Monday, October 13, 2008

The Great, Shrinking Income Inequality

Caution, Blog Post Wonk Index: High

Not many themes have recieved more airtime in the Obama repertoire than the issue of widening income inequality in the United States over the past eight years. He doesn't really talk about the data explicitly, but the idea forms the foundation of many of his most forceful arguments. The issue has been smoldering in the more thoughtful left-leaning press for the past several years. With each passing year, new data seem to add fuel to that fire. More than any other, the issue seems to fill Obama with an almost saintly glow, as he rails about the unfairness of it all.

First, let me state unequivocally my belief that income inequality, in and of itself, is no vice. If, by virtue of the policies we choose to add dynamism to our economy, we end up with a very high income inequality, but also have the richest poor people in the world, that is an end which should be pursued under all circumstances. The opposite, low income inequality, but poorer poor people, might somehow seem more fair, but is clearly less desirable for everyone. One day I'll expound upon this at length. I'd like to do some country-by country comparative income distributions by decile, and regress the slope of the curve to something like a Freedom Index, and then determine how much purchasing power each of the countries has at the lowest decile. Maybe the study is out there somewhere already, but I haven't seen it.

But now to the issue at hand. My gut tells me that the party is over at the top of the income distribution. We've just lost, over the course of several weeks, many trillions of dollars of wealth because of stock price declines. Perhaps another couple trillion of equity in real estate has vanished. Finally, something like 100,000 bankers and Wall Streeters are out of work. The ones that remain are working in a very different world, where compensation expectations have declined precipitously as financial institutions are in need of deleveraging in order to stay afloat. Anecdotal evidence suggests that the current financial mess is something akin to nuclear winter in the most high-flying of locales like Greenwich and Darien, CT.

The vast majority of this loss of wealth and income has obviously hit the top of the income distribution. We may find that when all is said and done, we're back to normal with regard to the slope of the curve. After all, people have been saying that the early part of the 21st Century has been an anomaly with respect to all sorts of measures, from the use of leverage to savings rates to real estate values. Why should not the increasing income inequality also be an anomaly?

Of course, it will take many years for the results of this mess to show up in the official, published statistics. In the meantime, Obama will continue to glow when he talks about fairness, even though income inequality may have already reverted to its historic norm.

1 comment:

mfinlay said...

Apparently, Robert Samuelson has been reading Polartics:
http://www.realclearmarkets.com/articles/2008/11/poor_arent_poor_because_rich_a.html