Decreasing income inequality?

While Donald Trump rarely uses the word “inequality,” economic justice, and a growing sense that Americans are getting a smaller piece of the pie at the expense of somebody else, is clearly at the center of his campaign. Similarly, Clinton has frequently spoken about income inequality, which was an issue at the core of her contentious primary race with Democratic Socialist Bernie Sanders. Even proponents of the conservative pro-growth perspective, who suggests that income inequality is essentially good when paired with economic growth, have been getting attention, with increased attention being paid to pro-capitalist views expressed by characters like Martin Shkreli and Mark Cuban.

In the midst of this debate, and, tellingly, on the Friday before the first presidential debate, comes some very interesting messaging from the Obama administration: https://www.whitehouse.gov/sites/default/files/page/files/20160923_record_inequality_cea.pdf

And, for some perspective, a FiveThirtyEight piece analyzing the report: http://fivethirtyeight.com/features/the-income-gap-began-to-narrow-under-obama/

Essentially, the Obama administration is arguing that income inequality is beginning to drop, as a direct result of the economic policies of his presidency. While much of this administration’s policy has undoubtedly been crafted to reduce inequalities generally (such as health care reform that has expanded access to insurance), and even crafted to reduce economic inequality (such as tax increases primarily targeted at the wealthy), a close reading of Piketty demonstrates how decreasing income equality isn’t necessarily a good thing.

Piketty essentially argues that income inequality has traditionally not been the largest issue, but, rather, the issue has been wealth inequality (or, if you prefer, capital inequality). The wealthy have traditionally maintained their wealth not through wage labor, but through the dividends of invested capital, passed through generations by inheritance and marriage. Piketty illustrates this with an allusion to Balzac’s Pere Goriot, in which the shady Vautrin tries to convince his industrious friend Rastignac that hard work is a waste of a lifetime in contrast to marrying rich: “By the age of thirty, you will be a judge making 1,200 francs a year, if you haven’t yet tossed away your robes…But can you name five lawyers in Paris who earn more than 50,000 francs a year [50000 is 5% of the fortune that his perspective wealthy wife possesses] at the age of fifty?” (Piketty, 2013, pp. 239–240)⁠. One of Piketty’s major findings is that economic shocks in capitalism demonstrably reduce the return on capital (and, by extension, the viability of living off of capital), and that the economic shocks caused by the events of World War II resulted in a paradigm shift in both the US and France (but more so in the US) where the wealthy were forced to seek wage labor in order to offset the declining profitability of their wealth. This results in the formation of a “super manager” class, who are paid increasingly absurd salaries that are so high that it dramatically increases the visible income stratification. The differences between the 19th century method of inheriting wealth and the 20th century model of supplementing the declining value of wealth by directly appropriating money from corporations is marginal, but the latter method is more visible to the public and conceptually easier to think and talk about.

Piketty’s model means that we can presume that capital lost a degree of profitability in the wake of the 2008 economic crisis at the beginning of Obama’s presidency, meaning income inequality would presumably expand as executives take larger paychecks to compensate for their reduced capital gains. As the economy recovers, income inequality will presumably contract, since their capital gains will provide sufficient revenue once again. In light of Piketty’s research, it would appear that the economy is structurally configured to act in the exact ways that the Obama administration would like to take credit for.

Furthermore, Piketty’s research reveals a major flaw in the Obama administration’s perception of their struggle with income inequality: nobody really knows how bad it is. Much of the Obama administration’s efforts to fight income inequality have focused on improving the economic situation of the poor. As a strategy for fighting income inequality, this is analogous to trying to balance a see-saw with an elephant and a frog on it by fattening the frog – the difference is just too great. But, distressingly, nobody really knows how fat the elephant is. Even the most basic descriptive statistics on the ultra-wealthy, who polarize both income inequality and wealth inequality so greatly, are essentially missing. This sabotages an enormous amount of research on income inequality – if Obama wants to contribute more to the fight of the income inequality than simply being President during a time period where the “invisible hand” happens to make him look good, enabling the social sciences to perform deeper research into the extent of income and wealth inequality in the US would be a good place to start.

Research questions:

RQ1: Do measures of return on capital vary with amounts of CEO compensation?

RQ2: Does the degree of income inequality in a country vary according to how much a country values investment?

 

Peter Jameson

 

One thought on “Decreasing income inequality?

  1. I agree that focusing on the frog will not produce as great a change in inequality, but a fat frog may be a bit healthier than an emaciated one. Health care access may not be the biggest stick against inequality, but the person that can now go to the doctor does not care. Certainly income inequality is the low hanging fruit, but it does matter to those with more money in their pockets.

    I would also question your argument that the declines in inequality during Obama’s term were simply a product of the market improving. I would need to see data on this. The ACA was the first government program in 30 years to actively push resources down the ladder. Obama also deliberately increased taxes on those at the top–a move Piketty would approve. Why should he not take credit? And why give credit to the market which so fervently resisted these changes? Do we have data that neither of these changes in government policy had an impact? Certainly, an increase in the ‘death tax’ would reshape inequality more so over the long term, but health insurance makes a difference in the lives of families today.

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