Wednesday, June 27, 2007

Larry Summers on rising inequality

Larry Summers weighs in on the subject of rising inequality in an article in FT (June 24).

Indeed, in a recent paper on tax policy prepared for the Hamilton project, my collaborators and I concluded from Congressional Budget Office data that, since 1979, changes in income distribution had raised the pre-tax incomes of the top 1 per cent of the population by $664bn or $600,000 per family – an increase of 43 per cent.

By definition what one group gains from changes in the distribution of income another group must lose. The lower 80 per cent of families are $664bn poorer than they would be with a static income distribution, which works out to $7,000 less in income per family or a 14 per cent loss. To put this in some perspective, the total gain in median family incomes adjusted for inflation between 1979 and 2004 was only 14 per cent. If middle income families had shared fully in the economy’s income growth over the past generation their incomes would have risen twice as rapidly!

While the most recent data available for performing these calculations come from 2004, it appears that the trend towards increased inequality is continuing and may even be accelerating, and will continue even in years when the price of stocks and other assets does not rise abnormally. It also appears that these trends reflect far more than increases in the financial return from education, as the top 1 per cent of the population has pulled away from the rest of the top 10 per cent and the top 0.1 per cent has pulled away from the rest of the top 1 per cent.

.......Given what has not happened to the pay cheques of average workers over the period of the information technology-induced acceleration in productivity and cyclical expansion, it is not plausible to suppose that policies that focus only on aggregate economic growth are sufficient to meet current challenges.

So, inequality is rising and growth cannot solve the problem. What do we do then? Greater regulation and curbing globalisation are not the answer, Summer avers. Okay, so what is the solution? Alas, Summers throws the problem onto the laps of politicians:

The challenge for those running for president of the US in 2008 – a challenge very different from that faced by presidential candidates until very recently – will be to develop a mandate for policy approaches that can ensure prosperity is more fully shared without threatening its fundamental basis.

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