A New Paper on Inequality and Growth

December 5th, 2013 at 11:24 pm

The Center for American Progress just released a paper I wrote, quite germane to the POTUS’s speech yesterday, about the impact of inequality on growth.  It’s called, “The Impact of Inequality on Growth.”  I know…how do I come up with such cleverness.

You could read the exec sum, but frankly, you’d do much better reading the really trenchant summary by Wonkblog’s Brad Plumer.

Print Friendly, PDF & Email

8 comments in reply to "A New Paper on Inequality and Growth"

  1. rjs says:

    just a curiousity; this post just came through dated Dec 06 on Net Vibes, with the message “Doc are you telling me you built a time machine?” attached…it has not yet appeared on the Old Reader or Digg, but it’s marked as 8 hours ago on my AOL Reader..

    (as this is off-topic, there’s no reason to post this comment)

    • Jared Bernstein says:

      Sorry–that’s pretty much all Greek to me.

      • rjs says:

        i am set up to follow much of the econo-blogosphere using feed readers, and the time stamp on your posts seem to be confusing them.

        note above for this post “This entry was posted on Thursday, December 5th, 2013 at 11:24 pm”; it obviously was posted before that, and our two comments posted here are time stamped for later this morning…

        your “Jobs day tomorrow” post shows the following time: “This entry was posted on Friday, December 6th, 2013 at 8:40 am”
        (which happens to be 10 minutes AFTER the report will be released)

  2. Perplexed says:

    Just finished your paper, very interesting read. Not too many surprises for OTE regulars as a lot of this has appeared on this blog for those who were paying attention. It is nice to have it “aggregated” in one place with the connections and possible interpretations so well articulated.

    As with Obama’s speech the other day, the questions arise not so much from what is said, but from what is left out. I’ve remarked a few times on some the earlier posts that I don’t see how you have this conversation without any discussion of monopoly rents and price discrimination rents. As with the residential construction/household expenditure data, they so obscure the picture that obvious links cannot be seen without accounting for them. I’m hypothesizing here that this what links the inequality to the lack of growth and, since it appears in all of your measured statistics, the connections that would be otherwise obvious have been completely obscured. It seems likely that rents are what shows up in the Acemoglu/Robinson observation and analysis that are completely obscured in the other models. The rents are simultaneously driving the inequality, preventing the productivity gains from reaching the 99%, and driving the government capture that produces and concentrates the rents. This would make the relevant counter-factual: what would have happened to both inequality and growth had all of the production been sold at price equal to its marginal product? The income share going to the top would have declined as would the prices of products being purchased by consumers. This would have resulted in the purchasing power increasing even as wages were stagnating. As less savings would have been accumulated by the top, the cost of going into debt would have been higher. (The housing bubble is a special case – it was driven as much by a massive counterfeit fraud as by any “underpricing of risk” – whatever that really means – how do you price risk you weren’t aware of due to fraud?) Selling mortgage with no underwriting as fully underwritten mortgages is simply a form of counterfeit fraud. Its never been done before on scale comparable to this so historical comparisons are pretty irrelevant. I’m not convinced it adds anything to our understanding of how the world works without separating out the effects of the fraud from the effects of the “bubble.” Maybe we’ll know better after the next financial fraud (nothing’s really changed to prevent it and the TBTF’s are even larger now, so it may not be too long until we find out.) As Acemoglu and Robinson point out this inequality/lack of participation thing has been going on for centuries. I’m not sure I see much value in looking at it through the lens of the largest counterfeit fraud ever thought up and executed. (Would “average Americans” ever really have taken on so much debt relative to their income with anything other than their homes which they viewed as “safe” investments? Its really a special case with few historical comparisons).

    My hypothesis says that rents seriously trump any education explanation (especially with regard to the top 5%). Is anyone in economicsville looking at the rent/inequality/growth relationship or is this subject taboo? If the subject is taboo, what’s ultimately driving that?

    • smith says:

      I would contend that rents are more of a problem in an economic system where labor contends more equally for resources. Giving labor power to demand wage increases commensurate with productivity gains pushes capital (owners and the ruling classes) to increase prices so as not to give up their share of the economic pie. The result is spiraling inflation, a serious problem to contemplate in a future era or alternative universe where workers get pay raises. The response should be vigorous anti-trust enforcement and regulation to promote competitive markets and ensure natural monopolies (banks, utilities) are restrained.

      To illustrate the point, Acme Widget could buy up all competitors and charge exorbitant prices for widgets, or fix prices with their only serious competitor Global Widget. This is separate from moving widget production to right-to-work state or overseas, and rewarding the CEO with excessive compensation, creating inequality.

      Likewise the excessive and unproductive growth in the financial sector which channels money to the already rich is not directly related to the consolidation and rent seeking in banking, but rather to inadequate regulation.

      Inequality and rent-seeking are separate items. But they do compliment each other, big time, so in that sense (and only in that sense) are you right. A third problem is political. Excess money in the hands of the rich allows them more resources for mischief, buying influence with politicians and the public. They spend on both items, securing rents, and securing their disproportionate share of the rents. To start, bring back the equal time rule and news requirements of media (T.V.), make corporations disclose political donations.

      • Perplexed says:

        -“I would contend that rents are more of a problem in an economic system where labor contends more equally for resources”

        Are rents now “resources” to be competed for that unions succeed in obtaining for their members? That’s the meme that has largely gone unchallenged and led to the destruction of the power of unions to protect their members from exploitation.

        Gabriel Palma contends that his work shows just the opposite conclusions. He suggests that organized labor merely counteracts the power of employers to engage in a form of a “reverse price discrimination” which not only precludes labor from access to rents, but actually prevents labor from achieving the market rate. (mostly through exploiting information asymmetries) See these links for more info.: http://www.kcl.ac.uk/aboutkings/worldwide/initiatives/global/intdev/people/Sumner/Cobham-Sumner-15March2013.pdf http://www.dspace.cam.ac.uk/bitstream/1810/241870/1/cwpe1111.pdf

        This isn’t the old story about manufacturers cornering an industry by buying up the competition at cheap prices ala Standard Oil. It about government granted monopolies (patents, trade restrictions) and dismantling of laws against price discrimination. The results are the same though, huge monopoly profits as a huge share of the “production” is sold at prices far above marginal cost. The effect is the same as a tax on buyers that bypasses the government and goes directly to the oligarchs. It shows up in the income of the top 5% and is “buried” in the “consumption” of everyone. (Think Microsoft, Apple, the Medical Industrial Complex, the Pharmaceutical Industrial Complex, the Entertainment Industrial Complex, “branded” and patented consumer products, etc, etc, etc.) Read “Cornered” by Barry Lynn for a good explanation of the how the newer forms of monopoly function and the history of the changes in anti-trust protections that legalized them.

        Rents are the channel through which this operates yet we make no attempt to measure them. Who decided that was OK? Think in terms of a country in which all products were sold at their at their marginal cost (remember the price=mr=mc stuff?) How much different is that from our current reality? All of the money spent in measuring, analyzing, and reporting on the economy and we have NO IDEA what % the rents are of GDP? Who decided this wasn’t important to measure and where did they get the power to make that choice? Are economists not mathematically adept enough to measure it or even “bracket” the likely numbers? It may well be the case that this has been researched and discounted and that I am just unaware of those studies but the almost complete lack of discussion about a channel that seems to be a rather obvious actor seems more than a little curious. It may also be the case that the term “labor markets” is largely an oxymoron. If the right to equal treatment under the law was actually enforced, those who’s “product” was labor (the 95%) would have the same protections under the law as every other commodity. How do “scientists” ignore this paradox? Why does organized labor not call on them to defend the practice with either real science, or real Constitutional law?

    • smith says:

      What I left out? The same power that is used to control pricing (rent seeking) is used to control labor. If you are a monopoly, not only can you control prices, but you’re are then the only business hiring in your field. If Acme Widget is a monopoly and/or conglomerate, they can set wages for skilled widget craftsmen, widget machinists at will, or in any industry they dominate at will. This also drives competitors paying fair wages out of business. In that case, there is another indirect link between rent seeking and inequality.

      It’s better to think of this in a gestalt manner, rigged economic system that favors the rich. There are many separate complimentary synergistic elements with one common theme.