Did rising inequality cause the financial crisis?

I can’t see any logical reason to connect these two variables, but lots of people seem to think they are connected.  So I thought I’d look at the evidence.  I found an OECD study that looks at income growth for the top 10% and the bottom 10%, between the mid-1980s and the late 2000s.  It seems reasonable to assume that if the income of the rich is growing much faster than the income of the poor, then inequality is increasing, and vice versa.  So rather than look at all countries, let’s focus on those where the difference is significant, say more than 1% per annum.  There are 8 countries where the rich did much better than the poor, headed by Sweden:

Country  Top 10%  Bottom 10%  Gap

Sweden       2.4%         0.4%         2.0%

Britain         2.5%        0.9%         1.6%

Germany     1.6%         0.1%         1.5%

New Zealand  2.5%      1.1%          1.4%

USA             1.5%        0.1%         1.4%

Norway        2.7%        1.4%          1.3%

Finland         2.5%       1.2%          1.3%

Holland        1.6%       0.5%          1.1%

And there were four countries where income got much more equal:

Portugal     1.1%        3.6%        (2.5%)

Greece       1.8%       3.4%        (1.6%)

Spain         2.5%       3.9%        (1.4%)

Ireland       2.5%       3.9%        (1.4%)

Comments?

Update:  Commenter Declan pointed out that I missed 4 countries in the increasing inequality camp:  Australia, Israel, Czech Republic and Luxembourg.  That’s because I originally got the list from a source with a smaller number of countries, and later linked to OECD.


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103 Responses to “Did rising inequality cause the financial crisis?”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    10. September 2012 at 06:11

    A response to what “lots of people seem to think” won’t move the conversation forward very much. I’d suggest tackling specific thinkers (Stiglitz might be a good one to start with) who see a process where concentrations of wealth (rather than income; and in the hands of the top 1% or 0.1%, rather than the top 10%) undermine regulation etc.

  2. Gravatar of Andy Harless Andy Harless
    10. September 2012 at 06:26

    I think the logical connection is pretty straightforward (although a lot of proponents don’t spell it out and I’m not sure it’s really clear in their minds). We can all agree that the consumption function is concave. In consequence, a concentration of income at the higher end implies less consumption and therefore greater demand for savings. Therefore, an more unequal distribution of income implies a lower equilibrium interest rate and hence a greater risk of hitting the zero bound. In the last business cycle we tried to get around this problem (after almost hitting the zero bound) by assuring that relatively low income people had access to credit so that they could fully realize their high propensities to consume. And it worked. Until it didn’t work…and that was the crisis.

    As to the empirics, it’s not clear what the appropriate unit for analysis is. Since capital markets are international, and many countries do run trade imbalances, one might argue that the appropriate unit is the world as a whole. In any case, it seems inappropriate to me to separate a single currency zone into individual countries. The PIGS are the poor; those were the countries that were able to offset the excess frugality of the rich Northerners by borrowing money, just as poorer individuals in the US were able to offset the frugality of the rich. (That last clause doesn’t quite work, I admit, because, from the US point of view, the real excess frugality was not the domestic rich but the Chinese, who are on average much poorer than even the poorer among Americans, so that’s probably the place you would want to go to make a counterargument.)

  3. Gravatar of John John
    10. September 2012 at 06:26

    In the social sciences you can use data mining to get the stats to say almost anything. That’s why it’s so important to look for data based on solid theory. The onus is on the “progressives” to put forward a logically sound case why income inequality leads to depression other than a few cases of correlation. Until they can do that, and they’ve failed so far with things like the Robert Reich’s purchasing power argument, the idea that our problem is one of income distribution should not influence the national discussion.

  4. Gravatar of genauer genauer
    10. September 2012 at 06:27

    For Germany the numbers are misleading.
    If you compare West Germany before reunification to West + East (still only 80% GDP, compared to the West) today, how do you do this? With some arbitrary numbers for the East ? or ignoring it? If you take the DIW SOEP data (“the Gold standard”), the income distribution has stayed very remarkably the same.

    For the GIPSI, they had some catchtp to do, which came from a higher agriculture fraction (Greece, I think still near 10%), with lower wages and a much higher unreported / taxed fraction.
    The Kuznet Curve effect.

    The report in general does not hide, that they have an agenda, which seems to be more and more the case with the OECD.

  5. Gravatar of Saturos Saturos
    10. September 2012 at 06:31

    Nothing about financial economics says that a financial system’s resilience depends on the distribution of income in the economy. So you have to tell that kind of story. But then the question is: If higher relative wealth buys sufficient political influence (a dubious proposition), why on earth would you use it to do things that will cause a financial crisis? Or perhaps the theory is that the same tampering with the system that causes the inequality also causes the crises. Again, doesn’t seem like a profitable strategy on net. And these theories all suffer from the old fallacy that the rich have a common class-interest and will “act collectively” to achieve it.

  6. Gravatar of Saturos Saturos
    10. September 2012 at 06:34

    Andy, how does that square with the empirical data on America’s savings rate? Do you really think that the main thing pushing real interest rates down in America is the increasing savings of the 1%? Or does it rather have something to do with global capital flows?

  7. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 06:38

    I can’t see any logical reason to connect these two variables, but lots of people seem to think they are connected.

    This belief is rooted in Marxian exploitation theory (which itself is rooted in messianic communism, which was unleashed after the Reformation).

    The “logic” is that capitalism contains within itself “contradictions” the opposite poles (material productive forces and relations of production) of which become more and more stressed over time, which manifests itself in increased impoverishment of “the proletariat” and increased surplus value and capital concentrated into fewer and fewer hands, until the working class becomes aware of its predicament and bring about a “crisis”, which overthrows capitalism and replaces it with communism.

    Of course, Marx was wrong about the absolute impoverishment of the working class, so Marxists fell back on relative impoverishment as the engine of the change.

    Ever since then, there has arisen the idea of a connection between rising inequality and crises in capitalism, to the extent that those who tend to follow ideas and adopt them rather uncritically, have come to believe that there is a causal relation between inequality and depressions. It’s a very watered down garbled version of Marxist ideology.

    There are various strains of this ideology. Minsky’s Instability Hypothesis for example adopts the familiar idea of capitalism containing a inner “contradiction” of unsustainable debt accumulation. This idea is derived from a superficial and naive inference of an alleged correlation between depressions and debt levels. There are other strains, but they all derive from the thousands of years old philosophical “dialectic”, which essentially views reality as a place of inherent conflict and stress, due to the fact that there is a separation in the universe, between subject and object. The separation presents itself as a limitation to the human drive for freedom, hence the destruction that can be unleashed when people actually try to transcend the separation and bring the theologically derived myths down to Earth.

    There is no consistent logic that connects inequality with depressions. There was never meant to be consistent logic. It’s derived from a psychological desire to obliterate “alienation.” The poorer the poor get, the more “cut off” they are from the material world, and the belief is that material forces will save the poor via a spontaneous revolution.

    The key idea for the purposes of this blog post is that if there happens to be low inequality in the world, or if there is no correlation between inequality and depressions, then the tried tested and true “dialectic” will be used and the argument will go “Well, capitalism hasn’t yet reached its mature stage; there is “uneven development”; working class infighting, and so on, but if we just wait a little more, the “contradictions” will reveal themselves in full force.”

    I appreciate your citing of data, but the people who talk about a connection between inequality and depressions are communicating an idea whose roots cannot be falsified by data. One of the more popular excuses to explain the “delay”, is that the exploitation in capitalist countries is being exported to third world countries like those in Africa. Wealthy capitalist nations, employers and employees included, are taking the role of the “bourgeoisie”, and the poor in third world countries have become the “proletariat.”

    ———————-

    Addendum: Among the many reasons for increased inequality, is inflation. Inflation typically enters the economy at distinct points. This creates an additional inequality in and of itself. Inflation has created larger than otherwise financial markets and established firms, and it is self-reinforcing as well, as the financial markets and established firms tend to remain the initial receivers of money. The Fed buys securities from large, wealthy established firms called primary dealers, as well as other politically connected firms like GE and Caterpillar (during 2008 crisis). They typically do not buy anything from Joe Schmo’s Auto Repair and Jim’s Fish and Chip restaurant. These poor saps primarily experience inflation not in the form of increased income, but in the form of increased prices.

    Central banking is a mechanism of stealth wealth transfer. If it is unintentional or intentional, it doesn’t change this.

  8. Gravatar of Martin Martin
    10. September 2012 at 06:44

    Scott,

    Would it not be more sensible to look at levels?

    If inequality tells you something about the fragility of the system, then it seems to me to that levels are more informative than changes.

    Not that it changes much, levels do not seem to be terribly important.

    http://stats.oecd.org/Index.aspx?DataSetCode=INEQUALITY

    I will enjoy copy & pasting the link to this post every time I hear that claim repeated now though :P

  9. Gravatar of jor jor
    10. September 2012 at 06:46

    It can’t be good for any economic system when a small % of the population experiences the benefits of a growing economy.

    Unless you are a “trickle down” guy.

  10. Gravatar of William William
    10. September 2012 at 06:57

    Major_Freedom,

    Nice comment. In general, it’s probably not nice to go around calling people Marxists, and to some it may seem like a dismissal, but it is important to recognize that certain ideas have deep roots and enduring appeal.

  11. Gravatar of AlanInAZ AlanInAZ
    10. September 2012 at 07:21

    The 10% cutoff is too high. The real issue is the growth of the very very wealthy, not a household with an income of $135,000 that currently sits at the 10% level.

  12. Gravatar of Jon Jon
    10. September 2012 at 07:28

    Andy,

    It’s comical you think high earners are big investors. There are some of these, but what we also find many of is extremely high levels of consumption. Go back and retread those articles about what’s middle class in NYC.

    Moreover, people in the suburbs tend to have one big so-called investment: there home, but since these same people consume all of the output of that capital, I challenge your claim that real rates are moved.

    Finally, income measures are usually flawed because they ignore pension earnings not yet distributed. (this also leads to wrong claims such as most assets are own by the super rich)

  13. Gravatar of Alan Alan
    10. September 2012 at 07:40

    My understanding of the argument is that rising inequality led to demands for government to expand credit and intervene in housing markets in a way that ultimately produced the housing bubble. Ryan Avent wrote on the thesis as argued by the book “Fault Lines” by Raghuram Rajan for the Free Exchange blog back in March:
    http://www.economist.com/blogs/freeexchange/2012/03/inequality-and-crisis
    http://www.economist.com/node/21550246

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    10. September 2012 at 07:47

    ‘It can’t be good for any economic system when a small % of the population experiences the benefits of a growing economy.’

    Which clearly was not the case in the USA. The benefits of a growing economy are CONSUMPTION. Which increased for the lower rungs of the economic ladder spectacularly during the quarter century between the two serious recessions of the early 80s and the most recent one.

  15. Gravatar of AlanInAZ AlanInAZ
    10. September 2012 at 07:53

    I assume the values refer to incomes before taxes and transfers. I think it is more revealing to look at incomes after taxes and transfers. This was discussed relating to poverty rates in Jared Bernstein’s blog a couple of days ago.

    http://jaredbernsteinblog.com/international-poverty-comparisons-what-do-they-tell-us-about-causes/

  16. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 07:54

    Which clearly was not the case in the USA. The benefits of a growing economy are CONSUMPTION. Which increased for the lower rungs of the economic ladder spectacularly during the quarter century between the two serious recessions of the early 80s and the most recent one.

    According to what measurement? PCEPI? Don’t make me laugh.

  17. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 07:59

    Who says Income inequity in itself casued the crises ?

    I don’t think any one is saying that unequal income distribution axiomatically causes financial problems from a strictly econ point of view are they ?
    Maybe there are some folks saying that it does, but I think overwhelmingly pundits and economist are saying that it causes political problems that impact economics.

    People are making a case that income inequity gives the elite the power over our political system that allowed them to gut regulations that could have prevented the mess.

    People are making a case that income inequity gives the elite the power over our political system that allowed them to create a de facto two tiered justice system… avoiding any punishment for their criminal acts.

    People are making a case that income inequity gives the elite the power over our political system that allowed them to be bailed out of the crises they created…while punishing the common man for imagined sins.

    In short…People are making a case that income inequity gives the elite the power over our political system that allows them to buy our government and rig the economic game.

    The elite have a created a moral hazard palooza for themselves.

    —————-
    Bill’s axioms…

    Given equal levels of income/wealth inequity (Wealth inequity is actually more important )….

    The more libertarian the system and the culture…the more the elite will rig the game.

    The more a culture is committed to the social contract…the less the elite can rig the game.

  18. Gravatar of Austin Austin
    10. September 2012 at 08:07

    Andy,

    So far as I understand it, your argument runs:
    - Wealthy people consume a smaller % of their income.
    - Increased supply of loanable funds drives i down.

    I’m with you so far. Then:

    <>

    I translate this to say either, (A) “we drove the interest rate down so low income people could afford loans.” Or it could also mean, (B) “we systematically disregarded poor folks’ bad credit to increase the demand for loanable funds to keep i low.”

    In either case, the problem is not any diminishing marginal propensity to consume.

    If (A), then there was not a problem from more savings from rich people, but from an additionally lower interest rate: savers gonna save, but when you inject funds the way the Fed does, the lowered interest rate drives out private savings and drives a wedge between private loanable funds and the demand for them.

    If (B), then even if there were a constant marginal propensity to consume, you’d still have poisoned the pool of demand for loanable funds, leading to toxic assets.

    If (A), the problem is the Fed; if (B), the problem is the folks who set policy on loans. Neither of these are related to how rich folks spend their money.

    The Wealth Inequality => Business Cycle argument depends upon the Marginal Propensity to Consume, as you say. But DMPtC does not explain the bubble in asset prices. It doesn’t explain how cash balances were drawn down while demand for loanable funds increased. It’s a red herring. Irrelevant.

  19. Gravatar of Austin Austin
    10. September 2012 at 08:09

    Gah. Formatting.

    The bit between the carrots above should read:

    “In the last business cycle we tried to get around this problem … by assuring that relatively low income people had access to credit so that they could fully realize their high propensities to consume.”

  20. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 08:13

    Bill Ellis:

    The more libertarian the system and the culture…the more the elite will rig the game.

    The more libertarian the system, the LESS able the elite can “rig” the system, because of the simple reason that the system is more open to competition, which punishes rigging.

    The LESS libertarian the system, the more able the elite can rig the system, because the power is more concentrated, and with more centralized power, the less competition there is, and with less competition, rigging goes less unpunished and is exacerbated.

    The more a culture is committed to the social contract…the less the elite can rig the game.

    Whose social contract? My social contract is different from yours. Social contracts are in actuality ex post justifications of already established power that is derived from movements away from libertarianism.

    Your axioms couldn’t be more wrong. You might as well have introduced the axioms up is down and black is white.

  21. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 08:14

    Your faith in the benevolence of state power is quaint.

  22. Gravatar of Tim Worstall Tim Worstall
    10. September 2012 at 08:20

    The theory is as follows:

    Human beings like keeping up with the Jones’. If income inequality rises then the poor will borrow more to keep up. Borrowing more leads to instability and eventually crisis.

    I don’t find the story terribly convincing myself, but that’s what the claimed process is.

  23. Gravatar of Gabe Gabe
    10. September 2012 at 08:25

    MORE QE coming: Academics tells us that more debt is the fix to record debt.

    The bad news: everything being tried now will fail, as it did before, because nothing has changed, except for the scale, meaning the blow up will be all that more spectacular. The good news: at least the Keynesians (or is it simply Socialists/central planners now?) out there will not be able to say we should have just added one more [ ]illion in debt/liquidity and all would have worked, just as our textbooks predicted. Because by the time it’s over, that too will have happened.

  24. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 08:28

    Tim Warstall:

    The theory is as follows:

    If income inequality rises then the poor will borrow more to keep up. Borrowing more leads to instability and eventually crisis.

    A theory. Minksy’s theory. It doesn’t explain where the lending funds come from.

  25. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 08:30

    The good news: at least the Keynesians (or is it simply Socialists/central planners now?) out there will not be able to say we should have just added one more [ ]illion in debt/liquidity and all would have worked, just as our textbooks predicted. Because by the time it’s over, that too will have happened.

    Silly Gabe, don’t you know the trick yet? They’ll say the terrible conditions are proof that things were worse than they thought, and that if only there was more inflation and more debt, problems would have been averted.

  26. Gravatar of jor jor
    10. September 2012 at 08:37

    “Which clearly was not the case in the USA. The benefits of a growing economy are CONSUMPTION. Which increased for the lower rungs of the economic ladder spectacularly during the quarter century between the two serious recessions of the early 80s and the most recent one.”

    Even if most consumption was financed by pulling it from the future via unsustainable debt growth, causing the balance sheets of middle and lower class to have little no equity? It has been well documented a lot of middle to lower class consumption was financed by unsustainable debt growth , as opposed to income growth.

  27. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 08:43

    MF…

    I know you don’t believe it but..I understand your views. I get the libertarian/miniarchy/anarchy point of view.

    I just think proponents of those views fail to accurately assess the reality of human nature. You guys believe people are waaaay better than I do.

    We could go in circles all day over this basic disagreement…
    We did.

    ———

    Scott, I want to apologize for going on and on when you were on vacation. I did not realize that it would flood your email. And just ‘cuz you were on vacation was a poor excuse for polluting your threads any way.

    Sorry.

  28. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 08:48

    Gabe:

    Nice lifting of text from

    http://www.zerohedge.com/news/two-days-ahead-more-qe-jpm-finds-world-already-drowning-liquidity

    You pasted your comments as if they were your own. Not cool.

  29. Gravatar of jor jor
    10. September 2012 at 08:52

    For those of you with an NBER subscription, this paper addresses the consumption/income inequality question.

    http://www.nber.org/papers/w17982

    It concludes with this:

    “All of our different methods yield similar results. We find that consumption inequality within the U.S. between 1980 and 2010 has increased by nearly the same amount as income inequality.”

  30. Gravatar of Jonathan Jonathan
    10. September 2012 at 09:02

    All those four countries where the growth of the bottom 10% seems harmful, are countries which do not have currencies of their own. That’s why the benefits of equality cannot compensate for the issue of being less competetive when poor people earn more money.

    For countries that were not stupid enough to adopt the euro, more equality might really result in stronger growth. Devaluation of the currency will restore competitvness.

  31. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 09:04

    Bill Ellis:

    I think people who think like you do “fail to accurately assess the reality of human nature.”

    In your dealing with people using your negative view of human nature, you completely ignore the fact that your proposed solution in fact double downs on viewing people as more positive than you ostensibly claim to be viewing them to be. For consider your “solution”:

    1. More centralized power. Yet what do humans do with more centralized power? They tend to abuse it. They tend to “rig the system” more because they can get away with it seeing as how they hold more of the cards. They are judge and prosecutor of their own interests.

    2. More “social contract.” What is “social contract” but a justification for the naked violence in statism? The quest to reinforce and strengthen “social contract” is a quest to empower the same centralized institution, which from 1. is something that tends to be abused, due to “human nature.”

    —————–

    What people like you need to learn is that it is precisely you doubters/haters of individual liberty who are creating the very problems you believe more centralized power can solve! More liberty makes it harder to “rig the system”, not easier. The more power is decentralized, the smaller the extent to which “game riggers” can negatively affect others.

    Imagine a purely anarchist society. Now imagine a truly evil person with no regard for human life trying to cause as much havoc as he could. His power is limited to the means at his disposal, correct? Well, there isn’t any centralized power center that he could take control of and cause harm to the entire society. So whatever damage he does, would be maximally localized to the sphere of destruction that his limited means can enable him to do. Now contrast that with a statist society, that is, a society with a centralized institution of systematic coercion/violence. If this evil sociopath somehow gains control over this power center, then he would have far more resources with which to implement his evil plans. No longer is he limited to his own property. Now he can use the property of others (through taxation, eminent domain, etc), and launch global wars using massive killing machines and weapons designed to kill millions.

    If you just stopped and thought about things a little more, you’d find that it is you who is mistaken about human nature and of social power. You simply have no clue about what it is you are advocating. You claim that humans are worse than what libertarians believe them to be, and yet it is typically libertarians who will be the ones to tell you that humans cannot be trusted with centralized power centers such as states. The temptation to abuse the power is just too overwhelming. Plus there is the fact that once states are established, they tend to attract evil people who know they can engage in more widespread evil with the assistance of a multi-trillion dollar revenue base collected by force, not consent.

    Bill, the more you find humans to be untrustworthy, evil, morally unscrupulous, and so on, the MORE you should find yourself advocating for power decentralization in the direction of libertarianism, which hits its maximum with anarchy. Not saying you have to be an anarchist, but you have to at least be going in the direction of more liberty, not less liberty.

    You should think of “More liberty” as referring to individuals being able to protect themselves and outcompete evil people. Don’t think of “More liberty” as meaning more freedom for evil people only.

  32. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 09:15

    Saturos,

    “…why on earth would you use it to do things that will cause a financial crisis?”

    That would be irrational wouldn’t it ? Hubris is not rational.

  33. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 09:22

    That would be irrational wouldn’t it ? Hubris is not rational.

    Well that pretty much sums up monetarism.

  34. Gravatar of jor jor
    10. September 2012 at 09:42

    “What people like you need to learn is that it is precisely you doubters/haters of individual liberty who are creating the very problems you believe more centralized power can solve! More liberty makes it harder to “rig the system”, not easier. The more power is decentralized, the smaller the extent to which “game riggers” can negatively affect others.”

    Couldn’t that just shift the system “rigging” away from the state and into the individual? The best “riggers’ can maintain their schemes for years. That’s what they are good at. Some individuals actually savor their ability to get over on people w/o them knowing it. The best fraud occurs when the sucker doesn’t even know he is being fleeced and can go on for years. Are you arguing centralization is what caused Madoff, Sanford, Enron…etc?

    “Bill, the more you find humans to be untrustworthy, evil, morally unscrupulous, and so on, the MORE you should find yourself advocating for power decentralization in the direction of libertarianism, which hits its maximum with anarchy. You should think of “More liberty” as referring to individuals being able to protect themselves and outcompete evil people”

    This seems it is a hair away from vigilante activity than anything else. Each individual’s definition of liberty, justice, fairness, good & bad, evil …etc will slightly different and often in conflict with each other. Arguably, it could lead to more chaos.

  35. Gravatar of Felipe Felipe
    10. September 2012 at 09:54

    Major_Freedom:

    > The more libertarian the system, the LESS able the elite
    > can “rig” the system, because of the simple reason that the
    > system is more open to competition, which punishes rigging.

    Do monopolies and oligopolies exist in your mental model of the world?

    > the more you find humans to be untrustworthy, evil, morally
    > unscrupulous, and so on, the MORE you should find yourself
    > advocating for power decentralization in the direction of
    > libertarianism, which hits its maximum with anarchy. Not
    > saying you have to be an anarchist, but you have to at
    > least be going in the direction of more liberty, not less
    > liberty.

    False. Once you acknowledge that going all the way into anarchism is (may) not optimal, then the direction is towards the optimal point, *not* towards unqualified more liberty. Which means we may well be in a situation where the optimal is headed towards less liberty.

  36. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2012 at 10:11

    Inequality is meaningless.

    The important question is how fast the lifestyle improvements enjoyed by the rich / early adopters trickle down to the poorest.

    Once everyone has a smart phone and meaningful bandwidth we will be able to completely blame people for not taking advantage of the tools at their disposal.

    Every year with each iteration, a new digital paradigm with NO SCARCITY is pressing itself into 9BILLION people’s lives.

    The very idea of inequality becomes laughable…. when everyone has the exact same 90% of what matter most in life.

    The real issue is STATUS and POWER.

    And saying “inequality” won’t ever get the left, what they want to get get… more status and power for themselves.

  37. Gravatar of John John
    10. September 2012 at 10:18

    Andy Harless,

    That’s an old argument you’re making. The bottom line is that the task of entrepreneurs and businessmen is to forecast consumer demand and adapt their production plans. If consumption by the upper class slowly changes the demand, the onus is on your theory to explain why business is incapable of adapting to this.

    Furthermore, your theory does nothing at all to explain the sudden clusters of business error that mark the start of a bust.

  38. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 10:21

    jor:

    Couldn’t that just shift the system “rigging” away from the state and into the individual?

    Well, rigging is always done by individuals, so the question is not whether rigging takes place in the state or with individuals, but rather whether the rigging is done by individuals with centralized power or done by individuals with decentralized power.

    The best “riggers’ can maintain their schemes for years.

    Sure, but at some point, humans learn. Without a state, it may take many, many, many years, but when humans do eventually learn, they are not prevented from protecting themselves from the rigging, precisely because the riggers do not have state power.

    Think about it. How hard is it to prevent riggers in Washington from getting taxpayer money, versus how hard it is for riggers in private business getting voluntary sales revenues? When riggers are without state power, they cannot use force against the entire population to maintain their rigging.

    Are you arguing centralization is what caused Madoff, Sanford, Enron…etc?

    No. Rigging is caused by individuals. But I will say that the SEC intentionally turned a blind eye to Madoff for nearly ten years, after being repeatedly warned by private investigators. The SEC had final authority, and precisely because the SEC is rigged, nobody had any authority to go after Madoff. Plus, Madoff was former chairman of Nasdaq, so he probably had a lot of friends in the state who turned a blind eye until they couldn’t use plausible deniability any more.

    Imagine if Madoff was operating in a stateless society. Do you think that ALL the decentralized power centers would have turned a blind eye to his scheme?

    Remember, if the state is corrupt, that’s it, riggers act with impunity.

    “Bill, the more you find humans to be untrustworthy, evil, morally unscrupulous, and so on, the MORE you should find yourself advocating for power decentralization in the direction of libertarianism, which hits its maximum with anarchy. You should think of “More liberty” as referring to individuals being able to protect themselves and outcompete evil people”

    This seems it is a hair away from vigilante activity than anything else. Each individual’s definition of liberty, justice, fairness, good & bad, evil …etc will slightly different and often in conflict with each other. Arguably, it could lead to more chaos.

    There is a huge difference between being legally “allowed” to do X (because there is no single enforcer of all laws) and having the power to be able to do X (because the law enforcers that do exist, prevent you).

    The question is under which alternative would the quality of laws tend to increase and costs tend to decrease over time. As every economist worth his salt will tell you, the services coming from monopolies tend to decrease in quality and the costs tend to increase over time.

    I am not offering you a perfect society. I am saying that when you are the judge and prosecutor of your own actions, which is what statism is, the incentive is to act coercively against others and then rule in favor of yourself. What can the people do in that situation? Suffer 4 years of violence and hope that the next elected power hungry politician “promises” to not abuse the power of the state? If you say “the people” can replace bad politicians with good ones, in a system where the politician’s revenues are guaranteed through coercive taxation, then surely you would have to accept that “the people” can replace bad private law enforcers with good law enforcers, in a system where the private law enforcer’s revenues can be taken away by customer choice?

  39. Gravatar of Bonnie Bonnie
    10. September 2012 at 10:35

    Here’s at least one thing I agree with MF on; the most dramatic instances of severe oppression of humankind occurred in centralized, authoritarian states. The most deadly of these were (and still is in North Korea) based on some supposed desire to eliminate differences in income classes and render everyone economically equal. But it never works out that way. The greedy bureaucrats are fat and happy while it becomes common place to find a dead, starved human in the street like road kill.

    Its surprising to me that after a handful of decades of ever encroaching government, people haven’t gotten the clue that no matter how much we try to overcome some of the more annoying things about living in a free society, they are not things government can solve, but rather government solutions end up hurting much worse than the original problem – especially when there is an entire ecosystem of corruption built around its schemes, like what happened with the GSEs.

  40. Gravatar of jor jor
    10. September 2012 at 10:42

    Coercive taxation is a funny line.

    Are we supposed to assume people will just pay what they owe and assume that will be enough for all the services and necessities a privately decentralized environement cannot provide for the lesser citizens?

    We just rely on the goodwill of people doing what they are supposed to do. That is idealism at is purest.

    Institutions, a large number being centrally organized, play a large role in further economic development, they do not hinder it. See Acemoglu and Robinson.

  41. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 10:43

    William:

    In general, it’s probably not nice to go around calling people Marxists, and to some it may seem like a dismissal, but it is important to recognize that certain ideas have deep roots and enduring appeal.

    I agree. I tried to go out of my way and refrain from calling people Marxists (although they do exist), and instead talk about the intellectual roots. It’s important like you said. When people know the roots of particular ideas, it puts those ideas in a whole new light, and makes it more difficult for people to introduce their biases and prejudices as the supporting premises. It happens far too often.

    One of the more notable examples of this is the minimum wage. Hardly any advocate of it knows the intellectual roots of it. It was founded by politically connected unionized workers who wanted to prevent non-unionized workers from competing for labor income in the market. (It is similar to how politically connected corporate executives want to prevent competition for their products by seeking licensing requirements, regulatory approval, and other tactics that shut out competition, thus raising the revenues of the lobbyists in question). Yet most advocates of minimum wage today don’t know this, so they introduce their own biases and prejudices as premises and believe that the minimum wage was introduced in order to empower the workers against greedy corporate executives.

    The list goes on and on.

    This is why all economists should read history in a teleological light. It should be a part of academic curricula, but unfortunately it is minimized. They should find out the intellectual origins of contemporary economic ideas, and find out, through writings and actions, what people were trying to accomplish, as well as which ideas influenced their ideas. Trace out the path of ideas like astrophysicists trace out cosmological events. Connect them over time. Too many economists don’t do this. Almost all monetarists (of all stripes) don’t do this when it comes to the Fed. Most follow Friedman and introduce their own bias and believe the reason the Fed was formed was due to a disinterested, non-political drive to improve the stability and functioning of the financial system and thus of a capitalist economy. They have no clue that the Fed was formed by dubious, if not nefarious, intentions by politically connected bankers and their “men in Washington”, who wanted to cease going bankrupt and being outcompeted by non-politically connected bankers who acted more conservatively in their lending.

    So today we have unwitting stooges wasting their years away trying to develop an improved “rule” for inflation. They have no idea that they are working for free for the very nefarious people who feign interest and attention in these monetarists for the sole purpose of maintaining their hegemonic rule over the monetary system.

    Some folks here find my comments disrespectful and undeservedly hostile, but I simply cannot admire or respect people with such low integrity and self-worth that they actually feel joy and elation when morally unscrupulous people pay attention to them and consider adopting their new money printing ideas.

  42. Gravatar of jor jor
    10. September 2012 at 10:51

    Respectfully, you need to get off your high horse, MF.

    You seem to have several biases you let into your analysis of the real world, yourself, so let’s relax with accusing others of having bias, shall we.

  43. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 10:52

    jor:

    Coercive taxation is a funny line.

    I know. It’s really funny what happens to people when they peacefully resist paying them. They asked to be kidnapped, thrown into a cage, and almost certainly sexually molested. It’s in the “social contract” they signed when they fell out of their mother’s womb.

    Are we supposed to assume people will just pay what they owe and assume that will be enough for all the services and necessities a privately decentralized environement cannot provide for the lesser citizens?

    No, we don’t have to assume that at all. Decentralized power does not mean lack of contract enforcement. It means contract enforcers act in competition, not monopoly.

    We just rely on the goodwill of people doing what they are supposed to do. That is idealism at is purest.

    That is bordering on straw man at its finest.

    Institutions, a large number being centrally organized, play a large role in further economic development, they do not hinder it. See Acemoglu and Robinson.

    “Economic development” founded upon initiations of violence is actually economic retrogression. Just because nominally various statistics may rise over time, doesn’t mean an absence of the centralized institution would make those statistics decrease.

    See PT Leeson’s “Better Off Stateless”, to learn how the collapse of the Somali government was followed by an increased rate of improvement in economic indicators.

    Acemoglu and Robinson don’t argue that centralized institutions necessarily improve economic growth. In fact, they argue the opposite. They give a fairly decent account in their discussion of the two Koreas.

    Methinks you’re introducing your own biases and prejudices.

  44. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 10:53

    jor:

    Respectfully, you need to get off your high horse, MF.

    I am just being myself, jor. If you view me as being on some sort of “high horse”, then that’s your problem. It has nothing to do with me.

    What, did you want to be on the high horse or something? I wasn’t even thinking of that.

    You seem to have several biases you let into your analysis of the real world, yourself, so let’s relax with accusing others of having bias, shall we.

    Biases such as what exactly? Be specific.

  45. Gravatar of jor jor
    10. September 2012 at 11:04

    Do you mean besides your liberterian view points that are present in every post and pretty much every assumption you make?

  46. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 11:16

    Do you mean besides your liberterian view points that are present in every post and pretty much every assumption you make?

    Coo, more bias and prejudice.

  47. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    10. September 2012 at 11:20

    ‘We find that consumption inequality within the U.S. between 1980 and 2010 has increased by nearly the same amount as income inequality.’

    Which isn’t an answer to my claim, which was;

    ‘The benefits of a growing economy are CONSUMPTION. Which increased for the lower rungs of the economic ladder spectacularly during the quarter century between the two serious recessions of the early 80s and the most recent one.’

    Which was a response to this claim;

    ‘It can’t be good for any economic system when a small % of the population experiences the benefits of a growing economy.’

    One good metric would be the increase in square footage of the median new house;

    http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf

    which increased by nearly 50% from 1982 to 2007.

  48. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 11:31

    Patrick R. Sullivan:

    One good metric would be the increase in square footage of the median new house

    which increased by nearly 50% from 1982 to 2007.

    Including a bubble as a credible measure for economic well-being? Well, it’s more optimistic that’s for sure.

  49. Gravatar of jor jor
    10. September 2012 at 11:36

    Patrick, we all look at what we want to.

    Keep up the good fight.

  50. Gravatar of Joseph Ward Joseph Ward
    10. September 2012 at 11:45

    Very interesting perspective within the maelstrom of inequality bleg! Thanks for the link!

  51. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 12:06

    To paraphrase Morgan…

    “It’s the toys stupid ! “

  52. Gravatar of Bababooey Bababooey
    10. September 2012 at 12:21

    On the topic of wealthy cultures (and a bit on how cultural norms reduce the friction of inequality) I found this interview pretty great. The Professor of Psychology and Economics calls on some refreshing evidence/case studies in illustrating how large, powerful free market societies have successfully transmitted (in the natural selection sense) their culture over many generations. The bits on markets and the Ultimatum game come late, but are worth the investment.

  53. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 12:36

    People want to believe that if they are willing to work full time, and give it their all, that their contribution no matter how small will be rewarded proportionality.

    They want their portion of the growth in the economy.

    The average guy may not be aware of the stats, but they know when they are spending their lives spinning their wheels, while the elite get an ever bigger piece of the pie.

    You can tell him that his life is better because he has better toys all day long, but better toys does not get him to his existential goal of making his family secure…It does exercise the specter a his child getting sick and him not being able to afford care….It does not relive him of the fear that the next round of layoffs could leave him unable to feed his family….It does not help him reach his goal of a respectable retirement where he is not a burden on his children.

    You can tell him that he is materially waaaaay better than he was, but you can not tell him that he and the people he is responsible for are more secure than they used to be.

    So when it comes to an ever increasing equity gap, the common man can’t help be think he and his family would be better off if his slice grew along with the pie…But the toys are nice.

  54. Gravatar of Farid Elwailly Farid Elwailly
    10. September 2012 at 12:37

    If the inequality numbers are a factor in the propensity of a central bank to abhor inflation then the numbers for Portugal, Greece, Spain, and Ireland don’t mean anything as it is the Germany numbers that drive the crazy behavior of the ECB.

    As I see it inequality -> crazy central bank behavior -> financial crisis.

  55. Gravatar of Doug M Doug M
    10. September 2012 at 12:47

    I am surprised that Russia and China are not on the list.

    I would expect income inequality to increase in economies that are undergoing a radical trasformation, and in economies that are highly innovative. USA in industrial revolution and tech revolution.

  56. Gravatar of Gabe Gabe
    10. September 2012 at 13:00

    I guess we should just call North Koreans and Maoist progressives and Nationalist Socialists were merely believers in making government more efficient.

  57. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 13:05

    Bababooey,

    I enjoyed that article. Thanks.

  58. Gravatar of Andy Harless Andy Harless
    10. September 2012 at 13:43

    Sarturos,

    Even if global capital flows are the driving force (as I acknowledge at the end of my comment to be the case for the US), inequality is still an issue, if we can presume that the national demand curve for savings slopes downward. The more inequality, the lower the equilibrium inerest rate will be, for any given capital inflow.

    Jon,

    Of course some rich people consume a larger fraction of their income than some poor people, because people are diverse. But every economist knows that the tendency is to the contrary. Of course people save in part by owning houses, but when there is an excess of savings, the marginal product of housing goes down as we build more houses, just as the marginal product of other forms of capital goes down. Income measures may be flawed, but I think the increase in inequality would be present even with better measures.

    Austin and John,

    My point was not that inequality precipitated the crash, but that inequality created the floor for it to crash on. There are cycles of optimism and pessimism in any case, and people behave irrationally, but normally this isn’t a macroeconomic problem because the interest rate adjusts upward during times of excess optimism and downward during times of excess pessimism. So you get ups and downs, but you don’t get big crises. The zero nominal interest rate bound, however, presents a problem, at least if you have a central bank that targets the inflation rate (and, I would argue, though Scott would disagree, more generally if the equilibrium interest rate during pessimistic times is so low that even a better monetary regime cannot hit it). More inequality is associated, in general, with a lower equilibrium interest rate: not a problem in optimistic times, but when the pendulum swings to pessimism this limits policymakers’ options in response and creates a situation that is perceived as a crisis.

  59. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 13:49

    Bill Ellis:

    People want to believe that if they are willing to work full time, and give it their all, that their contribution no matter how small will be rewarded proportionality.

    Statism killed that once valid belief.

    You can tell him that he is materially waaaaay better than he was, but you can not tell him that he and the people he is responsible for are more secure than they used to be.

    Why didn’t “he” save everything that he makes above what “he” used to make when he was waaaaay worse off? In other words, why didn’t people live like people did before in terms of consumption, and save the difference, thus securing a nest egg?

    Oh that’s right, Keynesianism infiltrated the US economy, and for generations savings was viciously attacked, and spendthrift profligacy was worshiped. What’s the savings rate now anyway? 5%? 8%? Pathetic.

    And Monetarists share the blame as well for this, to the extent that they champion inflation via treasury purchases, which generates more government spending, more real crowding out of resources…

  60. Gravatar of Matt Waters Matt Waters
    10. September 2012 at 14:06

    Andy said what I was going to say, except much more eloquently. That’s why he’s a respected economist and I’m just a hack commenter.

    Global capital flows, although not inconsequential, are somewhat overemphasized. The basic outline is the same for both the US and EU. The rich generally have very little propensity to spend while the poor had very high propensity to spend. This is especially true if you talk about rich vs. poor in wealth terms, not income terms. A lower propensity to spend, in and of itself, makes people more wealthy over time.

    This framework isn’t perfect. Propensity to save does not rely only on wealth. Germany was never all that wealthy, but it nevertheless had constant capital outflows. Lower tax rates and greater regulatory capture may explain higher inequality in the US. The Euro, meanwhile, may have been a completely separate cause for capital flows in the EU after 2000.

    As the interest rate needed for constant demand-side inflation (i.e. NGDP) shifts downward with higher propensity to save, the total volume of investment also goes upward. If markets were perfect, this wouldn’t matter. Under perfect markets, volume goes up but all the investments still make financial sense. But markets aren’t perfect and increased volume may mean increased susceptibility to principal-agent problems.

    If loan demand is unnaturally increased by people who could not pay back the loans, then a central bank will not have to decrease interest rates as much to target NGDP. As these bills come due, this part of loan demand goes away and the natural interest rate goes down further. Depending on future inflation, the natural nominal rate could go down a good bit below zero.

    The typical theory that 1% interest rates were somehow too low and caused the crash basically argues that we should have moved 2008 forward to 2001. Whether you like it or not, Greenspan didn’t have some magic control over propensity to save and higher interest rates in 2001 would have brought much higher unemployment due to lower NGDP. Similarly, 0% interest rates is no excuse for keeping interest rates too high.

    But if the 0% rate is a magical boundary, then increased income inequality can lead to declines in future spending. This is even more true if loans are naturally bounded to those who can pay them back without continual asset appreciation. The Global Savings Glut essentially brought this below-ZLB world upon us and central banks HAVE to overhaul their understanding of monetary policy to a world past the Great Moderation.

  61. Gravatar of orionorbit orionorbit
    10. September 2012 at 14:08

    Scott, i don’t think you can read anything in the data. The high divergence countries had a much worse banking crisis than the periphery, but then there’s Spain that had a much worse banking crisis than Holland but not as bad as the one in Sweden and speaking of the Swedish banking crisis, what about the Baltics? They had the worst banking crisis in all of europe, but I assume they are somewhere in the middle of the table since you don’t present them, so in the most extreme observation of your “dependent variable”, banking crisis, the independent variable lies somewhere in the middle? Hard to make anything out of this data set imo

    As i said the data don’t say much, so, as far as I understand it, inequality makes a banking crisis worse through balance sheet effects, i.e. the HHs that are more likely to borrow (and get the banks into trouble in case of crisis) have lower income and hence a higher likely hood to default; rich people in a banking crisis mostly lose equity, hence not a bank’s problem but their own.

    But do they CAUSE crises? I imagine in extreme cases they can, for instance if you cut the income of the bottom 30% of Sweden to 0 and pass it on to the top 10% you’d have the banks wiped out, but it’s really hard to find support for this hypothesis in less extreme cases. But as far the US is concerned, i think inequality did play a role (among other factors of course) in the collapse at the early stages, as poor households’ income stopped growing but their spending didn’t; if the bush tax cuts for instance were cut off the payroll tax instead fewer mortgage holders would have defaulted.

  62. Gravatar of jor jor
    10. September 2012 at 14:14

    To sum up most of MFs main points today.

    Statism = bad, Keynesianism = bad, centralization = bad, taxes = bad, QE = bad, monetarist = bad, decentralized individualism = good.

    No bias here folks, move along.

  63. Gravatar of jor jor
    10. September 2012 at 14:14

    To sum up most of MFs main points today.

    Statism = bad, Keynesianism = bad, centralization = bad, taxes = bad, QE = bad, monetarist = bad, decentralized individualism = good.

    No bias here folks, move along.

  64. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2012 at 14:43

    Unlimited personal knowledge is not a toy. The ability to find and do business with ANY other human is not a toy.

    The fact that many people today haven’t stepped into a future they will soon be in, is an argument for restructuring things so they are pushed into the system.

    This isn’t about a bigger network connected TV and a faster smarter mobile phone, this is about demanding people learn to USE these tools to survive in the modern world.

    If humans are in field digging with their hands to plant their food, and they have access to tractors, we don’t say, “well what can you expect, these are backwards people stuck in their dirty hand ways… we say “Yo IDIOT, use this god damn tractor!”

  65. Gravatar of Razer Razer
    10. September 2012 at 15:02

    Jor,

    You fail. To sum up MF’s core beliefs, it would be coercion/force is bad. The rest follows logically. And I also agree. But, then again, most if not all libertarians came upon this view through reasoning and not emotional appeal as did statists such as yourself.

  66. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2012 at 15:17

    BUT HOW will Jor get what he wants if he can’t use govt. to get it??

  67. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 15:35

    Jor,

    Q…How are Libertarians like vampires ?

    A…They can’t see themselves when they look in the mirror.

  68. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2012 at 15:48

    http://blogs.wsj.com/economics/2012/09/10/iphone-5-sales-could-offer-big-boost-to-gdp/

  69. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 15:59

    IQ corresponds with a bell curve, with half the people on the low side of 100 and half on the high side.

    Could it be that as our society gets more complex and technical, and productivity be comes more dependent on mastering technology…that making a good living is just simply out of reach of more and more people ?

    If so… we are faced with finding solutions based in morality not econ as to how or if we should make it so the less capable, but willing to work, are to be able to make a living that allows them to provide for a family.

    From an economic point of view productivity is what is rewarded, not hard work.

    We could choose to make hard work a product in itself I guess.

  70. Gravatar of W. Peden W. Peden
    10. September 2012 at 17:33

    Bill Ellis,

    “We could choose to make hard work a product in itself I guess.”

    Hard work in the pursuit of bad ends or waste is not a virtue. Hitler’s indolence was one of his best features; it would have been better if he was totally bone-idle.

    “If so… we are faced with finding solutions based in morality not econ as to how or if we should make it so the less capable, but willing to work, are to be able to make a living that allows them to provide for a family.”

    There are very, very few people who are unable to earn a basic subsistence living, and those who can’t are either so because of their own bad choices or are in tragic situations that any decent human being would voluntarily provide for them if necessary.

    I’m currently very interested in switches to “morality” and the general motivations behind the undermining of economics (or at least economics that tells people what they don’t want to hear). As Mises put it in “The Epistemological Problems of Economics” -

    “… one combats economics because one knows no other way to protect an untenable political program against unfavorable criticism that employs the findings of science.”

    - which is at least part of the story: economists tells people things they don’t want to hear, and therefore their authority is a threat so there is a market for undermining it. This is as true of libertarians as the left: there is a market for critiquing neoclassical economics. The existence of such incentives and products, of course, does not logically imply that none of the critiques is sound.

  71. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2012 at 17:34

    Bill,

    It is SO FRIGGIN NICE that you have finally come around to my GI plan to auction the unemployed:

    http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman

    1. We ARE going to see more people who do not have the ability to earn enough to cover their own nut.

    2. The obligation to help them is one decides on us by our politics, can no be placed on employers, no matter how genius they may be, to try and find ROI on local skills by overpaying in global market.

    3. And to be sure, we will make the commitment to those who WORK HARD, we will provide them as a society with a Guaranteed Income.

    4. BUT we recognize that the haves are the ones covering the nut for the have nots, and we want the haves to be satisfied that HARD WORK is required…. so they support this system.

    5. SO, we will auction that talent off weekly, in a way that rewards hard work, and punishes sloth with near instantaneous forgiveness to those who have become hard workers….

    6. Ensuring we save depressed areas, favor local entrepreneurs, outsource non-essential govt. services, and recover as much of the GI as possible via auction.

  72. Gravatar of Declan Declan
    10. September 2012 at 18:02

    Hey, what about Down Under? From Table 1 in the OECD report Israel, Australia, Luxembourg and the Czech Republic all belong in your ‘top 8′.

  73. Gravatar of Steve Steve
    10. September 2012 at 18:17

    Without income inequality, Richard Fisher would not have joined the Fed. Without Fisher on the Fed, monetary policy would have Tobeen easier in 2008. Therefore, income inequality caused the financial crisis.

    Tongue firmly in cheek.

    Unless you believe there is a generalizable pattern where income inequality put heartless rich people in charge of central banks…

  74. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2012 at 18:35

    If you are a man concerned about income inequality, you are under NO POSSIBLE DEFINITION, a “banker”

    My god people. MONEY is not a social justice tool. Get over it.

  75. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. September 2012 at 18:40

    Did rising inequality cause the financial crisis?

    To answer that question we first have to figure out when it started, and to figure that out we need some objective measure that logically precedes the crisis. May I suggests loan non-performance rates?

    By that measure we clearly see a rise in mortgage non-performance in the US in 2006. We see a much smaller rise in Spain in 2007. But all of the rest of these countries did not see any rise in non-performance rates until 2008 or 2009, *after* the recession had already started. So I suggest that the answer for almost all of these countries is no, since clearly the Global Great Recession caused their respective financial crises.

    What about the US and Spain? True, the US has the greatest degree of inequality as measured by the Gini coefficient of any of these countries. Spain on the other hand ranked fifth out of these 12 countries after taxes and transfers in 2008, after the US, UK, New Zealand and Portugal.

    I submit that those trying to make the argument that inequality cause the financial crisis really have to make the argument that inequality is responsible for the US financial crisis, and that the US crisis in turn caused the Global Great Recession, in order for their argument to have any real importance.

    But one problem they have is that the Global Great Recession seems to have started in Europe first. And with respect to the rise in household debt in the US, most empirical evidence seems to point in the direction of financial innovation and the loosening of credit standards.

    In short, there’s just not enough there there.

  76. Gravatar of Bill Ellis Bill Ellis
    10. September 2012 at 21:11

    Auctions do not create demand.

  77. Gravatar of Saturos Saturos
    10. September 2012 at 21:26

    Well, the good news is that NGDPLT would solve Andy’s problem, as it would keep nominal rates well above zero.

  78. Gravatar of Aias Aias
    10. September 2012 at 23:45

    I guess the top earners’ income fell in PIGS as the rich are leaving these countries and moving elsewhere…

  79. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2012 at 23:56

    Bill LOW PRICES create demand. Glad to help you understand auctions.

    That liquidation sales liquidate is an economic fact, you’ll need to learn to accept facts before you make policy.

    At $40 per week, we’ll see ALL 30M be given the chance every single week, to work hard, and prove they are worth more than $40.

    Look man, I’m glad you have epiphanies, I’m sorry they occur and you are suddenly repeating EXACTLY what I preach.

    But that’s what an epiphany is… when you grasp what I have long ago grasped.

    “If so… we are faced with finding solutions based in morality not econ as to how or if we should make it so the less capable, but willing to work, are to be able to make a living that allows them to provide for a family.

    From an economic point of view productivity is what is rewarded, not hard work.

    We could choose to make hard work a product in itself I guess.”

    No need to guess any more Bill you have found the right answer…

    That doesn’t mean productivity gains are not preferable, it just means that we FOCUS on HARD WORK is what we require from those who aren’t as productive.

    For their hard work in an auction environment, we subsidizer them.

    Along the way, we fix up ghettos, reward entrepreneurs in depressed areas, reduce cost / increase supply of public goods, increase social trust, decrease bad incentives.

    Bill, that the best policy comes from someone like me, is the most important lesson for someone like you.

  80. Gravatar of ssumner ssumner
    11. September 2012 at 05:07

    Everyone, Sorry I don’t have time to answer all the good comments. I did know about two theories:

    1. Keeping up with the Joneses.

    2. Political power leads to rent seeking.

    But hadn’t seen some of the others mentioned.

    Andy, Interesting comments:

    1. I had thought they were trying to explain a different “crisis,” the real estate bubble. You are trying to explain the zero bound problem. I agree that was the bigger issue, but I don’t recall people characterizing the crisis that way–they seemed to focus on the period from 2007 to Lehman.

    2. I think they were focused on within country inequality, not international inequality. So while your European story makes sense, I don’t think that’s what people were claiming (as the European countries have low levels of within country inequality. And of course as you say, the US/China relationship doesn’t fit.

    3. I’d guess we’d both agree that if your story is right, the root problem is a flawed monetary regime, not inequality.

    Jor, No, I favor income redistribution.

    Declan, I’ll correct with an update.

  81. Gravatar of Kabir Kabir
    11. September 2012 at 06:22

    My comments.

    1. A freer market (for competition) shows how much unequal a society is in terms of the monetary base etc. An unfree market can easily hide the actual inequality in the capabilities of its people.

    2. Inequality is only an approximate calculation as the actual wealth of the richest could be hidden in a Swiss Bank (esp. Europe) and also does not include assets etc. In poorer countries (Asian) much of the income of the poor is just not accounted for.

    3. A liberal blogger will never publish exactly this piece of information unless forced to and will somehow manage to jump in with some distant relatively insignificantly connected data to make the point that inequality creates the financial crisis.

    4. That Inequality creates Financial Crisis is equivalent to saying God or Mother Nature creates financial crisis because inequality is a fundamental trait of all societies. If indeed proven then everyone will finally understand why over millions of years of evolution the geniuses from India created the caste system. Yes 300 years from now the caste system could be back and considered a genius idea.

  82. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. September 2012 at 08:14

    ‘Patrick, we all look at what we want to.

    ‘Keep up the good fight.’

    And one has to be really, really blind not to notice the increased living standards of even ‘the poor’ during the Great Moderation.

    Btw, Morgan, notice that the size of the median new house kept getting bigger all through the 70s, 80s, and 90s. I.e. before the housing bubble started.

  83. Gravatar of GiT GiT
    11. September 2012 at 10:24

    “Of course, Marx was wrong about the absolute impoverishment of the working class, so Marxists fell back on relative impoverishment as the engine of the change.”

    No, it was relative, not absolute, impoverishment in Marx. Marxists didn’t “fall back” on anything. Rather, the absolute immiseration thesis is a straw man. But hey, go ahead and make things up if you’d like.

    “A rise in the price of labour, as a consequence of accumulation of capital, only means, in fact, that the length and weight of the golden chain the wage-worker has already forged for himself, allow of a relaxation of the tension of it.”

    “in proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse.”

    -Capital V1Ch25

    “A house may be large or small; as long as the neighboring houses are likewise small, it satisfies all social requirement for a residence. But let there arise next to the little house a palace, and the little house shrinks to a hut. The little house now makes it clear that its inmate has no social position at all to maintain,”

    “A noticeable increase in wages presupposes a rapid growth of productive capital. The rapid growth of productive capital brings about an equally rapid growth of wealth, luxury, social wants, social enjoyments. Thus although the enjoyments of the worker have risen, the social satisfaction that they give has fallen in comparison with the increased enjoyment of the capitalist which are inaccessible to the worker, in comparison with the state of development of society in general.”

    -Wages Labor and Capital Ch. 6

  84. Gravatar of Quotation of the Day… Quotation of the Day…
    11. September 2012 at 11:56

    [...] Completely coincidentally, I posted the above quotation from Lebergott before learning of this blog-post by Scott Sumner. Be Sociable, Share! TweetComments Add a Comment    Share var [...]

  85. Gravatar of The Original D The Original D
    11. September 2012 at 13:24

    Why are you using the delta? Isn’t multiple more applicable? In the US the top 10% grew at a multiple of 15 compared to the bottom 10. (Germany did even more)

    Here’s why I think multiple is more useful:

    If your (top-10) income of $100k grew by 1.5%, that means an extra $1500 in your pocket

    If your (bottom-10) income of $20k grew by 0.1%, that means $200 more in your pocket.

    That’s a $1300 difference that, if invested, will likely yield at least 1.5% annually, thus putting not just your earnings, but your savings in the top growth bracket.

    Of course, the poor could invest their $200 too, but they likely have less excess cash and, even if they *do* invest, the compounding effect is not nearly as impactful.

  86. Gravatar of Tswift Tswift
    11. September 2012 at 13:54

    As articulated by GiT, the statist perspective arises in response to a feeling of inadequecy. What justice is that, which is based primarily on feelings vice actions? Does the “feelings theory of left economics” illustrate the connection between the myriad of leftist issues? Is the reason that the politically knowledgeable are able to predict the positions of statistic and liberal because fundamentally they are aware of the conflicting justifications; emotion and logic?

    “Thus although the enjoyments of the worker have risen, the social satisfaction that they give has fallen in comparison with the increased enjoyment of the capitalist which are inaccessible to the worker”

    So all of humanity should rightly be held back from technological and economic advancement because that is what makes people happy? Perhaps Hayek had it right – Marx precipitates 1984. Is it really just, or a worthy cause, to subjugate all of humanities possibility for the sake of ignorant bliss – that state which occurs to make a North Korean citizen happy? This is the stuff of horror fantasies. Is this truly the epistemological root of statism in general?

    Allow me to paraphrase Rand “When one speaks of service, he speaks of servant and master, and he intends to be the master.”

  87. Gravatar of GiT GiT
    11. September 2012 at 23:36

    Actually, the perspective arrives from the intuition that it is possible to have a highly productive society without having highly unequal compensation, because one is suspicious of the conceit that certain tasks will only be performed adequately if compensation is sufficiently unequal.

    Accompanying the concern that the system of remuneration could be otherwise, is the thought that a less unequal system of remuneration produces a different pattern of production, one where what society produces will be more reflective of what society needs (food distribution, basic health care, quality education, leisure time) and less reflective of what the hyper rich want (yachts, mansions, luxury cars, private islands, man-servants, precious rocks and metals, high end illicit narcotics, access to elite patronage networks populated by their peers, plastic surgery, luxury travel, political influence and regulatory capture, &etc)

  88. Gravatar of Endrit Endrit
    12. September 2012 at 03:39

    The best possible explanation is the Acemoglu theory of institutions and growth.

    Rising levels on inequality ultimately produces a society with unequal ability to interact with political institutions. Those political institutions are then captured by a small elite of wealthy individuals who rig the system to benefit their group.

    Leading up to the Great Depression we now know for example that insider trading was rampant and there was nothing done to prevent it. In the current crisis all we could hear was how securitization was a magnificent process to spread risk, how the ratings were justified etc etc. That all proved false. Normally tighter regulation could have prevented those, yet all we would hear from the politicians was “deregulate deregulate”.

    Lastly, a comment to the blog’s most eminent troll, Major Freedom. You are committing one of the fallacies which you often claim left wingers do, that is to concentrate on the final result but not on how to get there.

    It is true that a “libertarian” society will have more competition. However there is nothing to suggest that deregulation and rising inequality leads to such society. In fact this was very clear to even early thinkers like Adam Smith. His “perfect” market is one that fulfills a lot of assumptions such as perfect information, no barriers to entry etc etc. How many markets in real life behave like that? How many markets left to rule themselves behave like that? In fact many of the regulations we put in place are done so exactly to fulfill those assumptions. Banning insider trading is one such clear example.

    Rising inequality might come due to perfectly reasonable market forces, but you clearly underrate the historical evidence that high inequality tends to be incredibly self-reinforcing. That is something that should not happen according to “libertarian” ideology.

    p.s one last advice, as bad as Austrian Theory is, you have to remember that it ultimately is a business cycle theory. It has never even tried to explain long-run growth. I don’t think you should either.

  89. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 04:47

    Endrit:

    Rising levels on inequality ultimately produces a society with unequal ability to interact with political institutions. Those political institutions are then captured by a small elite of wealthy individuals who rig the system to benefit their group.

    States are by nature “captured.” Their very creation is typically by a small elite of relatively wealthy land owners.

    The creation of the minarchist US state for example was carried out by a small elite of wealthy land owners. These elite land owners did not have the “support” of all other land owners, yet they arrogated themselves to be territorial monopolists in security and protection despite the lack of consent from those they began to collect protection money from.

    Acemoglu’s theory rests on the Marxian a priori axiom that economic progress develops into the division of labor, which then develops into capital concentration, which then develops into economic inequality, which then develops into political “alienation”. He then ex post justifies this material historicist conclusion by creating a theory that fails to grasp the inherent eliteness of monopoly states to begin with, and so he presents an Utopian vision of states to be initially “fair” and “non-captured” if not for the “contradictions” of capitalism.

    Acemoglu may or may not realize that his theory is derived from the notion that productive forces (technology and goods production) literally come out of nowhere, as a causa sui, and that it introduces a dialectical schism in mankind that divorces mankind from “itself.” The production relations then take on a power of their own and are alienated from man’s “collective” power.

    Thus we are to believe that an “elite” arises and who have relatively more control over capital, which then develops into a new justification of the state: to protect the wealthy elite and “hold back” the inevitable revolution which is to eliminate the alienation of mankind and put the productive forces back into submission.

    Of course if we realize that man’s ideas are actually at the root of the “superstructure” consisting of laws and private property rules, and thus of saving and capital accumulation, and thus of division of labor, and thus of inequality, then all this inequality is the root of all evil nonsense falls away.

    There are so many versions of this Marxian dialectical materialism that hardly anybody knows the origins of them anymore. Acemoglu’s followers probably don’t even realize that they are simply advancing another dialectical materialist version of history, and will hence balk at any suggestions that this is indeed what they are doing.

    It’s not surprising to me that a blog devoted to central planning of our monetary system would attract visitors who have found themselves (I am assuming unwittingly in your case) followers of at its core a communist ideology.

    ——————-

    The problem is not production. The problem is not the division of labor. The problem is not wealth inequality. The problem is the political institution itself. Without this institution, there can be no usage of systematic coercive power over all of society.

  90. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 05:20

    Endrit:

    Lastly, a comment to the blog’s most eminent troll, Major Freedom.

    Ah, see that? I have awoken the Marxist trolls.

    You are committing one of the fallacies which you often claim left wingers do, that is to concentrate on the final result but not on how to get there.

    I often claim that? Where? I do not hold there even exists such a thing as a “final result”. That is just your collectivist worldview trying to make heads and tails about my very different worldview.

    See, your worldview is eschatological. You are a student of “the science of the final days.” You have a Utopian vision of the future, which is rigid and unchanging. The end of history. When the division of labor and economic inequality are finally eradicated forever. At that final point, man will no longer be cut off from “itself.” Alienation will be over. Blah blah blah.

    My worldview on the other hand is one of continual action at the individual level. Each individual is an end in himself. He has goals and desires, and uses means to achieve them. “Alienation” and the division of labor increases in a progressing healthy society with growing standard of living. There is no “contradiction” between any monastic “material productive force” and production relations. It’s violence that is the problem. Reducing violence is the solution, not initiating more violence against those who are relatively more productive for others and hence accumulate capital faster than others.

    It is true that a “libertarian” society will have more competition. However there is nothing to suggest that deregulation and rising inequality leads to such society.

    As expected, you have things exactly backwards. Nobody is saying that rising inequality is a source of competition. Indeed, it is my conviction that statism creates a new, independent-from-relative-productivity source of inequality, that is unjustified. This is why I separate inequality into peacefully created and violently created. If I am more productive than you, and I earn more money than you, then there will arise an “inequality” between us. I argue this is justified, because I did not aggress against you. If however I robbed you, or used violent threats to prevent you from using your own property to economically compete with me, then there will also arise an “inequality” between us. I argue this is unjustified, because I did aggress against you.

    The libertarian understands regulation to be associated with the elite using state force to prevent competition. They don’t understand regulation to be in any way “necessary” to prevent an elite from using state power. This is where leftists have their heads up their arses. While they yammer for “more regulation”, what they are doing is asking the elite to create laws that disfavor the elite and favor the proletariat/poor/common man/etc. It’s lunacy. Even if labor unions and worker movements succeed in using state power to benefit themselves, guess what? The libertarian knows this will harm the non-labor movement workers who are regulated out of competing for income from a necessarily finite supply of wage payable funds.

    Do you think that I as a worker am happy when a union succeeds in raising their incomes using state power? On the contrary, this harms my interests because I am in competition with those workers for the scarce supply of wages available to be paid by those who pay wages. Contrary to the worker movement being a monolithic class struggle a la Marx, there is in fact no common interest between workers other than benefiting from a maximum supply of those who pay wages and a maximum amount of money available for wages, i.e. wealthy capitalists who hire wage earners.

    You see more wealthy capitalists as a threat against your desire for worker political power. I see the state as a threat against those like me who desire to produce and trade in peace, regardless of how wealthy some people get relative to others.

    In fact this was very clear to even early thinkers like Adam Smith. His “perfect” market is one that fulfills a lot of assumptions such as perfect information, no barriers to entry etc etc.

    Adam Smith in my view represents a degradation in the quality of economic science, as compared to the Physiocrats and the Salamanca School prior. So nice try with the fallacy of authority there. I won’t be intimidated by references to Smith.

    How many markets in real life behave like that? How many markets left to rule themselves behave like that?

    Blame people who think like you do. Don’t blame me. It’s people who think like you who are responsible for the mess that you naively blame on wealth production and the division of labor.

    In fact many of the regulations we put in place are done so exactly to fulfill those assumptions. Banning insider trading is one such clear example.

    Banning insider trading harms the proletariat who could have traded on inside information but is legally prevented. Of course the elite who trade on inside information are not prosecuted to anything close to the amount of times it occurs. Take Bernie Madoff for example. Private investigators warned and presented the SEC with evidence for almost 10 years, and the SEC did nothing. They are incompetent, or worse, corrupt.

    You have all these nice intentions for your Utopian “regulations”, but you have to learn the difference between intentions and results. State regulations may be intended to make things more “fair”. But I am flabbergasted that you can’t even connect this with your other claim that the elite “capture” the state, and so any regulations that do get passed, will tend to favor the elite. It’s like you have all these disparate beliefs about reality that you picked up from various sources, yet you don’t integrate those ideas. My guess is that there are so many internal contradictions in your worldview that you can’t do this, so you just continue to shout the empty “more regulation” and “inequality!” catch phrases and slogans.

    Rising inequality might come due to perfectly reasonable market forces, but you clearly underrate the historical evidence that high inequality tends to be incredibly self-reinforcing.

    See that? “Self-reinforcing”. That’s just the root core of Marxism making an appearance that productive forces in capitalism become “alienated” from the “collective man”‘s power. Thus you believe that wealth takes on a power of its own, and a revolution is required before these alienated forces are controlled again by “collective man.”

    That is something that should not happen according to “libertarian” ideology.

    Good, because it doesn’t happen in reality either. Just because you have wealth, it doesn’t mean you can keep it. One has to keep making good business decisions, i.e. decisions that benefit the customer, i.e. decisions that earn profits, if one is to keep their wealth. This is what occurs in a free market. In our quasi-fascist-communist society, i.e. in our society with growing state intervention, those who accumulate capital can use this state power to prevent competition, and so it appears to the narrow minded Marxist that wealth perpetuates itself and becomes “self-reinforcing.”

    If you only stopped and realized that huge multi-national conglomerates like Citigroup and Morgan Stanley, would have went bankrupt if it weren’t for state violence, which took from others and gave to these firms in the form of tax financed bailouts, AND in the form of multi-trillion dollar printing press sprees that of course took purchasing power away from others (regardless of what happened to prices temporally).

    The owner of this blog for example considers such printing press sprees as beneficial. Your hated state-elite connection is being supported by this blog owner, and you’re calling ME a “troll”?

    p.s one last advice, as bad as Austrian Theory is

    Which you haven’t at all shown…

    you have to remember that it ultimately is a business cycle theory.

    It is false.

    It has never even tried to explain long-run growth. I don’t think you should either.

    Yes, that’s it, intentionally be ignorant. That’s a good idea.

  91. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 05:27

    you have to remember that it ultimately is a business cycle theory.

    It is false.

    I meant your claim that it is only a business cycle theory is false. Austrian theory is the science of individual action. The business cycle theory is but one aspect of it. Other important aspects are theory of the entrepreneur, catallactic action (price system and economic calculation), limits of individual knowledge, among other theories. You’re just getting the third party (guaranteed to be misunderstood) crib sheet version of it. You read one blog post and you think you know everything about it. You’re like 99.99999999% of all other self-professed critics.

  92. Gravatar of Jason Jason
    12. September 2012 at 06:54

    It is absolute inequality, not the rate. Country A could go from a Gini of 0.1 to 0.3 and experience a major flowering of economic growth and progress while Country B could go from 0.4 to 0.5 and experience a decline into 3rd world country status.

    The problem in the US may be that we’re approaching Mexico in inequality while Sweden is approaching Britian which is fine.

    I don’t think it is established fact but the mechanism seems plausible. It’s a bit like the fuel-air mixture in your carburetor … Too high or too low is bad. Gini of 0.6 seems to characterize 3rd world countries or quasi-feudal states. A Gini of 0.2 seems to characterize communist states. In the middle is good.

    I looked at the OECD data over the past 50 or so years. If we consider human social-political endeavors to be a broadly construed algorithm for finding an optimum, it appears that a Gini in the upper 0.3′s might maximize economic growth. Most countries seem to be converging on that level (the US in the 60s, the UK recently) … Of course there will be fluctuations (like the US overshooting on the way down from 0.6 or so, hitting 0.3, and then coming back up to 0.45 … )

  93. Gravatar of Endrit Endrit
    12. September 2012 at 07:47

    @MF: You really really really need to read a bit more outside of the Von Mises Institute newsletters or whatever it is that you read.

    There is nothing about labour or capital divisions in Acemoglu’s theory. It’s all about incentives to work hard and innovate and how the right institutions can provide it and how the wrong ones undermine it. Since at its core is the idea of limiting and controlling political power (hardly marxist now is it) it’s a theory that also employs a lot of wording which you would like. I emphasize the last point because wording is really the only level which you seem to understand. You have hardly any knowledge of economics outside your little austrian world.

    @Jason: you got it! Too low GINI means probably a socialist type society, but too high a GINI and you risk becoming a banana republic run by a small elite like most of Latin America. Finding that balance isn’t always easy, but democratic institutions help.

  94. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 08:08

    Endrit:

    @MF: You really really really need to read a bit more outside of the Von Mises Institute newsletters or whatever it is that you read.

    You really really really really need to understand that I do read outside of the MI. Just because I think they are right about some important things, it doesn’t mean that’s all I read.

    There is nothing about labour or capital divisions in Acemoglu’s theory.

    I didn’t say there was. If you bothered to actually read what I said, then you would have noticed that I said their theory is a derivative of a theory that itself is based on a theory that utilizes the division of labor and capital concentration.

    It’s all about incentives to work hard and innovate and how the right institutions can provide it and how the wrong ones undermine it.

    Yeah except you added your own statements about economic inequality being a driver. I was responding to your statements. Now you’re saying you were only talking about Acemaglu’s political theory. How can you now say “it’s all about incentives” and “the right institutions”? Sounds like you’re retreating.

    “Institutions” as per Acemaglu is a derivative of the long standing debate between the “structural” side of historicism as opposed to the “humanist” side. It’s been going on for literally hundreds of years.

    Since at its core is the idea of limiting and controlling political power (hardly marxist now is it) it’s a theory that also employs a lot of wording which you would like.

    That’s what I said. You said the problem is inequality. Now you’re agreeing with me and saying the core idea is limiting political power.

    I emphasize the last point because wording is really the only level which you seem to understand.

    Yeah, that’s got to be it. It’s my fault you’re a flip flopper.

    You have hardly any knowledge of economics outside your little austrian world.

    You haven’t shown that to be the case at all. You’re just antagonizing to get a fix.

  95. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 08:12

    Jason:

    It is absolute inequality, not the rate. Country A could go from a Gini of 0.1 to 0.3 and experience a major flowering of economic growth and progress while Country B could go from 0.4 to 0.5 and experience a decline into 3rd world country status.

    Why aren’t you even considering the possibility of the causality going in the other direction? That the cause of impoverishment is the cause of “abnormal” inequality? Why do you assume that inequality is the cause of impoverishment? What is the exact mechanism by which you being wealthier than me, or me being wealthier than you, leads to both our impoverishment?

    Try to answer this without implicitly assuming state intervention into the market process.

  96. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 08:18

    The wealthiest in the US are flatlined / poorer since 1999:

    https://twitter.com/justinwolfers/status/245895919512473602/photo/1/large

  97. Gravatar of TheNumeraire TheNumeraire
    12. September 2012 at 09:10

    Rising income inequality is in fact largely due to the relationship between taxable income elasticity and changes in marginal tax rates. All the socioeconomic theories of why income inequality rose are far less convincing and less data-supported than the evidence supporting taxable income elasticity vis-a-vis MTR’s.

    Pikkety and Saez show a close correlation between changes in income shares of the top 1% and changes in marginal tax rates;

    Figure 4, panel A, pg. 51
    http://elsa.berkeley.edu/~saez/piketty-saez-stantchevaNBER11thirdelasticity.pdf

    Countries with large declines in top MTR’s saw large gains in top income shares in the measured period between 1975-79 and 2004-08. The list of countries with large gains in top 1% income shares is remarkable similar to those in the OECD with large increases in the gini index.

    Any difference between the Pikkety-Saez and OECD figures is probably due to the fact that P-S focus solely on the top 1%, while the OECD uses a broader 10%. For instance, in some countries where income of the top 10% did not grow nearly as fast as the income of the top 1% (i.e. Portugal) it is likely that MTR’s did not decline appreciably or may have risen for the top 10% as a whole, even while declining for the top 1%.

  98. Gravatar of Endrit Endrit
    12. September 2012 at 09:31

    You should read more carefully the material you claim to know.

    Acemoglu’s theory is about limiting political power. Clearly you didn’t know this yet you went on to talk about him as a form of neo-marxist on one of your typical tirades which make no sense at all to anyone other than you.

    Now, what emerges out of his theory is very clear. Wealthy individuals, even when that wealth is completely legitimate, can capture political institutions and therefore undermine the incentives that people have to work and innovate. The most typical argument they will use is that of “market forces” or in modern language “deregulation”.

    Quite clearly though, this new market while often deregulated is far away from the perfect market we learn in Econ 101. Because underneath it, some individuals have more information, have market power etc etc. Therefore the outcomes are not the perfectly efficient outcomes that Smith, Ricardo and others used to hope for.

    This is Acemoglu’s argument, and to me the best way to link the concepts of inequality and financial crisis using economic incentives. Hopefully, you’ll take a chill pill and actually bother to read next time. Clearly your history on this blog suggests otherwise.

  99. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 09:47

    Endrit:

    You should read more carefully the material you claim to know.

    That’s funny, really, since the arguments to which I responded were your statements.

    Acemoglu’s theory is about limiting political power.

    Your statement was about limiting inequality.

    Now, what emerges out of his theory is very clear. Wealthy individuals, even when that wealth is completely legitimate, can capture political institutions and therefore undermine the incentives that people have to work and innovate.

    Ah, see that? “What emerges out of this theory…” That’s what I responded to.

    Quite clearly though, this new market while often deregulated is far away from the perfect market we learn in Econ 101.

    While often deregulated? Clearly you don’t do any research with respect to regulations. If you did, then you would have known that not only is there exponentially more regulation now compared to the past, when inequality was actually lower than it is now, but you also would have known that regulation is what exacerbates inequality in the first place, since regulations add costs to business activity that large established firms can afford whereas it prices out lower market cap business activity at the margin.

    Because underneath it, some individuals have more information, have market power etc etc.

    To bad you don’t want poor people to trade on inside information and earn profits.

    Therefore the outcomes are not the perfectly efficient outcomes that Smith, Ricardo and others used to hope for.

    Thanks to the regulations you favor.

    This is Acemoglu’s argument, and to me the best way to link the concepts of inequality and financial crisis using economic incentives.

    No, that isn’t Acemaglu’s argument. His argument is the interplay between redistribution power and political power.

    Maybe you need to read his work more carefully?

  100. Gravatar of Endrit Endrit
    12. September 2012 at 10:10

    Well given that he himself uses the Gilded Age a one such period, clearly confirms my point.

    But what should I expect out of person who went on a tirade against my source without knowing the work I was quoting, and now tries to redefine his work.

  101. Gravatar of Major_Freedom Major_Freedom
    12. September 2012 at 10:54

    Endrit:

    Well given that he himself uses the Gilded Age a one such period, clearly confirms my point.

    The gilded age is consistent with many theories that compete with Acemaglu’s.

    But what should I expect out of person who went on a tirade against my source without knowing the work I was quoting, and now tries to redefine his work.

    I went on a “tirade” against your argument. You keep pretending to be only paraphrasing his work, which is weird, since you even said that what you said “emerges out of his theory.”

    You accuse me of “redefining” my work, when I was arguing against the inequality tirade you made the whole time.

  102. Gravatar of Endrit Endrit
    12. September 2012 at 12:50

    I apologize for your confusion but what I was simply stating were Acemoglu’s own views on the matter.

    http://whynationsfail.com/blog/2012/4/25/american-resilience.html

    Your 15 minutes of fame, I am afraid are up.

  103. Gravatar of Inegalités | Contrintuitif Inegalités | Contrintuitif
    31. October 2012 at 02:48

    [...] de la Grèce, du Portugal, de L’Espagne et de l’Irlande (comme avait pu le remarquer Scott Sumner) n’est pas particulièrement la bienvenue. Les données ayant été arrêtées en 2008, la [...]

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