Tag Archives: Inequality

Chief executives’ pay: reversing the race to the top

Eye-watering remuneration for chief executives is economically wasteful as well as socially divisive. Non-profits should pioneer compressed wage hierarchies.
By Alex Bird – As Oxfam reports that the top 1 per cent of the world’s population now own more than the other 99 per cent, it’s time to think about how those at the top of the economic tree can secure such eye-watering salaries, which they parlay into wealth.

Whereas in the past individuals became recognized by their status in the community rather than in cash, and for their philanthropy—such as Carnegie building libraries, or business people supporting the local football team—now driven individuals seek recognition through possessing conspicuous wealth.

This recognition drive is reinforced by remuneration committees, which are the method of setting top salaries recommended in the UK by the Financial Reporting Council. They employ specialist consultants to survey what others are paying, adjust for industry and turnover, and so arrive at a ‘market price’. Any executives earning less than this rate get a rise; anyone earning more is left alone, as their contract locks them in to that salary. Industry rivals see this change, redo their own surveys and the upwards-only merry-go-round progresses.

This, naturally, has led to an increasing disparity between the highest and average earnings. more>

They Don’t Just Hide Their Money. Economist Says Most of Billionaire Wealth is Unearned.

By Didier Jacobs – The 62 richest people in the world own as much wealth as half of humanity. Such extreme wealth conjures images of both fat cats and deserving entrepreneurs. So where did so much money come from?

It turns out, three-fourths of extreme wealth in the US falls on the fat cat side.

A key empirical question in the inequality debate is to what extent rich people derive their wealth from “rents”, which is windfall income they did not produce, as opposed to activities creating true economic benefit.

Economists define “rent” as the difference between what people are paid and what they would have to be paid to do the work anyway. The classical example is the farmer who owns particularly fertile land.

With the same effort, she can produce more than other farmers working on land of average productivity. The extra income she gets is a rent. Monopolists also get rent by overcharging customers as compared to what they could charge in competitive markets.

More generally, economists have identified a series of “market failures”, which are situations where full competition does not prevail and where someone can therefore overcharge – they would be ready to do the work for less, but lack of competition allows them to make a quick extra buck. Government can alleviate market failures through proper economic regulation; or it can make them worse.

Political scientists define “rent-seeking” as influencing government to get special privileges, such as subsidies or exclusive production licenses, to capture income and wealth produced by others.

So how much of extreme wealth derives from rents? more>

How Universal Basic Income Solves Widespread Insecurity and Radical Inequality

By Daniel Nettle – Today should be the best time ever to be alive. Thanks to many decades of increasing productive efficiency, the real resources available to enable us to do the things we value—the avocados, the bicycles, the musical instruments, the bricks and glass—are more abundant and of better quality than ever. Thus, at least in the industrialized world, we should be living in the Age of Aquarius, the age where the most urgent problem is self-actualization, not mere subsistence: not ‘How can we live?’, but ‘How shall we live?’.

Why then, does it not feel like the best time ever?

Contrary to the predictions of mid-twentieth-century economists, the age of universal wellbeing has not really materialized. Working hours are as high as they were for our parents, if not higher, and the quality of work is no better for most people. Many people work several jobs they do not enjoy, just to keep a roof over their heads, food on the table, and the lights on. In fact, many people are unable to satisfy these basic wants despite being in work.

Big problems require big ideas.

Our current generation of politicians don’t really have ideas big enough to deal with the problems of widespread insecurity and marked inequality. Big ideas come along every few decades. The last one was about forty years ago: neoliberalism, the idea that market competition between private-sector corporations would deliver the social outcomes we all wanted, as long as government got out of the way as far as possible.

Our current politicians propose to deal with symptoms piecemeal—a minimum-wage increase here, a price cap there, rent-control in the other place; tax credits for those people; financial aid to buy a house for those others. At best we are dealing with one symptom at a time. Each piecemeal intervention increases the complexity of the state; divides citizens down into finer and finer ad hoc groups each eligible for different transactions; requires more bureaucratic monitoring; and often has unintended and perverse knock-on effects.

A Universal Basic Income (UBI) is a regular financial payment made to all eligible adults, whether they work or not, regardless of their other means, and without any conditionality whatever. Receiving it is a fundamental entitlement that comes with being a member of society: people can know that it will always be there, now and in the future. more>

Why Inequality Matters

By Thorvaldur Gylfason – Since the early 1970s, the share of national income paid to workers in advanced economies has fallen from 55 to 40 percent. A declining labor share goes along with increased inequality in the distribution of income and wealth as well as health. Medical researchers report that the wealthiest one percent of American men live 15 years longer than the poorest one percent and that the wealthiest one percent of American women can expect to live ten years longer than their poorer counterparts. The gap is widening.

Concerns about inequality have recently been thrust to the forefront of political discourse around the world. An important part of the explanation for the surprise victory of Donald Trump in the 2016 US presidential election is that he did well among those voters who felt they had been left behind with stagnant real wages for decades while CEO compensation rose from 20 times the typical worker’s compensation in 1965 to 270 in 2008.

What could workers do?

As film maker Michael Moore puts it, they could throw Molotov cocktails at the powers that be. Trump was their Molotov. Similarly, in the 2016 referendum in the UK, those who felt left behind tended to vote for Brexit. more>

How Capitalism Actually Generates More Inequality

By Geoffrey M. Hodgson – At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality.

Typically there is freedom to trade and equality under the law, meaning that most adults – rich or poor – are formally subject to the same legal rules. But with its inequalities of power and wealth, capitalism nurtures economic inequality alongside equality under the law.

Today, in the USA, the richest 1 per cent own 34 per cent of the wealth and the richest 10 per cent own 74 per cent of the wealth. In the UK, the richest 1 per cent own 12 per cent of the wealth and the richest 10 per cent own 44 per cent of the wealth. In France the figures are 24 cent and 62 per cent respectively. The richest 1 percent own 35 percent of the wealth in Switzerland, 24 per cent in Sweden and 15 percent in Canada.

To what extent can inequalities of income or wealth be attributed to the fundamental institutions of capitalism, rather than a residual landed aristocracy, or other surviving elites from the pre-capitalist past? A familiar mantra is that markets are the source of inequality under capitalism. Can markets be blamed for inequality?

In real-world markets different sellers or buyers vary hugely in their capacities to influence prices and other outcomes. When a seller has sufficient salable assets to affect market prices, then strategic market behavior is possible to drive out competitors.

Would more competition, with greater numbers of market participants, fix this problem? If markets per se are to be blamed for inequality, then it has to be shown that competitive markets also have this outcome. more>

America’s Worsening Geographic Inequality

By Richard Florida – It’s not just economic inequality—the gap between the rich and the poor—that is growing ever wider. Geographic inequality, the divide between rich and poor places, is too.

America’s growing geographic or spatial inequality is documented in great detail in recent studies from the Economic Innovation Group (EIG) and The Hamilton Project of Brookings Institution.

Their analysis confirms the decline of America’s once-sturdy middle-class neighborhoods, and the splitting of the nation into areas of concentrated advantage, juxtaposed with areas of concentrated disadvantage.

Fewer than 40 percent of Americans, 120 million or so, live in middle-class neighborhoods which the study’s authors classify as “comfortable” and “mid-tier.” Another third, 106 million people, live in “at-risk” or “distressed” communities. An advantaged quarter or so of Americans, 86 million, live in affluent, “prosperous” neighborhoods. Furthermore, the gap between advantaged and disadvantaged neighborhoods has increased in the past decade or so. more>

America is Regressing into a Developing Nation for Most People

BOOK REVIEW

The Vanishing Middle Class: Prejudice and Power in a Dual Economy, Author: Peter Temin.

By Lynn Parramore – America is not one country anymore. It is becoming two, each with vastly different resources, expectations, and fates.

In one of these countries live members of what Temin calls the “FTE sector” (named for finance, technology, and electronics, the industries which largely support its growth). These are the 20 percent of Americans who enjoy college educations, have good jobs, and sleep soundly knowing that they have not only enough money to meet life’s challenges, but also social networks to bolster their success.

They grow up with parents who read books to them, tutors to help with homework, and plenty of stimulating things to do and places to go. They travel in planes and drive new cars. The citizens of this country see economic growth all around them and exciting possibilities for the future. They make plans, influence policies, and count themselves as lucky to be Americans.

The FTE citizens rarely visit the country where the other 80 percent of Americans live: the low-wage sector.

Here, the world of possibility is shrinking, often dramatically. People are burdened with debt and anxious about their insecure jobs if they have a job at all.

Many of them are getting sicker and dying younger than they used to. They get around by crumbling public transport and cars they have trouble paying for. Family life is uncertain here; people often don’t partner for the long-term even when they have children. If they go to college, they finance it by going heavily into debt. They are not thinking about the future; they are focused on surviving the present. The world in which they reside is very different from the one they were taught to believe in.

While members of the first country act, these people are acted upon.

Temin uses a famous economic model created to understand developing nations to describe how far inequality has progressed in the United States. For the first time, this model is applied with systematic precision to the U.S.

The result is profoundly disturbing. more>

updates from Chicago Booth

Why it’s so hard to simplify the tax code
By Dee Gill – Simplifying the tax code ostensibly has bipartisan backing. Both the Bush and Obama administrations advocated for simplification, in reports, as have House Speaker Paul Ryan (Republican of Wisconsin) and Senator Elizabeth Warren (Democrat of Massachusetts). But when the Senate passed a tax bill this past December, there was no postcard.

What happened? The same thing that always does, suggest researchers. While simplicity is a stated goal, complexity wins the day. Hence companies and individuals will hire accountants to wade through the latest bill, interpret the new rules, offer guidance, and help work through the inevitable corrections and amendments.

And this comes at an economic cost. Research by James Mahon and Chicago Booth’s Eric Zwick, and others, collectively indicates that the complexity leads individuals and companies to fail to take advantage of billions of dollars in offered breaks, many of them presumably intended to stimulate the economy. In this way, complexity undermines what tax incentives are purported to accomplish. more>

Related>

Europe’s Poor Need More Than Jobs

By Ive Marx – The idea that – to use a ubiquitous political slogan – “the best protection against poverty is a job” remains the mantra in the corridors of power right across Europe and indeed in Brussels. It is, alas, more tenet of faith than a statement of fact.

Unfortunately, things are not as simple. Employment growth never yielded the hoped-for reductions in poverty in the past (see here). There is no reason to expect that things will turn out any different this time.

First, many of the poor live in households where no adult has a job. Such “jobless households” often face severe financial hardship, including any children. In the past, employment growth never produced anywhere near commensurate drops in household jobless rates. Instead it tended to boost the number of double- or multi-earner households.

A second reason why more people in work does not automatically bring less poverty is that getting a job may not be enough for a household to escape poverty. Long considered a typically American phenomenon, there is now ample evidence that the “working poor” are to be found in significant numbers in every European country.

In conclusion: it is time to remind Europe’s politicians of the promises they made to bring poverty down. They seem to think that Europe’s buoyant labor markets will do the job. They will not. more>

Why Amartya Sen remains the century’s great critic of capitalism

BOOK REVIEW

The Moral Economists: R H Tawney, Karl Polanyi, E P Thompson and the Critique of Capitalism, Author: Tim Rogan.

By Tim Rogan – Critiques of capitalism come in two varieties. First, there is the moral or spiritual critique. This critique rejects Homo economicus as the organizing heuristic of human affairs. Human beings, it says, need more than material things to prosper. Calculating power is only a small part of what makes us who we are. Moral and spiritual relationships are first-order concerns. Material fixes such as a universal basic income will make no difference to societies in which the basic relationships are felt to be unjust.

Then there is the material critique of capitalism. The economists who lead discussions of inequality now are its leading exponents. Homo economicus is the right starting point for social thought. We are poor calculators and single-minded, failing to see our advantage in the rational distribution of prosperity across societies. Hence inequality, the wages of ungoverned growth. But we are calculators all the same, and what we need above all is material plenty, thus the focus on the redress of material inequality. From good material outcomes, the rest follows.

But then there is Amartya Sen. Every major work on material inequality in the 21st century owes a debt to Sen.

But his own writings treat material inequality as though the moral frameworks and social relationships that mediate economic exchanges matter. Famine is the nadir of material deprivation.

But it seldom occurs – Sen argues – for lack of food.

To understand why a people goes hungry, look not for catastrophic crop failure; look rather for malfunctions of the moral economy that moderates competing demands upon a scarce commodity. Material inequality of the most egregious kind is the problem here. more>