Download inequality as determinant of growth

INEQUALITY AS DETERMINANT OF GROWTH
The median voter hypothesis.
Three alternatives tax rates, and 3 voters (individuals)
Preference ordering
Voter 1 (poor)
Voter 2 (middle)
Voter 3 (rich)
A>B>C
B (A = C)
C>B>A
A = high level of taxes, B = middle level of taxes., C = low level of taxes.
Select btw. A and B. B wins 2 votes.
Select btw. C and B. B wins 2 votes.
Select btw. A and C. A tie. (Middle voter is a tie breaker).
If preferences are single peaked and consistent (if you want low taxes then
you would prefer tax rate of 10% to tax rate of 15% even if your most
preferred tax rate of 5% loses out), then the final choice will be
determined by the preference of the median voter.
This is also the peak of the aggregate (all 3 individuals) ordinal index of
preferences.
BM Asian exceptionalism explained by low inflation there; high
inequality in LAC partly due to high inflation there.
From Bulir’s table
BM OLS
Bulir
OLS
Hyperinfl
ation
omitted
Hyperinf.
Omitted
Log
Income
Log
income
squares
State
employment
Transfers
Hypeinfl High
.
infl.
Low
inflation
39.8*
39.4*
-2.61**
-2.57*
-0.223**
-0.242**
-0.416**
-0.397**
38.1*
-2.50*
-0.249**
-0.388**
-6.67*
-8.11**
38.5*
-2.53*
-0.249**
-0.401**
-6.6*
-8.8**
Very
low
infl.
7.81**
-6.0*
Effect of inflation on Gini (compared to hyperinflation)
-6
-6.6
-8
Very low
inflation
Low inflation
High inflation
Philippines, 1980-86 in Blejer and Guerrero (1990).
Equality measure is the share of “lower” income groups (bottom 60%)
over the top income quintile.
(Sl/Su).
They find, over 24 quarters, the effect on the income share of the
poor:
Positive effect
Productivity
Real ER
Real interest rate (!!)
Negative effect
Underemployment
Govt spending (!!)
Inflation
The same results are obtained if one uses the share of the bottom
quintile.
Some strange results: increase in interest rate →decline in GDP→
decline in share of high income groups, hence relative improvement
for the poor.
Also, real ER depreciation helps the bottom 60% relative to the top.
United Kingdom, 1967-77, Nolan (1987)
Employment income
Self-employment
income
Gross profits or rent,.
Interest dividends
Rents
Own pensions
Other pensions
Factor incomes
elasticity to economic
activity (capacity
utilization rate)
0.27
0.86
Household sector
income sources
elasticity to economic
activity
0.28
1.07
1.1
0.85
0.63
0.35
0.4
Undistbursed profits are most sensitive to cycles, total profits somewhat
less and dividends the least.
Effect of the cycle on the HHs is thus muted: elasticity of rent, interest and
dividends is 0.86 while elasticity of gross profits is 1.1. Also automatic
stabilizers kick in.
Problems with HH results. Underestimation of the sources of income that
are most pro-cyclical (returns from property, that is investment income).
Cycle increases inequality in HBS mostly because of the increased share
of top income groups: inequality is pro-cyclical. Gini increases on account
of cycles are relatively small compare to the overall inequality changes.
(That was a trend of decreasing Gini in the UK.)
This pro-cyclical nature of inequality contradicts other findings that say
that expansion reduces inequality because participation rates rise (as in
Beach re. the US). Pro-cyclical results agree with the results from Italy
(Brandolini) and also with what happened in Malaysia and Indonesia
during the 1997-98 crisis.
Italy, 1977-91 in A. Brandolini and P. Sestito (1994)
Gini  0.322  0.016 log t  0.591g
where t = time (trend), g = growth rate of GDP. Both are
highly significant. R2=0.86. Each percent of growth
increases Gini by 0.59 points. The pro-cyclical Gini
comes from gains in the top quintile and losses for the
bottom 40%. The third and fourth quintile show a very
mild pro-cyclical pattern.
Inflation reduces inequality (the opposite result from Blejer and
Guerrero, Mlinarik, Bulir), but the same result was found for
the UK and US (Blinder and Esaki, 1987, Nolan 1987 and 1988).
The indexation mechanism (scale mobile) operative until 1991
was specifically designed to help the poorer segments making
their percentage coverage higher (that is, indexation was a
decreasing function of income).
Another factor explaining this may be that inflation rises people
into higher tax brackets. Hence, the “fiscal drag.”
US, 1944-65 in Beach (1977)
Gini  0.426  0.22 p  0.75 g  0.41Um  0.005t
where p =inflation (not significant),
g = growth rate of GDP (not significant),
Um = male rate of UE (significant at 5%),
t = time trend. Estimated for the US over the 1944-65
period.
Brazil in Kane and Morisset (1993)
Effect of inflation on real income by quintiles, Brazil 1970-89
Labor
income
change
Asset
income
change
Total
income
change
First
quintile
-16.0
Second
Third
Fourth
Fifth
-4.7
-2.1
-0.8
-0.17
-2.9
-3.0
-36.4
-31.0
0.25
-18.9
-7.7
-38.8
-31.8
0.1
The rich protect their assets through indexation, and their
labor income through wage bargaining.