Growing income inequality: sign of the next Great Depression?

[James Bowman]

Originally Posted by Incredible Hulctuary

I thought the rising tide of the invisible hand was supposed to raise all boats, not raise the boats of the top 10% and sink the rest.

http://www.boston.com/business/globe...idens_in_2005/

Well, you know the old saying, "why is it whenever we see the workings of the invisible hand, it always has its middle finger raised?"

However, you have to be careful about how you measure income inequality. I'll just cut and paste from the "income inequality" article at wikipedia.

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Criticisms of Income Inequality Metrics

1. It is not clear how income should be defined. Should it include capital gains, imputed house rents from home ownership, and gifts? If these income sources or alleged income sources (in the case of "imputed rent") are ignored (as they often are), how might this bias the analysis? How should non-paid work (such as parental childcare or doing ones own cooking instead of hiring a chef for every meal) be handled? Wealth or consumption may be more appropriate measures in some situations. Broader metrics of human well-being might be useful.

2. Should the basic unit of measurement be households or individuals? The Gini value for households is always lower than for individuals because of income pooling and intra-family transfers. The metrics will be biased either upward or downward depending on which unit of measurement is used.

3. These income inequality metrics ignore life cycle effects. In most Western societies, an individual tends to start life with little or no income, gradually increase income till about age 50, after which incomes will decline, eventually becoming negative. This will have the effect of significantly overstating inequality. It has been estimated (by A.S. Blinder in The Decomposition of Inequality, MIT press) that 30% of measured income inequality is due to the inequality an individual experiences as they go through the various stages of life.

4. Should real or nominal income distributions be used? What effect will inflation have on absolute measures? Do some groups (eg., pensioners) feel the effect of inflation more than others?

5. How do we allocate the benefits of government spending? How does the existence of a social security safety net influence the definition of absolute measures of poverty. Do government programs support some income groups more than others?

6. Income inequality metrics are seldom used to quantify and examine the causes of income inequality. Some alleged causes include: life cycle effects (age), inherited characteristics (IQ, talent), willingness to take chances (risk aversion), the leisure/industriousness choice, inherited wealth, economic circumstances, education and training, discrimination, and market imperfections.

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But in spite of that, a system where the rich get richer and the poor can barely keep up doesn't exactly do wonders for a country's long-term stability.

--JB