Tuesday, October 21, 2014

On rising income inequality: Janet Yellen, Mohamed El-Erian and Dani Rodrik

Piketty and Saez have definitely managed to let the 'gini out of the bottle' (the Economist and others used this expression: see here and here

Now, Janet Yellen warns against rising income inequality in the US in her speech at the Conference on Economic Opportunity and Inequality organized by the Federal Reserve Bank of Boston (her speech can be found here),  In a New York Times article we read that
...she painted a bleak picture of the increasingly unequal distribution of wealth  and income, warning that Americans already have relatively little chance to advance economically, and that the problem may be worsening...
On the 17th of October Mohamed El-Erian wrote an article published in Project Syndicate with he title The Inequality Trifecta.  It is crisp and to the point and should be a must reading for IB Economics students:
most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity.
and
Given that affluent households spend a smaller share of their incomes and wealth, greater inequality translates into lower overall consumption, thereby hindering the recovery of economies already burdened by inadequate aggregate demand. Today’s high levels of inequality also impede the structural reforms needed to boost productivity, while undermining efforts to address residual pockets of excessive indebtedness
This is particularly true in the case of Greece where most Greeks are unwilling to accept much needed structural reforms because they are suspicious of the short term and long term effects these will have.  It increases political polarization and may result in greater instability which could prove disastrous for the country.  As El Erian writes, rising inequality '...erodes social cohesion, political effectiveness, current GDP growth, and future economic potential'.

El-Erian also points to the article How the rich rule by Dani Rodrik where we read about the
...strategies to which political leaders resort in order to get elected. A politician who represents the interests primarily of economic elites has to find other means of appealing to the masses. Such an alternative is provided by the politics of nationalism, sectarianism, and identity – a politics based on cultural values and symbolism rather than bread-and-butter interests. When politics is waged on these grounds, elections are won by those who are most successful at “priming” our latent cultural and psychological markers, not those who best represent our interests.
with Rodrik concluding that...
 ...widening inequality in the world’s advanced and developing countries thus inflicts two blows against democratic politics. Not only does it lead to greater disenfranchisement of the middle and lower classes; it also fosters among the elite a poisonous politics of sectarianism.
 (Read about who Mohamed El-Erian, here and here)

No comments: