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Rising Inequality in an Era of Austerity: The Case of the USA

Presented at Special Session on:

The Big Thinkers & The Big Five in one day 51st Annual ERSA Congress

Barcelona, Spain August 31, 2011

___________

Mark Partridge and Amanda WeinsteinThe Ohio State University

Swank Program in Rural-Urban Policy

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Introduction• We look in the future to what we see as an emerging US crisis.• Most of the world is fixated on surviving the Great Recession and the

subsequent “recovery.”• We argue the Great Recession covered up some structural trends. • Before the Great Recession, American families had become

increasingly vulnerable. Incomes for the vast majority of Americans had stagnated, and American cities are being globally challenged as leaders in innovation.

• Rising inequality is a cause of many of these long-term problems and its decades-long increase is reaching a tipping point that will cause significant problems unless it is addressed.– Inequality is good until it goes to far, but we believe we are pushing too far.

• We argue the rising trend in inequality is unsustainable. • Unsustainable trends either end the easy way or the hard way.

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Macroeconomic Context—The Old Institutions Matter Argument

• The great strength of the US economy in the latter 25 years of the 20th Century was job creation! Conventional Wisdom: Flexible U.S. labor markets allow less skilled workers to obtain work even if income inequality grew. “Inflexible” European labor markets did not having rising inequality but had very little job creation and high unemployment rates.– Nickell (1997); Blanchard & Wolfers (2000); Bertola, Blau & Kahn

(2001)– The flip side: Since 1973, the US economy has not

performed well in generating wealth for most Americans. • Since 2000, the US job machine has broken down.

U.S. Employment to Population Ratio

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

0.45

0.5

0.55

0.6

0.65

0.7

0.75

U.S. Male Female

US-EU* Annual Employment Growth Comparison

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-0.070

-0.060

-0.050

-0.040

-0.030

-0.020

-0.010

0.000

0.010

0.020

Europe United States

Empl

oym

ent G

row

th R

ate

* EU includes the EU15 plus the Czech Republic, Hungary, Iceland, Norway, Poland, Slovak Republic, Switzerland, Turkey

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19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

-0.05

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

U.S. Metropolitan Area U.S.

Grow

th R

ate

Annual US and Metropolitan Job Growth

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Macroeconomic Context—The Old Institutions Matter Argument

• While the U.S. experienced greater inequality, this may have promoted growth as it reflected greater incentives—– US states with more inequality had greater income growth.

• Partridge (1997, 2005); Frank (2009); Hasanov and Izraeli (2011) have a more nuanced view

– Metro areas (especially large ones) have a positive inequality-growth link. Fallah and Partridge (2007) argue more growth occurs where there are economic incentives for innovation and new market ideas—i.e. inequality (incentives) enhances agglomeration economies in promoting growth.• Inequality induces people to acquire more skills, as well as be innovative

and entrepreneurial because success has greater rewards – Welch (1999). • Inequality promoted American cities as global leaders in innovation.

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Macroeconomic Context• Moral: Inequality is Good! (Welch, 1999) • BUT, has US inequality grown too much for this

optimistic assessment? Is inequality still good?– Inequality is linked to more poverty, crime, poor health

outcomes—perhaps less social cohesion and equity concerns (Noah, 2010). So there are tradeoffs.

– Greater income mobility would offset normative worries about inequality. • Gottschalk and Moffit (2009) argue that mobility has declined. • Kopczuk et al. (2010) show the income mobility is remarkably stable

since 1953 (less for men offset by more mobility for woman).• In either event, mobility has not increased, meaning more

Americans are relatively falling behind.

U.S. Household Gini Coefficient

1967 1970

1973 1976

1979 1982

1985 1988

1991 1994

1997 2000

2003 2006

2009 0.380

0.390

0.400

0.410

0.420

0.430

0.440

0.450

0.460

0.470

0.480

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19731975

1977 1979

1981 1983

1985 1987

1989 1991

1993 1995

1997 1999

2001 2003

2005 2007

2009 40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

Median Income Mean Income

2009

Dol

lars

Ratio = 1.16

Ratio = 1.37

U.S. Median and Mean Household Income

• The distribution of income is becoming more skewed

International Gini Comparison

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U.S. Regional Inequality Trends• Regional variation in inequality tends to reflect

different trends of “good” incentives and those that reflect breakdown of social cohesion.

Median and Mean Household Income by Major U.S. Region

19751980

19851990

19952000

200535,000

45,000

55,000

65,000

75,000

Northeast

Median IncomeMean Income

Ratio = 1.45

19751979

19831987

19911995

19992003

200735,000

45,000

55,000

65,000

75,000

Midwest

2009

Dol

lars

Ratio = 1.31

19751979

19831987

19911995

19992003

200735,000

45,000

55,000

65,000

75,000

West

2009

Dol

lars Ratio = 1.37

19751980

19851990

19952000

200535,000

45,000

55,000

65,000

75,000

South

Median IncomeMean Income

Ratio = 1.37

• The distribution of incomes are more skewed in the Northeast and West

Metropolitan Areas with Highest Gini 2009Metro Area Gini

IndexMedian

Household Income

1. Bridgeport-Stamford-Norwalk, Conn. 0.532 $79,063 2. Naples-Marco Island, Fla. 0.516 $52,988 3. Brownsville-Harlingen, Tex. 0.507 $30,864 4. New York-Northern New Jersey-Long Island, N.Y.-N.J.-Pa. 0.504 $62,887 5. McAllen-Edinburg-Mission, Tex. 0.494 $30,460 5. Miami-Fort Lauderdale-Pompano Beach, Fla. 0.494 $45,946 7. Trenton-Ewing, N.J. 0.487 $71,650 8. Shreveport-Bossier City, La. 0.481 $40,936 8. Tallahassee, Fla. 0.481 $39,973 10. Charleston, W.V. 0.479 $48,246 10. Charlotte-Gastonia-Concord, N.C.-S.C. 0.479 $51,267 10. Lexington-Fayette, Ky. 0.479 $46,735 10. Los Angeles-Long Beach-Santa Ana, Calif. 0.479 $58,525 U.S. 0.468 $49,777 France (2008) 0.327 Germany (2006) 0.270

Metropolitan Areas with the Lowest 2009 Gini Coefficients are fairly wealthy

Metro Area Gini Index Median Household Income

1. Ogden-Clearfield, Ut. 0.386 $60,208 2. York-Hanover, Pa. 0.397 $57,027 3. Lancaster, Pa. 0.399 $55,673 4. Anchorage, Ak. 0.401 $72,712 5. Reading, Pa. 0.407 $53,485 6. Vallejo-Fairfield, Calif. 0.408 $65,783 7. Provo-Orem, Ut. 0.414 $57,476 8. Salem, Ore. 0.415 $44,915 9. Colorado Springs, Colo. 0.418 $55,176 9. Honolulu, Hi. 0.418 $67,744 U.S. 0.468 $49,777 France (2008) 0.327 Germany (2006) 0.270

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How growing inequality reduces growth?• Partridge (1997, 2005) found that a greater middle-class income share

(Q3) is associated with greater income growth—Middle Class consensus.– But Q3 is falling—suggesting less future growth.

• Welch (1999) noted that inequality has adverse effects when people believe that hard work and good ideas do not matter—i.e., the system is rigged against them.

• Greater inequality may cause social instability and more political turmoil (Perotti, 1996; Persson and Tabellini, 1994) .

• Inequality may produce greater credit market constraints. Large shares of the population cannot afford to fund their education (reducing growth) or fund capital accumulation (Galor and Zeira, 1993; Aghion and Bolton, 1997).

• The last three have been thought to be not applicable to the US. Will this remain true with the rises in inequality we have seen?

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Inequality since 1990

• Since 1980, growth in inequality is more at the very top—top 1% or even top 0.1%.

• That underlies our concern that if only such a small subset are benefiting from growth, rising inequality does not promote growth.

• US levels are reaching levels that are seen in plutocracies.

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Income Growth in the U.S. by Percentile: 1973=100

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

0

100

200

300

400

500

600

0 TO 90 90-100 99-100 99.9-100

Inco

me

Leve

l in

2008

Dol

lars

(1

973=

100)

Slight decline in bottom 90%

Massive rise at very top

20-20%

-15%

-10%

-5%

0%

5%

10%

15%Average Top 1% Bottom 99%

Annu

al R

eal I

ncom

e Gr

owth

Average U.S. Income Growth for Selected Groups

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Consequences of Poverty

• As inequality increases, the US makes remarkably little progress in reducing poverty or in providing basic necessities such as healthcare.

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Metropolitan and Non-Metropolitan Poverty

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

6

8

10

12

14

16

18

20

22

Metropolitan Central City Suburb Non-Metropolitan

Pove

rty

Rate

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19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

13.5

14

14.5

15

15.5

16

16.5

17U.S.Metropolitan Area

Perc

ent U

nins

ured

Percent of Population Lacking any Health Insurance

25

New inequality Growth relationship from Amanda regression.

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What should the US do?• The causes of rising US inequality are:– Skill-biased technological change; immigration; declining

unionization; tax policy that is very favorable to the wealthy; falling real value of the minimum wage; globalization (tournament/star power á la Lazear and Rosen, 1981; Rosen, 1981), off-shore sourcing, etc.

• Our preferred cause is political concentration of power in the wealthy and corporations—how else can we explain the top 1% benefitting. We can’t argue they are computer geeks?– All of the above except skill-biased technical change are

ultimately political decisions (Hacker and Pierson, 2010; Noah, 2010; Atkinson et al., 2011).

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What should the US do?—cont.• What about political economy causes? • US political campaigns are drawn out. Not the short

parliamentary elections found elsewhere. The US system has less attachment to political party. Each campaign has added importance.

• Together, this produces a race for political contributions to fund lengthy expensive “modern” campaigns that require TV ads to be competitive. – Today there are very few limitations on contributions or

expenditures on elections by special interests.• Wealthy actors that make large contributions have

disproportionate influence.

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What should the US do?—cont.• Hence—we argue the US needs major political

institutional change before it will make the policies to address rising income inequality.

• Other “economic” changes in an age of “austerity”—– Reform the way U.S. corporate executives are paid.– Better education—especially for low income groups and

early childhood education. (Haskins and Sawhill, 2009).– Reform U.S. tax structure to make it more balanced

across economic groups.– While other structural changes would be “nice”, they will

not matter or happen until political reform is undertaken.

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What should the US do?—cont.• A ray of hope is that the US “robber baron” era

ended with the Progressive era at the turn of the 20th Century, followed by the New Deal. While we can debate the success of the economic reforms, there were major political reforms despite similar headwinds.– E.g., woman gained the right to vote, direct election of

Senators, referendum, initiative, and recall in many states.

• Thus, while the US faces challenges, there is a precedent for being able to adapt.

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Conclusion• Inequality is good for providing the incentives to

promote skill development, enhance innovation, and it promotes entrepreneurship and risk taking.– Fallah and Partridge (2007) argue that inequality

facilitates/enhances the effects of agglomeration economies. Helps build global cities.

• Inequality becomes a negative when social cohesion breaks down and people no longer believe that hard work and good ideas are rewarded.

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Conclusion• As the growth in U.S. inequality has shifted away

from the broad upper income groups (say top 25%) to just the top 1%, we argue that its positive effects in promoting growth and facilitating global US cities has waned.

• We worry that current trends in inequality are unsustainable and that it will increasingly cause reduced growth and hurt the development of American cities.

• We conclude that only political institutional change will make a tangible difference.

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THANK YOU!Email: Partridge.27@osu.edu for

slides or download from:

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Appendix

Effect on Per Capita Income

Parameter

Variable Estimate t-Value

Intercept -0.1661 -2.60

Population (2000) 0.0000 -0.50

Mean/Median (2000) 0.0708 1.46

Household Mean Income (2000) 0.0000 0.90

Effect on Median Household Income Growth

Parameter

Variable Estimate t-Value

Intercept -0.1402 -1.41

Population (2000) 0.0000 0.34

Mean/Median (2000) 0.2881 3.80

Household Mean Income (2000) 0.0000 1.90

Global Comparison

Median Household Income

Average Annual Employment Growth 1990-2009

39

GDP Growth Rate Comparison

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

2010

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

United States France Germany

Grow

th R

ate

40

GDP Comparison

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100

2000

4000

6000

8000

10000

12000

14000

United States France Germany

GDP

(bill

ions

200

5 Do

llars

)

Household Income and Per Capita Income

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 94

95

96

97

98

99

100

101

102

103

Median Income Mean Income Per Capita Income

2009

Dol

lars

(199

9=10

0)

Regional Median Income Changes

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 200988

90

92

94

96

98

100

102

104

Northeast Midwest South West

2009

Dol

lars

(199

9=10

0)

Quintile Upper Limit Comparison

1973 1975

1977 1979

1981 1983

1985 1987

1989 1991

1993 1995

1997 1999

2001 2003

2005 2007

2009 15,000

35,000

55,000

75,000

95,000

115,000

135,000

155,000

175,000

195,000

Lowest Quintile Upper Limit Second Quintile Upper LimitThird Quintile Upper Limit Fourth Quintile Upper LimitTop 5 Percent Lower Limit

2009

Dol

lars

Percent in Poverty by State

Percentage of Individuals Living in Poverty by County (2000)