Usually I simply bookmark these on del.ici.ous…but there’s been a grand convergence on the internet today on the subject of income inequality, so it seems like a more fleshed out post is in order. Before we start with what’s Good, let’s skip the Bad and look at the Ugly – which would be Mark Milkie’s op-ed in today’s Sun. I wasn’t able to find out much about who Mark Milkie is and thus why he warrants an op-ed in a major national daily, but he works for or is a contributor to Troy Media.
…it’s shite. It’s obstensibly a critique of The Trouble With Billionaires by Linda McQuaig and Neil Brooks [Review | Review | Excerpt | Excerpt]. Milkie decries the use of strawmen he alleges, but he does not quote any passage and his characterization flies in the face of the two reviews and the excerpt provided. I haven’t read the book so I can’t comment with absolute certainty, but it definitely looks like Milkie is guilty of what he charges of others given that he chalks it all up to envy.
Both are useful examples of what happens when ideas are detached from the real world and spiced up with the colour green (as in envy).
But there are factual claims he makes that can be taken to the cleaners:
The 1929 crash didn’t create the Depression; post-crash policies did.
But in the 1930s, only a few of FDR’s policies were laudable; most deepened the Great Depression
Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%. The second world war aside, the United States has never experienced such sustained, rapid growth.
There was a slump in 1937, when FDR tried to return to orthodoxy. But these are just the facts that contradict the platform Milkie is trying to launch his theory from. Which is we need to “create more opportunity” to deal with poverty. How? Who knows. However, this brings us to better, more interesting things. The first is Richard Wilkinson’s book, The Spirit Level, which posits income “inequality as a major factor in health, life expectancy, and the levels of destructive behaviour in any society.” From the Tyee:
It seems at first a very hard case to prove: That the relative gap between poorest and richest in any country is a major factor in its population’s health and well being. The key word is “relative”: poor Americans and Canadians enjoy standards of living much higher than poor Cubans.
But Cubans actually enjoy lower infant-mortality rates than Americans, and their life expectancies are closely comparable: According to WHO, Cuban life expectancy is 77, and American is 78. (We’re at 79.) This is remarkable, considering how much less Cuba can spend on health care. The difference, says Wilkinson, is that rich Cubans aren’t much richer than poor ones.
The next is from Tyler Cowen in the American Interest – “The Inequality that Matters”. Of note:
The upshot of all this for our purposes is that the “going short on volatility” strategy increases income inequality. In normal years the financial sector is flush with cash and high earnings. In implosion years a lot of the losses are borne by other sectors of society. In other words, financial crisis begets income inequality. Despite being conceptually distinct phenomena, the political economy of income inequality is, in part, the political economy of finance.
Tyler’s story of private gains and socialized losses is surely true as an explanation for how the finance industry stayed highly profitable even while undergoing an epic meltdown. But I’m not sure it adequately explains why the industry became so stratospherically profitable before the meltdown. Because the problem in the pre-meltdown era wasn’t that banks were taking on more and more risk, the problem was increased leverage and mispriced risk. For some reason, as Tyler puts it, “It’s as if the major banks have tapped a hole in the social till and they are drinking from it with a straw.”
And finally there is “Inequality, Leverage and Crises,” an IMF paper written by Michael Kumhof and Romain Rancière. A taste:
The United States experienced two major economic crises over the past century — the Great Depression starting in 1929 and the Great Recession starting in 2007. Both were preceded by a sharp increase in income and wealth inequality, and by a similarly sharp increase in debt-to-income ratios among lower- and middle-income households. When those debt-to-income ratios started to be perceived as unsustainable, it became a trigger for the crisis.
….The key mechanism is that investors use part of their increased income to purchase additional ﬁnancial assets backed by loans to workers. By doing so, they allow workers to limit their drop in consumption following their loss of income, but the large and highly persistent rise of workers’ debt-to-income ratios generates ﬁnancial fragility which eventually can lead to a ﬁnancial crisis. Prior to the crisis, increased saving at the top and increased borrowing at the bottom results in consumption inequality increasing signiﬁcantly less than income inequality. Saving and borrowing patterns of both groups create an increased need for ﬁnancial services and intermediation. As a consequence the size of the ﬁnancial sector, as measured by the ratio of banks’ liabilities to GDP, increases.
All of the latter are interesting. I’m not entirely sure on Wilkinson, but it hard to deny there seems to be at least a circumstantial correlation b/w income inequality and health and mental health.