Shuffling Off to St. Louis…

February 26th, 2012 at 12:53 pm

…tomorrow to give a talk at Washington U, at the invitation of the great poverty warrior Michael Sherraden.

Here’s the introduction to the paper (haven’t written the rest yet) and here’s the PowerPoint deck which takes you through the whole thing.  Check it out and see what you think.  Note that the very last bullet of the very last slide (before appendix) ends with a question.

Introduction

In this paper I present a simple model linking economic growth to poverty reduction, opportunity, and mobility.  I then inject inequality into that chain and hypothesize about its impact.  Inequality diverts growth from middle and low-income families, and under certain conditions—ones I show are present in the US economy over the past few decades—leads to higher poverty rates than would otherwise prevail and middle-class income stagnation.  These developments lead, in turn, to less opportunity for certain groups, and that leads to diminished mobility.

There is, in the model, another dimension to inequality’s impact.  By dint of concentrating income at the top of scale, in a system like ours where money can buy power and influence politics and policy, inequality becomes self-perpetuating.  This part of the model predicts that policies to help promote greater equity will be blocked and those that exacerbate inequality, like “trickle-down” tax policies or favorable tax treatment of capital incomes, will find considerable support from the political class.

The model generates numerous hypotheses.  For example, the model predicts that increased inequality has been a causal factor behind middle class income stagnation and “sticky” poverty rates (i.e., poverty rates that are less elastic to growth).  It predicts that inequality would be causally linked to worse educational outcomes, which would in turn hurt the upward mobility of children in lower income families.  It predicts that political influence makes the system less responsive to those in, for example, the bottom half of the income scale, and that the system of taxes and government transfers would become less effective over time in reducing inequality.

Analytically, it is hard to make these linkages in a causal sense.  The processes behind the links in the model are complicated and any regression analysis, for example, would almost certainly omit key variables.  For example, I cite research that shows that the gap in spending on “child-enrichment” goods, like books, quality child-care, private schooling, between low and high income families has jumped by a factor of three since the 1970s, which is also the period when inequality began to grow.  The model would predict this outcome, and would further predict that it dampens economic mobility of those affected by it.  But I cannot prove that this development is a causal function of inequality (or, for that matter, that in earlier years, when inequality is much lower, this gap did not grow).

Similarly, I have convincing evidence that the tax system and safety has, in fact, grown less inequality reducing over time, and some of that is clearly a result of policy, such as regressive tax changes and less counter-cyclical welfare programs (part of it is demographic, as the aging population shifts social expenditures to less redistributive programs).  But while I associate these developments with the dynamics of the model, my evidence is largely circumstantial.  Future work needs to build tests for causal linkages between higher inequality and the outcomes I show throughout.

The paper proceeds with the evidence of all the links in the chain, including the rise of income inequality, diminished opportunity and mobility, and evidence of the impact of inequality on political power and policy outcomes.  I then go through a set of predictions as to what type of policies we might expect to see if, in fact, such a model were operative—e.g., regressive tax changes, a transfer system less effective at pushing back against inequality, pro-austerity measures, and many other policy ideas that are clearly part of our current reality (and some that aren’t, like a smaller share of government outlays as a share of GDP).  I conclude with thoughts about how politics and policy must change if we are to pushback on these harmful developments.

 

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8 comments in reply to "Shuffling Off to St. Louis…"

  1. Sharon says:

    Hi Jared,

    First:
    I read your deck and those are some eye opening slides. It will be interesting to read about the response to your presentation.

    Second:
    I’m a graphic designer and I’m here to help. When you get back from your talk email me and I’ll drop some design science on you! :)


  2. PeonInChief says:

    You might want to look at the cost of services (child care, books etc.) relative to incomes. My own observations (admittedly, with no scientific basis) are that, as inequality has grown, many goods and services become unaffordable to working class households. In addition, some services become so expensive (housing, health care ) that they crowd out other expenditures. And as richer households get services (like cell phones), the alternatives (public pay phones) disappear. Poorer people aren’t worth serving, except at very high interest rates (rent-to-own, payday loans and so on).


    • Fred Donaldson says:

      The elimination of services in poorer communities has been around for a long time. I saw it especially in Philadelphia neighborhoods in the 60s and 70s. As communities became majority Black, bank branches were closed to be replaced with pawn shops, etc.

      I went with a city councilman to meet with the president of a huge bank (dozens of branches) and he maintained that one branch was closed because of traffic concerns. A couple years later the bank reopened it as a check cashing center – and then there were real traffic woes in that Black community (which had 89% home ownership at the time, but no banks).

      The mindset for the rich is not to invest in poor neighborhoods. They don’t need “those” customers.

      Solution is some incentive – like lower business loan rates, but the opposite is true – loans are higher rate or impossible to get.


  3. R says:

    Woo! Go WU!

    Sorry, WU alum, hope you have a great time in the STL.

    If you want to have a good debate with some conservative economists, head over to the business school. They are admittedly good researchers on business topics, but could probably benefit from some debate on other macro issues. There are a few good labor economists there too if you’re interested….


  4. Chuck Sheketoff says:

    Jared — I was hoping to find your thoughts on the Sherraden-promoted policies of spending on asset development to reduce poverty (and income inequality) ahead of fully-funded safety net, education and job training programs.


  5. Michael says:

    I always wondered why no economist ever tried to explain how we already have a trickle-type economic system, except that it basically is trickle up.

    What I mean by that is simple. Poor people have few resources and skills. Therefore, they have little means of creating and/or holding onto wealth. They get a dollar, they spend a dollar. But because they are turnarounds for money, that money has to go somewhere. Therefore, it must goes upward, towards greater concentrations of wealth. Think about banks who save their higher interest rates for the biggest deposits. Do you really need a college education to figure out how many poor people, with interest-free checking deposits, it takes to compensate people like Bill Gates who are getting 6% interest on the $250,000 deposited in their accounts. And that is probably just the rates we know about.

    Furthermore, poor people end up buying things that not only are cheap but have little resale value when attempting to sell them. The wealthy, on the other hand, buy items that oftentimes sell for much more than they purchased them for. Or, even if they are at a loss, the percentage loss to their aggregate state of wealth is significantly lower than someone in a lesser economic bracket. If my current wealth is $500 (including a $300 tv) but I turn around and sell that tv for $100, that is a greater percentage of my wealth going back into the economic current than a millionaire worth $20 million selling their $2.6 million dollar estate for $1.9. Who is more likely to recover their lost wealth, and aggregate percentage, quicker?

    Furthermore, COL increases affect the aggregate percentage with regard to wealth, especially among the poor. A millionaire buys a new computer for their grade-school kid, its a drop in a bucket with regards to their economic impact. A poor family spends $50 on school supplies, that could equal their monthly heating bill or public transportation costs, becoming a greater demand on their total wealth. Soon enough, it does become a question of paying for school supplies or paying for food. If school supplies jump to $75 next year, have enough economic factors been included into their equation to offset that increase, or has the increase actually become a greater percentage of their budget? Rep. Allen West’s comments about having to spend $70 to fill his Hummer ignores how a greater impact could occur to a family who only had to spend $50 to fill their car (out of a monthly budget of maybe $200 after the basics are covered.)


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