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#S17 is today, and reminds us of the price of inequality

September 17, 2012

The twitter hash tag is #S17, and using it will connect you to all those preparing for the first anniversary of the Occupy Wall Street movement, which of course is today, September 17th.

You will find tweets encouraging your participation: “If you feel that the world is on the right track, stay home. If you know things are bad, Join your local #OWS.”

Others will guide you on how to prepare, be it “Escaping from Zip Ties” or “How to pick your way out of handcuffs” (actually just the Smith and Weston model 100s).

But whatever your level of engagement, there is a message that this anniversary has for us all, a reminder of the real price of inequality.

The real price of inequality is in the first instance political, and only secondly economic.

Face it, the Occupy movement really does not have much to say in terms of concrete policy proposals, and many were quick to point this out from the very beginning. Asked by the Wall Street Journal last October about his views on OWS, Martin Feldstein, the prominent Harvard economist, could only say “I can’t figure out what that’s all about…I haven’t seen what they’re asking for.”

But the vagueness OWS projects in terms of policy is hardly a basis for dismissing its significance.

For one thing it gave voice, and made well-known, some basic facts about how labour markets function.

The sharp and growing division between the 1% and the 99% is something that has been known and documented by labour economists for at least a decade. I distinctly remember being stuck in a small room, late on a warm spring afternoon in 2003, somewhere in the bowels of Carleton University. My task at this academic conference: to discuss a research paper “The Evolution of High Incomes in Canada, 1990-2000″ written by Mike Veall of McMaster university.

Many similar studies of other countries, most notably the United States, were also available and published well before September 17th, 2011.

This research has profound implications for how we should think about inequality, and the underlying causes like technical change and globalization. The stories economists traditionally told, and the implications for policy drawn from them, were just too simple: that the demand for skills has gone up, outpacing supply, leading the educated to make more, and that we should encourage others to get their degrees.

But research speaks with its own voice only to a small crowd. It always needs a policy entrepreneur to be made relevant, and in this case it was not the think-tanks, not the public service, not the  media that offered a trumpet to make the message clear. Indeed, just the opposite. In 2008 Statistics Canada released information from the 2006 Census on the incomes and earnings of Canadians, dryly noting that:

Median earnings of Canadians employed on a full-time basis for a full year changed little during the past quarter century, edging up from $41,348 in 1980 to $41,401 in 2005 (in 2005 constant dollars).

Earnings of full-time full-year earners rose for those at the top of the earnings distribution, stagnated for those in the middle and declined for those at the bottom.

The report was widely pummeled by the pundits, and then dismissed. Occupy Wall Street got its facts right, and it made those facts clear to everyone in a way that can no longer be ignored.

Source: OECD, Divided We Stand, page 39

But it also articulated why those facts really matter.

The market is a particular kind of democracy, wonderfully suited for the efficient allocation of scarce goods. And in the buying and selling of goods we are not all equal, and shouldn’t be. In a well-functioning market our interests should not be measured by inherent rights, but rather by the number of dollars we are willing to put on the table. So what if 15 or more percent of all earnings goes to just 1% of the population?

There is certainly an economic case to be made that this kind of inequality is a problem, most notably that the concentration of the gains from 25 years of economic growth among a small minority set the pre-conditions for a financial crisis and the deepest recession since the 1930s, as Joesph Stiglitz has argued.

Yes, the market is a particular kind of democracy, but it is not wonderfully suited for the conduct of politics. In a well-functioning democracy our interests should be measured by inherent rights, rather than the number of dollars we are able to put on the table.

The problem is that markets and politics have never been separate spheres, and a gross divergence in economic status changes political discourse, and the rules of the game—both the subtle rules of how industries and interests are regulated, but also broader rules governing the design of taxes and social policy—in a way that threatens to be of relatively more advantage to the relatively advantaged. This is something clear to the academic crowd, but because of OWS also to everyone else.

The longer-term significance of the movement that is celebrating its first birthday will be not how it articulates its economic demands, but how it changes the political terrain. It is not clear how occupying city parks will lead to sustainable changes in the conduct of politics. There is certainly potential for that, as the results of the recent Quebec election may well suggest.

The video of the birthday party a longstanding captain of Canadian industry threw for his wife attracted a good many viewers in Quebec earlier this spring. It may have given some the impression that tax rates on the wealthy are not high enough, but what must have surely hit a nerve was that the line of invitees leaving their limousines, and walking down a red carpet into the opulence and grandeur of what appears to be North America’s answer to Chateau de Versailles, included the lead politicians of Quebec society, active and former, who were clearly part of the cozy club. Why even George Bush the elder was there, but most notably so was the then premier of the province Jean Charest, when he could still be referred to as an active politician.

The visuals of OWS’s birthday bash will certainly be of a different kind, but if the movement is to have many more birthdays it will need to continue offering lessons on escaping from hand-cuffs of the metaphorical kind: to use and form the tools of democracy to escape from old-school politics, vested interests, and less than transparent government.

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10 Comments
  1. TheNumeraire permalink

    “Median earnings of Canadians employed on a full-time basis for a full year changed little during the past quarter century, edging up from $41,348 in 1980 to $41,401 in 2005 (in 2005 constant dollars).”

    Between 1980 and 2005, the composition of the workforce changed greatly, due to the immigration of hundreds of thousands of low-skilled workers from poorer nations, who work at lower-paying jobs in the more rapidly growing service economy.

    In the 1981 Census, the UK, Vietnam and the US were the three largest countries of origins for recent immigrants; by 2006, neither the UK and US were near the top (US#5, UK ninth).

    http://www12.statcan.ca/census-recensement/2006/as-sa/97-557/table/t1-eng.cfm

    The trend towards immigration from poorer nations was already evident by 1991, as the link shows. A continual influx of low-skilled workers has the effect of skewing the median wage downward. Since, Canada (along with Australia) is a country with both a large foreign-born population and also heavily reliant of immigration for much of its population growth, immigration has a heavy influence on various time series measures that attempt to measure economic trends via median estimates.

    Actually, the Statscan link you provided in your piece demonstrates quite clearly the effect that poor immigrants have had on the lower half of the income distribution.

    Statscan says;
    In 1980, recent immigrant men who had some employment income earned 85 cents for each dollar received by Canadian-born men. By 2005, the ratio had dropped to 63 cents. The corresponding numbers for recent immigrant women were 85 cents and 56 cents, respectively.

    Statscan wrongfully suggests that this trend has taken place because recent immigrants have “lost ground relative to their Canadian-born counterparts”. That is not the proper conclusion to take from that piece of data — immigrants earn less relative to the Canadian-born population relative to 25 years earlier because far more immigrants are low-skilled, less educated and far less likely to come from an comparably rich Anglo Saxon country of origin.

    Furthermore, the 2006 Census tells us that one of the reasons that the upper portion of the distribution is increasing is because more individuals are earning high-incomes, not just because the 1% or some such group are earning an ever larger share. In 1980, only 3.4% of earners made at least $100,000 (in constant dollars); in 2005, 6.5% of earners were above the same threshold.

    It appears that some of the variables creating today’s measured levels of income inequality are of the positive kind: more immigration of individuals from poorer countries to our prosperous nation and more individuals earning high incomes that a generation ago.

    • Thank you so much for your thoughtful post. This is very helpful.

      If I were to take away a single major message it would be the idea that while inequality has increased, it is done so for a number of reasons. Most notably there is something happening at the lower end of the income distribution—and you note that immigration is part of that story—but there is also something happening at roughly the top 25 or 20%, and also—maybe I am adding this—there is something else happening at the very top, the top 1% or even the top 0.1%.

      Is this a fair summary?

      If it is … I totally agree. When thinking about inequality we should recognize that different forces are at work. Some of these may be driven by the nature of changes in labour supply—for example the skills and characteristics of more recent cohorts of immigrants—but also some are driven by changes in labour demand, as well as changes in institutions associated with work and pay (minimum wages, unionization, corporate governance determining CEO pay).

      Occupy Wall Street focuses our attention on only one of these. But even so this is an important factor. You might have an interest in reading the very detailed book published by the OECD called “Divided We Stand”, where some attention is paid to determining the degree to which changes in overall inequality are due to changes in just the share of earnings/income accruing to the top 1%. But also because it very thoroughly discusses all the underlying causes of changes in inequality.

      I also offer a series of posts briefly summarizing these theme, that there is not a single cause behind inequality, and therefore if there is to be a policy response there is no single lever to pull or button to push. You can find these in the “inequality” section of the blog, but you might in particular have an interest in this one, http://milescorak.com/2012/06/02/understanding-inequality-and-what-to-do-about-it/ . You can download a copy of the presentation which I actually presented to a meeting I was invited to Occupy Ottawa last June.

      I hope I interpreted your post correctly, and would look forward to any further thoughts.

      best, m.

  2. Senator-Elect permalink

    Hi Professor Corak,

    I saw this essay on the Globe and Mail website and enjoyed it a lot. Thank you for presenting the argument so clearly and persuasively. Hopefully many people pay it the attention it deserves.

    Please keep writing!

  3. Jamie Carson permalink

    Who knew?

    From a Congressional Research Service report excerpted in a NYTimes blog (link to both below):

    “The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

    However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”

    http://economix.blogs.nytimes.com/2012/09/15/tax-cuts-and-economic-growth/

    http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf

  4. Jamie Carson permalink

    Just released:
    CSLS Releases Reports on Happiness and Inequality and Redistribution in Canada

    The Centre for the Study of Living Standards (CSLS) has released two reports of general interest. Today the CSLS released a report entitled “The Impact of Redistribution on Income Inequality in Canada and the Provinces, 1981-2010” http://www.csls.ca/reports/csls2012-08.pdf. The objective of the study is to provide an overview of trends in income inequality, defined as the Gini coefficient, in Canada and the provinces over the 1981-2010 period and to investigate the impact of redistributive policies – namely, taxes and transfers – on these trends. Income inequality is measured in terms of market income, total income, and after-tax income, with the latter considered the most important from a well-being perspective.

  5. Hi Prof Corak

    I haven’t been on your site for a while now, but reading you here I have a feeling you have moved from your earlier position that the only real thing wrong with inequality was its negative effects on social mobility, to an approch that seeks to show the larger structural effects of income distribution. Am I wrong? In any case this seems to me like a very promissing route for economics to start looking at these things. Sure sociology has been saying it for years, but economics has developped some interesting methodological tools that with a little outreach towards other disciplines could in my view expand our understanding of inequalitybeyond ideological barriers.

    • Thank you for your comments.

      I don’t know that I have a particular view on inequality, or that I am moving to a different view. I do have an expertise in the transmission of inequality across the generations, having worked in that area of labour economics for about 15 years. So I feel most comfortable speaking to that issue. I certainly agree with your last point: the idea that as good social scientists we should try to put ideology aside and look at important issues as objectively as possible. Currently there have been important developments in the degree of inequality that makes it important, and that is also in part why I am tending to spend a certain amount of time thinking and writing about it.

      If you think there are particularly promising techniques/methods that economists have developed, and that others should learn about, please let me know what you specifically have in mind and perhaps we can try to talk about them, or describe their use in more detail.

      best, Miles.

      • Hi thanks for the reply. I was actually speaking to the degree of mathematical sophistication and empirical rigor of econometrics in general. Sociological theory has lots of interesting intuitions which can expand our view of such things as inequality beyond the (in my opinion) limited viewpoint of methodological individualism, but it seems to me like much of the discipline has trouble systematizing these intuitions into comprehensive empirical research programs. Methodological individualism often seems to lead to problematizing questions of inequality in terms of social mobility alone. I am no expert on the question (I am a doctoral student in STS), but my intuition is that integrating individuals in larger structures such as social spaces and networks could very well lead to new insights in the study of wealth distribution (I know some economists are now working in interdisciplinary fields concerning network models which is encouraging).
        But just off the top of my head: what can wealth distribution tell us about the segregation/integration of social spaces? How does it affect the formation of cultural constructs (read practical knowledge, identities, ideologies, etc.) within and across theses spaces? What effect do these constructs have on communication between networks and on people’s attitude towards the wider social body (the case of Occupy Wall Street is a prime example) or towards the way they wish to participate in the economy?
        Economic sociology is very much interested in these things, but often I feel that their ideological standpoint makes them blind to the intuitions of economics, while the homogeneity of the theoretical landscape in economics (and perhaps a superiority complex attributable to their status?) makes them intolerant of the sometimes “fuzzy” yet undeniably fundamental questions that sociologist keep asking.

      • Thanks for this. I am afraid that I don’t really have the expertise to give you an informed reply. My interest is to focus on finding honest answers to interesting questions that matter for how people lead their lives. It is important to use the best tools available regardless of discipline. That said it is probably certainly the case that disciplines may condition the kinds of questions asked in the first place. best, m.

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