Inequality: Why should we care? Byron Gangnes Professor of Economics Senior Research Fellow, UHERO University of Hawaii at Manoa VLI February 2019 Hawaii Island Economic inequality Inequality a central issue Rising economic insecurity Alongside visible wealth Shaping economic future and political debate Why is US inequality high and increasing? In what ways does it matter? What might be done? Difficult issue in many respects Lots we don t know and different ways to view outcomes
US incomes vary dramatically Average income before means-tested transfers and federal taxes, by income group, 2015 Source: Congressional Budget Office, 2018 Top earners claim most of total income Richest claim largest share of US income A standard way of viewing income equality or inequality We ll skip the statistical measure (Gini coefficient) that just formalizes this 60 45 30 15 0 Shares of Aggregate US Income Lowest 2nd Middle 4th Highest Source: Gangnes from Census data Income Quintiles
Taxes and government programs help reduce inequality Source: Congressional Budget Office, 2018 But not as much as you might think Shares of income before and after transfers and taxes, by income group, 2015 Source: Congressional Budget Office, 2018
Wealth inequality is even more pronounced Source: Congressional Budget Office, 2016 Inequality by gender Median hourly earnings of US women as a percent of men s Gap has narrowed but persists. why? Educational attainment Types of occupations Work experience Periods out of work force for caregiving Discrimination? Better for younger women today Source: Pew Research based on US Current Population Survey data
Inequality by region The rise of The One Percent Why is the issue so volatile now? A new Gilded Age?
While most have seen little income growth Source: US Bureau of the Census The US in a global context Percent of Income earned by the top 10%
Why is US income more unequal? Less progressive taxes and less generous social programs US income distribution is more similar before taxes and transfers than after Fewer trade unions More concentrated corporate power Different underlying political structure Different underlying attitudes Why has inequality increased? Innovation has benefitted skilled workers Digital technologies favor Superstars Capital substitutes for lower-skilled labor Wages have lagged productivity Lower income, capital gains tax rates Other structural changes Offshoring of middle-income jobs Decline of unionization Spread of performance pay The gig economy and growth of part-time work Source: Wikipedia from BLS analysis.
Inequality burdens: personal and social Impacts on individuals and 42 families 36 40 million people live in 30 poverty 24 40% of households are 18 liquid asset poor 12 6 Life expectancy has gone 0 down for lowest 40% Lowest Cohort born in Life expectancy at age 50 by income quintile 2nd Middle 4th 1930 1960 Highest How does inequality burden the economy? Underuse or misuse of resources Waste of economic contributions, skills Outsized returns may reflect barriers to competition Social burdens of low incomes, poverty Social ills Fiscal burdens Spillover burdens Increased debt and risk of financial crises Political risk may discourage investment
Political burdens? Might inequality be beneficial? (or at least necessary?) Is it a necessary side-effect of development? China s top 10% has grown 3 times as fast as bottom 50% since 1980 Or of dynamism and growth? Incentives for innovation, entrepreneurship, and effort Incentives for needed capital investment Provides pools of wealth for same
Inequality and growth Evidence is unclear on whether inequality reduces growth Some studies find large negative effects (up to 1% of GDP!) Others find little or even positive net effects Source: OECD 2012 Policy options to address inequality Use government fiscal systems Redistribute income using taxes, transfers Enhanced EIC, more progressive income taxes (or GMI), wealth taxes Expand public programs that build human capital What are efficiency costs? Regulatory reforms Eliminate barriers to entry for workers, firms Reduce zoning, land-use barriers to housing development Fundamental changes to address power differentials Participatory corporate governance Labor-friendlier laws Broader political participation
Inequality: A broader view addressing the issue of rising inequality necessarily involves not just economics but also a healthy dose of political philosophy. (Mankiw, 2013) Should winners pay more for the public benefits they receive, given their ability to pay? Or do efforts to reduce inequality unfairly take away the just receipts of effort, undermine property rights? What is just or fair? Equality of opportunity Many Americans might agree that what matters is equality of opportunity The American Dream: Being free to accomplish almost anything you want with hard work and Being able to succeed regardless of the economic circumstances in which you were born. From Economic Mobility Project from Pew Trusts surveys on the American Dream
Equality of opportunity Intergenerational Income (Im)Mobility But economic opportunity is not very equal Intergenerational income mobility is very limited Appears due to lack of human capital investment in children Source: Attanasio and Pistaferri (2016) Worrisome generational trends