Saturday, December 10, 2005

economic inequality

An Australian economist, John Quiggin, believes he can demonstrate that the quality of life is deteriorating for many Americans, at least in a relative sense. As you can see, he puts it in terms of income and consumption inequality.

The comments are every bit as interesting as Quiggin's thesis. If you've got any interest in this subject, do read the whole thing. I give the following to whet your appetite.

Income and Consumption Inequality Posted by John Quiggin


I’ve spent a lot of time trying to work out what’s been going on with income and consumption inequality in the United States. Partly that’s because the subject is of interest in itself and partly because social and economic developments in the English-speaking world often (not always) follow the lead of the US.

However, there seem to be lots of contradictions in the data, and between data and popular perceptions, for example regarding social mobility and consumption inequality. I’ve finally managed to sort out what seems (to me, at any rate) to be a coherent account of what’s going on. A list of the main points follows, with supporting links, some of which may require registration/subscription. I’ve tried to indicate which bits of the story reflect my judgements, and which are drawn from the literature.

Here’s the outline

  1. Measures of inequality, mobility and so on reflect a combination of transitory variations and more stable effects arising from social class, occupation, education and so on.
  2. Although the US displayed exceptionally high social mobility in the 19th century, social mobility declined from the beginning of the twentieth century the US and is now comparable to that in European countries.
  3. Because of greater income inequality in the US, mobility within the income distribution is lower in the US than elsewhere.
  4. Wage inequality in the US has grown greatly since 1970. Income inequality has also grown, but not as much since low-wage households have increased hours worked.
  5. (Annual) Consumption inequality has not changed much since 1970. In my judgement, this reflects increased use of credit markets to smooth out short term fluctuations in income, which offsets increased long-run inequality
  6. In my judgement, increased reliance on credit has been the main cause of the dramatic increase in bankruptcy, particularly evident since 1990.
  7. Bankruptcy laws act as a kind of income insurance, and generous (to debtors) bankruptcy laws are a substitute for redistributive taxation.

Obviously, More Research Is Needed™


My favorite economist at the International Monetary Fund gave a good speech recently on the need for reforms in Europe. Some of what he said makes sense for the U.S. as well.

For the world altogether, there has been precious little progress toward the changes needed to avert serious problems, at least from the IMF point of view. The U.S. needs to deal with its deficits and give up its artificially low interest rates. China needs to liberalize its monetary policy. Emerging nations need to make structural changes so they can attract investment from cash-rich nations (oil producers and China principally). Japan needs to increase domestic consumption. And so forth.

Here's the link to the speech:

Revitalizing Reforms in Europe, By Raghuram G. Rajan, Economic Counsellor and Director of the IMF's Research Department


It might have made sense for an individual to finish university at 25 when he or she were likely to be active in the labor market for only another 25 years; it no longer makes sense when his or her workspan has doubled. Not only do universities need to expand their continuing education programs, they also need to seriously consider whether their programs should become more modular, with lifelong learning being the objective. Admission should be for a lifetime, not for a degree. Individuals should be able to take a short basic undergraduate course in their 20s, return repeatedly for specific skills as they specialize or shift careers in their 30s, pick up management courses in their 40s and 50s, and renew interests in art appreciation and philosophy in their 60s.

The world will not stand still while Europe makes up its mind on whether it wants to reform. Clearly, Brazil, China, India, and Eastern Europe are becoming more competitive. India alone has over a million students enrolled in engineering colleges. But before loose talk starts about hypercompetitive Asian economies, let me point out that only 3000 students graduate every year from the Indian Institutes of Technology and only about 20,000 more from other reputable technical institutes. The remaining come from schools of varying quality—some not even equivalent to a good high school education here. I would guess something similar is true of China.

Europe's per capita GDP has been falling relative to the United States. As is well known, some of this reflects a voluntary reduction in average hours worked: as is sometimes simplistically put, Europeans earn to live while Americans live to earn. But some of it also reflects lower labor participation rates as well as greater unemployment. Again, not all of this is involuntary, or even inefficient. For example, in Europe, a greater share of production is undertaken in the household, and this is not reflected in GDP numbers.

What is hard to dispute, however, is that since 1995, total factor productivity growth, as well as labor productivity growth, in the United States have outpaced that in the Euro area. Moreover, the US has considerably improved its performance over the last decade, while Europe's performance has declined. While a percent point or so of difference in TFP growth may seem small, pretty soon the power of compounding leads to substantial differences in wealth and competitiveness.

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