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Robert Shiller: Let's Index Inequality

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  • Robert Shiller: Let's Index Inequality

    I had a chance to hear Robert Shiller give a lunchtime lecture today and thought I’d post here since his topic is one that EJ routinely hits on – inequality in the American economy.

    In particular, Shiller spoke on a proposed solution to the growing inequality in the American economy and produced “Lorenze Curves” for the period 1979-current, which showed the degree to which income has been redistributed upward in the last 25 years.

    There were a couple basic premises that underpinned his research and his presentation. First, he considers the growing inequality in the US our “most important economic question” and that “economic growth depends on fairness.” Second, that some level of inequality is healthy and should be permanently maintained.

    He touched in passing on the historical results of gross inequality and the way that populist remedies often serve to reduce wealth for everyone in the process of reducing inequality. I think he'll need to make this point much more tangibly before people who might "lose" under his proposal are willing to think about it seriously (see below).

    In a nutshell Shiller proposes that we index inequality by tweaking tax rates over time to ensure that, for example, the bottom 20% of income is earned by a constant percentage of taxpayers. He suggested that we use today as a baseline. In other words, if 50% of taxpayers currently earn 20% of income, the goal would be to lock that in by managing tax rates.

    He suggested that in addition to ensuring that our society does not become (even more?) grossly unfair, this sort of indexing would create a shared sense of purpose and encourage popular acceptance of “growth policies” (since a rising tide would actually lift all boats).

    Note that Shiller acknowledged that there were a lot of details that had yet to be worked out or that couldn't be addressed within the time constraints today. So consider this a general concept only.

    My own impressions…

    As long as the wealthy in this country believe they can capture an ever-increasing portion of new wealth they’ll never allow this sort of thing to pass. Had we passed legislation like that Shiller’s proposing in 1979, here’s what tax rates (inclusive of all taxes) would have looked like in 2002:

    Earners of the top four sextiles of US income: 70% tax rate (~40% of HH)
    Earners of the fifth sextile: 55% tax rate (~20% of HH)
    Earners of the bottom sextile: 0% tax rate (~40% of HH)

    The percentage of households (HH) paying each rate could be off since I was just eyeballing the chart from a distance, but I thought this was interesting since it gives you some idea just how much wealth would have to be redistributed to recreate the distribution as it existed in 1979.

    At any rate…given the sample tax rates above, I don’t believe there’s any chance something like this will pass or even be taken seriously unless the people with power and money in the US are confronted with far grimmer alternatives. And while those alternatives may well be in the offing the people whose support would be needed for this kind of reform don’t see them coming.

  • #2
    Re: Robert Shiller: Let's Index Inequality

    Originally posted by WDCRob
    As long as the wealthy in this country believe they can capture an ever-increasing portion of new wealth they’ll never allow this sort of thing to pass.
    At some point the "populace" will revolt, and damage the over all economy by voting in communist type governments. The reason China / Russia / etc went communistic wasn't because of any inherent evilness, but rather the capitalistic systems went overboard and they felt that was the only appropiate response.

    Rubin makes the same point, and i think it is a good one. Policy is only good as the politics.

    The problem is how to develop an economic system that grows at such a rate that living standards in general will go up, all boats will rise. This system has to have a political basis that will allow it to happen without huge hiccups. Shiller is making a fantastic point, though I don't know if his solutions are the precise ones.

    Comment


    • #3
      Re: Robert Shiller: Let's Index Inequality - Full of challenges

      How do you get the bulk of these lower income folks who'll benefit from this redistibution of the Costs of running the USA or redistribution of the wealth to SAVE the Wealth.
      Many families who are long-time Citizens of the USA are use to spending everything that comes into the Household. I believe many had parents who were Union employees and never learned to buld a nest egg slowly and over a life-time.

      Heck- I was never taught to do it. Being smart about money is contrary to how many were brought up.

      Most think that the way to build wealth is to buy a home in a good neighborhood. Too bad this myth will be dis-spelled in the coming few years.

      Comment


      • #4
        Re: Robert Shiller: Let's Index Inequality - Full of challenges

        Originally posted by BK
        How do you get the bulk of these lower income folks who'll benefit from this redistibution of the Costs of running the USA or redistribution of the wealth to SAVE the Wealth.
        Well, in theory you're not redistributing anything. You're maintaining an existing distribution. Only in cases where the agreed-on balance is undone by uneven growth or contraction would you make a change in tax rates.

        And he was very clear that this isn't about fighting poverty, just future increases in inequality.

        Comment


        • #5
          Re: Robert Shiller: Let's Index Inequality

          the problem with shiller's proposal is that it requires politicians to acknowledge the distributional effects of the policies they vote for. they will never acknowledge this.

          Comment


          • #6
            Re: Robert Shiller: Let's Index Inequality

            Agreed, JK.

            btw...re: "it's not a poverty program"...from 1930 to 1970 the changes in distribution favored of the bottom and middle sections of the curve, at the expense of those at the top. Those changes would likewise be indexed.

            Comment


            • #7
              Re: Robert Shiller: Let's Index Inequality

              let's index index proposers and index makers.

              That would be quite a bull market - 3 sigmas removed from the norm.

              And, according to statistics and indexes, the indexes on statistics are as inaccurate as statistics on indexes, 3 times out of 20.

              Then we'll get the FED to hedonically adjust the indexes (and the statistics) and Bart and John Williams will keep "real, unadjusted" statistics (and indexes)

              Comment


              • #8
                Re: Robert Shiller: Let's Index Inequality

                Originally posted by WDCRob
                Let's Index Inequality
                Can you short it on a downtick?
                Finster
                ...

                Comment


                • #9
                  Re: Robert Shiller- Illegal Immigration

                  Did Mr Shiller touch on how out of control Immigration has increased economic inequality.

                  My impression people with factories and Service business benefit from the large influx of Immigrants in the United States.

                  For example, the guy who owns a Construction company can pay his Immigrant laborers less than US born laborers.
                  I spent a couple of days in and Up scale neighborhood in Houston-TX - all of these wealthy folks have all their household chores done by undocumented immigrants from Mexico. This includes House cleaning, landscaping, painting, and care of the children. This allows the more wealthy to escape a number of employer related Taxes that a traditional employer has to pay (Employer FICA, Emploer Medicare, State Unemployment taxes).

                  Impacts to the uneducated American is falling or flat wages for low skilled labor jobs. Think of the High school kid from a Poor family - trying to land a part time job to save for College or by extra clothing - he has to compete with Adults (Immigrants) that are available 40 plus hours per week and will work for minimum wage (just like then High school student).
                  This just increases the inequality of wealth - the more wealthy can take advantage of a cheap labor pool and the avoid these employer related taxes.

                  Anyone agree or disagree?

                  Comment


                  • #10
                    Re: Robert Shiller- Illegal Immigration

                    Originally posted by BK
                    Impacts to the uneducated American is falling or flat wages for low skilled labor jobs. Think of the High school kid from a Poor family - trying to land a part time job to save for College or by extra clothing - he has to compete with Adults (Immigrants) that are available 40 plus hours per week and will work for minimum wage (just like then High school student).
                    This just increases the inequality of wealth - the more wealthy can take advantage of a cheap labor pool and the avoid these employer related taxes.

                    Anyone agree or disagree?
                    At some point it seems those Americans who choose to be in the category of "uneducated Americans" may be forced to wake up and realize that if they wish a better level of existence that they or their kids under their influence will have to seek some form of more education. Further is might be possible, that someone who needs employees is unwilling to break the law to hire illegal immigrants and realizes what the American kid who is poor is trying to do with getting a part-time job to get more education and hire the poor kid versus the illegal immigrant. At the moment the problem may be finding such an American poor kid who is willing to work. The latter is speculation on my part, perhaps there are such American poor kids.
                    Jim 69 y/o

                    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                    Good judgement comes from experience; experience comes from bad judgement. Unknown.

                    Comment


                    • #11
                      Re: Robert Shiller - Immigration

                      Jim,

                      Lets take the Local Pizza Palor near me.

                      I'm guessing that inflation is slowly eating away at the profitability of selling Pizza - natural gas for the Oven, flour, Taxes on the Building, Medical insurance for the owner.

                      When we started going this shop had on Italian -(from Itlay) and two or three local High school kid. These kids have been replaced with workers who primarily speak spanish and come from Central America.

                      Most Restaurants today keep their operating margins by utilizing non-USA born work force. Restaurants feel Inflation creeping into every aspect of their business - utilizing non-US Citizens makes the business more profitable and viable.

                      Employers in Restaurants and Construction may be hiring people who present documentation that indicates they are legal. The business owner is fighting for his life in this economy there is no incentive to question whether or not the documents presented by a potential cheap hire are legal. A BIG variable expenses for both these types of Businesses is Labor. By reducing their labor Costs they increase their Margin.

                      I recently saw the foreman for our Landscaping Contractor paying is crew - no check - just Benjamin Franklins - for everyone.

                      The landscaping contractor minimizes his employer Taxes by paying a portion of his non-US workers under the table.

                      Please don't read my view as anti-immigrant. So, many of Americas most successful companies were created by immigrants. I'm just amazed that we never discuss the impact on the Median Wage earner in the Unitied States. The Meat packing Industries and Poultry business has relied on Immigration for survival. James Grant did a great analysis a few months back on how bad the Poultry business has been since the fear of Avian Flu. The increasing Inventories have made it impossible for the Poultry suppliers to increase what they charge the consumer. Meanwhile inflation has been eating the Big Poultry businesses alive - and Immigration keeps the costs of labor down. No need for a Major Medical plan when you have lots of less than 40 hr per week Immigrants chopping up the Birds.

                      Comment


                      • #12
                        Re: Robert Shiller: Let's Index Inequality

                        BK,

                        Fear not our government is at work. Immigration probe snares nearly 1,300.

                        http://news.yahoo.com/s/nm/20061213/...swift_usa_dc_5

                        Though I guess it will stick in the craw of anyone Liberterian, what this country must someday have is a non-replicable bio-identification card--this has to happen. The more people, the more complex are societies, and without any doubt some people will figure a way to "beat" the system, or to abuse the system with regard to all things that impinge upon the good of others. That is why there are ever increasing laws. There is no way that society will progress with a need for fewer laws. Then of course the laws have to be inforced
                        Jim 69 y/o

                        "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                        Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                        Good judgement comes from experience; experience comes from bad judgement. Unknown.

                        Comment


                        • #13
                          Re: Robert Shiller- Illegal - I am sympathetic

                          Jim,

                          I think the well promoted raids are merely a Public relations stunt. Democratic and Republican Politicians want it to appear they are working on an issue - without working on the issue. This is too explosive an issue for any politician to be interested in addressing it. Undocumented workers really don't need to be sought out with high profile raids - they aren't that hard to find.

                          You are avoiding discussing the true problem. These folks from Mexico and Central America (and elsewhere) are just trying to feed their familes. But, at some point you allow some many immigrants that you reduce the value of even their own labor. This leads to a reduction in value for entry level jobs and forces the prevailing wage for unskilled/semi-skilled work down.

                          Those who control the most assets are able to increase their wealth through having lots of cheap labor available. The regular guy doesn't have the Cash or physical asset that generate cash. For example, if you own a sod farm in New Jersey - its a lot cheaper to rely on Immigrants than to hire a US Citizen who will want Medical plan and other benefits.

                          Unbridled Immigration allows inflation to be minimized in the Service sector of our economy - Illegal Immigrants help the Politicians by reducing wage inflation for the average worker.

                          Making Immigrantion one of the best Inflation fighting tools that the Politicians have in their bag of Tricks.

                          Comment


                          • #14
                            Re: Robert Shiller- Illegal - I am sympathetic

                            Originally posted by BK
                            Jim,

                            You are avoiding discussing the true problem.
                            BK,

                            The True Problem is that there are too many people already on the planet.

                            The True Problem is that the great American Democratic political system is a failed system

                            The True Problem is that gaming, having an iPod, cellphone, car are more important than the possibilities from gaining an education.

                            The True Problem is that the most important "jobs" on the planet require no determination of suitablity for undertaking the job: all that is required are two willing opposite sets of reproductive organs.

                            The True Problem in America is nothing is going to change for what in reality might be better for everyone until such change is forced upon whatever ends up being the system of government.

                            I ran across something a night or two ago the title of which regarded the lack of prepardness of public health measures to deal with something like the bird flu or similar catastrophe, and it occurred to me that so many of this country's financial problems--such as unfunded social security, Medicare--would actually cease to be a problem, or would be much less of a problem if large segments of the population were killed by something. Perhaps some people in high places are counting on such as the "final solution" at least for a moment.
                            Last edited by Jim Nickerson; 12-13-06, 03:41 PM.
                            Jim 69 y/o

                            "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                            Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                            Good judgement comes from experience; experience comes from bad judgement. Unknown.

                            Comment


                            • #15
                              Re: Robert Shiller- Illegal - I am sympathetic

                              Originally posted by BK
                              ...
                              Making Immigrantion one of the best Inflation fighting tools that the Politicians have in their bag of Tricks.
                              But let's not ourselves be misled. Immigration, globalization, etceteras have utterly nothing to do with actual inflation. Immigration, for example, merely dumbs down our inflation statistics by bringing more low-wage workers into the reach of our domestic database. After all, their wages are no lower here than they were where they were before they immigrated.

                              The suggestion they lower inflation merely by being brought within our borders is no more accurate than suggesting there are more tuna in the Pacific as a result of a fisherman casting a wider net.
                              Finster
                              ...

                              Comment

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