More on Income Inequality

Earlier this year, I discussed the origins of the terminology of the “1%” and the “Occupy” movement described by Joseph Stiglitz.  Stiglitz has once again reaffirmed when speaking at Ramapo College, reported by North Jersey, about the income inequality in America.

Stiglitz talks about what makes income inequality such a mess for the United States.  Because of the separation, the amount of economic growth is hindered, and ultimately has led to recessions in American history.

“When we have a lot of inequality, demand goes down. … All this inequality was offset by creating a bubble. The bubble allowed people to consume more. Now we have the inequality but we don't have a bubble, and that means that we will have persistent, weak demand, and therefore unless we create another bubble it's going to be very difficult for us to get back to full employment.” -Economist Joseph Stiglitz

So this leaves us at our current standing.  The market looks to be growing, but as long as we continue to stand at a level of inequality in wealth, how far will we be able to hold growth?

Further points are made by Stiglitz that the problem with income inequality doesn’t revolve simply around the need to literally redistributing money to the poor, but more so the ability to create economic growth in the United States.  This includes building on education, infrastructure, and technology that will ultimately benefit growth in human capital.      

In my behavioral economics course, we have discussed the valuation of risk, and what the overall utility effect will have on society.  When looking at the situation theoretically, we can determine that there are two kinds of people: those who thrive off the benefits of wage gain, and those who further fear the loss of wages.  For each scenario, there are benefits that can be gained by society when determining what people would prefer. 

 Figure A

Figure A shows the benefits that a person who values higher wages gains over the risk of lower wages (a typical 1% mindset).  We can see that the overall benefit, or utility, of receiving an equal pay raise compared to pay reduction.  The raise in wage offers higher utility and outweighs the risk of receiving an equal pay cut.  In this scenario, If we were to assume society taxed the people to average the initial wage, the person with this preference curve would consider themselves worse off.    

 Figure B

On the other hand, figure B shows the other spectrum.  As one can see, the person typified for this curve is more risk adverse, and realizes a larger drop in utility from the initial price, showing the value placed on the initial price.  This preference would benefit from the averaging of the wages of the initial price, as the growth of more wages, as a whole, would not benefit enough to see a large change in preference.

Now how does this relate with Stiglitz’s arguments?  Well, we can likely assume that majority of the people in America take harder hits from wage cuts of the same value of a raise (based off assumptions that the 99% stand for).  With the ability to balance out the income distribution, we can potentially see higher utility for a higher quantity of Americans. 

While this may be a bit of a stretch, trying to connect the problems with income inequality can further benefit the potential that the United States economy can hold.  Perhaps extending the term wages, to amount spend towards human capital per capita, would be more sufficient.  This variable may then hold Stiglitz’s points on redistributing in order to stimulate the economy, and avoid the dreaded bubble that we have fallen victim to in the past.

References:

1. Tangel, Andrew. “Famed Economist: Income Inequality Bad for Economy”. North Jersey. http://www.northjersey.com/news/141149483_Economist_says_wealth_gap_is_bad_for_growth.html

Wall Street: How Things Haven't Changed

After I wrote in a previous post on credit cards and consumer faith in the financial industry, I chose to turn the television on to relax my mind for a bit.  While scanning through the channels, I stumbled across Wall Street, the 1987 critically acclaimed film that portrayed the malicious world that is the free market.

Cutthroat, power hungry brokers and their investors push around shares of company's to make a simple dollar. As Charlie Sheen's character is sucked into the world of insider trading and other unethical trade practices, the film truly holds up what remains a problem in today's society, or at least how the public perceives it.

While the SEC has tightened greatly since 1987, we can still see why Americans have lost faith in capitalism.  The financial industry has seen tremendous growth in the number of members in the 1% category, and their wealth comes at the hands of many people's downfalls.  The concept of the art of unethical trading is questioned in the film when Bud Fox asks Wall Street legend Gordon Gekko, "When does the game end?"  The question lingers today, and begs the question of when the social costs have finally hit such a large hole?

If I learned anything from the film, the importance of expectations is a fact that I confirmed.  What the market perceives to be valuable (even if it is simply overstated by high volume traders) can cause an eruption.  A shot heard 'round the world.  On the other hand, a single whisper might send a thriving corporation into bankrupt.

Last year, the S&P bond ratings lowered the US bonds from AAA to AA, a downgrade that sent investors running to the hills.  Many economist felt the downgrade was unnecessary and put false perception in the eyes of investors.  The truth remains that control remains in the power of who controls the access points in society.

The S&P downgrades, which have been occurring often in the last year, should send warnings to investors, that perhaps putting all of one's eggs in the same basket isn't wise.  I am not saying S&P is a hoax; but, we should always gain access to as many sources as possible.  Make sure to check the credibility and react in ways that benefit not only ourselves but the social wealth of the American and global economy.

References:

1. Brandimarte, Walter. "United States Loses Prized AAA Credit Rating from S&P". Reuters.  http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-idUSTRE7746VF20110806 
2. Wall Street (Film). 1987.    

Income Inequality...When Will the Separation End?

Income inequality is one of the topics that I have been looking over the last few weeks in my journal entries.  Last week, the Economist published an article giving the details on who exactly the 1% entails to, given the recent release of presidential candidate Mitt Romney.  One of the big stats in the data is the differential in job positions by the 1% from 1979 to 2005.  

There has been a rise in lawyers in the 1% along with a substantial rise in the financial industry.  The belief is that those who have now gained vast sums of money are innately able to invest in the market to further build their wealth.  The article continues to discuss more about the consequences that occur because of the amount of money invested by in the financial industry.  

In my post on higher inequality and intergenerational mobility (1-19), we see that generation to generation inheritance creates heavy income inequality.  The 1% are able to invest their money and put their family in positions to exceed far beyond what most can even imagine.  Also, the Economist discovered that members of the 1% are more likely to marry within the other members of the 1%.  This leaves the wealthy even better while the middle class shrinks.

Another article that I fell across from a while back was Joseph Stiglitz article on the development and damage of the 1% (written in May 2011).  This came before the Occupy movement began, but explains the reasoning for anger amongst the lower and middle class of America.  While many supporters of the current capitalist system believe the growth in America is strong, that remains to be seen only among the 1%.  

The trickle down effects that are believed to exist have not been working over the past decade, and statistics could support that this has been a problem for even longer.  Among those fighting to protect the rich, numerous government officials entering today are heavily supported by these corporations, and many are part of the 1% themselves.  To think the government were supposed to be protecting and serving the rights of the majority in America.

Now, with this continuous trend of increased differential in incomes, there is a lot to stand by that the United States needs to switch things up.  The amount of tax money that is going into the education systems are at an all time low.  And the worst part is that many government officials want this percentage to be cut even further.  America was built for opportunity for all, but by not only cutting the funds in secondary schools and four year institutions, community colleges are taking heavy hits.  This seems extremely poor considering the fact that many of minds can be garnished after secondary school once students have started to mature.  

For the sake of our country, it would seem wise to invest in the proper places, and not that this income inequality is not going to benefit our economy.  The costs will surely sink the benefits of the corporations that are trying to get tax free to bring growth the economy.

References:

1. "Income Inequality: Who Exactly is the 1%?". The Economist. http://www.economist.com/node/21543178
2. Stiglitz, Joseph E. "Of the 1%, by the 1%, for the 1%". Vanity Fair. http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105