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Piketty’s Ghost Haunts Standard & Poor’s Report on income inequality (and he is still alive!)

by Andrew White  |  August 15, 2014  |  1 Comment

I said some months ago now that income inequality would be a hot topic for the next US general election.  I am convinced of this even more.  I was amazed to see that Standard & Poor, a rating agency, published a report on the topic.  It was titled, “How Increasing Income Inequality is Dampening US Economic Growth, and Possible Ways to Change the Tide.

This is a complex topic that needs some context.  First, is income inequality increasing?  How is this measure defined?  Are the assumptions underpinning that definition valid?  Also, what is the cause for any such divergence in income, and is a resolution or reversal of said divergence good?  Good for whom?  And how would such reversal be achieved?

In a nutshell, here is my analysis:

  • Yes income inequality has increased but only recently.  There is ample data out there that suggests, in general, it has not increased over the last 30 years.  Only in the last 5 has it diverged, slightly.  This hog wash about “last 30 years” was recently exposed in Thomas Piketty’s new book – I blogged on the exposure of such fallacy – see The Promise of Piketty (new book: Capital) Doesn’t Hold Up.
  • The single largest cause of this recent divergence is Quantitative Easing (QE).  The US government, in trying to cope with its own self-inflicted slow-growth policies, has encouraged the Fed to pump so much money into the economy so that rich hedge funds and investors have taken advantage of cheap loans and near free money.  I have not taken advantage of this money – and I would guess neither did you.  So my income didn’t change.  In fact in the last 10 years my position with respect to the population has been unchanged, or slightly fallen!  But those that had millions of dollars before QE now have even more.  The rest of us have less in comparison.
  • Is this widening gap bad?  We don’t’ know.  There is a related argument that poverty is also increasing, due to the widening gap in income.  I don’t accept that on face value.  There is ample evidence that what we mean by poverty is not even valid; and that what qualifies in 2014 is very different to what we meant in 1914, even 1954.  See my blog on The Tyranny of Numbers: Measurement and Misrule, by Nicholas Eberstadt.
  • How do we reduce income inequality?  Not sure yet but QE has to stop.  However, as interest rates recover, and investors move their money from stocks and bonds into cash, they will reap the rewards more than the less well off, who have less to save.  What is needed is strong GDP growth that would create a surplus of the state to increase funding in education and welfare.  It seems we are going to do this, but from a Federal perspective (being far removed from those parents, children and teachers involved), without any surplus (i.e. more borrowing).  Oh well.  Nice try.

Here is one of my recent blogs on the topic of inequality and productivity: The Productivity Puzzle – The One Solution that can Negate the Inequality Issue.

And today, in the US print edition of the Wall Street Journal, there was an Opinion piece reviewing the S&P report, titled, “The supply-side case for government redistribution“, by Alan Binder, a professor of economics and public affairs at Princeton.  His article starts off nicely showing how the S&P conclusions are in fact spurious or flat wrong.  He then ends the article with some good advice, though based on a false premise that inequality is rising “for the last 30 years” and so is a drag on the economy.

He starts off by demonstrating data that shows how spending patterns for the vast majority of Americans do not in fact differ.  The ‘vast majority’ here represent those with family income levels of between $20,000 (near the poverty line) and $200,000 (top 5% of earners).  The impact on spend does differ for those at the extremes- below $20,000 and over $200,000.  But the majority is not that different in terms of habits.  So where is the drag?

Mr. Binder has some great suggestions, oriented on ‘equality opportunity’ as opposed to the fallacious ‘equal outcome’ school.  Government should invest in education and welfare, most especially for those that are less well off.  Yes, I agree 100%.  There is a related issue here- who, federal or local government, is best situated to determine what is needed in each region.  But let’s ignore that hot potato.

Lastly, Mr. Binder states, “Inequality has risen so much in the last 35 years that it may now be retarding economic growth on the supply side while leaving us with the finest government money can buy.”  No, I don’t believe inequality has risen that much in the last 35 years.  Second, poverty in 2014 is a whole better than poverty in 1914, or even 1954 for that matter.  Transfer payments to the poor have ballooned and now represent over two thirds of federal spending – see A Nation of Takers.  So I do accept his premise, supply side conditions might have an economic drag though this is in spite of all the educational and welfare peddling the federal government has done.  Since that spending has not helped, shall we try something different?

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Category: economic-growth  economic-productivity  economy  income-inequality  inequality  quantitative-easing-qe  transfer-payments  

Andrew White
Research VP
8 years at Gartner
22 years IT industry

Andrew White is a Distinguished Analyst and VP. His roles include Chief of Research and Content Lead for Data and Analytics. His main research focus is data and analytics strategy, platforms, and governance. Read Full Bio

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