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Thomas Grennes is a professor of economics at the North Carolina State University and a former visiting faculty member at the Stockholm School of Economics in Riga. More ›

Income Inequality and its Sources

Authors: Thomas Grennes & Andris Strazds  ·  July 4th, 2014  ·  288 http%3A%2F%2Fwww.economonitor.com%2Fthoughtsacrossatlantic%2F2014%2F07%2F04%2Fincome-inequality-and-its-sources%2F Income+Inequality+and+its+Sources 2014-07-04+18%3A30%3A40 Thomas+Grennes http%3A%2F%2Fwww.economonitor.com%2Fthoughtsacrossatlantic%2F%3Fp%3D288  › Share This Print

It is generally recognized that the distribution of income in the United States and within many other countries has become less equal since the 1980s. Increased inequality has been popularly interpreted as a negative development, and many proposals have been offered to reverse or offset the change in inequality. However, the interpretation of increased inequality depends on the source of the change. Increased inequality could be the result of technical improvement that raises total income, or it could be the result of restrictions that increase the monopoly power of special interests that reduces total income of a nation; Mankiw, 2013). Changes in the distribution of income are the result of more fundamental shocks to an economy, and failure to recognize the source of change could block innovations that would benefit most of the population.

The distribution of income can be divided into the distribution of labor earnings and the distribution of income from property (capital). The contribution of capital income to greater inequality has received a great deal of attention from many people, including Thomas Piketty, who hypothesized that developments in the last 30 years are part of a longer historical pattern of changes in the distribution of income. Karabarbounis and Neiman (2014) have shown that the increased share of capital income is a broad phenomenon that has occurred in most of the 58 countries in their sample. The increase in the share of capital income has also occurred in most of the 50 states of the U.S. The rise in capital’s share has contributed to greater inequality, but changes in the earnings of labor have also contributed to greater inequality. Incomes of high skilled labor have increased relative to earnings of middle and low-skilled workers. A satisfactory explanation of changes in income inequality must explain similar changes in many countries, and it must also be capable of explaining increased earnings of both capital and high-skilled labor. An explanation for rising inequality based solely on developments in the United States (taxes, government spending, minimum wage, unions) is not sufficient.

Technical change has had a major effect on national income, the rate of economic growth, and the distribution of income. Technical change has occurred across countries and industries, and the forces of globalization have contributed to its dissemination. Innovations have been a specific type biased toward using capital and high-skilled labor and against the use of middle and low-skilled labor. Technical change has contributed to greater prosperity by raising the productivity of capital and labor, but a side effect of recent technical change has been a redistribution of income in favor of owners of high-skilled labor and capital.

Equal opportunity is important for efficiency and economic growth. It is important for people to be able to acquire skills, enter occupations, and start businesses without restrictions. However, equal opportunity to use one’s labor and capital productively does not imply equality of results or equal incomes.  Economic history is filled with spurts of innovation (shipping innovations in the 15 th  century, the steam engine, petroleum related innovations, and the microprocessor that Intel introduced in 1971) in which the innovators received large rewards that temporarily increased income inequality (Gordon, 2014). Greater concentration of wealth has provoked envy and resentment, but attempts to use government policy to increase equality may reduce the incomes of  both the poor and the rich, even if they increase the share of the poor in a smaller total income. Failed experiments with planned economies in China and the Soviet Union, intended to promote greater equality, are extreme examples, but Casey Mulligan (2014) has documented recent US policies intended to reduce inequality, that have also reduced incentives for people to work.

Observed increases in inequality in a given year should not be confused with changes in intergenerational economic mobility. Some critics have claimed that America is no longer a “land of opportunity”? A recent study by Chetty et al (2014) challenged this claim and concluded that  “young adults entering the labor market today have roughly the same likelihood of moving up the income distribution ladder relative to their parents as those who were born in the 1970s and entered the labor market two decades ago”. Increases in inequality in particular years have not prevented individuals from rising above or falling below the incomes of their parents.

SOURCES OF INCREASED INEQUALITY 

Technical change has been the main source of increases in income inequality across many countries.  It has been biased toward using higher-skilled labor and capital, and it has been widely disseminated by globalization. New patterns of international trade have contributed to the bias against middle and low skilled labor. Production of many products has become increasingly specialized (fragmented), such that components of the final product have been produced in many different countries. The fraction of foreign value added in a typical product has increased substantially in recent years. A well-known study of iPods shows that components were made in 13 different countries and assembled in China (Dedrick et al, 2010). When they are imported into the U.S., iPods are classified by Customs officials as “made in China”, even though only 3% of the total value added comes from China, and 33%-50% accrues to Apple. The supply chain is managed by Apple in the U.S. so as to use the best technology in a way that minimizes total cost. One result of this complex fragmentation of production is an increase in the share of skilled labor and capital in total value added and a reduction in the shares of middle and unskilled labor. This process that favors skilled labor and capital also applies to other Apple products, and it has been shown to apply to a wide variety of other manufactured products in a sample of countries that comprise 85% of world GDP. (Timmer et al, 2014).

Thus, new technology has produced valuable new products at costs that millions of consumers can afford, but an unintended side effect is increased inequality of income. The process is an example of Schumpeter’s “creative destruction”. The “destruction” can be avoided only by foregoing the valuable new products. The increased inequality need not be permanent. In the case of labor, lower skilled labor was matched to the old technology. If more workers acquire the higher skills that are in greater demand, relative labor earnings and the distribution of income will again become more equal. The dynamic process of adjustment to the innovation has been described as a “race between technology and skills” (Acemoglu and Autor, 2012). Gordon has described major innovations in US economic history that increased economic growth, enriched innovators, and temporarily increased income inequality.

WHAT SHOULD BE DONE ABOUT INCREASED INEQUALIITY?

The efficient response to increased inequality depends on what caused the increase. If technical change is the source, greater inequality of earnings performs a useful economic function of encouraging workers to acquire skills that are in greater demand. Policies that offset technologically- induced  innovation decrease total income. For example, extending unemployment benefits to a longer period encourages workers to remain unemployed longer (or leave the work force), rather than acquire skills that are in greater demand under the new technology. Policies that motivate the unemployed to seek new employment and at the same time ease the acquisition of skills would increase total income and reduce inequality of earnings. In the “race between technology and skills”, faster response of skill supply to skill demand enhances economic efficiency. For example, the Hartz IV reforms implemented in Germany in 2005 that resulted in a significant cut in the unemployment benefits for the long-term unemployed along with Germany’s established dual vocational training system have been acknowledged to have significantly contributed to its low unemployment rate, including low youth unemployment.

Conversely, policies intended to reduce inequality (higher marginal tax rates, extended unemployment benefits, higher minimum wages) would have the unintended consequences of reducing total income and economic growth. Casey Mulligan (2014) has documented how policies that raised effective marginal tax rates (for example, extended unemployment benefits) have decreased employment and slowed the recovery from the Great Recession in the U.S.

If the source of greater inequality is greater privileges to the rich (rent-seeking) that enables them to protect themselves from competition, the solution is a more open and competitive economy. The rise of rich and powerful oligarchs in Russia and billionaires in China are examples of crony capitalism, in which politically powerful elites use the power of government to protect their economic interests. In the US, if influential individuals (Romney, Buffett) or corporations (General Electric) enhance their wealth by paying low or zero taxes, there is an economically efficient remedy.  Closing the many loopholes in the tax code that favor special interests would broaden the tax base, and it would allow the government to receive the same tax revenue at lower tax rates. Eliminating sources of rent-seeking can reduce income inequality while also increasing economic efficiency.

CONCLUSION

The personal distribution of income has become less equal in the United States and many other countries in the last 30 years. This has been widely viewed as a negative development, and many proposals have been offered to achieve a more equal distribution. However, a prudent response depends on the source of the change in income inequality. Technical change that has spread to many countries and is biased toward using more skilled labor and capital is a major source of greater income inequality, but it is also a major source of economic growth. Since economic growth has been a major source of poverty reduction since the Industrial Revolution, it would be prudent to recognize that redistribution policies come at a cost.

REFERENCES

Acemoglu, D and David Autor. 2012. “What Does Human Capital Do? A Review of Goldin and Katz’s The Race Between Education and Technology”. Journal of Economic Literature, June.

Dedrick, Jason, Kenneth Kraemer, and Greg Linden. 2010. “Who Profits from Innovation in Global Value Chains?” A Study of the iPod and Notebook PCs”. Industrial and Corporate Change” 19(1)81-116.

Gordon, John Steele. 2014. “The Little Miracle Spurring Inequality”. Wall Street Journal  June 3.

Karabarbounis, Loukas, and Brent Neiman. 2014. “The Global Decline of the Labor Share?”. Quarterly Journal of Economics. 129 (1): 61-103.

Mankiw, Gregory. 2013. “Defending the 1%”. Journal of Economic Perspectives.  Summer .

Mulligan, Casey. 2014. “A Recovery Stymied by Redistribution”. Wall Street Journal, June 30.

Piketty, Thomas. “Capital in the 21 st  Century”.

Timmer, Marcel, Abdul Azzi Erumban, Bart Los, Robert Stehrer, and Gaaitzen de Vries. 2014. “Slicing Up Global Value Chains”. Journal of Economic Perspectives, Spring.

Filed under: Uncategorized

288 5,701 Responses http%3A%2F%2Fwww.economonitor.com%2Fthoughtsacrossatlantic%2F2014%2F07%2F04%2Fincome-inequality-and-its-sources%2F Income+Inequality+and+its+Sources 2014-07-04+18%3A30%3A40 Thomas+Grennes http%3A%2F%2Fwww.economonitor.com%2Fthoughtsacrossatlantic%2F%3Fp%3D288 to “Income Inequality and its Sources”

Conscience Warrior • July 4th, 2014 at 3:57 pm

As pointed out in this post , the cause of the inequality (rents, increasing capital share, sunspots, etc) is irrelevant if the inequality is self-reinforcing. As economists, we are so enamored with negative feedback systems that we often ignore or dismiss systems characterized by positive feedback. It's not immediately clear that the path of economic inequality will exhibit positive feedback, but if it does, it is unambiguously negative, as it will inexorably lead to upheaval.

http://www.consciencewarrior.com/2014/06/dual-end …

ThomasGrennes • July 4th, 2014 at 10:24 pm

Income levels are important. The average German has many more opportunities than the
average Ethiopian. If income grows, people can rise out of poverty even if the distribution of
income remains constant or even moves slightly in favor of higher income groups. In fact, millions of people have moved out of poverty since the Industrial Revolution. Conversely, if total income falls for everyone, but it falls a little less for the poor, will this redistribution in favor of the poor protect against "upheaval"? If lower income groups are satisfied with decreased incomes, then envy is a powerful motive.

Conscience Warrior • July 5th, 2014 at 9:12 am

It's entirely possible that developing countries might have to accept more inequality while they are growing. I'm not sure there are a lot of useful direct economic comparisons between Ethiopia and the United States in the 21st century, however.

Even if we accept Kuznets' hypothesis about the hyperbolic relationship between inequality and growth, there is no reason to believe that the relationship is causal, never mind in which direction. There is much more recent work, such as Ostry, Berg, and Tsangarides (2014) , showing a negative (or at least not-positive) relationship between inequality and growth in industrialized countries. Again, accepting Kuznets, maybe this means that the industrialized countries are on the right-hand side of the Kuznets Curve, where inequality and growth are negatively correlated.

As they wrote, one of the negative knock-on effects of high inequality is that it inspires countries to do all sorts of inefficient and harmful things to combat it. Wouldn't it be better to identify smart policies to turn back this trend, rather than play ostrich? It's sad to me that so few of Piketty's critics are willing to actually engage his arguments, and are content to simply respond to the arguments they think he's making.

ThomasGrennes • July 5th, 2014 at 10:34 am

I criticize the use of inequality of income as a measure of economic welfare. Knowing that the richest 20% have 30% of the income tells nothing about whether the country is as rich as Germany or as poor as Ethiopia. In fact, the greatest inequality exists in lower income countries.Brazil and South Africa are consistently among the least equal. My main point is that certain technological innovations might result in large changes in total income and reduce poverty, even if they also increase inequality of results. Equal opportunity is much more important.

I take Kuznets hypothesis to be an empirical regularity that held over a certain historical period that could easily be contradicted during another period. It is not an "iron law". Certain kinds of technical changes could decrease inequality whereas others could increase it. "Smart policies" would recognize that not all innovations that temporarily increase income inequality are harmful to most people.

windriven • July 8th, 2014 at 2:49 pm

"I criticize the use of inequality of income as a measure of economic welfare."

And that would be fine if all income inequality measured was how nice a car one drove and how big a boat one owned. But as wealth concentrates in a few hands so does political power and the ability to shape debate through media and political contributions.

Even in terms of purely economic welfare, is there a GINI at which you would become concerned? The US at .45 already has the highest GINI of the major western nations* putting us in company with Bulgaria and Iran. Would a GINI of .50 concern you (Zimbabwe, Mexico)? Why is it that most wealthy industrialized nations are closer to .25 (Denmark) or .30 (EU average)?

*https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html

antonwalter • July 8th, 2014 at 4:00 pm

This is a bad link. The source of the following analysis from a CBO report does a lot with GINI index. http://www.textbooksfree.org/Capitalism%20Not%20t ….

windriven • July 8th, 2014 at 4:42 pm

Define a "bad" link.

windriven • July 8th, 2014 at 5:26 pm

Ah, I see. A broken link. I wasn't able to find the book at the site. Apparently the break is at that level.

ThomasGrennes • July 8th, 2014 at 4:50 pm

Would you be willing to share some of these useful ideas with us?

ThomasGrennes • July 8th, 2014 at 4:15 pm

Gini coefficients contain little information unless one also knows income levels. If two countries have the same Gini, are they somehow equal. What if one has an income per capita of $50,000 and the other has $1,000 with differences in infant mortality and literacy? Anti-poverty policies, such as the war on poverty and the World Bank's Millenium goals have been expressed in terms of income levels, not Ginis.

Equality of opportunity is more important than equal income. Excluding girls in Aghanistan from school violates equal opportunity, lowers total income, and increases inequality. If more girls are allowed in school, and the results are higher incomes and greater ineqality, wouldn't this be an improvement?

windriven • July 8th, 2014 at 4:41 pm

"Gini coefficients contain little information unless one also knows income levels. If two countries have the same Gini, are they somehow equal."

GINIs contain a remarkable amount of information about how income is distributed. If two countries have similar GINIs and remarkably different income levels, the relative distributions remain the same. Those on the lower end of the spectrum in a relatively wealthy country may not be hungry but they remain at a distinct disadvantage politically and that will only fuel continued upward rise in GINI as the wealthy order the rules to their advantage.

So I ask the question again, is there a GINI that would trouble you? Economics is a tool, not an end in itself.

ThomasGrennes • July 8th, 2014 at 5:16 pm

I got interrupted and answered your question about "troubling Ginis" below.
If increased inequality of results (Gini) were accompanied by greater inequality
of economic and political opportunity, that would be troublesome. However,
decreased opportunity is the key, not just Gini coefficients. They can change for many reason unrelated to equal opportunity. For example, an aging population
can change income distribution. The average American household earns low income in young years, maximum income in middle age, and lower incomes in old age. Changing the age distribution can change the measured income distribution without obviously negative implications for the general population.

ThomasGrennes • July 8th, 2014 at 4:47 pm

Response to Windriven continued:
Equal opportunity includes political opportunity. However, greater income inequality does not necessarily mean less political equality. Higher income individuals are not homogeneous, as some donate to Democrats, some to Republicans, and some to both parties. It is not so easy to buy elections. There are many examples (Virginia Congressional election) of candidates spending more than opponents and losing elections. However, political competition is important for equal opportunity.

I would be concerned about a higher Gini if it also implied decreased economic and political opportunity. European countries with lower Ginis than the U.S. tend to be more
homogeneous countries. Recently as Sweden and Denmark have take in more ethnically and religiously different refugees they have experienced problems. Refugees
have experienced problems of assimilation and lower incomes. I wonder if this will affect future income distribution in these countries. Also the US has taken in many low education and low income immigrants from Latin America. I wonder how much this has contributed to measured inequality. Conversely Asian immigrants to the U.S. have earned higher than average incomes, which also contributes to greater measured inequality.

windriven • July 8th, 2014 at 5:25 pm

Thank you for your reply.

"However, greater income inequality does not necessarily mean less political equality."

No, there is sweat equity too, for whatever that is worth. But all things considered, the Koch brothers and Michael Bloomberg have rather more political clout than do I. One may not always be able to buy an election outright (although Jon Corzine might argue) but with wealth one can certainly shape the debate.

Your note that higher income individuals are not homogeneous is both true and meaningless as both parties happily suckle at the breast of the wealthy and just as happily do their bidding. The paucity of meaningful reform in the wake of the great recession stands as poster child for this actuality.

"Also the US has taken in many low education and low income immigrants from Latin America. I wonder how much this has contributed to measured inequality."

Very little from what I can tell. There has been thinning of the middle ranks but the big shift has been in the top decile and, most notably in the top two or three percentiles.

Reformuj, a będziesz wybrany • July 8th, 2014 at 5:24 am

[…] Grennes (Uniwersytet Północnej Karoliny) i łotewski ekonomista Andris  Strazds wracają do tematu nierówności. Z ich analizy literatury przedmiotu wynika, że narastające nierówności […]

margsview • July 8th, 2014 at 7:33 am

Now if the major off-shoring of jobs for cheaper labor costs, etc could also be accounted for in the same way innovation is posited as a main contributor to income inequality maybe a somewhat fuller explanation could be apparent . As well, given the devastation of the 'investor-state dispute settlement ' clause that is the main component of every trade agreement to formulate an assured shareholder profit where losses should have happened as part of the normal course of business, a less skewed picture of outcomes would certainly be expected. Since the recession the US business community has been far more focused on stock speculation for earnings purposes than investing in productivity growth let alone innovation. For the last 7 years, the main complaint has been corporate reluctance to re-investing huge capital holdings into business growth. The additional fact of such high unemployment figures (last estimated to be well over 60 million) can only be explained by a total redirection away from producing products to stock speculation. And it is this singular speculation of corporate capital coupled with minimal regulation that led to the fiasco of job losses and increased debts as far as Main Street was and is concerned. Further extreme losses are expected if the TISA is agreed to, especially if the planned careless privatization of public services and pensions, education, health care and of course the free flow of global banking data and services are implemented to cement economic control. This fear-based economic plan is fueled by the belief in dwindling markets given global competition corporations and banks are now going after control over local markets and public assets to increase costs to consumers through extreme privatization, thus the overriding necessity of secrecy in all these trade negotiations. It is telling that little if any discussion of these developments are part of the current economic analysis due to the need to offset public reaction; which would, in many ways be as negative, as they were when public tax monies were used to bailout the mistakes and losses of banks, who, when the situation is reversed, simply allow their customer to actually deal with any losses or foreclosures as the expected end to bad decisions or unfortunate outcomes. It seems rather moot to say the obvious, after all when industrial pollution is discovered it is the taxpayers who are told they can expect to pay one way or another, right? Never the other way around, so much for legalities or equalities, of any kind including income or corporate subsidies.

ThomasGrennes • July 8th, 2014 at 2:08 pm

Offshoring of jobs is a source of both higher total income and greater inequality. The iPhone example we refer to is an extreme example of offshoring to many different countries that has resulted in a low cost product that has been purchased by millions of people of all income levels around the world.

U.S. corporations have innovated and invested less since the Great Recession. Increased uncertainty about government policy is one factor. Another is the U.S. corporate tax that discourages investment in the U.S. The tax rate of 35% is one of the highest in the world,
but payment can be deferred if profits are earned abroad and kept abroad. As a result U.S.
corporations legally hold more than a trillion dollars abroad.

Employment has recovered slowly from the Great Recession, but there cannot be 60 million people unemployed. With a labor force of about 150 million, that would imply a 40% unemployent rate. One can quibble about the accuracy of the official rate of around 6%, but it cannot be 40%.

margsview • July 8th, 2014 at 3:32 pm

Excuse my error, naturally it is not 40% unemployment, but 60 to 90 million Americans living on the edge, disenfranchised if you wish, without much hope of a future for themselves or their next generations; giving the total systematic corruption of education, employment and yes even the wherewith all to blunt the exclusive use of secrecy. There was such a tone of indifference that ran through a few of the articles, included in this series. I guess for those acknowledging such empathy must be avoided in order to appear to have achieved the normal goal of objectivity . Hopefully I learned from several professor's warnings to do otherwise, as most of them agreed when discussing aspects of our human condition that clinical treatments usually end up affecting little except in the amount of dust and repetition they attract.
I had further hoped that instead of the distraction of going back to the Great Recession as a backdrop comparative, while ignoring as did so many economists, the important factors involved in causing our current recession of 2008 would be far more salient and constructive.

ThomasGrennes • July 8th, 2014 at 2:49 pm

Margsview makes many points, and I would like to respond to one more. He is concerned about bailouts of banks and other corporations. In many cases, the government has allowed profits to be privatized but losses to be socialized. I agree that this is a foolish policy. Bailing out banks was a mistake, and unfortunately subsequent "reforms" have continued the policy by creating a class of banks that are too big to fail. We now have a class of "systemically important financial institutions" that gets special protection from the government. Fannie Mae and Freddy Mac contributed to the housing bubble, but they continue to dominate mortgage guarantees. One could site many other examples of questionable bailouts of private corporations, such as General Motors. GM has become
known recently for defrauding consumers and recalling more cars than they sell. These bailouts do not contribute to higher incomes, and they may contribute to greater inequality.

margsview • July 8th, 2014 at 4:18 pm

My concern not only rests on the previous use and effects of bailouts but the current mandate agreed to in Europe, that globally all developed countries should enact legislation to permanently place bailouts, safe harbors, bail-ins etc as a guarantee of using taxpayers monies to absorb all and any financial speculative bank losses or residual debts. In fact, the corporate sector it seems will have the TPP, TIPP and the TISA to ensure a windfall of taxpayers wealth through expected take-over, after privatization of any and all public assets, pensions and services. And to think so many questioned the public secrecy of all these trade negotiations. Common sense, given our recent recession, would have made anyone curious enough to figure out that the only ones to be outraged would be the—– targeted taxpayers for the unconstitutional and anti-contract legal aspects of the 'investor-state dispute settlement' clause which directs all these trade deals. But the debate so far does not seem to include investigating the nature of these negotiations to uncover what purposes and consequences would be at the core and goal and which too-big-fail sectors of our economies are to be the only intended benefactors. I mean, to date none of our enforcement institutions have jailed one fraudster, and yet so many insightful books have been written by insiders and concerned authors alike. Pity, what?

Andrej_Starkis • July 8th, 2014 at 8:06 am

Talk about slippery. To rebut the Piketty thesis about income inequality, the authors–not so deftly–slide off the top-to-bottom comparison into a discussion of labor-income inequality, a rather different subject. Then it becomes easy to castigate the slow, lazy, underperforming workers and say that they need to step up their game and that any government effort to help them carry their weight is, of course, counterproductive.

What's not said is that those at the top prosper in a myriad of ways from government action (or targeted inaction), including the very existence of government-created corporations (yes, they all are) and that, perhaps, sensible, balanced government policy might be an antidote to the breadth of inequality government policies have helped to create. Adding a tag at the end decrying "corporate subsidies" may be a denial of blindness, but it's hardly proof of clear vision.

Andrej_Starkis • July 8th, 2014 at 9:09 am

Talk about slippery. To rebut the Piketty thesis about income inequality, the authors–not so deftly–slide off the top-to-bottom comparison into a discussion of labor-income inequality, a rather different subject. Then it becomes easy to castigate the slow, lazy, underperforming workers and say that they need to step up their game and that any government effort to help them carry their weight is, of course, counterproductive.

ThomasGrennes • July 8th, 2014 at 1:40 pm

Piketty covers many topics in his nearly 700 page book, so I am not sure what specific
"thesis" Andrej_Starks refers to. We do not disagree with Piketty that personal incomes
have become less equal in many countries. We do not disagree with Piketty (see his chapter 8) that labor incomes have also become less equal, with a bigger share of labor income going to the top 1% of earners. We do not refer to "lazy" or "underperforming" workers. We do refer to differences in skills and the demand for skills that, for example,
distinguish textile workers from electrical engineers. If the demand for electrical engineers increases, their salaries will increase, and labor incomes will become less equal. The change in relative rewards performs an important signalling function. If for some reason relative earnings are not allowed to change, there will be a shortage of electrical engineers and a surplus of textile workers. Changes in the relative supply of skills has nothing to do with "laziness".

We did say explicitly that some wealthy individuals and corporations benefit from tax exemptions and subsidies. However, the efficient way to reduce welfare for the rich and corporations is to close the many existing loopholes, rather than to raise tax rates and
leave loopholes in place. In the 1950s, the U.S. had a maximum marginal tax rate of over 90%, but there were so many legal exemptions, that hardly anyone paid that rate.

Yes, corporations are created by governments. They are legal entities with certain rights and obligations that can only be granted by governments. Some have for-profit status, but
many are not-for-profit corporations, including all the incorporated cities and towns.
However, the government origin of corporations says nothing about their profitability.Some are profitable for long periods, but many others go bankrupt every year.

antonwalter • July 8th, 2014 at 3:54 pm

The CBO reports that after taxes and transfer payments; median income is up 35% since 1979 so the inequality is caused by the top getting more than 35%. The 2011 report shows other factors getting more than labor. Use this link http://www.textbooksfree.org/Capitalism Not t… and the link below the 2nd graph to go to report. I would love to see the same data for 1950 to 1979. The top 1/10 of one percent get so much and the Feds easy money has stock prices at records. The analysis will look much different if the market tanks.

margsview • July 8th, 2014 at 4:48 pm

I am waiting to hear anyone discuss the effects of the trough of derivatives, speeding globally as various mysterious investments and part of the debt structure of far too many incorporated cities and towns and 'too big to fail' banks which have all been snookered. Imagine investing in smoke that can't be traced forward or back, it's enough to cause a potential global migraine, so the worried and informed are saying. Some have these supersonic derivatives now globally totally anywhere from 100 to around 400 trillion dollars. And hedge funds are legally so advantaged, by a 15% tax rate and preferred creditor status. It is also rumored that even the hedge fund owners have trouble explaining their losses or successes. As if our de-fracking system wasn't vulnerable enough, now forecasting sound economic policy appears virtually impossible.

ThomasGrennes • July 8th, 2014 at 4:59 pm

Some of the complex new derivatives are looking curiously like the old ones that contributed
to the last financial crisis and the Great Recession. Some of the risky derivatives and bonds appeal to some investors because of near zero interest rates in the U.S. Their desperate search for higher yields ignore the fact that they are also taking on greater risk

margsview • July 8th, 2014 at 5:54 pm

If considering the few and (given the entry cost) wealthy who feel the need to gamble without the pleasure of actually knowing their moves, not many really care. To be blunt, it is the scary silence as to the amounts of derivative contracts outstanding that bothers the many. Especially since our banks have been left to their own devices, without any real oversight. To think that these banks can simply ignore their 'shadow debts' after the monetary and economic tremors they caused in 2008, is frankly beyond belief. And yet except for the odd request for larger capitalization amounts there has yet to be a country reputable enough to demand full bank audits or the threat of creative 'bailouts' that pin bank future profits to the exact amounts to be lent, if another crisis is manipulated.
There have also been a series of info documentaries positing that some of our 'too big (s)' are taking depositor funds and purchasing utilities, airports and even commodities such as aluminum to apparently corner certain markets, or be in the position of owning assets and services they can charge more for. This financial system is out of control and our laws and officials appear to have agreed to see nothing, say nothing and do nothing. Well I hope to hear that taxpayers realizing that their votes didn't change attitudes or enforcement will act accordingly and vote with their feet.

ThomasGrennes • July 8th, 2014 at 8:30 pm

Margsview: You seem to lack confidence in the major financial reform promised by the 1000
page Dodd-Frank law and its Volcker rule designed to protect against banks speculating
with depositors' money. Do you also lack confidence in the "stress tests" given by the Fed
to commercial banks?

ThomasGrennes • July 8th, 2014 at 8:41 pm

Reply to Anton Walter: The share of top incomes has increased because the share going
to capital (property) has increased and because the earnings of high salaried workers has
increased relative to low earning workers. The share of top incomes regularly falls after sharp drops in the stock market. It dropped temporarily after the 2008 financial crisis and it dropped even more after the Crash of 1929. However, these stock market crashes are a painful way to reduce inequality, as total GDP and per capita GDP also dropped sharply.

Erikwim • July 9th, 2014 at 4:46 am

The article seems highly poltically motivated, writing with the conclusion set beforehand and then going around the world to cherry-pick data to support the conclusion. Of course leaving out the inconvenient facts. Well there are two very inconvenient facts that are fully ignored in the article: 1. among the richest people we find the Walton and Mars family in the US and Heineken and Bettencourt in Europe, in the 'highly innovative' retail, candy-bar, beer and shampoo industry??? 2. The success of the fast recovery of Germany also involves the use of extended unemployment benefits during the crisis, or better extending benefits to people officially not even fired, but with their salaries paid out of social security.

ThomasGrennes • July 9th, 2014 at 10:14 am

The evidence we cite on technical change and globalization (Timmer 2014) is the opposite of "cherry picking". The Apple i-Pod was an example, but the Timmer study included many countries, years, and industries, and the general result was technical change biased against the use of middle and low-skilled labor and a decrease in the share of labor in total value-added. The many innovations included the efforts of Bill Gates, Steve Jobs, etc, but they do not imply that every living millionaire was an innovator. The general pattern is not inconsistent with the existence of some inherited wealth, as in the Walton, Mars, and Heinz families.

In the case of the duration of unemployment benefits, Germany, the United States, and most countries extended the duration of benefits as a result of the crisis. However, didn't Germany reduce the duration of benefits after the crisis, and hasn't its unemployment rate been consistently below the EU average? Unemployment benefits are intended to be temporary, and they are especially important during a recession. However, historical evidence shows that extending the duration contributes to higher average unemployment rates.

Income Inequality and its Sources | Abnormal Capitalist • July 22nd, 2014 at 5:40 pm

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