Tag Archives: Inequality

Updates from Chicago Booth

Think you’re not racist?
Research uncovers our secret prejudices, and ways to overcome them
By Alice G. Walton – It has been 50 years since the Civil Rights Act outlawed discrimination based on race, color, religion, sex, or national origin. The landmark legislation marked the end of the era of legalized racism. Now some affirmative action programs, created to encourage and promote diversity and the presence of underrepresented minorities, are being rolled back.

However, while overt racism may be on the wane in the US, research suggests it remains just below the surface. Very few people would admit to being biased, yet there’s strong evidence that biases continue, often under the level of our expression and of our awareness.

Ten years ago Marianne Betrand, Chris P. Dialynas Distinguished Service Professor of Economics at Chicago Booth, and Sendhil Mullainathan, then at MIT, published a famous study entitled, “Are Emily and Greg More Employable Than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination,” in which 5,000 fictitious resumes were sent in response to 1,300 job postings in Chicago and Boston. The resumes were either “high quality” or “low quality,” varying in the typical things that set resumes apart—job and internship experiences, academic institutions, and languages spoken. Then, the team randomly assigned either a “white-sounding” name, such as Emily Walsh, or an “African American–sounding” name, such as Lakisha Washington, to each resume.

The results were unambiguous. White-sounding applicants got 50% more callbacks than African American–sounding candidates. This didn’t seem to be a matter of how common the names were or the apparent social status of the applicant, but simply a function of what the names suggested about the race of the fictional applicants.

Even more disturbingly, white applicants with higher-quality resumes had a strong advantage over their African American peers. The authors suggest that this makes it less enticing for African Americans to develop high-quality resumes, which makes hiring discrimination part of a destructive cycle. more> [VIDEO]

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Inequality Causes Economic Collapse

Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms.
By Sally Goerner – Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms. In living organisms, poor circulation of blood causes necrosis that can kill. In the biosphere, poor circulation of carbon, oxygen, nitrogen, etc. strangles life and would cause every living system, from bacteria to the biosphere, to collapse. Similarly, poor circulation of money, goods, resources, and services leads to economic necrosis – the dying off of large swaths of economic tissue that ultimately undermines the health of the economy as a whole.

In flow systems, balance is not simply a nice way to be, but a set of complementary factors – such as big and little; efficiency and resilience; flexibility and constraint – whose optimal balance is critical to maintaining circulation across scales. For example, the familiar branching structure seen in lungs, trees, circulatory systems, river deltas, and banking systems connects a geometrically constant ratio of a few large, a few more medium-sized, and a great many small entities. This arrangement, which mathematicians call a fractal, is extremely common because it’s particular balance of small, medium, and large helps optimize circulation across different levels of the whole. Just as too many large animals and too few small ones creates an unstable ecosystem, so financial systems with too many big banks and too few small ones tend towards poor circulation, poor health, and high instability.

In his documentary film, Inequality for All , Robert Reich uses virtuous cycles to clarify how robust circulation of money serves systemic health. In virtuous cycles, each step of money movement makes things better. For example, when wages go up, workers have more money to buy things, which should increase demand, expand the economy, stimulate hiring, and boost tax revenues. In theory, government will then spend more money on education which will increase worker skills, productivity and hopefully wages. This stimulates even more circulation, which starts the virtuous cycle over again. In flow terms, all of this represents robust constructive flow, the kind that develops human and network capital and enhances well-being for all.

Of course, economies also sometimes exhibit vicious cycles, in which weaker circulation makes everything go downhill – i.e., falling wages, consumption, demand, hiring, tax revenues, government spending, etc. These are destructive flows, ones that erode system health. more>

Updates from Chicago Booth

When rich folks move downtown, inequality gets worse
By Victor Couture, Cecile Gaubert, Jessie Handbury, and Erik Hurst – As the rich in the United States get richer, they have been moving from the suburbs to downtown, boosting the demand for luxury amenities. While this process of gentrification has long been decried for pushing out poor people, it also measurably worsens income inequality, according to University of California at Berkeley’s Victor Couture and Cecile Gaubert, University of Pennsylvania’s Jessie Handbury, and Chicago Booth’s Erik Hurst.

The researchers analyzed US Census data from 1970, 1990, and 2000, along with the Census Bureau’s American Community Survey from 2012 through 2016. They find not only that the income gap between the wealthiest 10 percent and the poorest 10 percent widened by 19 points over 1990–2014, but also that gentrification contributed another 1.7 points to that gap.

This additional welfare calculation addresses the economic fallout for poorer residents, who had to pay more for downtown housing as the influx of wealthy residents drove up prices at restaurants and bars, along with the cost of entertainment and personal services. “Poorer residents, who are mostly renters,” the researchers write, “have a choice between paying higher rents for a bundle of amenities that they do not value as much and moving out of downtown.” more>

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Saving Capitalism from Inequality

Robust middle incomes deliver the demand that businesses need to produce.
By Robert Manduca – After decades of praise heaped on “job creators,” viewers today may find it disorienting to see the consumer—and a middle-income one at that—cast as the hero of the economy, instead of the investor or the entrepreneur.

Yet Fortune, which produced the video in 1956, was hardly an outlier. In the mid-twentieth century, advertising, popular press, and television bombarded Americans with the message that national prosperity depended on their personal spending. As LIFE proclaimed in 1947, “Family Status Must Improve: It Should Buy More For Itself to Better the Living of Others.”

This messaging was not simply an invention of clever marketers; it had behind it the full force of the best-regarded economic theory of the time, the one elaborated in John Maynard Keynes’s The General Theory of Employment, Interest and Money (1936). The key to full employment and economic growth, many at the time believed, was high levels of aggregate demand.

But high demand required mass consumption, which in turn required an equitable distribution of purchasing power. By ensuring sufficient income for less well-off consumers, the government could continually expand the markets for businesses and boost profits as well as wages.

Conversely, Keynes’s theory implied, growing income inequality would lead to lower demand and slower economic growth.

The basic Keynesian logic of demand-driven growth came to be accepted across U.S. society in large part due to significant postwar efforts to explain, communicate, and popularize it. Proponents of Keynesian thinking worked hard to educate the public about the new economic theory and the possibilities of abundance that it foretold. A particularly compelling example is the book Tomorrow Without Fear (1946). more>

Economics Can’t Explain Why Inequality Decreases

A problem with Piketty’s explanation
By Peter Turchin – In September I went to an international conference in Vienna, Austria, The Haves and the Have Nots: Exploring the Global History of Wealth and Income Inequality. One thing I learned at the conference is that, apparently, economists don’t really know why inequality increases and decreases. Especially, why it decreases.

Let’s start with Thomas Piketty, since Capital in the Twenty First Century is currently the “bible” (or should I say “Das Kapital”?) of inequality scholars.

Piketty provides a good explanation of why inequality increases. It’s good not in the sense that everybody agrees with it, but in the sense of being good science: a general mechanism that is supported by mathematics and by data.

So far so good. But how does Piketty explain the decline of inequality during the middle of the twentieth century? It was a result of unique circumstances—two destructive world wars and the Great Depression. In other words, and forgive me for crudeness, shit happens.

This is not a particularly satisfactory conclusion. Of course, it’s possible that the general trend of inequality is always up, except for random exogenous events that knock it down once in a while. So devastating wars destroy property, and by making the wealthy poorer reduce inequality. This is one of the inequality-reducing forces that Piketty mentions several times in his book.

To me such exogenous explanations are not satisfactory. My intuition (which I understand may not be shared by all) is that when inequality gets too high, there are forces that bring it down. In other words, to some degree it’s a regulatory process, and that’s why we don’t see truly extreme forms of inequality (when one person owns everything).

In Piketty’s view, the only reason we don’t see such extremes is because some kind of random event always intervenes before we get to it. more>

America’s Hot New Job Is Being a Rich Person’s Servant

“Wealth work” is one of America’s fastest-growing industries. That’s not entirely a good thing.
By Derek Thompson – In an age of persistently high inequality, work in high-cost metros catering to the whims of the wealthy—grooming them, stretching them, feeding them, driving them—has become one of the fastest-growing industries.

The MIT economist David Autor calls it “wealth work.”

While there are reasons to be optimistic about this trend, there is also something queasy about the emergence of a new underclass of urban servants.

Wealth work falls into two basic categories. First, full-time retail and service jobs at places like nail salons and spas. “You’re talking about people with $30,000 incomes that are often employed in high-wealth metro areas, or resort economies,” Muro said.

Because they often cannot afford to live near their place o-f work, they endure long commutes from lower-cost neighborhoods. These arrangements aren’t merely time-consuming; they can also be exploitative. For example, New York City nail salons are notorious for flouting minimum-wage laws and other labor regulations, and massage parlors across Florida have served as fronts for human trafficking.

A second category is the “Uber for X” economy—that nebulous network of people contracted through online marketplaces for driving, delivery, and other on-demand services.

Optimistically, these jobs offer autonomy for workers and convenience for consumers, many of whom aren’t wealthy. But the business models that keep these firms aloft rely on the strategic avoidance of laws like the Fair Labor Standards Act, which regulates minimum wage and overtime pay. These laborers often do the work of employees with the legal protections of contractors—which is to say, hardly any. more>

Nobel Economist Says Inequality is Destroying Democratic Capitalism

By Angus Deaton – As at no other time in my lifetime, people are troubled by inequality.

Across the rich world, not only in America, large groups of people are currently questioning whether their economies are working for them. The same can be said of politics. Two-thirds of Americans without a college degree believe that there is no point in voting, because elections are rigged in favor of big business and the rich. Britain is divided as never before and, once again, many believe that their voice doesn’t count either in Brussels or in Westminster. And one of the greatest miracles of the 20th century, the miracle of falling mortality and rising lifespans, is no longer delivering for everyone, and is now faltering or reversing.

At the risk of grandiosity, I think that today’s inequalities are signs that democratic capitalism is under threat, not only in the US, where the storm clouds are darkest, but in much of the rich world, where one or more of politics, economics, and health are changing in worrisome ways. I do not believe that democratic capitalism is beyond repair nor that it should be replaced; I am a great believer in what capitalism has done, not only to the oft-cited billions who have been pulled out of poverty in the last half-century, but to all the rest of us who have also escaped poverty and deprivation over the last two and a half centuries.

But we need to think about repairs for democratic capitalism, either by fixing what is broken, or by making changes to head off the threats; indeed, I believe that those of us who believe in social democratic capitalism should be leading the charge to make repairs. As it is, capitalism is not delivering to large fractions of the population; in the US, where the inequalities are clearest, real wages for men without a four-year college degree have fallen for half a century, even at a time when per capita GDP has robustly risen. more>

The exploitation time bomb

Worsening economic inequality in recent years is largely the result of policy choices that reflect the political influence and lobbying power of the rich.
By Jayati Ghosh – Since reducing inequality became an official goal of the international community, income disparities have widened. This trend, typically blamed on trade liberalization and technological advances that have weakened the bargaining power of labor vis-à-vis capital, has generated a political backlash in many countries, with voters blaming their economic plight on ‘others’ rather than on national policies. And such sentiments of course merely aggravate social tensions without addressing the root causes of worsening inequality.

But in an important new article, the Cambridge University economist José Gabriel Palma argues that national income distributions are the result not of impersonal global forces, but rather of policy choices that reflect the control and lobbying power of the rich.

The driving force behind these trends is market inequality, meaning the income distribution before taxes and government transfers. Most OECD countries continually attempt to mitigate this through the tax-and-transfer system, resulting in much lower levels of inequality in terms of disposable income.

But fiscal policy is a complicated and increasingly inefficient way to reduce inequality, because today it relies less on progressive taxation and more on transfers that increase public debt. For example, European Union governments’ spending on social protection, health care and education now accounts for two-thirds of public expenditure, but this is funded by tax policies that let off the rich and big corporations while heavily burdening the middle classes, and by adding to the stock of government debt. more>

As U.S. expansion notches record, recovery may have only just begun

By Howard Schneider – It was only last year that U.S. gross domestic product caught up with estimates of its potential, surpassing where Congressional Budget Office analysts feel it would have been if the housing bubble hadn’t burst in 2007, investment bank Lehman Brothers hadn’t failed the following year, and the world had not cratered into a deep recession.

The periods when GDP exceeds potential are typically when workers enjoy the greatest wage gains and members of historically sidelined communities find jobs. In recent years, those periods have not lasted long, a fact that Fed and other officials are wrestling with as they weigh possible interest rate cuts and assess just where the U.S. economy now stands.

The approach of the decade-long expansion mark has boosted speculation about how much longer the recovery might last, whether a recession is inevitable in the next couple of years, and whether the Fed and U.S. government are adequately prepared to fight another downturn.

For the type of progress Fed and elected officials feel is needed to rebuild middle-class incomes, it may take several more years.

But the environment has changed.

In the short-term, global trade disputes and other risks could slow the economy no matter what the Fed does. more>

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A radical legal ideology nurtured our era of economic inequality

By Sanjukta Paul – Where does economic power come from? Does it exist independently of the law?

It seems obvious, even undeniable, that the answer is no. Law creates, defines and enforces property rights. Law enforces private contracts. It charters corporations and shields investors from liability. Law declares illegal certain contracts of economic cooperation between separate individuals – which it calls ‘price-fixing’ – but declares economically equivalent activity legal when it takes place within a business firm or is controlled by one.

Each one of these is a choice made by the law, on behalf of the public as a whole. Each of them creates or maintains someone’s economic power, and often undermines someone else’s. Each also plays a role in maintaining a particular distribution of economic power across society.

Yet generations of lawyers and judges educated at law schools in the United States have been taught to ignore this essential role of law in creating and sustaining economic power.

Instead, we are taught that the social process of economic competition results in certain outcomes that are ‘efficient’ – and that anything the law does to alter those outcomes is its only intervention.

These peculiar presumptions flow from the enormously powerful and influential ‘law and economics’ movement that dominates thinking in most areas of US law considered to be within the ‘economic’ sphere.

Bruce Ackerman, professor of law and political science at Yale University, recently called law and economics the most influential thing in legal education since the founding of Harvard Law School.

The Economics Institute for Federal Judges, founded by the legal scholar Henry Manne, has been a hugely influential training program in the law and economics approach. more>