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Inequality benefits the rich and hurts the poor

For a long time, the right has argued that we shouldn’t worry about inequality because the true concern is the reduction of poverty. Conservatives also maintained that higher levels of inequality were unimportant because “a rising tide would lift all boats,” and high levels of inequality propelled the economy forward. New research by Roy van der Weide and Branko Milanovic decimates these myths. They find that inequality doesn’t fuel growth for the whole economy, but rather, just the rich.

Before we get to the research of van der Weide and Milanovic, it’s important to understand how mainstream thought on inequality and growth has changed recently. For a long time, mainstream economists didn’t spend much time worrying about distribution. Nobel laureate Robert Lucas declared, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

Once rampant inequality did become an increasingly mainstream concern, Martin Feldstein insisted that the question is “not inequality but poverty.” Economists believed that redistribution slowed down economic growth, and that attempts to reduce inequality would, as a result, only worsen poverty. The reasoning had at least two strands of thought: First, since the poor tend to consume most of their income, it was good for the rich to have more wealth to invest in the future — inequality would increase savings. Second, inequality provided incentives for individuals to work harder to take home more of the pie.

There is now a burgeoning literature showing that these assumptions aren’t true, and that inequality actually reduces growth. That’s because the reasons for accepting inequality were actually backwards. Instead of motivating the rich to invest, higher inequality meant that the poor took on more and more debt, destabilizing the economy. Without enough poor and middle-class families consuming their products, businesses had fewer customers, and less revenue. Further, instead of providing the poor and middle class an incentive to better their lives, higher inequality gave the rich a reason to pull up the ladder, leaving the poor behind. Instead of working harder, the rich sit back on their wealth. The poor and middle class, disenchanted by lack of opportunity, have less money to invest in their own education (and are therefore are increasingly burdened by debt). Inequality thereby reduces growth by reducing both demand and upward mobility.

So Milanovic and van der Weide decided to investigate how inequality affects growth across the income spectrum. They used a state-level survey conducted once every decade to estimate annualized income growth at different income percentiles. What the researchers find is that the old story of “trickle down” economics have no support in the data – instead, inequality boosts growth only for the rich.

The charts below show income growth across different percentiles. Each line shows annualized growth over a decade with the horizontal axis defining growth by quintile. The first chart shows that during the relatively equal period of the 1960 to 1970 (red), when inequality was lower, growth was strong and equally distributed (it actually slightly favored the poor). During the 1980-to-2000 period (blue and green) growth favored the rich; however, their gains weren’t enough to make up for the massive losses to the poor and middle class. Finally, in the period between 2000-to-2010, growth for everyone was abysmal in the wake of a massive financial crisis (see the purple line of the final chart). 

As Milanovic tells Salon, “You know it used to be that the U.S. growth was pro-poor, in the sense, that the growth rates among the poor were higher than amongst the rich. Now it’s the opposite.”

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When the authors dug deeper and looked at individual states, they find that, “inequality is negatively associated… with subsequent real growth for the population located below the 25th percentile, and positively with growth for the population belonging to the top decile.” In simple language: Inequality benefits the rich and harms the poor. A rising tide doesn’t lift all boats — just the luxury yachts.

Using the data the authors have developed, we can discover what growth would look like in a more equitable society. The chart below shows annual income growth between 1960 and 2010 by percentile in red. The chart is sloped upward, meaning that the income of the richest grew by 1.8 percent each year, while the growth of the poorest grew by .7 percent each year. However, if inequality was reduced by one standard deviation (the difference between Connecticut and South Carolina) across the country, income growth for the poor would more than double, to 1.6 percent each year (blue line).

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This has important political implications. First, we should not assume that the mere fact that inequality reduces economic growth will be enough to convince the rich to reduce it. Inequality benefits the rich immensely. Second, the idea that a rising tide lifts all boats has been so utterly disproved it should be embarrassing to state in public. Yet reformicons like Michael Strain continue to repeat the mantra, “ Growth Beats Inequality.” That is false, Between 1960 and 2010, GDP increased by an annualized rate of 3.2 percent (a total of  378 percent) but incomes for the poorest 5 percent increased by only .7 percent a year. However, if we had reduced our gini coefficient (the standard measure of inequality) by only 9 percent, to the level of Japan, we could have doubled income growth for the poorest Americans.

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There is also hope, however. The growth rate of the 1960-to-70s was rapid and equitable. Compared with growth rates from the massively unequal 1990-to-2010 period, everyone was better off. So there is some reason to believe the rich could support more equitable policies. But the rich won’t be so easy to persuade – in a massively unequal society, even modest economic growth still benefits economic elites. Don’t worry about growth, worry about inequality.

A version of this article originally appeared on Salon. 

Five reasons why democracy hasn’t fixed inequality

One of the most longstanding hopes (on the left) and fears (on the right) about democratic politics is that voters of modest means will use their electoral weight to level the economic playing field. In a market economy, the median voter’s income will invariably be below the national average creating an apparently compelling opportunity for a politics of redistribution. This makes the sustained increase in income inequality in the United States and other developed countries a bit of a puzzle. One common suggestion, offered recently by Eduardo Porter in The New York Times, is ignorance. Voters “don’t grasp how deep inequality is.”

But while Americans understanding of economic trends is certainly imperfect, the data suggest that the broad trends are known to the population. Nathan Kelly and Peter Enns, for instance, find that when asked to compare the ratio of the highest paid occupation and the lowest, Americans at the bottom of the income distribution do believe inequality is high and rising. In 1987, Americans as reported that the highest-paid occupation took home 20 times what the lowest paid occupation did – by 2000, they thought the gap had grown to 74 times.

A recent Pew survey finds that 65% of adults agree that the gap between the rich and everyone else has increased in the past 10 years, only 8% say it has decreased. A Gallup poll from earlier this year suggests that 67% of Americans report that they are either “somewhat” or “very” dissatisfied with the income and wealth distribution in the U.S.

If ignorance doesn’t explain inaction, what does? These five factors are the most important culprits:

1) Upward mobility

(Sean McElwee, data from Engelhardt & Wagner)

(Sean McElwee, data from Engelhardt & Wagner)

According to research from Carina Engelhardt and Andreas Wagner, around the world people overestimate the level of upward mobility in their society.

They find that redistribution is lower then when actual social mobility is but also lower where perceived mobility is higher. Even if voters perceive the level of inequality correctly, their tendency to overstate the level of mobility can undermine support for redistribution. In another study Alberto Alesina and Eliana La Ferrara find that, Americans who believe that American society offers equal opportunity (a mythology) are more likely to oppose redistribution. Using data from 33 democracies, Elvire Guillaud finds that those who believe they have experienced downward mobility in the past decade are  32% more likely to support redistribution. A relatively strong literature now supports this thesis.

2) Inequality undermines solidarity

Enns and Kelly find, rather counterintuitively, that when “inequality in America rises, the public responds with increased conservative sentiment.” That is, higher inequality leads to less demand for redistribution. This is perhaps because as society becomes less equal, its members have less in common and find it less congenial to act in solidarity. Bo Rothstein and Eric Uslaner argue that, “the best policy response to growing inequality is to enact universalistic social welfare programs. However, the social strains stemming from increased inequality make it almost impossible to enact such policies.”

As inequality increases, the winner-take-all economy leads voters try to look out for their own children. The period during which overall inequality has risen has seen a massive increase in more affluent families’ spending on enrichment for their own children.

(Sean McElwee, data from Lars Osberg)

(Sean McElwee, data from Lars Osberg)

Chris Dillow points to research by Klaus Abbink, David Masclet and Daniel Mirza who find in social science experiments that disadvantaged groups are more likely to sacrifice their wealth to reduce the wealth of the advantaged group when inequality was lower than when it was higher. Kris-Stella Trump finds that rising inequality perpetuates itself, noting that, “Public ideas of what constitutes fair income inequality are influenced by actual inequality: when inequality changes, opinions regarding what is acceptable change in the same direction.”

3) Political misrepresentation

Ideological factors can’t tell the whole story. Many Americans support redistributive programs like the minimum wage and support for the idea that hard work leads to success has plummeted in the last decade. A further important reason for the lack of political response to inequality relates to the structure of American political institutions, which fail to translate the desires of less-advantaged Americans for more redistribution into actual policy change. Support for this thesis comes from many corners of the political science field, including Martin GilensDorian WarrenJacob HackerPaul Pierson, andKay Lehman Schlozman. Research by five political scientists finds that status quo bias of America’s often-gridlocked congress serves to entrench inequality.

More simply, lower-income Americans tend to vote at a lower rate. William Franko, Nathan Kelly and Christopher Witko find that states with lower turnout inequality also have lower income inequality. Elsewhere, Franko finds that states with wider turnout gaps between the rich and poor are less likely to pass minimum-wage increases, have weaker anti-predatory-lending policies and have less generous health insurance programs for children in low-income families. Kim Hill, Jan Leighley and Angela Hilton-Andersson find, “an enduring relationship between the degree of mobilization of lower-class voters and the generosity of welfare benefits.” Worryingly, Frederick Solt finds that, “citizens of states with greater income inequality are less likely to vote and that income inequality increases income bias in the electorate.” That is, as inequality increases, the poor are less likely to turn out, further exacerbating inequality.

4) Interest-group politics

The decline of labor unions has decreased the political importance of poor voters, because unions were an important “get-out-the-vote” machine. A recent study by Jan Leighley and Jonathan Nagler finds that the decline in union strength has reduced low-income and middle-income turnout. But labor’s influence (or lack thereof) is also important when the voting is done. Research finds that policy outcomes in the United States are heavily mediated by lobbying between interest groups, so organization matters.

Martin Gilens writes, “Given the fact that most Americans have little independent influence on policy outcomes, interest groups like unions may be the only way to forward their economic interests and preference.” His research indicates that unions regularly lobby in favor of policies broadly supported by Americans across the income spectrum, in contrast to business groups, which lobby in favor of policies only supported by the wealthy.

(Sean McElwee, data from Martin Gilens)

(Sean McElwee, data from Martin Gilens)

It’s no surprise then that numerous studies have linked the decline in union membership and influence with rising inequality.

5) Racial conflict

A recent study by Maureen A. Craig and Jennifer A. Richeson finds that when white Americans are reminded that the nation is becoming more diverse, they become more conservative. Dog-whistle phrases like “welfare queens” have long driven whites to oppose social safety net programs they disproportionately benefit from. Research from Donald Kinder and Cindy Kam indicates that racial bias among white voters is strongly correlated with hostility toward means-tested social assistance programs. Another study by Steven Beckman and Buhong Zhen finds that blacks are more likely to support redistribution even if their incomes are far above average and that poor whites are more likely to oppose redistribution.

In other words, a massive public education campaign about the extent of income inequality is neither necessary nor sufficient to achieve the kind of redistributive policies liberals favor. The real obstacles to policy action on inequality are more deeply ingrained in the structure of American politics, demographics, and interest group coalitions. Insofar as there is a role for better information to play, it likely relates not to inequality but tosocial mobility which remains widely misperceived and is a potent driver of feelings about the justice of economic policy. As John Steinbeck noted, “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.” Stronger unions, more lower income voter turnout and policies to reduce the corrupting influence of money on the political process would all work to reduce inequality. It will take political mobilization, not simply voter education to achieve change. The wonks have interpreted the world; the point, however, is to change it.

This piece originally appeared on Vox.