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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 Weinstein
The Ohio State University
Swank Program in Rural-Urban Policy
1
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.
2
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.
3
U.S. Employment to Population Ratio
0.75
0.7
0.65
0.6
0.55
0.5
0.45
U.S.
Male
Female
US-EU* Annual Employment Growth Comparison
0.020
Employment Growth Rate
0.010
0.000
-0.010
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-0.020
-0.030
-0.040
-0.050
-0.060
-0.070
Europe
United States
* EU includes the EU15 plus the Czech Republic, Hungary, Iceland, Norway, Poland, Slovak
Republic, Switzerland, Turkey
Annual US and Metropolitan Job Growth
0.04
0.03
0.01
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-0.01
1991
0
1990
Growth Rate
0.02
-0.02
-0.03
U.S. Metropolitan Area
U.S.
-0.04
-0.05
6
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.
7
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.
8
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
U.S. Household Gini Coefficient
0.480
0.470
0.460
0.450
0.440
0.430
0.420
0.410
0.400
0.390
0.380
U.S. Median and Mean Household Income
75,000
70,000
2009 Dollars
65,000
60,000
Ratio = 1.37
Ratio = 1.16
55,000
50,000
45,000
Median Income
Mean Income
• The distribution of income is becoming more skewed
10
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
40,000
International Gini Comparison
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.
12
Median and Mean Household Income by Major U.S. Region
Midwest
Northeast
75,000
75,000
Ratio = 1.31
65,000
65,000
55,000
55,000
Median Income
45,000
45,000
Mean Income
35,000
35,000
1975
1980
1985
1990
1995
2000
2005
1975
1979
1983
1987
1991
1995
1999
2003
2007
2009 Dollars
West
South
75,000
Ratio = 1.37
75,000
Ratio = 1.37
65,000
65,000
55,000
55,000
Median Income
45,000
45,000
Mean Income
35,000
2007
2003
1999
1995
1991
1987
1983
1979
1975
35,000
1975
1979
1983
1987
1991
1995
1999
2003
2007
2009 Dollars
Ratio = 1.45
• The distribution of incomes are more skewed in the Northeast and West
Metropolitan Areas with Highest Gini 2009
Metro Area
1. Bridgeport-Stamford-Norwalk, Conn.
2. Naples-Marco Island, Fla.
3. Brownsville-Harlingen, Tex.
4. New York-Northern New Jersey-Long Island, N.Y.-N.J.-Pa.
5. McAllen-Edinburg-Mission, Tex.
5. Miami-Fort Lauderdale-Pompano Beach, Fla.
7. Trenton-Ewing, N.J.
8. Shreveport-Bossier City, La.
8. Tallahassee, Fla.
10. Charleston, W.V.
10. Charlotte-Gastonia-Concord, N.C.-S.C.
10. Lexington-Fayette, Ky.
10. Los Angeles-Long Beach-Santa Ana, Calif.
U.S.
France (2008)
Germany (2006)
Median
Gini
Household
Index
Income
0.532
$79,063
0.516
$52,988
0.507
$30,864
0.504
$62,887
0.494
$30,460
0.494
$45,946
0.487
$71,650
0.481
$40,936
0.481
$39,973
0.479
$48,246
0.479
$51,267
0.479
$46,735
0.479
$58,525
0.468
$49,777
0.327
0.270
Metropolitan Areas with the Lowest 2009
Gini Coefficients are fairly wealthy
Metro Area
1. Ogden-Clearfield, Ut.
2. York-Hanover, Pa.
3. Lancaster, Pa.
4. Anchorage, Ak.
5. Reading, Pa.
6. Vallejo-Fairfield, Calif.
7. Provo-Orem, Ut.
8. Salem, Ore.
9. Colorado Springs, Colo.
9. Honolulu, Hi.
U.S.
France (2008)
Germany (2006)
Gini Index
0.386
0.397
0.399
0.401
0.407
0.408
0.414
0.415
0.418
0.418
0.468
0.327
0.270
Median Household
Income
$60,208
$57,027
$55,673
$72,712
$53,485
$65,783
$57,476
$44,915
$55,176
$67,744
$49,777
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?
16
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.
17
18
600
Massive rise at very top
500
400
300
200
100
0 TO 90
90-100
99-100
99.9-100
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
Slight decline in bottom 90%
1975
0
1973
Income Level in 2008 Dollars (1973=100)
Income Growth in the U.S. by Percentile: 1973=100
Average U.S. Income Growth for Selected Groups
15%
Average
Top 1%
Annual Real Income Growth
10%
5%
0%
-5%
Full period
1993-2008
Clinton
Expansion
1993-2000
2001
Recession
2000-2002
Bush
Expansion
2002-2007
Great
Recession
2007-2008
-10%
-15%
-20%
20
21
Consequences of Poverty
• As inequality increases, the US makes remarkably
little progress in reducing poverty or in providing
basic necessities such as healthcare.
22
Metropolitan and Non-Metropolitan Poverty
22
20
16
14
12
10
8
6
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Poverty Rate
18
Metropolitan
Central City
Suburb
Non-Metropolitan
23
Percent of Population Lacking any Health Insurance
17
Percent Uninsured
16.5
U.S.
Metropolitan Area
16
15.5
15
14.5
14
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
13.5
24
New inequality Growth relationship from Amanda regression.
25
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).
26
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.
27
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.
28
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.
29
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.
30
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.
31
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32
Appendix
33
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
GDP Growth Rate Comparison
8.00
United States
6.00
France
Germany
2.00
-4.00
-6.00
39
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
-2.00
1976
0.00
1974
Growth Rate
4.00
40
2010
2008
2006
2004
2002
2000
1998
1996
France
1994
1992
1990
United States
1988
1986
1984
1982
1980
12000
1978
1976
1974
GDP (billions 2005 Dollars)
GDP Comparison
14000
Germany
10000
8000
6000
4000
2000
0
Household Income and Per Capita Income
103
2009 Dollars (1999=100)
102
101
100
99
98
97
96
95
94
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Median Income
Mean Income
Per Capita Income
Regional Median Income Changes
104
2009 Dollars (1999=100)
102
100
98
96
94
92
90
88
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Northeast
Midwest
South
West
Quintile Upper Limit Comparison
195,000
175,000
135,000
115,000
95,000
75,000
55,000
35,000
Lowest Quintile Upper Limit
Third Quintile Upper Limit
Top 5 Percent Lower Limit
Second Quintile Upper Limit
Fourth Quintile Upper Limit
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
15,000
1973
2009 Dollars
155,000
Percent in Poverty by State
Percentage of Individuals Living in Poverty by
County (2000)