Economists & Economic Inequality

[Kitsune]

From reading discussions by University Economists, I get the impression that most consider income inequality to not be the idea situation. I am getting somebody arguing on that and curious if somebody knows what the position of most economists is?

This seems to me to be a political issue, why I posted here.

[Rogue 9]

Well, the AP had this recent survey of economists.

AP survey: US income gap is holding back economy
By CHRISTOPHER S. RUGABER
— Dec. 17, 2013 5:13 PM EST

WASHINGTON (AP) — The growing gap between the richest Americans and everyone else isn't bad just for individuals.

It's hurting the U.S. economy.

So says a majority of more than three dozen economists surveyed last week by The Associated Press. Their concerns tap into a debate that's intensified as middle-class pay has stagnated while wealthier households have thrived.

A key source of the economists' concern: Higher pay and outsize stock market gains are flowing mainly to affluent Americans. Yet these households spend less of their money than do low- and middle-income consumers who make up most of the population but whose pay is barely rising.

"What you want is a broader spending base," says Scott Brown, chief economist at Raymond James, a financial advisory firm. "You want more people spending money."

Spending by wealthier Americans, given the weight of their dollars, does help drive the economy. But analysts say the economy would be better able to sustain its growth if the riches were more evenly dispersed. For one thing, a plunge in stock prices typically leads wealthier Americans to cut sharply back on their spending.

"The broader the improvement, the more likely it will be sustained," said Michael Niemira, chief economist at the International Council of Shopping Centers.

A wide gap in pay limits the ability of poorer and middle-income Americans to improve their living standards, the economists say. About 80 percent of stock market wealth is held by the richest 10 percent of Americans. That means the stock market's outsize gains this year have mostly benefited the already affluent.

Those trends have fueled an escalating political debate. In a speech this month, President Barack Obama called income inequality "the defining challenge of our time."

Obama also called for an increase in the federal minimum wage, now $7.25. Republican leaders in the House oppose an increase, arguing that it would slow hiring.

Several states are acting on their own. California, Connecticut and Rhode Island raised their minimum wages this year. Last month, voters in New Jersey approved an increase in the minimum to $8.25 an hour from $7.25.

Income inequality has steadily worsened in recent decades, according to government data and academic studies. The most recent census figures show that the average income for the wealthiest 5 percent of U.S. households, adjusted for inflation, has surged 17 percent in the past 20 years. By contrast, average income for the middle 20 percent of households has risen less than 5 percent.

The AP survey collected the views of private, corporate and academic economists on a range of issues. Among the topics were what policy decisions, if any, the Federal Reserve might announce after it ends a policy meeting Wednesday.

Three-quarters of the economists surveyed don't think the Fed is ready to announce a pullback in its economic stimulus. Speculation has been rising that the Fed will soon scale back its $85 billion in monthly bond purchases because of the economy's steady gains. The bond purchases have been intended to keep long-term loan rates low to induce people to borrow and spend.

Most of the economists think the Fed will begin slowing its bond buying in January or March.

And most don't think the economy needs the Fed's help. Just over half say they believe growth could reach a healthy 3 percent annual pace even without the Fed's extraordinary help.

As Janet Yellen prepares to succeed Ben Bernanke as chairman early next year, most of the economists expect the Fed to become more "dovish" — that is, more focused on fighting unemployment than on worrying about higher inflation that might result from the Fed's actions. The Senate could confirm Yellen as soon as this week.

The economists are also confident that U.S. growth is picking up. Three-quarters said the recovery, which officially began 4½ years ago, has yet to reach its peak. And nearly all think the next recession is at least three years away; half think it's at least five years away.

The economists forecast that growth will average 2.9 percent in 2014. That would be the healthiest annual pace since 2005.

One reason they expect healthier growth is that the effects of tax increases and government spending cuts that kicked in early this year should fade.

A budget bill that passed a pivotal test in the Senate on Tuesday will reverse some of those spending cuts. That should add slightly to economic growth. The bill also removes the threat of another government shutdown next year.

Among the economists' other views:

— The Obama administration's health care law will make little or no difference to the job market. About two-fifths said the law would cost jobs. None said it would increase hiring. The law has drawn fierce opposition from many small business owners, who say it will raise hiring costs by requiring companies with 50 or more employees to provide coverage starting in 2015.

— The stock market isn't in a bubble. While the Dow Jones industrial average reached record highs earlier this year, most economists said that higher profits largely justified the gains.

— Europe will keep growing and avoid a recession in 2014. But growth will remain so tepid that inflation will be nearly non-existent. Nearly two-thirds of the economists forecast that inflation won't consistently reach the European Central Bank's inflation target of 2 percent until 2016.

— Inflation in the United States will remain low for the long run. A majority of economists think consumer inflation won't consistently meet or exceed the Fed's 2 percent target level until 2015 or later.

Economists appear to be increasingly concerned about the effects of inequality on growth. Brown, the Raymond James economist, says that marks a shift from a few years ago, when many analysts were divided over whether pay inequality was worsening.

Now, he says, "there's not much denial of that ... and you're starting to see some research saying, yes, it does slow the economy."

[Kitsune]

One problem is that the person is arguing that media sources are just biased
This is the claim

Kitsune wrote:I chose a single paper of the beaten path. . . .Often times, I will read an article and then will look for either the professors cited or if the article has a direct link.

You should read a textbook. There's a reason students don't primarily read papers until they reach PhD level or beyond.

I also continue to doubt this is true. The amount of information one can derive from reading abstracts (the full versions are mostly behind pay-walls and only available to university libraries) is tiny. I think you likely read Paul Krugman's "Conscience of a Liberal" blog and other newspaper punditry that is not behind pay-walls.

You argument is that a huge income disparity between different economic classes is a good thing. You should be able to find some university sources that will argue that it is a good thing.
Doesn't seem to be that tough a job.

I don't remember making any argument. If you would like me to make one, it's uncontroversial that pay depending on productivity is beneficial. You won't find any paper published in the last 5 years whose conclusion is that, because it's assumed knowledge. Pay depending on productivity will naturally produce income inequality. Some people think that too much income inequality results (very few think too little, for whatever reason), but I'm not sure how one would empirically determine the optimum inequality to judge that scientifically.

[Simon_Jester]

Ah, so this is another one of those "help me argue my case" threads. Gotcha.

Well, I'll bite: in his own new argument your opponent is missing the difference between two things. One is "pay depending on productivity" and the other is "pay proportionate to productivity." If people are getting paid a thousand times more for ten times the productivity, that can have a distorting effect and be bad for the overall economy, even if it is good for productivity to be rewarded.

It's like, food is good for you, not having food leads to death, but having too much food or the wrong type of food can kill you in the long run. Having pay depend on productivity can, likewise, be good for you in moderation.

That ties into the "for whatever reason" behind people thinking that we have too much income inequality, versus too little.

We know that for certain purposes, it is important that the median citizen be able to spend some money. Which means they have to have money in the first place.

We know that we want labor to be fluid and able to move physically, or move between sectors of the economy. Which means they have to have some kind of reserves or safety net that lets them afford to move about, or to change careers.

We know we want a well-educated workforce, which means either the government has to pay for education, or the people do. Right now, the government pays for education before high school... but we want a college-educated workforce. Someone's got to pay for all that college tuition, which means the median citizen needs to have some money in their pocket.

The reason people are concerned about income inequality is not some kind of absurd "THE RICH ARE TOO RICH" thing. The problem is that a huge number of people can't afford to do the things we need them to do for our society to be healthy (save money for emergencies, buy consumer products, and fund their children's upbringing and college tuition). And clearly this is not because of an overall societal lack of resources, because there are plenty of people out there making the money we'd need for all this to work.

The difficulty is that almost all the money is locked up under the control of a few people, who then try to get everyone to keep doing what they're "supposed" to do for the system to function (consume, change jobs, raise children). But the things the average person is supposed to do are getting steadily more expensive due to inflation, while the average person's resources are not increasing... because of growth in income inequality.

C. S. Lewis perceived a moral deficit in 1940s British education, and criticized it using the following passage. I feel a little ambiguous using it to criticize the economic arrangements of 2010s America, but speaking literally, word for word, it fits:

And all the time—such is the tragi-comedy of our situation—we continue to clamour for those very qualities we are rendering impossible. You can hardly open a periodical without coming across the statement that our civilization needs more ‘drive’, or dynamism, or self-sacrifice, or ‘creativity’. In a sort of ghastly simplicity we remove the organ and demand the function... We laugh at honour and are shocked to find traitors in our midst. We castrate and bid the geldings be fruitful.

So there is a very real practical problem with the way our society functions, when you expose it to enough income inequality. The system will not function as we know it if there are a handful of aristocrats who own everything, supported by a great mass of impoverished proles. Therefore there is an upper bound on how much income inequality we can survive.

There is also, in theory, a lower bound on how little income inequality we can survive... but we are in no danger of crossing this line. So it is of no interest whatsoever except as a rhetorical trick on the part of the ignorant.

[Kitsune]

There was a school of thought that the church in the early Middle Ages had most of the wealth of Europe tied up in holy objects.
Basically, all of the gold and silver was in the form of religious objects.
The Vikings actually helped break Europe out of that cycle by stealing the holy objects and melting them down.
Don't know how prevalent this position today is however.

[Simon_Jester]

Gold and silver alone don't necessarily matter very much; this is pretty much the same mistake the Spanish made trying to make themselves a superpower using gold and silver taken from the wreckage of the Aztec and Inca empires (and the associated mines). It worked in the short run, but in the long run their domestic economy collapsed from inflation, the mines petered out, and they wound up the sick man of Europe.

What really matters is more general: control of resources and having the means to purchase goods. If the great majority of all resources are controlled by a small elite, and the general public has only a small fraction of all resources, then only a small fraction of resources are available to care for the needs of the public. This means that the public will be poor, and therefore sickly, undereducated, and so on- because it costs money to make those problems go away.

Technology and broad ownership of wealth are the twin pillars of a modern economy; neither matters much if the other is not present.

[Kitsune]

The problem is that all of this makes perfect sense to me. . . .Don't need to be a genius to understand
I just understand if there is a way to explain to explain this to conservatives and libertarians
I am also wondering if my position, and apparently yours, is the mainstream view of economists.
Most sources I see when I Google the subject argue something very much along those lines
Usually Forbes disagrees and indicates that Income Inequality is a good thing.

[Simon_Jester]

Forbes is a for-profit publication whose audience consists mainly of business executives and stock dealers. In other words, people with a vested interest in thinking income inequality is a good thing. Forbes is no more likely to publish a condemnation of income inequality than the Washington Blade is to publish a condemnation of homosexuality.

If you want a way to explain this, make it very simple:

"Never mind questions of fairness or anything, this isn't about that. This is practical. Our society works a certain way, the machine runs a certain way.

We expect people to buy consumer goods, and for this consumption to drive the creation of new industries that will in turn create jobs. That's how we got the prosperity of the late 20th century in the first place: capitalism created a virtuous cycle, because making more wealth available stimulated demand, which in turn stimulated supply. Income inequality means that demand shrinks.

That's a problem, whether we like it or not.

We expect people to be able to save for retirement. If they don't have enough money to do that, then either we have a bunch of starving old people 30 years down the road, or we have a bunch of adults who are so busy taking care of their aging parents that they don't have money to do anything else.

If people can't afford to save for retirement, and Social Security is just about enough to keep them in cat food, then we have a problem. Not because of fairness, but because of practical things that happen whether we like it or not.

We expect people to pay for their kids' college education, we expect most of the population to actually go to college. Our modern economy needs plenty of educated workers- it has no use for the ignorant and the illiterate.

That means that if the median citizen can't afford to put their kids through college, then we all have a problem. Not because of fairness, not because I want lots of kids going to school for free or something. Because we need those kids to get college diplomas, or our whole system of labor breaks down. Again, we have a problem whether we like it or not.

That's what I'm trying to get across here- this isn't about making rich people less rich, and it isn't really even about making poor people less poor. It's about what happens in a society where a few people are very rich and everyone else is very poor. It's about what happens if we try to create prosperity by making a bigger pie for everyone... but all the extra pie gets eaten by the same couple of guys.

They get fat, everyone else gets hungry, end of story. It's not about fairness. It's about consequences.