Posts Tagged ‘Gini coeficient’

How Rising Inequality Hurts Everyone, Even the Rich

February 15, 2018

The title of this post is identical to the title of an article by Christopher Ingraham in the Business Section of the 11 February 2017 issue of the Washington Post. The article begins, “Over the past 40 or so years, the American economy has been funneling wealth and income, reverse Robin Hood style, from the pockets of the bottom 99% to the coffers of the top 1%. The total transfer, to the richest from everyone else, amounts to 10% of the national income and 15% of the national wealth.

It’s part of a massive concentration of wealth and income among the rich that has put the United States at levels of inequality not seen in this country since before World War II. It’s a trend that economists such as Thomas Piety believe will continue unchecked in the coming decades with the top 1% of American capturing a quarter or more of the national income by 2030.”

Research suggests that the inequality depresses economic growth, leaving less for society to divvy up—regardless of how its members decide to do so. Research has also discovered that inequality, particularly the light level seem today in the United States, promotes criminal behavior. Regardless of whether you’re in the bottom 99% or the top 1% these effects can take a chunk of your paycheck. The article notes “Leading economists and economic organizations are coming around to the idea that to maximize income and wealth for everyone—including those at the top—there have to be meaningful checks on income and wealth inequality.

The following is in bold in the article, “Inequality hurts economic growth especially high inequality (like ours) in rich nations (like ours). The Organization for Economic Co-operation and Development a collective of the world’s 35 wealthiest nations including the United States found that rising inequality in the United States from 1990 to 2010 knocked about 5% points off cumulative GDP per capita over that period. Similar effects were seen in other rich countries.

The OECD found, “The main mechanism through which inequality affects growth is by undermining education opportunities for children from poor socioeconomic backgrounds lowering social mobility and hampering skills development. Children from the bottom 40% of households are missing out on pricey education opportunities. That makes them less productive employees, which means lower wages, which means lower overall participation in the economy.”

What might be surprising is that while this is obviously bad news for poor families, it also hurts those at the top. For if you’re a billionaire owner of a retail or manufacturing company, you want people to be able to afford the stuff you’re selling. It is not because of any altruistic impulses that Henry Ford offered his workers high wages, but because he wanted them to buy his cars.

Inequality is not necessarily bad. A 2015 World Bank paper that a certain amount of inequality boosts per capita GDP in developing economies by allowing wealth entrepreneurs to invest more. This effects is reversed in advance economies like our own, because of the detrimental effects on education attainment mentioned above.

Even in advanced countries, not all inequality is harmful. A report by the International Monetary Fund found the inequality could be beneficial to growth at low to moderate levels. Using the Gini coefficient, where 0 means that everyone has the same income and 100 means just one individual has it all, inequality spurred growth in the counties with index values below 27. Too bad for the US where our current Gini index is somewhere around 41, which is well beyond the threshold where inequality because harmful.

To quickly summarize inequality harms overall growth by decreasing per capita income, damaging health and well-being, decreasing disposable income, or enticing middle-class individuals to incur debts they can’t pay.

Of course, this is of no interest to the Trump administration. They are not interested in research studies and instead are relying on Trump’s gut feeling. Moreover, Trump’s tax cut exacerbated the problem of wealth discrepancy and increased the size of the national debt.

© Douglas Griffith and healthymemory.wordpress.com, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.