Economic Inequality??

One can easily misrepresent or exaggerate reality with a few select statistics and come to conveniently chosen conclusions. This doesn’t really help the conversation.

The distribution of wealth and income has become a social, economic, and political problem in recent decades. And not only in the US. But the question is why and what to do about it.

First, we should notice the timeframe of the comparison: 1980 vs. 2014. During these years there has been a massive credit bubble with low to zero interest rates and low inflation, especially over the past 16 years. This has disproportionately rewarded asset holders and debt-driven consumption and the income shares in industries associated with that, like FIRE.

The cheap credit has also led to massive investments in technology and biotech, where income levels have far exceeded those in other industries. This is not necessarily a bad thing, especially for aggregate growth, but it does have distributional consequences for wealth and income. Globalization, through outsourcing, trade and labor migration, has also served to keep labor costs low in developed nations.

So, what to make of this? I would have differences with the suggestions of the author as stated here:

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation. 

First, the problem with the tax code is that it creates barriers for asset accumulation for those without assets. In other words, it favors the haves over the wannabes, even if the wannabes are more deserving. So we need to reduce those barriers. Not by making it harder to get rich, but by making it harder to stay rich and idle sitting on assets that have ballooned in value through no effort on the owners of those assets. Thus, we should look more toward wealth taxes as opposed to income or capital taxes. We should also make capital taxes more progressive so that the have-nots are not doomed to remain so. Have you seen your interest on savings lately?

Second, a better functioning education system is always a deserved policy priority, but it won’t fix this income distribution problem. The cost of education is becoming prohibitive and elitism is turning top universities, where costs are in the stratosphere, into branding agents rather than educating institutions. In other words, the Ivy League degree is more valuable as a signalling device than anything a student may or may not have learned there. Thus we are biasing favoritism over meritocracy.

Third, the focus on wages and organized labor is completely misguided.  Most workers in growth industries in the 21st century eschew labor unions in favor of equity participation and risk-taking entrepreneurship. Does that mean manufacturing labor has no future? Not at all. But it should be bargaining for equity in addition to a base wage. Competing solely on wages means workers are competing with the global supply of labor, which is a losing proposition for developed countries’ workers.

The inability of policymakers to see clearly how the world has changed and how ownership and control structures must adapt to the information economy leads them towards the rabbit hole of universal basic incomes, which fundamentally is a universal welfare program to support consumption. One thing we’ve learned over the past 60 years is that nobody wants welfare, but many become addicted to it. It’s not a solution or even a short-term fix.

Refer to the NYT website link to view the graphs…

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable.

But it’s not.

 

A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.

 

The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.

 

This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here.

The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in percentage terms, than the pay of the rich.

 

The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2 percent a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)

 

In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else.

 

The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

 

It’s true that the country can’t magically return to the 1950s and 1960s (nor would we want to, all things considered). Economic growth was faster in those decades than we can reasonably expect today. Yet there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population.

 

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

 

Remarkably, President Trump and the Republican leaders in Congress are trying to go in the other direction. They spent months trying to take away health insurance from millions of middle-class and poor families. Their initial tax-reform planswould reduce taxes for the rich much more than for everyone else. And they want to cut spending on schools, even though education is the single best way to improve middle-class living standards over the long term.

 

Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough.

Share the Wealth?

The Third Way? No, the Only Way forward. It’s called peoples’ capitalism, the Ownership Society, employee ownership, inclusive capitalism, etc. (Ironic how Reich has embraced a concept introduced in national politics by George W. Bush.)
Reprinted from the Huff Post. Comment below…

The Third Way: Share-the-Gains Capitalism

by Robert Reich

Marissa Mayer tells us a lot about why Americans are so angry, and why anti-establishment fury has become the biggest single force in American politics today.

Mayer is CEO of Yahoo. Yahoo’s stock lost about a third of its value last year, as the company went from making $7.5 billion in 2014 to losing $4.4 billion in 2015. Yet Mayer raked in $36 million in compensation.

Even if Yahoo’s board fires her, her contract stipulates she gets $54.9 million in severance. The severance package was disclosed in a regulatory filing last Friday with the Securities and Exchange Commission.

In other words, Mayer can’t lose.

It’s another example of no-lose socialism for the rich — winning big regardless of what you do.

Why do Yahoo’s shareholders put up with it? Mostly because they don’t know about it.

Most of their shares are held by big pension funds, mutual funds, and insurance funds whose managers don’t want to rock the boat because they skim the cream regardless of what happens to Yahoo.

In other words, more no-lose socialism for the rich.

I don’t want to pick on Ms. Mayer or the managers of the funds that invest in Yahoo. They’re typical of the no-lose system in which America’s corporate and financial elite now operate.

But the rest of America works in a different system.

Theirs is cutthroat hyper-capitalism — in which wages are shrinking, median household income continues to drop, workers are fired without warning, two-thirds are living paycheck to paycheck, and employees are being classified as “independent contractors” without any labor protections at all.

Why is there no-lose socialism for the rich and cutthroat hyper-capitalism for everyone else?

Because the rules of the game — including labor laws, pension laws, corporate laws, and tax laws — have been crafted by those at the top, and the lawyers and lobbyists who work for them.

Does that mean we have to await Bernie Sanders’s “political revolution” (or, perish the thought, Donald Trump’s authoritarian populism) before any of this is likely to change?

Before we go to the barricades, you should know about another CEO named Hamdi Ulukaya, who’s developing a third model — neither no-lose socialism for the rich nor hyper-capitalism for everyone else.

Ulukaya is the Turkish-born founder and CEO of Chobani, the upstart Greek yogurt maker recently valued at as much as $5 billion.

Last Tuesday Ulukaya announced he’s giving all his 2,000 full-time workers shares of stock worth up to 10 percent of the privately held company’s value when it’s sold or goes public, based on each employee’s tenure and role at the company.

If the company ends up being valued at $3 billion, for example, the average employee payout could be $150,000. Some long-tenured employees will get more than $1 million.

Ulukaya’s announcement raised eyebrows all over corporate America. Many are viewing it as an act of charity (Forbes Magazine calls it one of “the most selfless corporate acts of the year”).

In reality, Mr. Ulukaya’s decision is just good business. Employees who are partners become even more dedicated to increasing a company’s value.

Which is why research shows that employee-owned companies — even those with workers holding only a minority stake — tend to out-perform the competition.

Mr. Ulukaya just increased the odds that Chobani will be valued at more than $5 billion when it’s sold or its shares of stock are available to the public. Which will make him, as well as his employees, far wealthier.

As Ulukaya wrote to his workers, the award isn’t a gift but “a mutual promise to work together with a shared purpose and responsibility.”

A handful of other companies are inching their way in a similar direction.

Apple decided last October it would award shares not just to executives or engineers but to hourly paid workers as well. Twitter CEO Jack Dorsey is giving a third of his Twitter stock (about 1 percent of the company) “to our employee equity pool to reinvest directly in our people.“

Employee stock ownership plans, which have been around for years, are lately seeing a bit of a comeback.

But the vast majority of American companies are still locked in the old hyper-capitalist model that views workers as costs to be cut rather than as partners to share in success.

That’s largely because Wall Street still looks unfavorably on such collaboration (remember, Chobani is still privately held).

The Street remains obsessed with short-term stock performance, and its analysts don’t believe hourly workers have much to contribute to the bottom line.

But they’re prepared to lavish unprecedented rewards on CEOs who don’t deserve squat.

Let them compare Yahoo with Chobani in a few years, and see which model works best.

If I were a betting man, I’d put my money on Greek yoghurt.

And I’d bet on a model of capitalism that’s neither no-lose socialism for the rich nor cruel hyper-capitalism for the rest, but share-the-gains capitalism for everyone.

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My comment:
Reich’s argument for inclusive “ownership” capital is certainly a welcome improvement over artificially raising labor costs through wage mandates or union restrictions. Kudos to Mr. Ulukaya, but a more widely adopted model can’t rely solely on enlightened capitalists. Mr. Reich glosses over the important issue of who bears the risks of capitalist enterprise before success. Sharing the gains unfortunately also means sharing the financial risks, or the direct relationship between human loss aversion and risk-taking enterprise collapses. In other words, nobody gets to receive gains without taking risks and nobody take risks without expected gains. If that truth escapes you, you’re probably not a casino gambler.
Mr. Ulukaya bore these risks and now wisely seeks to share the risks and rewards going forward. But these ownership rights should be negotiated by employees across the economy and can’t rely on the benevolence of successful entrepreneurs. Labor organizations could play a collective action role here on securing and enforcing ownership rights. The public sector also should address how economic risks can be better managed through a functioning private insurance market complemented by social insurance where private markets are incomplete.
The current desire to centralize risk and control in big government, big business, and big labor is sorely misguided and it would be helpful if both left and right could come together on that fact. Ideology be damned.
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I include this cartoon below for its comic irony. So many people reading this article mistake Reich’s argument for Bernie Sanders-style socialism when it is the exact opposite. It’s about extending capital ownership to labor, whereas socialism is about abolishing capital ownership in favor of some altruistic notion of communalism.
share-the-candy

Beyond Piketty’s Capital

Income-USA-1910-2010

What Ben Franklin and Billie Holiday Could Tell Us About Capitalism’s Inequalities

It has now been two years since French economist Thomas Piketty published his tome, Capital in the Twenty-First Century, and one year since it was published in English, raising a fanfare of praise and criticism. It has deserved both, most notably for “putting the distributional question back at the heart of economic analysis.”[1] I would imagine Professor Piketty is also pleased by the attention his work has garnered: What economist doesn’t secretly desire to be labeled a “rock-star” without having to sing or pick up a guitar to demonstrate otherwise?

Piketty’s study (a collaborative effort, to be sure) is an important and timely contribution to economic research. His datasets across time and space on wealth, income, and inheritances provide a wealth of empirical evidence for future testing and analysis. The presentation is long, as it is all-encompassing, tackling an ambitious, if not impossible, task. But for empirics alone, the work is commendable.

Many critics have focused on methodology and the occasional data error, but I will dispense with that by accepting the general contour of history Piketty presents as accurate of real trends in economic inequality over time. And that it matters. Inequality is not only a social and political problem, it is an economic challenge because extreme disparities break down the basis of free exchange, leading to excess investment lacking productive opportunities.[2] (Piketty ignores the natural equilibrium correctives of business/trade cycles, presumably because he perceives them as interim reversals on an inevitable long term trend.) I have followed Edward Wolff’s research long enough to know there is an intimate causal relationship between capitalist markets and material outcomes. I believe the meatier controversy is found in Piketty’s interpretations of the data and his inductive theorizing because that tells us what we can and should do, if anything, about it. Sufficient time has passed for us to digest the criticisms and perhaps offer new insights.

Read the full essay, formatted and downloadable as a pdf…

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[1] Distributional issues are really at the heart of our most intractable policy challenges. Not only are wealth and income inequalities distributional puzzles, so are hunger, poverty, pollution, the effects of climate change, etc. Unfortunately, the profession tends to ignore distributional puzzles because the necessary assumptions of high-order mathematical models that drive theory rule out dynamic network interactions that characterize markets. Due to these limitations, economics is left with the default explanations of initial conditions, hence the focus on natural inequality, access to education, inheritance, etc. General equilibrium theory (GE) also assumes distributional effects away: over time prices and quantities will adjust to correct any maldistributions caused by misallocated resources. For someone mired in poverty or hunger, it’s not a very inspiring assumption.

[2] As opposed to distributional problems, modern economics is very comfortable studying and prescribing economic growth. Its mathematical models provide powerful tools to study and explain the determinants of growth. This is why growth is often touted as the solution to every economic problem. (When you’re a hammer, everything looks like a nail.) But sustainable growth relies on the feedback cycle within a dynamic market network model, so stable growth is highly dependent on sustainable distributional networks.