That is the central thesis of my Fouling the Nest.
On Mon, Jun 26, 2006 at 08:24:34AM -0700, Jim Devine wrote: > June 25, 2006/New York TIMES > > Economic View > Income Inequality, and Its Cost > > By ANNA BERNASEK > > INEQUALITY has always been part of the American economy, but the gap > between the rich and the poor has recently been widening at an > alarming rate. Today, more than 40 percent of total income is going to > the wealthiest 10 percent, their biggest share of the nation's pie in > at least 65 years. The social and political repercussions of this > disparity have been widely debated, but what about the effects on the > economy? > > Oddly, despite its position in the political debate, the question has > received little attention from economists. Mostly, they have focused > on measuring income inequality and establishing its causes. Some > research has been done, however, and the results, including insights > from related disciplines like psychology and political science, are > disturbing. > > Start with recent findings in the field of public health. Some > scientists believe that growing inequality leads to more health > problems in the overall population a situation that can reduce > workers' efficiency and increase national spending on health, > diverting resources away from productive endeavors like saving and > investment. > > Sir Michael Marmot, a professor of epidemiology and public health at > University College London and director of its International Institute > for Society and Health, has spent most of his career studying the link > between inequality and health around the world. In a much-publicized > paper published in May in The Journal of the American Medical > Association, Sir Michael and three colleagues studied health in the > United States and in Britain. They found that at various points > throughout the social hierarchy, there was more illness in the United > States than in Britain. > > Sir Michael theorizes that a reason for the disparity was the greater > inequalities in the United States and heavier stresses resulting from > them. > > Other researchers have focused on how income inequality can breed > corruption. That may be especially true in democracies, where wealth > and political power can be more easily exchanged, according to a study > of 129 countries by Jong-Sung You, a graduate student at the Kennedy > School of Government at Harvard, and Sanjeev Khagram, a professor of > public affairs at the University of Washington in Seattle. > > Corruption, of course, can hurt growth by reducing the efficient > allocation of public and private resources and by distorting > investment. That may end up creating asset price bubbles. > > Unchecked inequality may also tend to create still more inequality. > Edward L. Glaeser, a professor of economics at Harvard, argues that as > the rich become richer and acquire greater political influence, they > may support policies that make themselves even wealthier at the > expense of others. In a paper published last July, he said, "If [!] > the rich can influence political outcomes through lobbying activities > or membership in special interest groups, then more inequality could > lead to less redistribution rather than more." > > In the United States, there is plenty of evidence that this has been > occurring. Bush administration policies that have already reduced the > estate tax and cut the top income and capital gains tax rates benefit > the well-to-do. It seems hardly an accident that the gap between rich > and poor has widened. > > There may be other ways in which growing inequality hurts the economy. > Steven Pressman, professor of economics at Monmouth University in West > Long Branch, N.J., has identified a psychological effect that may > lower productivity and reduce efficiency. Professor Pressman draws on > the work of Daniel Kahneman, a Nobel laureate in economics, and his > experiments on fairness. One experiment, called the ultimatum game, > involves two people with a fixed sum of money that must be divided > between them. One person is to propose any division he likes; the > other can only accept or reject it. If the division is accepted, each > person receives the proposed amount; if it is rejected, neither gets > anything. > > It might be expected that a rational individual in the role of divider > would take a large part of the money and that rational receivers would > accept a small portion rather than walk away with nothing. But it > turned out that when faced with an offer they considered unfair, most > people rejected it outright. Perhaps in anticipation of this, many > dividers made substantial offers. > > Professor Pressman relates those results to economic behavior in > corporate America. "If a C.E.O.'s salary is going through the roof and > workers are getting pay cuts, what will happen?" he said. "Workers > can't outright reject the offer they need to work but they can > reject it by working less hard and not caring about the quality of > what they are producing. Then the whole efficiency of the firm is > affected." > > THE effects of income inequality aren't entirely negative. Without > some inequality, there would be little economic incentive to earn > more. And some researchers, particularly advocates of supply-side > theories, predict that as the rich get richer, their increased wealth > will be used for greater savings and investment, thereby bolstering > growth. The latest data on the American economy, though, do not seem > to support this prediction. > > Savings among top income earners have actually declined. According to > the Federal Reserve's latest Survey of Consumer Finance, the > percentage of families in the top 10 percent by income that saved > anything at all dropped to 80.6 percent in 2004 from 84.3 percent in > 2001. And this was during a period when President Bush cut top > marginal income tax rates and taxes on capital gains and dividends. > > The trend of growing income inequality may eventually be reversed, but > at the moment, current policies appear to be worsening the situation. > If more researchers turned their attention to the subject, they would > find plenty to explore. > -- > Jim Devine / "In the Soviet Union, capitalism triumphed over > communism. In this country, capitalism triumphed over democracy." -- > Fran Lebowitz -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu
