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25.IncomeDistribution

25.IncomeDistribution - Outcomes Income Inequality Taxes...

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Outcomes: Income Inequality, Taxes, Spending, and Politics 1 The Growth of Inequality Figure 1: The Gini Index of Inequality The Gini coefficient measures income inequality. Its pattern shows a very long term trend toward lower inequality—disrupted by the Great Depression of the 1930s—followed by a steady increase in inequality since the early 1970s. The question for this lecture is why? What is going on in the American economy and in American politics that is producing greater inequality than was true of the recent past. Since there is every indication that this trend will continue, we are also looking at the causes of what may be a society of the very rich and very poor in the our future. 1
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1.1 A two-stage conception 1. Most (maybe 80%) of income equality and inequality is determined by the private economy. A free market economy tends to produce very unequal outcomes. 2. Then government gets into the act and redistributes the proceeds. So growing inequality needs to be understood as due to both. (1) For some reasons the market economy is more unequal than it used to be, and then (2) government is not doing as much to change the distribution from high to low as it once did. Figure 2: Income Shares Held by Five Quintiles from Lowest to Highest There is not a great deal to be learned by looking at income shares. But it sets up a context for looking at how income shares are changing, which does have a lot to say. The story of Figure 3 clearly is that the richest Americans—the top 20%—are gaining rapidly and everybody else is losing. What the figure tells us is that inequality is being created by the acceleration of incomes at the top, not by decline at the bottom. The bottom 80% are more or less stagnant, while the top 20% are seeing major income growth. 2
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Figure 3: Gains and Losses of Incomes Shares in Three Decades Within the top 20% there is the same disparity. The lower 19% are increas- ingly modestly while the top 1% are getting most of the growth. Why? 2 Trends in Income Inequality: Market Eco- nomics 2.1 Upper Income Groups are Thriving Recent Experience: National Economic Factors Half of the Story: Upper Income Groups are Thriving! Professionals: Bottleneck in many fields where there aren’t enough people with state of the art training to adapt to changing technology base—bids up salaries. MD’s, e.g. went from (on average) modest affluence in 40s and 50s to mil- lionaire status in 70s and 80s. Some lawyers, but not all, did very well too. 3
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Managers: Wraps are off salary restraints for managers; huge changes in absolute salaries and huge changes in manager/worker salary ratios. Part of this story is promotion from within. Adopted as a “reform” in per- sonnel policies, its actual effect is to eliminate competition for top jobs, and therefore eliminate all semblance of market constraint. There are thousands of highly qualified outsiders who would apply for top management positions at a small fraction of salaries and benefits actually paid. But promotion
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