Inequality begets inequality, according to the Economic Report of the President

On a warm evening last spring I found myself at a dinner party in the lush suburbs of a small Ivy League town not far from New York City.

The main concern of a fellow economist was the trouble his son was having raising his new family: that would be the son living in Manhattan, the one making $10 million a year.

It appears there is a bidding war for spaces in good kindergartens and, as we all know, prices skyrocket when demand outstrips supply.

And demand has been rising. We also know that.

So the most striking claim in the Economic Report of the President for 2012 is not that the share of earnings accruing to the top 1%—a share that was about 8% during the early 1980s—stands at close to 20%. After all, this is old news, the stuff of Occupy Wall Street.

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Inequality and Occupy Wall Street 8: causes of growing inequality and policies to address it

This video of a panel discussion called “The Challenges of Growing Inequality” organized by the Kennedy School of Government at Harvard University features a discussion by Lawerence Katz, a prominent labour economist. Katz speaks on the causes of inequality and offers advice to Occupiers on what should be done about it.

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Inequality and Occupy Wall Street 7: tax policy for occupiers

Perhaps a bit more politely than others in the mainstream media, but nonetheless pretty emphatically, the Ottawa Citizen columnist Joanne Chianello tells Occupiers that it’s time to leave, and she offers some advice:

“I don’t know what the answer is to the growing income gap. Unfortunately, neither do the people at Occupy Ottawa or Occupy Toronto or Occupy Vancouver. They could have contacted a lefty economist (yes, they exist) to help frame specific policy issues or demands, but they didn’t. Perhaps that’s the protest’s “stage two” we keep hearing about.”

Contact a lefty economist!

Well, if economists are going to be at the centre of “stage two” why don’t we forget about “lefty” or “righty”, and just consult the “best”?

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Inequality and Occupy Wall Street 5: decline of the American Dream

There is nothing wrong with inequality … until it starts limiting opportunity.

Well that might be a bit too strongly put, but it is certainly one thing to live in an unequal society where the chances of changing places with the rich, of seeing your children move on and upward, are high. Indeed, if this is the case we may even want a certain degree of inequality: people would have both the incentive and the possibility to better their situation.

But it is another thing altogether to live in an unequal society where there is little chance of moving on, where there are barriers preventing our talents and energies from being rewarded, where the accident of birth determines a child’s life chances.

This type of inequality should worry Occupiers and the 99% because it cuts sharply against what we commonly understand to be the American Dream.

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Inequality and Occupy Wall Street 4: daddy put you in the top 1% !

rupert-and-james-murdoch

It was almost a sad sight to see Rupert Murdoch’s son sitting beside the famed newspaper publisher in the televised committee hearings conducted by the British parliament last July.

James seems so out of depth.

Superstar salary he certainly has, but superstar talent?

If the members of the top 1% are there because of connections or political power—rather than by the force of their talent, energy, and motivation—then we should be rightly critical about claims that they merit their fortunes, and question the contribution they make to economic productivity.

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Inequality and Occupy Wall Street 3: the top 1% are superstars

To explain the fact that the top 1% now take home a larger share of total earnings than they ever have since the 1940s Occupiers need to understand the economics of superstars.

Talent is unique. Or as the late University of Chicago economist Sherwin Rosen stated, “hearing a succession of mediocre singers does not add up to a single outstanding performance.” When he was at his best there was only one Wayne Gretzky, and I guess that is why they nicknamed him “the Great One.” To those of us listening to the opera, or watching the hockey game, the superstar is one-of-a-kind. And because there are no substitutes they get paid much more than even the second best.

This only explains that there is a top 1%, and that as the most talented they get paid a good deal more than the rest of us. It does not explain what has changed, why have they been taking away a bigger and bigger slice of the pie since about 1980.

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