Thursday, November 09, 2006

Another non-bond post

In thinking about the Democratic sweep on Tuesday, I continue to struggle with what they are actually going to do with their new-found power. The consensus is they'll try to increase the minimum wage, but I think most serious economists will agree that this will have minimal impact on the economy as a whole. Its also widely reported that the Dems are interested in curbing executive pay.

This gets me thinking about the issue of income disparity. The fairness element of this issue is a debate for another forum. My question is, what are the economic consequences of a widening income disparity?

First, it seems there is no single measure for income disparity. What is the correct way to measure this? Is it the top 10% vs. the bottom 10% in income? Or 1%, or 20%? Is the relevant question how do the richest Americans compare with the poorest, or how the poorest compare with the median, or how the median compare with the richest? Sometimes the "poverty line" is used in calculating income disparity, but this tends to be a moving target.

In my mind, we cannot define how to measure the issue without defining what economic problems might arise. The classic argument is that too much income disparity leads to social unrest. So let's think about that for a moment. If the gap between the wealthiest 10% and the poorest 10% is widening because the rich are getting richer but the poor are about the same, then there is no reason to expect social unrest.

History tells us that social unrest tends to grow out of hopelessness more so that simple disparity. The French and Russian peasants lived with the feudal system for centuries and rose up not because they suddenly resented the rich, but because they were starving. I'm sure they resented their feudal lords all along, but it was only once their situation got worse that actual social unrest occurred.

Now, it sounds like I'm being incredibly callous about poverty in America. This argument is not to say that there aren't people really struggling nor that there is nothing we should do about poverty as a society. Again, fairness is another issue for another blog. What I'm saying is that the issue of income disparity, as it exists in America, is not a macroeconomic growth problem. It is a political issue. A moral issue.

So as January rolls around and the Democrats start making the case for a higher minimum wage and for curbs on executive pay, there will undoubtedly be arguments that there are economic problems with large income disparity. Whatever your position is on these issues from a fairness/moral perspective, income disparity as an economic problem is dubious.

1 comment:

Richard said...

Minimum wage increase is kind of a given. Long overdue, and in my view good for the economy as I believe people are generally more efficient at spending money on what they need than government programs are at picking up the pieces.

The problem is that standards of living have been dropping for the poorest X% (I'm not sure what the author claimed X was) since the 70s.

Curbs on executive pay is a very blunt way of approaching income disparity though and will cause problems because it's so anti-American-Dream. Better would be to force full disclosure of what perks and options and bonuses cost the shareholders. The market, when properly informed, will act in an efficient manner. I might be a freaky greenie liberal, but I believe in the market. Which in this case should result in a limiting of executive pay as people realise just how expensive CEOs are.

The idea would probably require that mutual funds voting powers be split up amongst their holders, as this makes it easier for small investors to express their displeasure and executive renumeration.

But I enjoy this sort of stuff, and mutual funds are for people who don't.

Woah, I got off topic didn't I?

But yeah. Minimum wage increases are good for the economy because they allow people to make their own decisions and should lead to a reduction in poverty related expenses (crime and healthcare).