The Rich Get Richer...

EconTalk Extra
by Amy Willis
Gabriel Zucman on Inequality, ... Philip Auerswald on the Rise o...

income inequality.jpg But is that a bad thing? That may be the central question explored in this week's EconTalk episode with UC Berkeley's Gabriel Zucman. Working with Thomas Piketty and Emmanuel Saez, Zucman explored national income accounts to look for trends in income inequality in the United States since 1980.Their results suggest that the bottom 50% of Americans have seen no growth in income, while a disproportionate share of growth has accrued to the top 1%. How robust are these results, and what policy implications might be suggested? And how does income inequality in America compare to that in other nations? Do you feel richer than you did in the 80s? Share your thoughts with us today... We always love to hear from you.

1. In terms of income inequality, how are average growth rates misleading about the real state of the economy, according to Zucman?

2. How does Zucman's analysis differ from previous attempts to measure income inequality? What are the weaknesses of using tax data for such purpose? How might a cross-sectional approach yield different results regarding income inequality?

3. What four causes does Zucman suggest have brought about this combination of stagnant income growth for the bottom 50% of Americans and increased income inequality? Which does Roberts give the most credence to, and why? Which do you find most explanatory, and why? Least explanatory?

4. While Zucman finds that the lower and middle classes have not experienced any income growth over the past three decades, Roberts counters that even so, they are still much better off than in 1980. How can he make that claim? To what extent does Roberts convince you?

5. Some, like John Tamny in this piece for Law & Liberty, suggest that there are indeed positive benefits to inequality. What might these be, and to what extent do you accept this argument? At what point does emulation (which Adam Smith saw a positive role for) shift from being aspirational to confrontational?

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COMMENTS (16 to date)
Ravi writes:

>> While Zucman finds that the lower and middle classes have not experienced any income growth over the past three decades, Roberts counters that even so, they are still much better off than in 1980. How can he make that claim? To what extent does Roberts convince you?

Both may be right to some extent, reason being that goods and services have become cheaper in real terms due to technological advancement, trade etc.

Amy Willis writes:

Ravi, That's true...And if it is, to what extent then is the inequality troubling? (It may still be, albeit for different reasons...) Your thoughts?

SaveyourSelf writes:

@ Amy Willis, thanks for the link to, “What’s wrong with inequality.” John Tamny is bright. He had several really good quotes:

“Trade deficits are merely an accounting fiction. All trade balances.”
That my hands down favorite. It is so obviously true.
“In an economy of individuals, inequality is the goal of all individuals.”
This is an interesting statement in that it portends to recreate the microeconomic assumption that human desire is unlimited, but it fails the reality test. For one thing, some human goals include others outside the individual. For another, people don’t think in terms of inequality. Inequality is a statistical description and people are not statistical machines. To suggest, therefore, that the desire of every human is a statistical one cannot be true.
“In an economy of individuals, and that’s the only kind of economy…”
This is deep and important. 'Don’t forget there are trees when considering the forest,' kind of wisdom. Economies are networks, not a whole new organism independent of the shackles or their underlying organization and building blocks.
“…we’re all constantly in search of the path that will enable our own inequality relative to others. Inequality is ultimately about freedom and happiness.“
I interpret this to say something about competition, which, in the absence of violence, benefits all the competitors, but that’s my bias. What he actual says in statistical inequality is synonymous with freedom and happiness. Freedom, perhaps, but happiness? He’s overstretched.
Szymon Moldenhawer writes:

Two things were missing in his analysis

401 K /retirement accounts which are proliferating mostly among rich in US. In Europe rich have it mostly in real estate ( maybe because of the higher taxation or because US companies retain more profit)

Consumption angle was missed as well . Poor people in Europe pay 200% - 300% more in consumption taxes (VAT and excises) . Point he conveniently missed. Income of poor In France should be dived by 2 or more adjust for actual costs. (see Vimeo website)

Conclusion that bottom 50% of France had growth and US did not - is an absurd if you know anything about consumption level of french low class changes over the last 40 years
Poor Americans consume luxury items at scale of upper middle class in Europe. (cars, electronics, restaurants living space in square meters)
i.e. In France going out for lunch in restaurants for working class people is rare event.
1000 square feet apartment in lowest 50% is non existent phenomenon.

When education was discussed it was even worse economic malpractice of guest in France admission to best ( and free + subsidized by tax payer Universities limited solidified inherited for generational and geographic elites = 4th generation upper class Parisian )

Pete Hickey writes:

Two semi-related points:
1) I don’t see the logic in not counting transfer payments in an economy with large transfer payments like the U.S. Perhaps I missed it listening in my car. I would like to know a bit more about how people actually fared in the system we live in.
2) I wonder if there is a way to look at the “working” poor to see what their income growth is. Could you exclude anyone collecting disability (a number that I believe has grown in recent years), unemployment and welfare or is that too complex to be done?

Vincent Geloso writes:

I don't think that this is the right way to think about it (especially at point 4). First of all, the tax measures of inequality are overestimated (see Auten et al. 2016; Geloso et al. 2017) and while there is an increase in inequality and U-curve of inequality over the 20th-21st centuries, magnitudes are debatable (see also Armour et al. 2012).

Secondly, not all inequality are bad. Choice-based inequalities (i.e. length of work year, occupational choices) are hard to condone (especially if some people are not willing to trade positions for higher incomes - i.e. high school professors dont wish to become investment bankers and so do benedictine monks). These are good inequalities (witnessed by diminishing inequality in life satisfaction reporting as Stevenson and Wolfers 2013 find).

There are some bad inequalities - those from birth (sticky inequality - see Corak 2013) are among them. Those from counterproductive government intervention also make the list (i.e. occupational licencing, war on drugs, corporate welfare, regressive regulation that affect goods that feature disproportionately in poor household budgets, etc). The inability to think about decomposing inequalities by types is one of the biggest flaws that we have in the economics of inequality.

See here;

Luke J writes:
The Rich Get Richer... But is that a bad thing. That may be the central question explored in this week's EconTalk episode with UC Berkeley's Gabriel Zucman.

Not only was this not the central question, it was not even addressed in the discussion. This episode presumes inequality then jumps to the accuracy of measurement.

Bernie Sanders says "The issue of wealth and income inequality is the great moral issue of our time", and the very existence of inequality seems to be a moral failure.

Where is the exploration of the ethics of wealth inequality? Certainly not in this episode, and mostly absent from discussion generally. Until people like Sanders, Piketty, and Zucman can make a compelling moral/ethical argument for why inequality itself is abhorrent, then all we have is a mass of useless data.

Ajit Kirpekar writes:

@ Luke J

They have tried with mostly weak arguments.

1) Rich people save, poor people consume and our economy needs more direct consumption(of what, is never explained - consumables, non durable goods, cars??).

2) Rich people have an externality of making poor people spend more. Rich guy throws a lavish party, so poor guy most compete otherwise he looks less impressive in the eye of his neighbors.

3) Marginal Utility - rich person doesn't really care about the next billion he or she earns, but the poor person could really get a lot more happiness if some of that billion went to him or her

To be fair, all three are vaguely possible - but they often ignore a few things. First - none of these arguments are properly measured. Do we really think our growth doldrums are from lack of consumption by the poor? Do we really know how much poor debt is the result of keeping up with the Gates? Do we know how much more utility a poor guy gets from a pack of cigarettes versus Zuckerberg with his next mcMansion? If so, what unit of measurement are we using for utility - elation tokens?

But even if we concede all three of these arguments - they never address the consequences. What happens when taxes are levied and the money is flushed into our imperfect system? Won't it just encourage more tax cheating, bloated pork laden policies of which most doesn't get the poor, and the terrible incentives transfer schemes cause?

SaveyourSelf writes:

Vincent Geloso, wrote that choice-based inequalities diminish inequality in life satisfaction.

Absolutely Brilliant!
bensonyates writes:

Two of the best books on income inequality that I've come across are "The Price of Inequality" by Joseph Stiglitz and "Inequality: What Can Be Done?" by Anthony Atkinson. Another book that I have yet to read but has been recommended to me is "Inequality: What Everyone Needs to Know" by James Galbraith. These are for the most part books on the economics of inequality, and pose the problem in economic terms of efficiency and human welfare. If you're looking for moral arguments against wealth and income inequality, you generally aren't going to find them from mainstream economists--you'll have to venture into the fields of ethics and normative political theory.

Holt Oliver writes:

To link to other threads of discussions on is the distribution of growth of wealth over time unjust I would add a few points.

1) Nassim Taleb points out that systems are antifragile when they survive systemic shocks. A given politicial-economic system that can survive the threats to longterm societal risks is selected for. Widely skewed wealth would seem to lead to a more vulnerable society with less internal cohesion and risk of societal uprising.

2) Another take would be to look at Rawls' framework for justice. If you were to take a random spin in life's assortment of resources without the luxury of being assured your current position of citizenship, education, wealth and occupation , would you want to spin the wheel with the distribution currently.

3) The methods of Piketty and Zucman pick at one of the hidden problems of capital distribution, that the hyperwealthy would prefer not to advertise the distribution of wealth through off shore havens, shelters, etc. An honest political discussion of is the current distribution fair, without a predisposed ethical framework, just a political one, should begin with transparent data and a willingness to engage in honest dialogue

Bryan McGrath writes:

Zucman seemed to have a serious grasp of his facts, and Russ--though he was clearly skeptical of many of the findings--was a model of how do disagree agreeably. I've been very, very dismissive of inequality as anything other than a measure of envy (not an economist). That said, there are questions of scale and proportion that seem to require answers.

Amy Willis writes:

bensonyates, thanks for the suggestions! In case you missed it, Galbraith was on EconTalk discussing inequality a few years ago. You may want to check it out:

Adam writes:

Germany, France and Norway were Zucman's policy gems, but what about Italy, Spain and Greece? Similar EU policies, very different outcome

Ok, so what US incomes? Isn't factor price equalization part of the answer? The discussion was all about income growth rates and nothing about levels. US workers as a whole seem to enjoy a real wage premium over similar skilled workers abroad. Remember digital outsourcing?

Is it any surprise that the wages of less skilled US workers and less skilled non-US workers would converge? Convergence puts downward pressure on wages in the high wage country, reducing growth rates in income. In lower wager regions, wages would rise at high positive rates--rates higher than in the initially high wage country or region.

kelly smith writes:

1. Way too much is made out of the red/blue color of a state or county when it reality is often a two percent difference in population, a difference between a 52-48 area and a 48-52 area.

2. How is liberal welfare policies not considered "populism" when it literally is buying votes of those who get the government benefits? Especially when some subgroups vote 90-95% for one party over another?

3. Has there ever been an age or location where the rural areas outgain the cities over a decade or more? By definition the cities are going to be more specialized and must "earn" enough to buy food and natural resources from the rural areas. So why is this effect in current times anything remarkable?

Andy McGill writes:

I don't think income comparisons across time or societies are very useful. The biggest impact of capitalism is the ever increasing consumer surplus, which over time dwarfs value of income. Everyone would rather be poor in 2017 than rich in 1917, especially facing the 2018 flu pandemic.

The poorest people in the USA walk around with the world's most complete encyclopedia in their pocket, plus ten billion hours of entertainment, plus the ability to talk to anyone for thousands of miles in any direction. What could the rich do in 1917?

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