Inequality, policy and some cause for optimism

The causes underlying inequality are extraordinarily complex. If the causes were simple to tease apart, the policy prescription to address inequality would also be simple to identify. In my ECONS102 class, we devote a substantial amount of time just to list a number of the most high-profile causes of inequality. Teasing out which causes contribute the most to current inequality seems like an impossible task.

However, it may be possible to look at differences in inequality over time, or between countries, and identify some of the contributions to those differences. For instance, in New Zealand there was a big jump in inequality in the late 1980s and early 1990s, as shown here (which is Figure D.14 from this report, and shows the changes in two measures of inequality for New Zealand from 1981 to 2017):

Since then, there really hasn't been much change, despite any media rhetoric to the contrary (a point made many times by Eric Crampton - see here and here and here for example - or see this post of mine from last year). In a recent article in Scientific American, Nobel Prize winner Joseph Stiglitz looks at the case of the U.S. His article is worth a complete read, but I'll pull out the most relevant bits:

Since the mid-1970s the rules of the economic game have been rewritten, both globally and nationally, in ways that advantage the rich and disadvantage the rest. And they have been rewritten further in this perverse direction in the U.S. than in other developed countries—even though the rules in the U.S. were already less favorable to workers. From this perspective, increasing inequality is a matter of choice: a consequence of our policies, laws and regulations.

In the U.S., the market power of large corporations, which was greater than in most other advanced countries to begin with, has increased even more than elsewhere. On the other hand, the market power of workers, which started out less than in most other advanced countries, has fallen further than elsewhere. This is not only because of the shift to a service-sector economy—it is because of the rigged rules of the game, rules set in a political system that is itself rigged through gerrymandering, voter suppression and the influence of money. A vicious spiral has formed: economic inequality translates into political inequality, which leads to rules that favor the wealthy, which in turn reinforces economic inequality...

Political scientists have documented the ways in which money influences politics in certain political systems, converting higher economic inequality into greater political inequality. Political inequality, in its turn, gives rise to more economic inequality as the rich use their political power to shape the rules of the game in ways that favor them—for instance, by softening antitrust laws and weakening unions...

Rigged rules also explain why the impact of globalization may have been worse in the U.S. A concerted attack on unions has almost halved the fraction of unionized workers in the nation, to about 11 percent. (In Scandinavia, it is roughly 70 percent.) Weaker unions provide workers less protection against the efforts of firms to drive down wages or worsen working conditions...

Many other changes to our norms, laws, rules and regulations have contributed to inequality. Weak corporate governance laws have allowed chief executives in the U.S. to compensate themselves 361 times more than the average worker, far more than in other developed countries. Financial liberalization—the stripping away of regulations designed to prevent the financial sector from imposing harms, such as the 2008 economic crisis, on the rest of society—has enabled the finance industry to grow in size and profitability and has increased its opportunities to exploit everyone else...

Other means of so-called rent extraction—the withdrawal of income from the national pie that is incommensurate with societal contribution—abound. For example, a legal provision enacted in 2003 prohibited the government from negotiating drug prices for Medicare—a gift of some $50 billion a year or more to the pharmaceutical industry. Special favors, such as extractive industries' obtaining public resources such as oil at below fair-market value or banks' getting funds from the Federal Reserve at near-zero interest rates (which they relend at high interest rates), also amount to rent extraction...

Notice the similarity in some of the arguments Stiglitz is making, to the market-based reforms that happened in New Zealand in the late 1980s to early 1990s. Many economists argue that there is a trade-off between market efficiency (the size of the economic pie) and equity (how evenly the pie is distributed). The reforms were designed to increase the size of the pie, so that all groups could have more, even if the shares were less evenly distributed. Stiglitz takes on those arguments as well:

Some economists have argued that we can lessen inequality only by giving up on growth and efficiency. But recent research, such as work done by Jonathan Ostry and others at the International Monetary Fund, suggests that economies with greater equality perform better, with higher growth, better average standards of living and greater stability. Inequality in the extremes observed in the U.S. and in the manner generated there actually damages the economy. The exploitation of market power and the variety of other distortions I have described, for instance, makes markets less efficient, leading to underproduction of valuable goods such as basic research and overproduction of others, such as exploitative financial products.

Stiglitz's policy prescription has many facets to it. Of most relevance to New Zealand are reform of political financing to reduce the influence of lobby groups, progressive taxation, increased access to high-quality education, modern competition laws, labour laws that better protect workers (see here for a related post of mine), and reforms to corporate governance laws and affordable housing. Much of that sounds like the policy goals of the current New Zealand government. So, if Stiglitz is right, then there may be cause for optimism for those who would prefer that inequality was lower in New Zealand.