Tag Archives: Inequality

Post-Davos Depression

By Joseph E. Stiglitz – I’ve been attending the World Economic Forum’s annual conference in Davos, Switzerland – where the so-called global elite convenes to discuss the world’s problems – since 1995. Never have I come away more dispirited than I have this year.

The world is plagued by almost intractable problems. Inequality is surging, especially in the advanced economies. The digital revolution, despite its potential, also carries serious risks for privacy, security, jobs, and democracy – challenges that are compounded by the rising monopoly power of a few American and Chinese data giants, including Facebook and Google. Climate change amounts to an existential threat to the entire global economy as we know it.

Perhaps more disheartening than such problems, however, are the responses.

But, by the end of their speeches this year, any remaining illusion about the values motivating Davos CEOs was shattered. The risk that these CEOs seemed most concerned about is the populist backlash against the kind of globalization that they have shaped – and from which they have benefited immensely.

They may lack the candor of Michael Douglas’s character in the 1987 movie Wall Street, but the message hasn’t changed: “Greed is good.” What depresses me is that, though the message is obviously false, so many in power believe it to be true. more>

The consequences of increasing concentration and decreasing competition—and how to remedy them

By William A. Galston and Clara Hendrickson – Our paper, “A policy at peace with itself: Antitrust remedies for our concentrated, uncompetitive economy,” shows why antitrust has become an object of public concern and documents the urgent need to reform antitrust enforcement, which has failed, in recent years, to stem rising concentration and prevent declining competition.

Not only are today’s firms astoundingly profitable, they are persistently profitable. While a profitable American firm in the 1990s had a 50 percent chance of finding itself similarly successful 10 years on, a very profitable American firm today enjoys over an 80 percent chance.

That persistently high profits remain unchallenged suggests many firms may be receiving a return on market power.

Under-enforcement has harmed consumers as many mergers have led to higher prices. Declining competition has also resulted in rising inequality as inter-firm earnings disparities deepen the economic divide among workers. more>

When Welfare Sabotages Lives

BOOK REVIEW

Scarcity: Why Having Too Little Means So Much, Authors: Sendhil Mullainathan and Eldar Shafir.

By Ngaire Woods – The first lesson is that people – rich and poor – often make bad choices when they lack a key resource, like money or time. For example, ruinously expensive “payday loans” can be appealing to cash-strapped borrowers, even if the terms of these loans tend to push people deeper into debt.

This is not because people lack education. But poor decisions can result from conditions of scarcity and stress.

Britain’s new program was championed as a way to reduce costs and incentivize better decisions, thereby moving more people into work and reducing benefit claims. But, so far, there is little evidence to support this rosy scenario.

By reducing benefits received by the poor, the government is ensuring that scarcity surges and poor decisions multiply. And by changing the system frequently and making it more complicated to access, Britain’s leaders are also forcing the poor to consume more mental bandwidth. Taken together, these factors are leaving welfare recipients worse off. <a href="http://Britain’s new program was championed as a way to reduce costs and incentivize better decisions, thereby moving more people into work and reducing benefit claims. But, so far, there is little evidence to support this rosy scenario.

By reducing benefits received by the poor, the government is ensuring that scarcity surges and poor decisions multiply. And by changing the system frequently and making it more complicated to access, Britain’s leaders are also forcing the poor to consume more mental bandwidth. Taken together, these factors are leaving welfare recipients worse off." more>

The Case Against Free-Market Capitalism

By Ngaire Woods – Free-market capitalism is on trial.

Just a quarter-century ago, the debate about economic systems – state-managed socialism or liberal democracy and capitalism – seemed to have been settled. With the Soviet Union’s collapse, the case was closed – or so it seemed.

Since then, the rise of China has belied the view that a state-led strategy will always fail, and the global financial crisis exposed the perils of inadequately regulated markets. In 2017, few of the world’s fastest-growing economies (Ethiopia, Uzbekistan, Nepal, India, Tanzania, Djibouti, Laos, Cambodia, Myanmar, and the Philippines) have free markets. And many free-market economies are suffering from growth slowdowns and rapidly rising inequality.

The conservative case, eloquently articulated by Theresa May, is that a free-market economy, operating under the right rules and regulations, is the greatest agent of collective human progress ever created. If that claim is true, the only logical conclusion is that we are doing it wrong.

So what measures are needed to get it right? more> https://goo.gl/ioQAAD

Citizens’ Wealth Fund To Tackle Inequality

By Stewart Lansley – The 20th century trend to greater wealth equality is now in reverse. Wealth is much more unequally distributed than incomes. Capital ownership is even more concentrated—so much for a share owning democracy.

Because of such concentration, the considerable returns from wealth (in dividends, rent and interest) accrue disproportionally to the already rich. The more wealth booms at the top, the more it undermines the life chances of those left out of the party. Moreover, because of rolling privatization, wealth is increasingly privately owned. Today, the public holds only a little over a tenth of total wealth, well down on the post-war decades.

Tackling these issues requires some big policy shifts. First, the level of taxation on wealth needs to rise. Wealth is hugely undertaxed compared with income: the combined revenue from existing capital taxes accounts for less than one per cent of total economic output. To spread capital ownership, we need to expand the role of alternative business models—from partnerships to co-operatives—which distribute economic gains more equally. more> https://goo.gl/RuUSFz

Updates from Chicago Booth

What has happened over the past 40 years in the United States, particularly in cities?
By Veronica Guerrieri – It is well known that the US has experienced a large increase in income inequality, which, in my view, is one of the biggest problems of the US economy. At the same time, there has been an increase in neighborhood segregation, especially in larger cities: the rich are more and more concentrated in rich neighborhoods and the poor in poor neighborhoods. Alessandra Fogli of the Federal Reserve Bank of Minneapolis and I document a strong correlation between inequality and residential segregation.

The data show that cities with more segregation have a bigger education gap between the children of rich and poor families—and have less intergenerational mobility, which measures how hard it is to become rich if your parents are poor. In rich neighborhoods, it’s easier for kids to get a good education, and the return on education is higher. There are better schools, parents invest more in after-school activities, and there are stronger peers. This means that segregation amplifies inequality. At the same time, inequality increases segregation because richer people are happy to pay more to live in better neighborhoods. more> https://goo.gl/Qxi1wD

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Are You Ready To Consider That Capitalism Is The Real Problem?

BOOK REVIEW

The Divide: A Brief History of Global Inequality and Its Solutions, Author: Jason Hickel.

By Jason Hickel and Martin Kirk – A full three-quarters of people in major capitalist economies believe that big businesses are basically corrupt.

Why do people feel this way?

It’s because they realize—either consciously or at some gut level—that there’s something fundamentally flawed about a system that has a prime directive to churn nature and humans into capital, and do it more and more each year, regardless of the costs to human well-being and to the environment we depend on.

That’s what capitalism is, at its root.

What might a better world look like? There are a million ideas out there. We can start by changing how we understand and measure progress.

We can change that.

People want health care and education to be social goods, not market commodities, so we can choose to put public goods back in public hands. People want the fruits of production and the yields of our generous planet to benefit everyone, rather than being siphoned up by the super-rich, so we can change tax laws and introduce potentially transformative measures like a universal basic income. more> https://goo.gl/ntiMQr

The economy is more a messy, fractal living thing than a machine

BOOK REVIEW

In Our Own Image: Savior or Destroyer? The History and Future of Artificial Intelligence, Author: George Zarkadakis.

By George Zarkadakis – Mainstream economics is built on the premise that the economy is a machine-like system operating at equilibrium. According to this idea, individual actors – such as companies, government departments and consumers – behave in a rational way.

Ever since the invention of the assembly line, corporations have been like medieval cities: building walls around themselves and then trading with other ‘cities’ and consumers.

The so-called ‘gig economy’ is only the beginning of a profound economic, social and political transformation. For the moment, these new ways of working are still controlled by old-style businesses models – platforms that essentially sell ‘trust’ via reviews and verification, or by plugging into existing financial and legal systems.

Blockchain technologies promise to replace these trusted third parties with a huge digital record book, spreading out organically across a network of computers that grows and changes but can’t be meddled with.

By getting rid of middlemen, they’re likely to radically reduce transaction costs, and accelerate the mixing of many different actors in the new economy who have been freed from the grip of leaders or institutions. more> https://goo.gl/Gs6f4B

Updates from Chicago Booth

How to split equity without drawing blood
By Mike Moyer – We live in a world where entrepreneurs and early-stage company participants get taken advantage of so frequently that we hardly notice. Bad equity deals are the rule, not the exception. Fairness is rare.

The intent for fairness is there in the way equity is split among business partners, but the practice of fairness is not. This is a correctable problem.

When a person contributes to a start-up company and does not get paid for her contribution, she is putting her contribution at risk with the hopes of getting a future reward. And, while the timing and the amount of the future reward is unknowable, the amount of the contributions at risk is knowable. It is equal to the fair market value of the contributions.

Because it’s impossible to know when or even if the rewards will ever come, we can never know how much people must put at risk to get the rewards. Every contribution, therefore, is essentially a bet on the future of the company, and nobody knows when the betting will end. more> https://goo.gl/F3ELyY

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What Economics Models Really Say

BOOK REVIEW

Economics Rules: The Rights and Wrongs of the Dismal Science, Author: Dani Rodrik.

Why is there such an enormous gulf between what economists know and what they say in public?
By Peter Turchin – Rodrik notes early in the book, “economics is by and large the only social science that remains almost entirely impenetrable to those who have not undertaken the requisite apprenticeship in graduate school.”

And economics is “impenetrable” not because of mathematical models, at least not to someone trained in mathematical natural sciences (the math is universal), but because economists have developed an entirely distinct jargon that sets them apart from other disciplines and creates artificial barriers to understanding the many truly worthwhile insights from economics models.

In popular press, comparative advantage is always used as a justification for advocating free trade. Rodrik does an admirable job explaining why, under many conditions, free trade can lead to really negative consequences for economies and populations of countries that open themselves to international competition.

For example, there is strategic behavior. A country may choose to protect its domestic industry with high tariffs and subsidize its exports in order to gain market share.

Perhaps its leaders don’t understand the Principle of Comparative Advantage, not having the benefit of apprenticeship in economics. Or perhaps they care more about their country’s long-term survival in an anarchic international environment than about making immediate profit.

As Rodrik correctly stresses, these cases do not prove that standard economics is wrong. In short, “someone who advocates free trade because it will benefit everyone probably does not understand how comparative advantage really works.” more> https://goo.gl/mQr9tV