Rewriting the Rules of the Market Economy to Achieve ... the...• Incentives for skilled biased...
Transcript of Rewriting the Rules of the Market Economy to Achieve ... the...• Incentives for skilled biased...
RewritingtheRulesoftheMarketEconomytoAchieveSharedProsperity
JosephE.StiglitzNewYorkJune2016
Enormousgrowthininequality• Especially inUS,andcountries thathavefollowedUSmodel
• Multipledimensions ofinequality• Moremoneyatthetop• Morepeople inpoverty• Eviscerationofthemiddle• Inequalities inwealthexceed those inincome• Inequality inhealth—especially largeinUS• Inequality inaccesstojustice
Source:TheWorldWealthandIncomeDatabase(latestdataavailableathttp://www.wid.world/).
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Real201
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Dollars
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Top1%AverageIncome(incl.capitalgains)
Bottom90%averageincome(incl.capitalgains)
Top1%vsBottom90%AverageIncome
Source:TheWorldWealthandIncomeDatabase(latestdataavailableathttp://www.wid.world/).
Incomeshareoftherichest1%
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UnitedStates
UnitedKingdom
Canada
Australia
Stagnation:U.S.medianhouseholdincome(constant2014US$)
Source:U.S.CensusBureau
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1975 1980 1985 1990 1995 2000 2005 2010
2014:$53,657
Declineinmedianincomeoffull-timemaleworker
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1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
RealMedianIncomeofFull-TimeMaleWorker,1965-2014
U.S.minimumwage,1938-2012
Source:U.S.DepartmentofLabor.http://www.dol.gov/minwage/minwage-gdp-history.htm
Mostinvidiousaspect:inequalityinopportunity
• Notasurprise:systematicrelationshipbetweeninequalityinincomes(outcomes)andinequalityofopportunity
Incomeinequalityandearningsmobility
Source:“UnitedStates,TacklingHighInequalitiesCreatingOpportunitiesforAll”,June2014,OECD.
Globalinequality
• AlmostallOECDcountrieshaveseenincreased inequality inlast30years
• Thetrendaroundtheworld issomewhatmixed,butremains aconcernalmosteverywhere
GinichangesinOECD
Source:OECD2015,InItTogether:WhyLessInequalityBenefitsAll,http://www.oecd.org/els/soc/OECD2015-In-It-Together-Chapter1-Overview-Inequality.pdf
Globalinequality:Ginisworseinmanycountries,late2000svs.1980s
Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html
Globalinequality:incomegrowthbypercentile,1988-2008
Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html
Globalinequality:incomegrowthbypercentile• Whatprevious chartmeans isthat,globally:• Veryrich—those atfarrightofgraph—haveseen theirincomesgrowatahighrate
• DevelopingAsianmiddleclass(especially China)hasalsogrownatafastrate.Thisisrepresented bythose inmiddle-left ofthegraph.
• Theincomesoftheworld’sverypoor—those onthefarleftofthechart—have notkeptpace.
• Advancedcountrymiddleclassincomes—those around the80thpercentile—have stagnatedcompletely
• (ThisistheanalysisthatBranko Milanovic hasputforward)
Majorchangesinunderstandingsofinequality• Trickledowneconomicsdoesn’twork• Thereneverwasgoodtheoryorempiricalevidenceinsupport• Inaway,ObamaadministrationandFedtrieditagain:bail-outtobankswassupposedtobenefitall;QEwouldworkbyincreasingstockmarketprices,benefittingmostlythoseattop
• “Repeal”ofKuznets law• WasperiodafterWWII,the“goldenageofcapitalism,”anaberration,theresultofthesocialcohesionbroughtonbythewar?• Withtheeconomynowreturning tothenaturalstateofcapitalism?
• Oristheincreaseininequalityafter1980aresultofachangeinpolicies?
• Largedifferences inoutcomes/opportunities amongadvancedcountries• Suggestingthatitispolicies,notinexorable economicforces thatareatplay
• Inequality isachoice• Aresultofhowwestructure theeconomythroughtaxandexpenditure policies, throughourlegalframework,ourinstitutions,even theconductofmonetarypolicy• Allofthese affectmarketpower,bargainingpowerofdifferent
groups• Evenaccesstojobsandabletoparticipate inlabormarket• Resulting indifferentdistributions ofincomeandwealthbeforetaxes
andtransfers
Majorchangesinunderstandingsofinequality
• Beginningaboutathirdofacentury ago,webeganaprocessofrewriting therules• Loweringtaxesandderegulationwassupposed toincreasegrowthandmakeeveryone betteroff
• Infact,onlytheverytopwasbetteroff—incomes ofthereststagnated,performance oftheeconomyasawholeslowed
• Resulting inbasicnecessities ofamiddle classsocietybeingincreasingly outofreachoflargeproportionofpopulation
• Retirement security,educationofone’schildren,abilitytoownahome
• “Repeal”ofOkun’s Law• Economieswithlessinequalityandless inequalityofopportunityperformbetter
• Equalityandeconomicperformance arecomplements• Manyreasons forthis
• Lackofopportunitymeansthatwearewastingmostvaluableresource• Macro-economic• Instability:Linkbetweeninequalityandfrequencyofcriseshasbeenshown
byIMFaswellasothers.
Cont’d
Majorchangesinunderstandingsofinequality
• Weakergrowth• Richestconsumeasmallerproportionoftheirincomes thanthepoorormiddle
• Greater equalitywouldstrengthenaggregatedemand
• Smallandmedium-sizedbusinesses, buoyedbystrongmiddleclass,aredriversofeconomicgrowth
• Politicaleconomy• Harderfordividedsociety tomakeneeded public investments in
infrastructure,technology,education,etc.• Asdemocraticprocesses areskewed(e.g.inU.S.),policies that
protect interestsandrentsofwealthiest replacethosethatsupportbroad-basedgrowth
• Erosionoftrust
• Wecanaffordtohavemoreequality• Infact,itwouldhelpoureconomy• Somemuchpoorereconomieshavechosenmoreequalitarianpolicies
• Becauseinequality istheresultofpolicies, itisshapedbypolitics• Economicinequalitygetstranslated intopoliticalinequality• Politicalinequalityleadstoeconomicinequality• Viciouscircle
Majorchangesinunderstandingsofinequality
Broaderconsequences
• Undermining democracy
• Dividing society
• Especiallywhen inequalitiesareonracialandethniclines
Alternativeinterpretationsofgrowthininequality
Marketforces—based oncompetitivemarkets(a) Changes insupplyanddemand fordifferent factors justturned
outbadlyforpoor—decreasing wagesofunskilledworkersandincreasing returns tocapitalandskilledworkers
(b) Increased inequalityintheintergenerational transmission ofadvantages leadingtoincreased inequalityinownershipofproductiveassets (humanandfinancial capital)
Changesinfactorreturns
(a)Skillbiased technological changeUnpersuasive• Skilledworkers’wagesgoingdown• Doesn’texplain gapbetween averageproductivityandaveragewages
(b)Globalization• Predictedbystandardtheory• Evidence thatithasplayedanespecially importantrolesince2000
Intergenerationaltransmissionofadvantage
• Richleavetheirchildrenwithmorehumanandfinancialcapital
• Equilibriumwealthdistribution reflectsbalancebetweencentrifugalandcentripetal forces
• Increased inequality reflects anupsettingofpreviousbalance
• Contrarytoprincipleofequalopportunity
Alloftheseareaffectedbypolicy,byrulesofgame• Incentives forskilledbiased technological changevs.resourcesavingtechnological change• Fedpolicy—lowinterestrates—encouragecapitalintensivetechnologies
• Absenceofclimatechangeunderminesincentivesforresourcesavingtechnologicalchange
• Thewaywestructured globalizationencouragedoutsourcingofjobs• Especiallyinabsenceof industrialpolicies
• Andweakenedbargainingpowerofworkers• Justaswewereweakeningunions
• Regressive taxationandweakeningpublicschools leadstoincreasedintergenerational transmission ofadvantage
Alternativeexplanation:increaseinrents• Increasedmonopoly, monopsony powershiftsdistributionofincomeandwealthtothosewiththesepowers
• Butalsootherreasonsforanincreaseofrent—with increasedincomeandwealthtothosewhocontrolassetsgeneratingrents• Landrents• Intellectualproperty rents• Rentextraction fromgovernment• Rentextraction fromconsumers
Oureconomyismarkedbyincreasingrents• Somearesultoftechnology• Networkeffects• Localizedservices
• Somearesultofchangesineconomy• Urban landrents
• Somearesultofpolicies• ChangeinIPRlaws• Deregulation—allowing extractionofmorerentsfromgovernmentandconsumers
• Somearesultofmarket “innovation”• Betterwaysofexploitingconsumers
Piketty’sexplanationisavariantofintergenerationaltransmissionhypothesis
• Twoclasses,capitalistssaveeverything, wealth growsatr,returnoncapital• Workers savelittle
• Withr>g,growthofeconomy, ifrdoesnotfall,shareofincomeofcapitalistsgrows
CritiqueofPiketty• Savingsrateofcapitalistsfarlessthan1• Returnoncapitalendogenous, andshouldbedecliningascapitalistsaccumulate• Modelsneedtohavemacro-/micro- consistency• IfWwereK(wealthandKweresame), thenlawofdiminishingreturnswouldimplyrwouldfall
• Andwageswouldrise• Theassumption thatr>gisnotconsistentwithlongrunequilibrium: Virtually allmodels showthatinlongrunsr <g:Piketty’sresultcannothold• Infact,Piketty’smodelhadbeenwell-studied inoldergrowthliterature
WhatPiketty’smodelcannotexplain• Ignoresgrowthinlife-cyclewealth• Cannotexplaingapbetween averagewagesandproductivity
• Eveniftechnicalchangeisskill-biased• Cannotexplaingrowthinoverallwealth/incomeratio• Canonlyexplain½to¾ofgrowthinwealthincomeratiobynationalsavings
• Wealth“residual”explainedbestbygrowthofrents• Landrents• Exploitation rents(monopoly power, politicalpower)• Intellectualproperty rents
• Wealthcangoupevenif“K”isgoingdown• Andmanyincreasesinwealthassociatedwithrentsleadtodecreased
productivity
WhatPiketty’smodelcannotexplain
• DistributiveeffectsofQE• Inmoderneconomy,keydistinctionisnotsomuchbetweendebtorsandcreditors,butbetween lifecyclesaversandinheritedwealth
• Differences inportfoliocomposition
• QEhasbenefits inheritedwealthatexpense oflifecyclesavers,contributingtoinequality
Consequencesofinequalityfortheglobaleconomy• Growthin2015weakest sinceGlobalFinancialCrisisandoneofpoorestperformances inrecentdecades; 2016ontrackforbeingequallyweak
• Underlying problem: lackofglobalaggregatedemand
• Oneofthereasons: highlevel ofinequality
• Inequality alsoaffectsaggregatedemand indirectly
• Increases instability
• Realizationofthiscreatesuncertainty
• Uncertainty leads tolowerinvestment
Concludingcomments• Inequality isnotjustamoral issue;ithaseconomic andpoliticalconsequences, especially when itreachesthelevel thatithasintheUSandespecially when itarisesinthewaythatitdoesintheUS
• Incremental changeswillnotsuffice• There isacomprehensive agendawhichwillsignificantlyreduceinequalityandincreaseequalityofopportunityentailing“rewritingtherules”
• Urgency—decisions todaywillaffectinequality decades later• Keyisrewriting therulesonceagain
• Realquestion isnoteconomics: itispolitics