Inequality and Budget Deficits: Why is Only the Latter an Emergency?

From Huffington Post:


I just read two sweeping reports on the state of income inequality in the U.S. (the second link focuses on state-level inequality) and other advanced economies. Perhaps it’s because I’ve been so ensconced in fiscal cliff discussions, but I was struck by how much more alarmed policy makers are by the budget deficit than by the inequality situation. There are reasons for that tilt — some good, some bad — but based on magnitudes of the problem, it’s far from clear that our current sole policy focus is warranted.


The first link above finds the indispensable inequality researchers Piketty and Saez reflecting on the long income inequality time series data they and others have developed for the advanced economies. Their key findings are:

– The decline in income concentration in the U.S. over the great recession was due to cyclical capital losses, not a structural change in the underlying factors driving the trend. This can be seen quite clearly by a) taking capital gains out of the income data, revealing a steady upward trend, or b) by noting the increase in inequality (share of income going to the top 10% of households) in 2010, a return to trend.

– The fact that different countries hit by the same globalization and technology advances show different inequality trends suggests an important role for political economy — policies that affect the distribution of market incomes — in these outcomes. In France and Germany, for example, the top 10% holds about 35% of national income; in the US, it’s about 50% (see figure below). “Pure technology stories based solely upon supply and demand of skills can hardly explain such diverging patterns,” write the authors, who argue that tax policies are a “promising candidate.”

– As I’ve suggested in various posts, the authors agree that higher inequality may be associated with the debt bubble and bust from which we’re still recovering, though they’re not sure as to what’s causation and what’s correlation (they take solace in the Minsky-esque conclusion that “modern financial are very fragile and can probably crash by themselves — even without rising inequality”). Me, I think in an economy where a) inequality steers growth away from the broad middle, b) credit is cheap, under-regulated, and securitized such that there’s distance between originator and final borrower, and c) as the boom progresses, risk become underpriced — well, that’s a recipe for the shampoo cycle (bubble, bust, repeat) with inequality at the core of the model.

The second paper — from researchers at EPI and CBPP — is also part of a valuable series (“Pulling Apart,” or PA) that tracks income inequality by states over time. Some findings that caught my eye:

Continue reading at:

Posted in Uncategorized. Comments Off on Inequality and Budget Deficits: Why is Only the Latter an Emergency?
%d bloggers like this: