Thursday, September 14, 2006

Reversing inequality

Over the past couple of months, I've been following an interesting series of posts by Kevin Drum on income inequality in America. His core thesis is that government policies aimed at keeping unions weak and inflation low have kept a lid on wage growth, allowing the wealthy to capture virtually all the economic growth of the last few decades. The result has been spiralling inequality, an enormous increase in the wealth of the already-rich - and stagnation or decline for everyone else. Median incomes have fallen across much of the US in the last six years (by 2.8% nationally, and more than 10% in some states), and the average, median-income-earning male is now worse off in real terms than they were in 1972. The US has become what Joseph Stiglitz calls "a rich country of poor people".

If this seems like a familiar story, it's because it is exactly what happened here during the 90's. The smashing of the unions under the ECA, the adoption of tight anti-inflationary policies, and the manipulation of unemployment levels to create a constant labour surplus neatly channelled the fruits of growth away from the many, and into the hands of the few.

How can we reverse this? One way is by more progressive taxation. Another is by strengthening unions and allowing them to fight (and win) improvements in wages and conditions. This will slowly begin to rebalance the distribution between wages and capital (which had shifted significantly over the 90's in favour of the latter), and slowly reduce inequality. Labour has done both of those things, and now it’s just a matter of time waiting for them to work. Unfortunately, all their good work could be upset if National gets back into power and restarts the Revolution...


lots of good articles by Paul Craig Roberts (former Assistant Treasury Secretary under Reagan) floating around on the web.

funny thing is, most americans seem to think it's just a matter of time before their turn comes to be super-rich. fascinating culture, based on people getting shafted and begging for more...

Posted by Anonymous : 9/14/2006 07:43:00 PM

You have been warned about those ellipses!

Inflation is an enemy of the poor. That is one reason why there should be anti-inflationary measures.

Posted by Gooner : 9/15/2006 08:51:00 AM

I/S without a stable and growing economy nothing can happen. What is worse, a situation where there is 10 to 15% real unemployment (40% in inner cities) but strong unions and better pay parity and effective tenure in the public service *or* a situation where the economy has been stable, unemployment is low and the boom bust cycle has been avoided?

The former scenario describes France the latter NZ and the UK. I would suggest that the avenues for achieving equality in NZ and the UK are far better than they are in France.

Not saying your goals are not laudable, just that without strength and stability in the economy we cannot achieve anything. I certainly think high unemployment is just about as unfair as things can get.

Posted by Anonymous : 9/15/2006 09:58:00 AM

so, let's get this straight:
a living wage + fair working conditions = 40% unemployment

is that the 4th Law of Thermodynamics then?

Posted by Anonymous : 9/15/2006 12:05:00 PM

Gooner: unfortunately, those anti-inflationary measures seem to be worse for the poor than the problem they are trying to solve. They are however very good for the rich (and not just because they stop their money from eroding).

Hyperinflation or Muldoon levels of inflation are bad. I'm not sure that levels of up to 5% are, particularly if it results in a more equitable distribution of the fruits of growth.

Posted by Idiot/Savant : 9/15/2006 12:33:00 PM

Noddy: I'll echo anon here and say "WTF"?

In addition to strengthening unions, one of the key changes Labour has made has been to weaken the Reserve bank's Policy Targets Agreement, both to broaden the level of inflation considered acceptable, and to require it to "avoid unnecessary instability in output, interest rates and the exchange rate" (which means no more Brashing the economy whenever the unions get uppity). A consequence of this has been to effectively engineer a labour shortage, which in turn strengthens the bargaining position of workers even more, and forces business to invest in improving productivity rather than hiring more warm bodies. I think these are good policies, and aimed at reversing the trend of the 90's - but they will take a while to work.

Posted by Idiot/Savant : 9/15/2006 12:40:00 PM

noddy: a little to soon, my wooden nosed friend, so say we've escaped boom and bust...

I/S this is just pedantry but I don't think that the inflation under Muldoon qualified as hyperinflation. This isn't to say that it was bad though. Otherwise I'm with you on inflation.egt

Posted by Anonymous : 9/15/2006 01:07:00 PM

Terence: I know; I was trying to distinguish the two, not lump them together.

Posted by Idiot/Savant : 9/15/2006 01:22:00 PM

How is inflation an enemy of the poor?

Posted by Anonymous : 9/15/2006 03:45:00 PM

sigh, my apologies I/S, overly hastey reading and the midafternnon haze...

Posted by Anonymous : 9/15/2006 06:16:00 PM

Inflation increses the cost of things thereby effectively lowering your wage.
Those who have decent negotiating power and are concentrating a lot on how much they make on a day to day basis may adjust their income but those that aren't may well not.
So theoretically a person with low income will find his income sliping and may have to fight on an ever more regular basis for an income rise at some cost to him/herself of course.
Also from a political point ofview one might want to raise the minimum wages - but will need to fight that battle on a regular basis - a defferal of a decision might be a wage cut to those on the minimum wage.

Low inflation does however help businesses to plan - this means that businesses (just like workers) can plan a bit better and thus make more risky decisions that make a little more money.

Having said that I wouldnt fetisize low inflation. But it is genraly speaking a good thing.

Posted by Genius : 9/29/2006 08:27:00 PM