This link is to a lecture given by Emmanuel Saez at Stanford. Saez has won several economic awards for his data on income inequality. The lecture is fairly data intensive but it leads to a different set of conclusions about the growth in income inequality, and its causes, than the conservative explanation offered by Jerry Muller that I posted yesterday.
Many of the explanations for the growth in income inequality center around broad changes in the global economy. Muller claims that it is due to the dynamic quality of capitalism which invariably leads to income inequality. It would be mistake to alter that pattern because there is little that can be done about it, and because efforts to modify our economic system might decrease its dynamism.
Others argue that our economy has become more technical and that rising inequality is due to the premium that we pay for technical talent. Globalization has also increased inequality, but there is nothing that can be done about how the effects of globalization might be modified by governments. The financialization of the economy has contributed to inequality but there is nothing that can be done about that either. Emmanuel Saez reviews the data on income inequality and reaches a very different conclusion. I have summarized some his key points below.
The first point that I would like to make is that there is no such thing as capitalism. Every nation has a mixed economy in which government and the private sector operate under slightly different rules that determine the economic outcomes, and the well being of the public. Every nation has been subject to the same forces of technology, globalization and the financialization of their economies. Saez shows that the pattern of growth in inequality in the US, Canada and the UK follows a similar pattern. He is very polite, and he is also French, so he did not call it the Anglo American disease. In each of these countries there are has been a dramatic increase in income inequality that exceeds that of most other OECD nations. The pattern also reflects a basic difference in governance. There is a strong correlation between the changes in the top marginal tax rate and the growth in inequality. Lowering the top tax rate seems to have encouraged rent seeking. That is, lower tax rates increased the incentives of those in positions of power to take actions that increased their share of the income. The tax rate on incomes over $1 million was reduced from 70% in the Reagan administration to 28%. The growth in income was equally shared by all segments of the population prior the Reagan tax cuts. The top 10% received only 33% of national income between 1960 and 1980. The top 10% captured 46% of the growth in the nation's income in 2010.
One of the arguments for the Reagan tax cuts was that they would encourage people to work harder and stimulate economic growth. The growth in the US economy since the Reagan tax cuts has been lower than it was in the decades with higher tax rates on high incomes. That does not mean the high marginal tax rates encourage economic growth. It shows, however, that low marginal tax rates are not necessary for economic growth. The tax cuts influence the distribution of income more than they do the growth in income.
Some other comparisons between countries show that institutions have a huge effect on the growth in income income inequality. Capitalism is not a thing of nature. It is shaped by government, and government can influence the distribution of income without destroying the dynamic capacity of capitalism. In fact, the maldistribution of income has a negative impact on aggregate demand. That is because the top 1% saves about 51% of its income. Middle income households spend around 90% of their income.
Other capitalist countries have done a better job of dealing with income inequality. Switzerland just passed a bill that severely restricts executive compensation. It was passed with a 68% majority. Capitalism is not a natural phenomenon. It is shaped by government and some governments do a better job of spreading the benefits than others. Its hard to imagine America or other Anglo nations taking the action just taken by Switzerland. The corporate executives would fire the politicians. Perhaps Donald Trump would supervise the firing.
Saez makes a final point about how to change tax policies which favor the rich and encourage growth in income inequality. The bottom 99% have to understand how they are affected by cutting taxes for the rich. They are affected in several ways. More of the tax burden is shifted to them; government programs that benefit them are at risk, and the rich have greater influence on government. Many Americans would like to have a democratic system that is not controlled by the super rich.
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