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Robert Shiller Argues That Rising Inequality In The US Was A Major Cause Of The Recent Crisis, And Little Is Being Done To Address It
I have previously argued at some length that rising inequality is one of the main causes of the economic crisis.
Famed Yale economist Robert Shiller agrees.
As the Browser reports:
Yale economist Robert Shiller argues that rising
inequality in the US was a major cause of the recent crisis, and
little is being done to address it.
Shiller gave The Browser a reading list of books which explain the
economic crisis, including former IMF chief economist Raghuram G.
Rajan’s book Fault Lines, which gives several causes for the current crisis, explaining:
The first of them is political, and the politics that
lead to rising inequality. That’s been a trend in recent years in most
nations of the world. Inequality has been getting worse, particularly
in the US, but also in Europe and Asia and many other places. One
thing that this has done is it has encouraged governments, who are
aware of the resentment caused by the rising inequality, to try to
take some kind of steps to make it more politically acceptable. He
gives other examples as well, but historically, that has often taken
the form of stimulating credit: instead of fixing the problems of the
poor, lending money to them. He has a chapter entitled ‘Let them eat
credit’.The US in particular has stimulated the housing market, it has
subsidised lending to people, which drove up home prices in an
unsustainable way. And there wasn’t that much concern about, or
understanding of, the sustainability of this. That’s his first fault
line
Shiller notes:
I think inequality is a huge emerging problem, and that
our society has to think about dealing with it in a constructive and
real way – not through ‘Let them eat credit,’ not through wishful
thinking. We have to understand how we get inequality and what we can
do about it.
Shiller then discusses Winner-Take-All Politics: How Washington Made the Rich Richer and Turned its Back on the Middle Class, by Paul Pierson and Jacob Hacker:
This is a new book – it just came out. It’s about rising
inequality and it traces back to fundamental causes. I like books
that get back to ultimate causes and that think like social scientists
about these causes. The question is, ‘Why is inequality getting worse
in so many different countries?’ This book particularly focuses on
the US. The traditional answer is – well, there are a number of
traditional answers, but the most prominent among them is this idea
that in a modern economy there is a skill bias in technical change.
Our computers and communications have led to a winner-take-all
society, where only the really smart can make money. Everyone else is
technologically obsolete, with all these computers that are replacing
people. It is, I think, a very important theory.But Hacker and Pierson point out that it doesn’t really fit the
recent data. In the US, we’ve seen a rapid concentration of wealth at
the extreme high end. The top tenth of a per cent of the top hundredth
of a per cent of the population is getting wealthy very fast. They
point out that this is not true in Europe, and yet the economies are
very similar and growing at similar rates. If the technology is the
same, why would there be a difference at the extreme high end? And
they argue that the answer is really political. There have been
political changes in the US that allow the extreme high end to garner
more wealth. Ultimately, it represents a failure of our society to
take account of the fact that the extreme high end can lobby and can
organise for its own interests, and we’ve let it happen.
The interviewer asks:
So you feel inequality is central to what has gone on and that we really need to address that?
Shiller responds:
Yes – and there is
very little concrete talk about addressing it. It’s a very difficult
problem. You might think that in a system of majority voting, the
middle class and the poor would dominate and would prevent this kind of
inequality from developing. But it hasn’t been that way – it’s been
even less so that way lately, especially in the US. And once again, we
have to attribute that to some change in our zeitgeist, in our way of
thinking about what people view as important. That’s an underlying
theme in all of these works, going back to Adam Smith. I don’t think he
uses the word inequality very much – but it is about poverty and the
alleviation of poverty. In Adam Smith, of course, the wealthy tend to
be the kings and lords…
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Elitist econo-babble, strange immigration wasn't even mentioned, its kind of like discussing global warming and not mentioning the SUN.
When you look at who is poor and uneducated (not that it matters there are plenty of educated and unemployed professionals) the predominant source of the "poor and uneducated" are immigrants, aliens, foreign nationals and their children both in the US and Europe. The riots in France, Greece and Los Angeles were and are almost exclusively immigrant or children of immigrants.
The invading mobs are now taking down the wages of middle class white collar workers and professionals with doctors, lawyers and accountant wages scheduled to get slashed next.
Spot on remark. Iceland should also be set out as another example of the trend. They had riots too.
When the median price of a home doubles at the same time inflation adjusted wages for the average citizen are either stagnant or declining, does anyone think something bad isn't going to happen? How can the US homeowner percentage go UP under such a scenario!?... Enter the ultimate mortgage product..no verifiable income necessary, nothing down, interest only payment! What bank would write such a loan? Only a bank who knew they could sell it. Who would buy such a loan from a bank? Only a bigger bank who knew they could package it in such a way as to hide its true value (or lack of)... and quickly sell it down the line... and then bet against it for a little extra profit.
Most of us are now in an under-recognized, economically and socially catastrophic negative feedback loop (which is really just human nature run amuck). Everyone (rich, middle, poor) is trying to secure their piece of the pie in varying states of self preservation crisis mode. The rich just flat out have better means to build and secure their piece of the pie. I am sure in their view there is no limit to the resources one may need to secure themselves against economic and social upheaval.This time it ISN'T different.
Yes... I again I realize that we will all eventually reach the end point of our individual (or collective) survival time-lines. But... where's the intellectual fun in ending (or beginning) every post with the same inevitable end point over and over again.
"The poker game ends when one person gets all the chips ..." ... and a new game begins: "Get out of the Saloon alive, and with your winnings"
"the top hundredth of a per cent of the population is getting wealthy very fast. They point out that this is not true in Europe"
because Europe concentrated the wealth and power at the top a long time ago. The US is busy trying to catch up.
Do you like to just make stuff up on the fly because it fits your preconcieved ideas of what reality should be? Google GINI ratios
My God, I just figured it out.... the percentage of charitable giving that was done with currency printed out of the thin air was 100%.
<sarcasm/off>
Another drivel article.
The crossroad between US citizens is their ideological approach of issues.
The fact is that the US citizens are working collegially on a system that leads to increased inequalities, the bottom line being to fall on the right fence of the barrier, winner and loser and stuff.
So what?
The only questionable part is the US habit of getting the rest of the world foot the bill for the game the US citizens consensually agree on playing.
That is the only issue. Of course, the US citizens might wish to play another game if they lose their capacity to pour down their internal troubles on the rest of the world... That could be a point.
Raghuram G. Rajan... This guy had the legs to think and evaluate whether or not the US housing bubble was engineered in order to alleviate potential social tensions in the US.
It is well known that the fabric of the US society sells among many other things the idea that a hard working law abiding (non dissentful) US citizen will be rewarded by the possibility of buying a home during the course of his life.
Trouble, though, the US general environment keeps growing better and better, therefore building and owning a house in the US requires more and more resources.
As many US job outputs are not valued enough to meet the resources requirement, well, inflating a house bubble was a convenient way to direct resources on the world scale to the US.
The bubble pops and the houses built thanks to the bubble are left in the US. And the bill is sent to the rest of the world, with the idea they are guilty of offering environments requiring less resources to be operated.
Classical US business style. Nothing new. That is the way the US built their infrastructure during the 19th.
Most important thing is that this guy, this Indian, had the nerves to call a spade a spade, originating the issue at its origin.
Something unsurprisingly uncommon for an economist.
Not true: the housing/credit crisis was the result of specific, market manipulating attempts to flatten out economic inequality made by people who get really upset about economic inequality. So lets all take a deep breath before we get behind another grand scheme.
Besides, Shiller has the political mechanics wrong. It's the bottom and the top against the middle not the top against all. And up until like the day before yesterday (human civilization-wise) not starving or dying of diarrhea was the primary concern of almost all human beings, so let's keep things in perspective here. No one ever died from inequality.
If you keep waving penniless, third world peasants over the border EVEN IF EVERYBODY ELSE IN THE COUNTRY GETS RICHER EVERY YEAR inequality will continue to widen because the far left side of the scale is pegged to near zero.
The inter-connected, infallible, political/banker oligarchy is a real problem in America but its a specific and fairly recent problem that wouldn't be all that difficult to fix if the understanding and will were in place - a lot easier than addressing the massive public sector worker and entitlement problem would be.
Nobody ever died from equality either. An empty consideration then.
Just like the rest of the comment as usual.
Propagandists should really rise their expectations toward themselves.
Output is pretty poor.
This seems to be the topic du jour--same subject on the cover of The Economist and Atlantic magazines--must be a left wing plot !!
Dollar Bill is spot on, so many are totally brain mushed into---
YOUR SIDE MY SIDE YOUR SIDE MY SIDE and their CD is frilled.
How many on ZH has actually gone to see their representative at the state level?? 1%. Write down 10 simple questions and pick 2 that make it to the top of your priority concerns as face time is fleeting except when you go with 2 people as myself and a friend do--I stand in the doorway as to block any interuptions from the aides coming in to interupt while my friend sits and ask's the 2 questions.
1st ?what is most important to them--their family or the TBTF
2nd? why has mortgage and bank fraud not been prosecuted in this state to its fullest -who is to blame for this and why.
3rd? if there is time--how many people within their family are unemployed and why.
Get face time period and plant the seed.
I write Sen. Scott Brown at least once a week on various issues. My writings are not some emotional rant that I'm sure receive "form letter" responses, as his aides have called my home in response on "some" issues, so I know they are in fact being read. Usually I use many resources, including hard data here on ZH, but from others as well. I usually write to the local papers here also, which also have been published a few times, hoping to shed light on legal and economic issues.
Unfortunately, as I have found from comments I received, the majority have absolutely no clue or ambition to learn on their own. In fact, some comments openly ask: "What are you talking about?" and catagorize people in the "tin-foil hat" crowd. That's what we're up against, my guess is TPTB know this and as long as the masses are dumbed down, there's no imminent threat to the status quo.
I write Sen. Scott Brown at least once a week on various issues.
Myself have been there, done that, but after a dozen letters and generic replies I decided it was time to see the person themselves. Impressive were they--not hardly--totally uninformed--yes-- and completely taken in from the cathedral surroundings. Most of them could use a night class for Roberts Rules but most never heard of them. Maybe several of us here could form our own National Peoples Coalition Face-off team to look state reps in the eye and test their metal.
Just thinking Northeaster
This is why i am no longer a pure libertarian because without somwthing like a jubilee or some.structure that optimizes growth with the least amount of inequality a rigid class structure develops. Slavery and the caste system naturally sprang up from mostly free unregulated markets in the beginning of time. However how do we do it without killing incentive? For.example lets look.at my situation. Were you.to immediately end social security caps and raise marginal rates small professional business owners would take a huge hit. Close to.14 percent more of total income to.fica is big. My response at this point in my life is to close the office more and take more free time, because they havent figured out how to tax my free time yet. My marginal willingness to work and produce extra tax income.for the government is reduced in favor of more free time. This hurts rhe economy.in ways that are not noticed nor attributed correctly when noticed. Longer waiting times for my professional services and higher prices to the consumer will occur and will be disproprtionately borne by the average consumer since most markets particularly professional services are not pareto efficient. I will enjoy my.hedonic substitution here. Marginal propensity !
It's all over except the starvation and hypothermia. Good Bye cruel world.
Run for office. Vote out incumbents. Send letters to your representatives. Bust their balls. Rattle the cage.
Billionaire private equity guys and HF guys pay 15% income tax, because their billions are "carried interest". Are you only paying 15% ?
You should be carrying something that would be of interest to both the pols and the elite ... and that would clearly raise the whites of their eyes.
Indeed there's a clear observed correlation between social mobility and the top personal income tax bracket. See this OECD study for example:
http://www.oecd.org/dataoecd/2/7/45002641.pdf
In countries where the top bracket is high (50%) social mobility is measured to be the highest: children who get born into poor circumstances have a higher chance to raise 'out of their class' if they are smart and children who get born into richer circumstances have a higher chance to drop back to the middle class if they are idiots.
In countries like the US where the top bracket is low (35%) and the backdoor of capital gains tax can lower the income tax even more (to 15%), social mobility is the lowest: the poor stay poor even if they are smarter and the rich stay rich even if they are dumber.
Of course it's an average trend not a rule, so there are plenty of examples of people raising out of their class in the US as well.
So it seems that the concept of 'equal opportunity' is violated the most in countries where personal income taxes are the lowest.
Furthermore, there's another metric as well beyond social mobility, in countries where the personal income taxes are higher the willingness to be charitable to fellow humans is visibly higher as well.
Here's the list of the most charitable countries on the planet, on an "annual percentage of income given to charitable causes":
How charitable is the average US citizen? Only 0.20% of the average income ...
So it turns out that those 50% top tax bracket 'big wellfare state' taxpayers in Europe are giving two to five times more money per capita to charitable causes than the USA which has a top income tax bracket of 35%.
I hope everyone can see the dangers of allowing born-into social status determine the future role in life: it allows comparatively dumb people to command a comparatively much larger proportion of the nation's resources.
It makes boom & bust hardcoded, and it also makes those who have the means insensitive to people in 'lower classes'. Lack of vision and lack of empathy. Does that fairly describe the US? Looking at the health-care debate or at the Gifford incident I can only agree.
Your statistics didn't sound right so I double checked, and don't think they reflect reality.
Americans are the most charitable by far -- private giving alone = $295 billion in 2006, or about $1000 per person. This does not include massive $$ in US government spending on foreign aid, such as $10 billion for AIDS to Africa. The percentage is just dwarfed by our GDP. Your statistics are % GDP going to foreign aid, and that isn't even charity at all -- that's government spending. That's the %'s the Europeans always cite when they want to claim America is stingy and should give more money to the UN to waste. Over 50 charitable Americans died in the Haiti earthquake because they were already there at their own expense doing charitable work. That's common.
The least charitable tend to be atheists and socialist countries. China is at the every bottom.
Moreover, Thomas Sowell points out that while money is gravitating to the financial elites, the typical 10-12% "poor" statistic in America is woefully abused. Persons considered poor are constantly changing as people move in an out of brackets over their earning lifetimes due to upward mobility. Multimillionaire Barack Obama is proof there is no lack of opportunity in America, just wasted opportunity by those who choose to drop out and not engage in society. He and Oprah were both "poor" when they were just starting out.
By Arthur C. Brooks From the March/April 2008 Issue
Filed under: Culture, Public Square
Americans are remarkably charitable. But what sorts of people give the most? And how do we compare with the Europeans?Q. How much do Americans give? Is the amount we give going up?
A. In 2006, Americans gave about $295 billion to charity. This was up 4.2 percent over 2005 levels, and charitable giving has generally risen faster than the growth of the American economy for more than half a century. Correcting for inflation and population changes, GDP per person in America has risen over the past 50 years by about 150 percent, while charitable giving per person has risen by about 190 percent. That is, the average American family has gotten much richer in real terms over the past half century, and charitable giving has more than kept pace with this trend.
Q. Are Americans more or less charitable than citizens of other countries?
A. No developed country approaches American giving. For example, in 1995 (the most recent year for which data are available), Americans gave, per capita, three and a half times as much to causes and charities as the French, seven times as much as the Germans, and 14 times as much as the Italians. Similarly, in 1998, Americans were 15 percent more likely to volunteer their time than the Dutch, 21 percent more likely than the Swiss, and 32 percent more likely than the Germans. These differences are not attributable to demographic characteristics such as education, income, age, sex, or marital status. On the contrary, if we look at two people who are identical in all these ways except that one is European and the other American, the probability is still far lower that the European will volunteer than the American.
Charitable giving by country: who is the most generous? Full data | Global development | guardian.co.uk
And there's another article, from the very liberal UK Guardian --- Americans were #5 in the world. Australia, New Zealand --- #1; Canada --- #3. Sweden was not even in their top ten --- are you Swedish or something?
.
Yes, the data is indeed inconclusive. As I mentioned it above 'private giving' data is skewed in favor of the US - because ODA contributions amount to a few hundred dollars per capita.
The ODA data is skewed against the US, because it does not include private giving.
Is it still charity if your elected representatives pay for charity? Is it still charity if Bill Gates donates his money and the charity buys ... Windows computers?
+1300 ... QE to infinity, and beyond! I take it you're not a big fan of Greenspan's ZIRP forever then?
Excellent post +++
I wonder how much of this is "real" charitable giving and how much is simply church donations characterized in the data as "charitable giving" due to the tax code, and how that might vary by country. Inquiring minds etc etc.
That's a good question - for which there are no really good, clear answers, because indeed there's so manny channels of charity and there's no clear separation between charitable causes and business interests. (Does Bill Gates giving money to his foundation (tax-free) which then promotes Windows count as "100% charity"? Even official stats are scattered: for example the ODA stats are skewed against the US because it does not cover individual contributions. Individual contributions are skewed in favor of the US, because proportionally the US gives much less in ODA.)
For social mobility there's much better data available, for example the periodic OECD report I quoted above:
http://www.oecd.org/dataoecd/2/7/45002641.pdf
Figure 5.1 is the one to check.
I wonder what % of charitable giving was done with currency that was printed out of the thin air?
<sarcasm/off>
The gulf between the elected and the electorate grows ever wider. This will end very badly unless we get some politicians with a concern for the country as opposed to their own wallets.
It ends poorly if you're a corrupt politician....
So in the US how many has it ended badly for??
Easy. Everyone in the bottom 90% income bracket. This will change. Soon, only the top 5% will benefit, then the top 3%, and then...
Sorry, these are not the answers you (and I) are looking for.
It only ends poorly for those who get caught out ... otherwise it's three sheets into the wind for the rest of the club goers.