Friday, September 09, 2011

Is inequality the problem?

Argues Jeff Stibel at HBR:

We also need to face the stark reality of income inequality as an exasperating factor in the economy's decline. These disparities are growing at an alarming rate and have been accelerating throughout the recession. An economy that derives 70% of its GDP from consumer spending cannot sustain stable growth when average consumers don't have money to spend. 
Unbalanced growth — growth derived primarily from one segment of the population — inevitably collapses upon itself. From 2000 – 2009, overall GDP grew by 17.8% while average household net worth dropped by 4% when adjusted for inflation. At the same time, the richest individuals and corporations grew net worth by record amounts. This incongruity between rising economic growth and decreased household income is even more remarkable considering there was record low inflation. 
Long-term, stable growth cannot be truly sustainable if it is also massively unequal.
Absent from this conversation is whether or not productivity has shifted commensurate to any increases in wealth.  The policy implications are sweeping.  If in fact productivity of the wealthy or the aggregate number of high income earners is driving economic growth, economic policy should not be to punish the rich (Greg Mankiw) for doing what we want them to do - which is what President Obama has proposed with his new stimulus bill announced yesterday.

In private conversations, there are some who even believe that inequality will lead the poor to revolution, to which Chris Blattman recently noted his skepticism that the poor are any more prone to revolution than at least the middle class.  So is this a question of (re)distribution?  Or a question of access to opportunity?  (Or both?).  The conversation is woefully incomplete.

Specifically in Stibel's case, I note that he cherry picks a few numbers.  He notes that despite GDP growth of 17.8%, average net worth - not net income (which would be the apples to apples comparison given that is what GDP is), fell 4 - adjusted for inflation (which he may or not have adjusted the 17.8% for).  He implies that this suggests that all the subsequent net worth accrued to the rich.  This might be plausible if we didn't know that the rich also saw net worths fall in the last recession and the numbers of high income earners have also fallen in absolute numbers - from the WSJ:
While I don't doubt this is a serious issue, I'm not sure the issue is inequality so much as asking what is dragging down income growth for low and middle income earners.  Whatever the question, Stibel's exaggerations/leaps in logic (for which he is not alone) are unhelpful.

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