The current level of income inequality in the U.S. is dampening GDP growth.
At least, that’s the conclusion of a new report from S&P Capital IQ. There’s a lot to digest in this exhaustive summary of existing research, including a bunch of interesting data on educational attainment and research on political frictions in times of extreme inequality. But the core argument is driven by a simple relationship: while many people tend to spend most of their earnings (and often more than they actually earn) on goods and services, those who make a lot of money spend a large share of their income on financial assets and property. As more and more of the country’s income shifts upwards to a smaller subset of the population, everyone else is deprived of spending power at the same time as more capital is available to invest. Read more
The Resolution Foundation has published its annual look at UK standards of living, and what a brightly coloured chartfest of post-recession misery it is indeed.
It’s an attempt to provide an accurate picture of income distribution, addressing some flaws in the official statistics. But the central message is that not just the middle, but everyone outside the top 1o per cent has seen their share of economic gains squeezed. Read more
For all the gnashing and wailing about the dangers of quantitative easing from some of the super rich, the fact remains that owners of capital (ie the rich) have done very well from QE.
Now, as we’ve noted before, plenty of serious people are paying attention to the inequality question, and its not clear what monetary policy can do about inequality even if it should do something about it. But news that US housing is turning frothy again, with San Francisco prices up 25 per cent over the last year, has Albert Edwards of Societe Generale reaching for the exclamation marks. Read more
From SocGen’s Andrew Lapthorne and quant team: in the first quarter of 2013, buybacks done to offset the dilution from executive stock options maturing reached near a post crisis high and ticked past the amount of buybacks done to reduce the overall share count — you know, those done to benefit the shareholders:
Coincidentally (or not), three speeches that exemplify a renewed focus on inequality have been given in recent weeks by the three women on the Federal Reserve Board – Governor Sarah Bloom Raskin, Governor Elizabeth Duke, and Vice Chair Janet Yellen.
That’s an observation from Neal Soss of Credit Suisse in a note released at the end of last month, writing that inequality has increasingly appeared on the radar screen of monetary policymakers. Read more
Risk assets have had a good run from western policymakers for several decades, says Morgan Stanley’s Gerard Minack. But that time is probably over. Read more
US president Barack Obama warned the nation Tuesday that the decades-old promise of a secure and rising middle class is under threat because of growing wealth disparity, says the Washington Post, in his election year State of the Union address which is expected to serve as a template for the campaign ahead. Mr Obama outlined a series of steps that he believes will reinforce the tentative economic recovery, including proposals to eliminate tax incentives for companies to move jobs overseas, to make college more affordable and to expand help for credit-worthy homeowners looking to refinance mortgages at historically low interest rates. Many of his proposals centered on changes to the tax code, including limiting deductions for companies that move jobs overseas, rewarding companies that return jobs to the US and increasing taxes on wealthy Americans, says the NYT. The US president said tax reform and budget reduction should be guided by the principle that anyone with annual income of more than $1m should pay a minimum effective tax rate of 30 per cent, the FT reports. The text released before the speech also pushed drilling for shale gas as a potential boost to the economy, reports Bloomberg. Hydraulic fracturing, which injects a mix of water, sand and chemicals underground to free gas trapped in rock, could create 600,000 jobs by the end of the decade, Mr Obama’s prepared remarks said.
…potential thus exists for the formation of a”vicious cycle” where increases in disparity weaken concern for wage equality or redistribution. This weakened concern affords greater future compensation differentials, a shrinking of the welfare state, and so on that further increase inequality and again shift preferences.
With all the furore around high pay packets and “capitalism in crisis“, it seemed appropriate to look up what some of the latest academic research has to say. The above is taken from a NBER working paper entitled “Income Inequality and Social Preferences for Redistribution and Compensation Differentials” and it’s by associate professor William R Kerr of Harvard Business School. Read more
This graph is from this powerpoint — part of a presentation by Alan Krueger, chairman of Obama’s Council of Economic Advisers.
So it has been used to illustrate American inequality and its effect on inter-generational social mobility. H/T P Krugman. Read more
Economists surveyed by Bloomberg expect the UK’s GDP growth to have slowed to 0.2 per cent in the second quarter, from 0.5 per cent in the first quarter. Output was affected by disruptions relating to the disasters in Japan, and holidays for Easter and the royal wedding. Demand is being hit by government spending cuts while high inflation is eroding household incomes at the fastest pace since the 1970s. Meanwhile the FT says new research shows that households with lower than average earnings have seen a sharp decline in their gains from growth in the economy, with government policies and changing sectoral composition among the causes.