The problem of income inequality

[Papa bull]

I've been listening. Income inequality is a big problem. It does bad things. So does that mean everyone should make the same? No, of course not. It's just that the current level of income inequality is really really bad.

Ok. I've got all that. But no one has said what the RIGHT level of income inequality should be. Anyone on the left want to field that? What, precisely, is the good and right level of income inequality?

 

[Declan]

I've been listening. Income inequality is a big problem. It does bad things. So does that mean everyone should make the same? No, of course not. It's just that the current level of income inequality is really really bad.

Ok. I've got all that. But no one has said what the RIGHT level of income inequality should be. Anyone on the left want to field that? What, precisely, is the good and right level of income inequality?

Shouldn't you first explain why you think the current level of inequality is bad? I am unconvinced it is because there are no structural factors at play.

 

[brothern]

Ok. I've got all that. But no one has said what the RIGHT level of income inequality should be. Anyone on the left want to field that? What, precisely, is the good and right level of income inequality?

What's the optimal GDP growth per year? What's the optimal unemployment rate, inflation rate, currency strength, balance of trade, and so forth?

Who knows?

Everyone has her own idea of what "optimal" actually is, because everyone has different economic interests. One economic actor (firm, individual, local government) may benefit from one particular level of income inequality; while at the exact very same time another economic actor is severely suffering from it.

For income inequality basically all we we can say right now is that, income inequality is at historical extremes, and that practically everyone is being hurt by this. Just like you could say a -10% GDP growth is a complete historical extreme and practically everyone would be hurt by it.
But exactly where that income right-skewed distribution (a left-skew trails to the left, so the mode falls to the right) should fall; or exactly where our target GDP growth (0%, 2%, 10%, 200%?) should fall is a very valid discussion.

 

[Papa bull]

Shouldn't you first explain why you think the current level of inequality is bad? I am unconvinced it is because there are no structural factors at play.

If you think the current level of inequality isn't bad then you can't answer the question.

 

[Papa bull]

What's the optimal GDP growth per year? What's the optimal unemployment rate, inflation rate, currency strength, balance of trade, and so forth?

Who knows?

Everyone has her own idea of what "optimal" actually is, because everyone has different economic interests. One economic actor (firm, individual, local government) may benefit from one particular level of income inequality; while at the exact very same time another economic actor is severely suffering from it.

For income inequality basically all we we can say right now is that, income inequality is at historical extremes, and that practically everyone is being hurt by this. Just like you could say a -10% GDP growth is a complete historical extreme and practically everyone would be hurt by it.
But exactly where that income right-skewed distribution (a left-skew trails to the left, so the mode falls to the right) should fall; or exactly where our target GDP growth (0%, 2%, 10%, 200%?) should fall is a very valid discussion.

I hear you. It's bad now. So what level is GOOD. if you can't identify the position of "good" then you can't delineate "bad" in anything but an arbitrary fashion, either. So what is the GOOD level for it?

 

[iguanaman]

I hear you. It's bad now. So what level is GOOD. if you can't identify the position of "good" then you can't delineate "bad" in anything but an arbitrary fashion, either. So what is the GOOD level for it?

I think you have to look at history to determine what level is good and why the current level is bad. The postwar period of near equal growth in all income classes comes to mind as the "ideal". If you want to know why this level is bad you need only go back to 1929.

How Income Inequality Is Damaging the U.S. - Forbes

 

[ttwtt78640]

That is, indeed, a great question. The next question, of course, is how that may be achieved "fairly".

 

[Papa bull]

I think you have to look at history to determine what level is good and why the current level is bad. The postwar period of near equal growth in all income classes comes to mind as the "ideal". If you want to know why this level is bad you need only go back to 1929.

How Income Inequality Is Damaging the U.S. - Forbes

That's a nice chart. What does it tell us, from a logical perspective?

 

[Papa bull]

That is, indeed, a great question. The next question, of course, is how that may be achieved "fairly".

Wait for it. Let's try to crack this nut first.

 

[OrphanSlug]

I've been listening. Income inequality is a big problem. It does bad things. So does that mean everyone should make the same? No, of course not. It's just that the current level of income inequality is really really bad.

Ok. I've got all that. But no one has said what the RIGHT level of income inequality should be. Anyone on the left want to field that? What, precisely, is the good and right level of income inequality?

It is not just some number at a specific point, it is the trend overtime when it comes to incomes at the various quintiles. Look at the below chart carefully, it illustrates well the point that by trend one income quintile is doing well over time and others seem to lag behind in growth, which economically means certain income levels are not even keeping up with inflation (no matter how that inflation is calculated... CPI, PCE, realized, etc.) I understand that the graph is a little old but keep in mind the context over the period in question.

Everything from the 3rd through 5th income quintile is not doing all that well by trend, the 2nd income quintile is somewhat keeping up with inflation, and the top income quintile is the only one that is excelling. To answer your question a "good level" of income equality is when all income quintiles move upward with some degree of association. Not necessarily a mirror, but some relation as the below tells us there is little to none currently.

Macro economically speaking that is not always easy to accomplish, but what cannot continue is seeing all other income levels lag behind the top. It shows that too much wealth is pooling at higher income levels and perhaps staying there. And in similar macro economic terms, that could lead to undermining social economic behavior cohesion at a high level and even things like velocity of money in more specific terms.



This one shows well the trend by grouping all the lower incomes but the top 10%

 

[jet57]

I've been listening. Income inequality is a big problem. It does bad things. So does that mean everyone should make the same? No, of course not. It's just that the current level of income inequality is really really bad.

Ok. I've got all that. But no one has said what the RIGHT level of income inequality should be. Anyone on the left want to field that? What, precisely, is the good and right level of income inequality?

This whole income inequality thing has been so misrepresented and your post here is more evidence of that. It's not a matter of what one person makes over another. It's a matter of total national income as a defined number that is put on a scale. That scale shows us that the top 1% of this country make up to 60% of the total income. The other 99% share 40% of that number. What that says, is that earning power in this country has dramatically shifted away from the majority of the population. This is just another example of why disposable income is down. We have to shift teh earning power back the other way in order to correct the economy.

 

[Aunt Spiker]

I've been listening. Income inequality is a big problem. It does bad things. So does that mean everyone should make the same? No, of course not. It's just that the current level of income inequality is really really bad.

Ok. I've got all that. But no one has said what the RIGHT level of income inequality should be. Anyone on the left want to field that? What, precisely, is the good and right level of income inequality?

I don't think it's a problem at all.

A few rich people who own some fancy junk aren't altering or affecting my life by existing or owning that fancy junk. Take away their fancy junk - and it won't impact my life at all.

Now what happens through our country's infrastructure and financial industry - legislation and corporatism collapses - these things do effect me. So that's what I worry about.

 

[imagep]

That's a nice chart. What does it tell us, from a logical perspective?

That there is correlation between income disparity and significant economic downturns.

Of course correlation doesn't prove causation, but you don't really have causation without correlation, so this graph opens the door to the likelyhood that excessive pooling of income/wealth contributes to a poor economy. (had to put that part in their to preempt getting a lecture on correlation and causation).

 

[whysoserious]

I've been listening. Income inequality is a big problem. It does bad things. So does that mean everyone should make the same? No, of course not. It's just that the current level of income inequality is really really bad.

Ok. I've got all that. But no one has said what the RIGHT level of income inequality should be. Anyone on the left want to field that? What, precisely, is the good and right level of income inequality?

It's an incredibly tough question. I've never seen it answered and I don't think I have the answers.

People will obviously hate this opinion, but I've been somewhat fond of the idea of a max pay ratio. No one employee can make higher than, let's say, 20:1 than any other employee. That way there is no physical cap on what someone can earn, but it would be more difficult to rake in a $50 million a year check while paying near minimum wages to employees.

Someone would obviously have to determine that ratio, though, and that would bring up a lot of other issues that probably make the idea unusable.

 

[brothern]

So what is the GOOD level for it?

Arbitrary depending on where you stand as an economic actor, but less than it is now.

However if you ask me personally, it should be comparable to other first world economies. There's a dozen ways to measure inequality (any number of gini coefficients, Palma ratio, quintile measures), but for convenience, look at this chart where we sit at is #41 with 45.0 and compare it to other powerhouse economies: Japan #76 37.6, EU #118 30.6, Germany #130 27.0.

 

[iguanaman]

That's a nice chart. What does it tell us, from a logical perspective?

I already explained it. When the level of inequality was low in the chart, all income classes benefitted more or less equally from increases in productivity. When it was high the lower income classes income stagnates until it reaches a breaking point and the whole thing comes tumbling down like in 1929.

 

[ttwtt78640]

I think you have to look at history to determine what level is good and why the current level is bad. The postwar period of near equal growth in all income classes comes to mind as the "ideal". If you want to know why this level is bad you need only go back to 1929.

How Income Inequality Is Damaging the U.S. - Forbes

And now, the rest of the story:

So as income inequality grew, the government propped up spending by promoting easy credit for less wealthy Americans, and much of the profit from that easy credit fed the wealth of the richest, widening the gap between rich and poor yet further.

Ir seems that "nature" is not the problem - it may just be government tinkering that turns recessions into depressions.

The most successful parasite does the least damage to its host.

 

[imagep]

...Not necessarily a mirror...

Here is your mirror:

This illustrates that the distribution of wealth and income in terms of percentages is a zero sum game.

 

[Papa bull]

That there is correlation between income disparity and significant economic downturns.

Of course correlation doesn't prove causation, but you don't really have causation without correlation, so this graph opens the door to the likelyhood that excessive pooling of income/wealth contributes to a poor economy. (had to put that part in their to preempt getting a lecture on correlation and causation).

It does not open any doors to a likelihood. It illustrates a suggestion. To claim that this chart is evidence of a probable causality between income inequality and economic depression is not logical.

 

[brothern]

A few rich people who own some fancy junk aren't altering or affecting my life by existing or owning that fancy junk. Take away their fancy junk - and it won't impact my life at all.

That's not the problem. The problem occurs on the macro level. The bottom three (or bottom 60%) income quintiles are making less and less each year in real terms. As an aggregate they're being pushed out of the ability to maintain their lifestyle, because all the capital within the economy is being pooled at the top in a tiny few institutions.

In extreme hyperbolic situations that leaves 60% of the country not being able to make ends meet, which would lead to social and political instability and economic collapse.

In our situation, that just means that the middle class is a endangered species, people are struggling despite having a paycheck and that there's no strong existing consumer class with disposable income to drive the economy forward.

Now what happens through our country's infrastructure and financial industry - legislation and corporatism collapses - these things do effect me. So that's what I worry about.

Our country's infrastructure is being heavily pressured by income inequality.

 

[imagep]

...What that says, is that earning power in this country has dramatically shifted away from the majority of the population. This is just another example of why disposable income is down. We have to shift teh earning power back the other way in order to correct the economy.

As has the spending power.

When income shifts to those who have a lower propensity to spend, we have less demand. Businesses produce only to the point that demand is filled, so the shifting of income away from those with the higher propensity to spend, tends to retard economic growth.

 

[Papa bull]

This whole income inequality thing has been so misrepresented and your post here is more evidence of that. It's not a matter of what one person makes over another. It's a matter of total national income as a defined number that is put on a scale. That scale shows us that the top 1% of this country make up to 60% of the total income. The other 99% share 40% of that number. What that says, is that earning power in this country has dramatically shifted away from the majority of the population. This is just another example of why disposable income is down. We have to shift teh earning power back the other way in order to correct the economy.

Nothing in my post represented this as you say.

I'm asking what is the right level. So what is it?

 

[Cephus]

I think you have to look at history to determine what level is good and why the current level is bad. The postwar period of near equal growth in all income classes comes to mind as the "ideal". If you want to know why this level is bad you need only go back to 1929.

How Income Inequality Is Damaging the U.S. - Forbes

Correlation is not causation. Do try again.

 

[iguanaman]

And now, the rest of the story:



Ir seems that "nature" is not the problem - it may just be government tinkering that turns recessions into depressions.

The most successful parasite does the least damage to its host.

Except that the trend continues through good times and bad. But I would agree that recessions always increase the income gap. Low interest rates benefit the middle class as well so that is not the problem, recessions are.

 

[imagep]

I don't think it's a problem at all.

A few rich people who own some fancy junk aren't altering or affecting my life by existing or owning that fancy junk. Take away their fancy junk - and it won't impact my life at all....

Of course it would.

Look at it in reverse. What if the top 0.1% transfered part of your junk to their accounts? That wouldn't effect you? You don't realize that's how they got all that fancy junk to begin with? The guy who owns a ten million dollar yacht didn't personally build it, other people did, and he just reaped most of the rewards. Wealthy people just have the negotiating power (one way or another) to get a larger slice of our economic pie than the non-wealthy do.

Do you really think that Bernie Madeoff personally created billions of dollars of wealth, or did he just transfer it from others using his negotiating power (in his particular case, his negotiating power was created by lies and deceit).