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Author Topic: A slightly off-center perspective on monetary problems. Did rising inequality cause
JWatts
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I wasn't sure that this question was ever asked seriously, but Scott Sumner decided to address it.

quote:

A slightly off-center perspective on monetary problems.
Did rising inequality cause the financial crisis?

I can’t see any logical reason to connect these two variables, but lots of people seem to think they are connected. So I thought I’d look at the evidence. I found an OECD study that looks at income growth for the top 10% and the bottom 10%, between the mid-1980s and the late 2000s. It seems reasonable to assume that if the income of the rich is growing much faster than the income of the poor, then inequality is increasing, and vice versa. So rather than look at all countries, let’s focus on those where the difference is significant, say more than 1% per annum. There are 8 countries where the rich did much better than the poor, headed by Sweden:

Country Top 10% Bottom 10% Gap

Sweden 2.4% 0.4% 2.0%
Britain 2.5% 0.9% 1.6%
Germany 1.6% 0.1% 1.5%
New Zea 2.5% 1.1% 1.4%
USA 1.5% 0.1% 1.4%
Norway 2.7% 1.4% 1.3%
Finland 2.5% 1.2% 1.3%
Holland 1.6% 0.5% 1.1%

And there were four countries where income got much more equal:

Portugal 1.1% 3.6% (2.5%)
Greece 1.8% 3.4% (1.6%)
Spain 2.5% 3.9% (1.4%)
Ireland 2.5% 3.9% (1.4%)

The Money Illusion
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Pete at Home
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They are connected, but one did not cause the other. This economic crisis, like the Great Depression, was caused by various schemes by the Rich to get Richer. A wildly successful scheme, at least in the USA. So economic inequality did not cause the crisis, but the crises was caused by some of the schemes that exacerbated economic inequality.

The Republican proposal that we fix the economic crisis by cutting taxes on the very persons that caused the crisis, is a little bit like a proposal to tax black people to compensate whites for their ancestor's transport to America.

I say a little bit, because I recognize that my comparison is hyperbolic, although not on a Biden scale.

[ September 11, 2012, 03:08 PM: Message edited by: Pete at Home ]

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LetterRip
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First off I'd use the top 20%ile versus the remainder - the very poorest have very little impact on the economy one way or the other and can be largely ignored. Also the top 20%ile doesn't contain the wealthiest individuals (most data sets exclude almost all of the top 1 percentile). So his analysis is fairly useless.
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Wayward Son
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I don't recall who connected the latest financial crisis to rising inequality, or how they did so, so I don't understand the connection of these charts to the question.

quote:
And there were four countries where income got much more equal...
I really don't know where he got the idea that incomes became "much more equal."

Consider that, in the U.S., the top 10 percent of taxpayers earned 46.0% of the total AGI in the year 2000, while the bottom 50% (it isn't broken down any finer from my source at the IRS), earned 13.0% of the total AGI. That means the top 10% earned, on average, 17.7 times more than the bottom 50%.

Now the top 10% earned, on average, $230,480 AGI that year. Which means that the bottom 50% earned, on average, about $13,021. A difference of $217,459.

Now let's say that we had the same change as Portugal. That means the top 10% earned 1.1% more, or about $2535/yr. So they would now make thier AGI $233,015/yr, on average. But the bottom 50% made 3.6% more per year, or about $469. So their new average is a whopping $13,490/yr.

So the difference has gone from $217,459/year to $219,525/year.

It increased. [Frown]

And these calculations took the bottom 50% instead of the bottom 10%, so it is probably much, much worse.

So from my rough calculations, the only illusion here is that "income got much more equal." [Roll Eyes]

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Adam Masterman
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There is most certainly a connection between wealth disparity and the financial crisis, but I've never heard anyone try to frame it as simplistically as this. For one thing, the causes of the financial crisis are not well correlated (if at all) to the nation-states which experienced the worst of the fall-out and aftermath. For another, using the top 10% actually *hides* income disparity in a lot of cases: the top two percent could rise significantly, while the next eight percent could fall, and it would look flat in these statistics (but in fact be just the opposite).
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KidTokyo
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There is no "crisis" for the people at the top.

For everyone else, the "crisis" is the means by which the people at the top stay there. Our instability is their stability.

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Pyrtolin
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Car A increases its speed by 100%. Car B increases its speed by 10%. Which one is now dangerously over the maximum safe speed for its road conditions?

The information that you need to actually answer that question is similarly missing from Sumner's analysis, and he's not even presenting order of magnitude differences in rates.

A large rate of change from a small disparity is not as much of an absolute change as a small change where a large disparity already exists. (And the former might even be moving from a point where the overall level of disparity may be too low for healthy feedback- implicit in his analysis is a false assertion that people that complain about the absolute degree of disparity thing that any disparity is bad.)

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