A rising tide lifts all boats. A growing economic pie means bigger slices for everybody. Wealth that flows to the top will always trickle down.
Cheerleaders for wealth’s concentration have over the years invoked a variety of images to justify the ever larger fortunes of our society’s most fortunate. These images all rest on a single economic assumption: that letting wealth accumulate in the pockets of a few grows an economy’s capacity for investment and ultimately, as investments create jobs, leaves everybody better off.
That assumption has dominated mainstream economics for generations. But that’s changing. Even mainline economic institutions are these days challenging the notion that good fortune for the few eventually and automatically translates into better fortune for the many. The latest of these institutions to chime in: the OECD, the official economic think tank for the developed world.
The OECD’s just-published contribution comes right on the heels of another new analysis that essentially shreds what little credibility remains from that once dominant “rising tide” case for accepting inequality.
The co-author of this new analysis, former World Bank lead research economist Branko Milanovic, has had quite a year. The sensational international success of French economist Thomas Piketty’s Capital in the Twenty-First Century may owe more to Milanovic than anyone else other than Piketty himself.
The higher the inequality, the lower the income growth of poorer households.
Last fall, Milanovic published the first widely circulated review — in English — of Piketty’s masterwork. His rave write-up ignited within the chattering class a massive pre-publication buzz about the book. Piketty’s chronicle about concentrating wealth would go on to sell over 500,000 copies, more in a shorter period than any other economics tome in global publishing history.
Milanovic is currently doing his research work at the City University of New York Graduate center. His new paper, prepared with the World Bank’s Roy van der Weide, begins by noting a paradox within the economic literature on the relationship between inequality and economic growth.
Measures of income inequality, the two authors note, address how income levels can vary substantially from one economic class to another. But the measures that researchers have used to gauge whether the benefits from a growing economy do indeed “lift all boats” almost always focus on what’s happening to an economy’s average income or GDP per capita.
In their new paper, Milanovic and van der Weide set out to “unpack growth,” to explore how actual individuals “at different steps of the socio-economic ladder” are faring. The two zero in on state-level inequality in the United States over the half-century between 1960 and 2010.
For each state, the co-authors use micro-census data to highlight the income shares of rich and poor at the beginning of each of that half-century’s five decades. How does this initial inequality, they ask, impact how much the incomes of poor, middle class, and rich households grow over the next 10 years?
The answer their research has generated: The higher the state-level inequality at the start of each decade — in effect, the larger the top 1 percent share of each state’s income — the lower the income growth of the state’s poorer households and the faster the income growth of the richest.
A modest decrease in inequality more than doubles the income growth of a state’s poorest 20 percent of households.
The magnitude of this dynamic turns out to be quite striking. A modest decrease in a state’s inequality level at the start of a decade more than doubles the income growth of a state’s poorest 20 percent of households over the next 10 years.
Milanovic and van der Weide have some thoughts of why higher income inequality so stunts income growth for a state’s poorest. They point to the phenomenon they call “social separatism.”
In a society where the rich are grabbing incomes “significantly greater than the incomes of the middle classes,” the rich have little interest in public services. Their lives revolve around private services, everything from private schools to private country clubs.
These wealthy, note Milanovic and van der Weide, “prefer not to invest in public goods like education, health, and infrastructure.” But these public investments — for the poor — make all the difference in the world. Paltry investments in public services translate into paltry, or worse, income growth for the poor.
The political implication? If income inequality speeds the growth of wealthy people’s incomes, Milanovic and van der Weide wonder, how can we expect the wealthy to accept public policy changes that reduce inequality?
We can’t, of course. Most rich will continue to claim that trickle down works, no matter how empty that claim may be. And the evidence for that emptiness is pouring in from more than academic sources.
We now have, for instance, the live-action contrast of Kansas and California. In Kansas, an exceedingly rich people-friendly governor and legislature two years ago slashed taxes on the state’s wealthy, most notably by making business profits tax-free.
Sign-up for Too MuchIn California, meanwhile, voters at about the same time raised tax rates on taxpayers making over $500,000 by 30 percent.
The story since then: California, notes analyst David Cay Johnston, has grown jobs “at 3.4 times the rate of Kansas.” California’s weekly wages have also grown more than weekly wages in Kansas.
So maybe we do need a rising tide after all, a rising tide of voter anger at pols who keep winking at inequality.