Observations on the Economic Inequality Issue
Class made it abundantly clear that there is no surprise about the perception in the growth in economic inequality.
The various political campaigns around the world also indicate that people are responding to that growth in various ways. The populist wave is rooted in part in a desire of the losers to send a message to the winners in the global economic world.
The academic literature researching inequality is also growing.
We are now engaged in a search for an approach which can have the political pithiness of the Arthur Okun dictum that redistribution and growth are antithetical to each other and which was encapsulated in the Washington Consensus and thus embedded in the neoliberal prescriptions for fiscal and monetary policy.
The literature documents progress on some fronts.
- The recognition that the GINI Coefficient [GC] which underlies most media accounts of the growth in inequality has some serious deficiencies. The most important distinction is between ‘market inequality’ and ‘net inequality’. This enables us to be more precise when comparing GINI Coefficient changes over time. This distinction has begun to seep into the media thus enabling a more catchy way of comparing countries or states. Talking about ‘redistribution’ in academic circles may be one thing. Talking about it politically is quite another. So Jeffrey Sachs was able to write a column for the Boston Globe in which he compares the GC on gross or market income with that on disposable income and thus avoiding the ‘hot political button’ of the term ‘redistribution’.
I think the term ‘disposable income’ has several advantages over the term ‘net inequality’. More people instinctively know the meaning of ‘disposable income’ compared with ‘net’. Secondly, it permits more room to include or exclude some of the variables which have been discussed in the GC discussions. Also the ongoing discussions in the US about redefining the poverty index, have focused more on the basket of goods needed for basic living thus establishing a more realistic poverty measure.
- The research on mobility between economic quintiles is establishing more information on how growth policies are affecting people’s mobility between the income quintiles (as reflected in market incomes and redistribution policies and as reflected in net incomes or disposable incomes). The studies indicate that income and wealth mobility is quite low, despite ‘common economic wisdom’.
Piketty’s case is that even if you exclude ‘rentier’ income there is a widening gap since the 1980s between the upper income and middle/lower income groups and that a major cause is the rise of ‘super managers’. Piketty’s observation has also been studied in some other research. Walter Frick cites some research by David Card of Berkley and Nicholas Bloom of Stanford about the rise of the multi-nationals and the sorting effect. This sorting effect essentially posits that as multinationals or other large corporations grow in size they have more purchasing power. This purchasing power enables these companies to invest more in people (with more talent), productivity (e.g., computers), patents (intellectual property) and lobbying (reducing competition or blocking negative legislation and rules). This in turn strengthens these ‘frontier firms’ in their competitive position thus completing the circle of sorting. Depending upon the country, Card and Bloom posit that as much as 40% of the GINI Coefficient in a country can be explained by this phenomenon. In addition another study looked closely at pay within [UK] companies and concluded that “pay disparities between top-level jobs – those where
managerial skills and responsibility are most important–and bottom-level jobs are increasing in firm size. By contrast, pay differentials between jobs involving either no or only little managerial responsibility are invariant to firm size. Moreover, firms with higher within-firm pay inequality have better operating performance, higher Tobin’s Q, and higher equity returns”.
 Forcefully stated in Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsanagnarides. “Redistribution, Inequality, and Growth”, IMF Staff Discussion Note February 2014.
 Jeffrey D. Sachs. ‘Facing up to Inequality’, Boston Globe October 2, 2016.
 See Ostry et.al., p12.
 For example, the cost of shelter is not included in the current poverty index used in the US. The Supplemental Poverty Measure introduced in 2010 reflects a consensus amongst economists on a measure more in tune with reality and does include shelter costs.
 It should be noted that while there is much to be said from a media viewpoint for the division of family, household or personal income into upper, middle and lower classes (e.g., Thomas Piketty. ‘Capital in the 21st Century’, Harvard University Press, 2014, pp.250-255) but there is more precision when one divides income into quintiles.
 Ibid., p.303.
 Walter Frick. ‘Corporate Inequality is the Defining Fact of Business Today’, Harvard Business Review May 2016.
 Dan Andrews, Chiara Criscuolo and Peter N. Gal. ‘The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy’, OECD Productivity Working Papers 5, OECD Publishing, 2016, p 17.
 Holger M. Mueller, Paige P. Ouimet, Elena Simintzi. ‘Within-Firm Pay Inequality’, SSRN January 2016 revised January 2017.