’t just the product of deregulation.

Another post on the same topic is here. More posts in this series are here.

Standard