Real Time discusses income inequality and the Great Depression

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  • #1
OrbitalPower
iL6YS-8rBnE[/youtube] On Bill Ma...ntist Robert Dahl dubbed the American system?
 

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  • #2
ultimablah
Who gave the rich all their money?
 
  • #3
russ_watters
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China, with its vastly increasing income inequality must be in real trouble, then -- despite that they also have consistent 10% gdp growth....

I'm not a big believer in coincidences. Economic growth and income inequality go hand in hand. Income inequality helps drive economic growth. If the opposite were true (that income inequality was harmful to prosperity), we would not have seen the spectacular increases in the Western standard of living over the past 50 years.

The US economy is vastly different today from pre-WWII. There was an awful lot of "old money" out there - people who never worked a day in their lives and lived only on their investments. These people didn't take much from the economy but they also didn't add much - in essence, they weren't really part of the economy. There isn't nearly as much of that today. Today, we have a class of "working rich" - entrpreneurs who have earned their money in ways that stimulated the economy (ie, by starting businesses).

At the same time, there is a theory that in a healthy capitalistic society, the historical income inequality will be inverted U-shaped, decreasing as more of the lower end get pulled up. We may yet see that happen.

An article on the subject:
The wars generated large Žscal shocks, especially in the
corporate sector that mechanically reduced distributions to stockholders.
We argue that top capital incomes were never able to
fully recover from these shocks, probably because of the dynamic
effects of progressive taxation on capital accumulation and
wealth inequality. We also show that top wage shares were at
from the 1920s until 1940 and dropped precipitously during the
war. Top wage shares have started to recover from theWorldWar
II shock in the late 1960s, and they are now higher than before
World War II. Thus, the increase in top income shares in the last
three decades is the direct consequence of the surge in top wages.
As a result, the composition of income in the top income groups
has shifted dramatically over the century: the working rich have
now replaced the coupon-clipping rentiers. We argue that both
the downturn and the upturn of top wage shares seem too sudden
to be accounted for by technical change alone. Our series suggest
that other factors, such as changes in labor market institutions,
Žscal policy, or more generally social norms regarding pay inequality
may have played important roles in the determination of
the wage structure.
http://elsa.berkeley.edu/~saez/pikettyqje.pdf
 
  • #4
China, with its vastly increasing income inequality must be in real trouble, then -- despite that they also have consistent 10% gdp growth....

I'm not a big believer in coincidences. Economic growth and income inequality go hand in hand. Income inequality helps drive economic growth. If the opposite were true (that income inequality was harmful to prosperity), we would not have seen the spectacular increases in the Western standard of living over the past 50 years.

The US economy is vastly different today from pre-WWII. There was an awful lot of "old money" out there - people who never worked a day in their lives and lived only on their investments. These people didn't take much from the economy but they also didn't add much - in essence, they weren't really part of the economy. There isn't nearly as much of that today. Today, we have a class of "working rich" - entrpreneurs who have earned their money in ways that stimulated the economy (ie, by starting businesses).

At the same time, there is a theory that in a healthy capitalistic society, the historical income inequality will be inverted U-shaped, decreasing as more of the lower end get pulled up. We may yet see that happen.

An article on the subject: http://elsa.berkeley.edu/~saez/pikettyqje.pdf
Interesting. So would Obama's economic policies actually stagnate economic growth?
 
  • #5
jal
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Interesting. So would Obama's economic policies actually stagnate economic growth?
Get real!!! ... look north to Canada .... they have a better banking system and and plenty of growth
 
  • #6
russ_watters
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Interesting. So would Obama's economic policies actually stagnate economic growth?
Could you be more specific about what policies you mean?
 
  • #7
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China, with its vastly increasing income inequality must be in real trouble, then -- despite that they also have consistent 10% gdp growth....
I think there are a couple of issues at work in China.

First, although the inequality is increasing in absolute quantities, I think one could argue that in a percentage, inequality has actually gone down. Under Mao, a few leaders controlled almost all the resources, now the control and wealth is spread very widely.

Second, a lot of the economic growth one sees in China is due to American outsourcing. So in a sense, the Chinese growth can be explained simply as displaced American industry. It is not "real" in the sense of wealth creation, it is more like wealth displacement.

I think the real model of a economy with concentrated wealth is the stagnated Third World economies. After all, if there is a single person who makes $100 million a year, that person may purchase a dozen cars and maybe 6 or 7 houses. But if you have 1000 people making $100,000 a year each one is going to buy a couple cars and a house. They will be a engine in the economy that very rich never will be.
 
  • #8
russ_watters
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My point is that you can't have those 1000 people making $100,000 a year unless there is someone to employ them and pay them. And that's the guy making $100 million. They can't exist without him.
 
  • #9
mheslep
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...The US economy is vastly different today from pre-WWII. There was an awful lot of "old money" out there - people who never worked a day in their lives and lived only on their investments. These people didn't take much from the economy but they also didn't add much - in essence, they weren't really part of the economy. There isn't nearly as much of that today. Today, we have a class of "working rich" - entrpreneurs who have earned their money in ways that stimulated the economy (ie, by starting businesses).
....
Thanks for the QJE piece RussW. Here's an old joke I heard once while visiting US old money, blue-blood country; it underscores the point above by it's out datedness. Paraphrasing:

A charming young woman of the mansion, servants, and capital set suffered a reversal of fortune when her husband passed away and left the family in financial dire straits, threatening to end their way of life. After a time, the young woman continued to entertain society with little apparent reduction in circumstance. One one such occasion, two matrons engaged the young woman and inquired about the paradox. She deflected the inquiry for a time, but they persisted. Finally, mortally ashamed, she admitted she had turned to occasional prostitution, to which the matrons replied, "Oh thank heavens dear, we thought you were dipping into capital!"
 
  • #10
Could you be more specific about what policies you mean?
Correct me if I'm wrong on this, but it seems like Obama's economic policies are centered around increasing taxes on the rich (the ones who makes $250,000 or more a year) and evenly distributing the wealth. Is this just a quixotic idea or will this actually improve economic growth?
 
  • #11
mheslep
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Get real!!! ... look north to Canada .... they have a better banking system and and plenty of growth
Canadian unemployment over the last 10 years averaged over 7% compared to 5% in the US. US GDP growth averaged over 3% in the last five years, Canada under 3%. To its credit, recent Canadian governments have been running a budget surplus. To emulate all this the US should first ... become the 2nd largest holder of oil reserves in the world (counting tar sands). Oil/gas/mineral exports, mainly to the US, count for a large part of the Canadian industries sector and resulting government revenue, as the recent collapse of oil prices and US slowdown is about to highlight.

http://www.canadianeconomy.gc.ca/english/economy/unemployment.cfm [Broken]
http://www.indexmundi.com/canada/gdp_real_growth_rate.html
 
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  • #12
russ_watters
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Correct me if I'm wrong on this, but it seems like Obama's economic policies are centered around increasing taxes on the rich (the ones who makes $250,000 or more a year) and evenly distributing the wealth. Is this just a quixotic idea or will this actually improve economic growth?
That idea is the very essence of socialism and will undoubtably stifle growth. If by quixotic, you mean dreaming of the ideas of Marxist redistribution of wealth and a resulting paradise - a long dead dream of a flawed ideology - then yes.

Nevertheless, it is clear that socialistic policy is on the rise in both the US and in the West in general. Due to the nature (free money = buying votes) it is difficult to stop, but the fact that the US's economic growth has long eclipsed her more socialistic western counterparts is evidence of the flaw inherrent in those policies. My biggest economic worry for the future is about this very issue.

Here's an article on the subject - I haven't fully read it, but it looks pretty good. I was mainly looking for a citation for the two claims in that last sentence (the growth fact and the reason for it).
By definition, the remaining causes of Europe's low standard of living relative to its
high relative productivity must be accounted for by some combination of a higher structural
unemployment rate and a lower labor force participation rate. The higher unemployment rate
in Europe is at least partly due to more generous unemployment compensation, and the
welfare adjustment is not obvious. But part of the unemployment is related to laws that have
lengthened vacations and shortened weekly work hours, making workers more expensive to
employ.
http://faculty-web.at.northwestern.edu/economics/gordon/355.pdf [Broken]

The author goes on to discuss reasons for the shorter hours and more vacation. I'm not in 100% agreement with that point, but the gist of it is the same.
 
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  • #13
mheslep
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...Nevertheless, it is clear that socialistic policy is on the rise in both the US and in the West in general...
I agree that a) the trend at the moment is for more socialism in the US, and b) that other Western countries have chosen much greater levels of socialism relative to the US in past decades. However, I argue that at the moment other Western countries are probably moving away from socialism; the record is at least mixed.

Observe:
  • Canada. Government has grown more frugal under Harper and his predecessor; its former government-only health care system now tolerates a large growth in private health clinics.
  • Netherlands: reformed a previously government run health system to now use mostly private suppliers w/ a universal mandate.
  • Ireland: very low business taxes, 1/3 of the US rates.
  • Central Europe. Poland just overhauled its formerly state run health system to provide the option of buying private. I believe similar efforts are under consideration elsewhere in CE.
  • France: ? The French President is less socialist than his predecessor, at least by sound bite, and has attempted to open up the employment laws.

I assume these trends are the result of growing recognition of the consequences outlined, for instance, in the article posted by RussW. Hopefully these trends in other OECD countries will be noticed in the US.
 
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  • #14
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That idea is the very essence of socialism and will undoubtably stifle growth.
Have you looked at the stock market lately? Clearly the very essence of capitalism has stifled its long-term growth...
 
  • #15
drankin
Have you looked at the stock market lately? Clearly the very essence of capitalism has stifled its long-term growth...
I disagree. Our current situation is due to banks loaning money to people who could not pay it back. Basically, gambling by both the lender and borrower. The markets will readjust.

Socialism does not allow people to build wealth. It does not reward individuals who work hard and take the risks to pursue success. It's an ideal (similar to a religion) that, in my opinion, does not inspire innovation let alone support "long-term growth".
 
  • #16
russ_watters
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I agree that a) the trend at the moment is for more socialism in the US, and b) that other Western countries have chosen much greater levels of socialism relative to the US in past decades. However, I argue that at the moment other Western countries are probably moving away from socialism; the record is at least mixed.

I assume these trends are the result of growing recognition of the consequences outlined, for instance, in the article posted by RussW. Hopefully these trends in other OECD countries will be noticed in the US.
I'm not plugged into foreign politics enough to know much about that - but I hope you are right that the pendulum is swinging back toward freedom/democracy.
 
  • #17
russ_watters
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Have you looked at the stock market lately? Clearly the very essence of capitalism has stifled its long-term growth...
"lately.....long term".

No.
 
  • #18
Art
I'm not plugged into foreign politics enough to know much about that - but I hope you are right that the pendulum is swinging back toward freedom/democracy.
:confused: What on earth has freedom/democracy got to do with the subject at hand?? It's not as if we socialist Europeans live in countries whose internet usage is monitored and recorded, whose phone calls are listened into by the gov't and who holds prisoners without charge in secret prisons whilst torturing them; or even in countries where elections are settled in gov't appointed courts rather than through the ballot box. :rolleyes:

Perhaps in some twisted way you see the US gov'ts ability to get away with such reprehensible activities as exercising it's freedom. It's freedom to practice tyranny that is!

As in the way countries with 'democratic' in their name tend to be the most autocratic so it seems those who talk about freedom the most in the US are in reality those who most oppose it.

You refer to shorter working weeks and longer vacations as if they are a negative in society. Perhaps you should consider the possibility that quality of life is an important consideration for most people which is greatly enhanced by spending more leisure time with friends and family. If longer working weeks and less leisure time is your goal then perhaps a slavocracy would by your ideal society.
 
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  • #19
vanesch
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I disagree. Our current situation is due to banks loaning money to people who could not pay it back. Basically, gambling by both the lender and borrower. The markets will readjust.
Well, visibly you let them re-adjust so well that you need to bail them out !

Socialism does not allow people to build wealth. It does not reward individuals who work hard and take the risks to pursue success. It's an ideal (similar to a religion) that, in my opinion, does not inspire innovation let alone support "long-term growth".
I find this socialist-capitalist opposition rather sterile and outdated. I think it is clear that a pure free market is out of the question and a pure state-controlled economy doesn't work ; what most western democracies go for is a regulated market, where the market is essentially left free, but where certain democratically desired features that are not achieved by market forces are put in by regulation - by hard law, or by incentives such as taxes and fees. The reason for that is that the natural goal of the free market doesn't correspond perfectly to the democratic goals in most places. The free market is a noisy, chaotic system that has some postulated attractor at the "optimal ressources distribution to optimize ressources production to optimize ressources production to...". This can be a goal on itself, when scarcity of ressources is important. However, when one is of the democratic opinion that there are sufficient ressources, but that they are badly distributed, then the market is not going to achieve the democratically set forth goals, and then regulation is democratically desired. This comes of course with a penalty in less ressources production. Yes. But that was not the set for goal in the first place.

Look at holidays in France. Yes, it is probably true that this hinders growth, and that this increases unemployment, etc... But if it is something that the French find important (visibly they do), and they don't want to be caught in a competition with those who do want to work harder (a minority) and hence be obliged to work harder themselves, then that is their good right. If they decide democratically that they want 50 days of holidays a year, even if that comes at a cost of lower growth and higher unemployment, then so be it. It is the desire of the people in that case. Personally, I enjoy 50 days of holiday a year. If I could double my salary by giving this up, I think I wouldn't - for the moment. Is this "socialist", or just democracy in action ? Now, the problem is of course that people want it both ways.

I think one should set oneself free of ideology, and put in place the system that corresponds most to what is democratically desired. That can be wealth and production, or that can be leasure, or it can be more equal distribution of limited ressources, or. ... and use economic knowledge to achieve, through market forces and regulation, whatever is the desired goal.

Wealth is not the goal. Happiness is. It doesn't come without some wealth of course. But both are not equal. Maybe it is not a democratically decided value that hard work should lead to wealth. Maybe people who enjoy life should be rewarded with wealth. Who knows ? Setting values is a democratic process. There are no a priori values. Of course, when everybody is starving, then increasing wealth so that one can eat will be a priority. Then things like markets and so work pretty well to achieve a society's goal. But when there is enough food for everybody, and when there is a minimum of medical care and so on, all the rest is superfluous. It can be that it is a desire to work hard and get more and be rewarded with wealth because of that, and if that is the society's desire, then that's ok. But it can also be different.
 
  • #20
mheslep
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...Look at holidays in France. Yes, it is probably true that this hinders growth, and that this increases unemployment, etc... But if it is something that the French find important (visibly they do), and they don't want to be caught in a competition with those who do want to work harder (a minority) and hence be obliged to work harder themselves, then that is their good right. If they decide democratically that they want 50 days of holidays a year, even if that comes at a cost of lower growth and higher unemployment, then so be it. It is the desire of the people in that case. Personally, I enjoy 50 days of holiday a year. If I could double my salary by giving this up, I think I wouldn't - for the moment. Is this "socialist", or just democracy in action ? ...
It is both, a government more activist in the means of production, rather than less, chosen by the majority. The fact that the majority chose that path does not by itself make it a good thing. In this case, the many who are unemployed are losing freedom - the option to go out and earn a living, or just work productively in their chosen field - because, for instance, employers can not afford to hire any more people who are gone 50 days a year.
 
  • #21
vanesch
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It is both, a government more activist in the means of production, rather than less, chosen by the majority. The fact that the majority chose that path does not by itself make it a good thing. In this case, the many who are unemployed are losing freedom - the option to go out and earn a living, or just work productively in their chosen field - because, for instance, employers can not afford to hire any more people who are gone 50 days a year.
Uh, the democratic dogma is that "good" = "whatever the majority desires" :cool:

By definition then, it means that the freedom of the unemployed is considered a lesser good than the desire of the majority to enjoy more free time.
 
  • #22
WheelsRCool
The thing to keep in mind is that "whatever the majority desires" is not always a good thing; it is oftentimes just the mob in charge. The majority must be protected from the minority, but the minority must be protected from the majority.

America produces so much wealth because in general it has lived by a very simple rule: You don't work, you don't eat.
 
  • #23
mheslep
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Uh, the democratic dogma is that "good" = "whatever the majority desires" :cool:

By definition then, it means that the freedom of the unemployed is considered a lesser good than the desire of the majority to enjoy more free time.
That would be the dogma of the mob (or perhaps Robespierre), not a constitutional democracy. C'mon that has a hole a mile wide and centuries of history posting warning signs en-route to the hole. Slavery was once considered a good for the majority. There are certain basic human freedoms that the majority, even in unanimity, does not have the right to infringe. Perhaps the state has the power, granted by the people, to in act very restrictive velvet glove labor laws, but lets not pretend that the state does not simultaneously reduce the liberty of others by doing so.
 
  • #24
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My point is that you can't have those 1000 people making $100,000 a year unless there is someone to employ them and pay them. And that's the guy making $100 million. They can't exist without him.
It is the old chicken and egg thing. The reality is that a modern economy can't exist without a lot of the $100,000 people or at least a few of the $100,000,000 dollar people (assuming that they are the original people who came up with the idea for the company and not just some CEO ripping the joint off...). The problem comes when the country becomes too unbalanced one way or another.

I personally think that it has become too unbalanced in the direction of the very rich recently and that has contributed to our problems, but that is an opinion and it certainly could easily become unbalanced in the other direction too so care is called for.
 
  • #25
vanesch
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The thing to keep in mind is that "whatever the majority desires" is not always a good thing; it is oftentimes just the mob in charge. The majority must be protected from the minority, but the minority must be protected from the majority.

America produces so much wealth because in general it has lived by a very simple rule: You don't work, you don't eat.
Sure. The question is: do we consider it "good" or "important" that there is much wealth ? Or do we consider it "good" to lie in the sun and enjoy a short, poor, but happy life ? "good" is an open concept, which needs to be defined in one or another way. If you DEFINE "good" as "whatever the mob in charge desires", then you cannot say that sometimes that's not good. There is no absolute good. Good is what we define to be good.
What was "good" 150 years ago is mostly considered "bad" today. What is "good" to a religious fanatic is often considered "bad" by others, and what is considered "good" by humanists is often considered "bad" by conservative integrists. What was considered "good" by communists was considered "bad" in the West and vice versa. Every society has its own rules of what is "good" and what is "bad", and this has seriously evolved, and flipped over during the course of history.

There are usually (and even not always) some extreme things which are generally accepted to be "good" and to be "bad", but when going to more moderate items, what's good and what's bad is entirely arbitrary, a priori. And so we need to define first what is going to be good: give a rule of how to determine whether something is to be considered good or bad.
 

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