The Heirs of Inequality

Alexander Stille

23 August 2012
.


 
 
 
 
ROMEIt has long been known that spurts of rapid economic growth can increase inequality: China and India are the latest examples. But might slow growth and rising inequality – the two most salient characteristics of developed economies nowadays – also be connected?
 
 
 
.
That is the intriguing hypothesis of a recent study by the French economist Thomas Piketty of the Paris School of Economics. Piketty has done some of the most important work on inequality in recent years.
 
 
 
 
Taking advantage of the French bureaucracy’s precision, Piketty was able to reconstruct the French national accounts over nearly two centuries. The economy from 1820 until World War I – a kind of second ancien regimehad two striking features: slow growth – about 1% a year – and an outsize share of inherited wealth, which accounted for roughly 20-25% of GDP.
 
 
 
 
The link between low growth and the importance of inheritance, Piketty argues, was not coincidental: with inherited wealth yielding 2-3% a year and new investment only 1%, social mobility was extremely limited and stratification was encouraged.
 
 
 
 
That began to change with WWI, when growth picked up – a trend that accelerated sharply after World War II. With annual economic growth running as high as 5% during the post-1945 boom, inherited wealth shrank to only 5% of French GDP, ushering in a period of relative mobility and equality. Ominously, however, during the past two decades of slow growth, the share of inherited wealth has rebounded to about 12% of France’s economy.
 
 
 
 
This pattern should be a cause for concern, because annual GDP growth in the eurozone during the past decade has averaged about 1%. Similarly, average annual growth in the United States has slowed from around 4% between 1870 and 1973 to roughly 2% since then.
 
 
 
 
Joseph Stiglitz, the Nobel Prize-winning economist, also believes that low growth and inequality are interconnected, but he believes that the causal arrow moves in the opposite direction. As he put it in a recent interview, “I think it’s inequality that’s causing low growth.” In his new book The Price of Inequality, he writes that, “Politics have shaped the market, and shaped it in ways that advantage the top at the expense of the rest.” Rent-seeking, the ability of entrenched elites to allocate resources to themselves and smother opportunity for others, invariably leads to a less competitive market and lower growth.
 
 
 
 
 
There is some support for this argument in Piketty’s work: the French economy takes off after WWI and again after WWII, both periods in which the French political system opened up and enacted progressive reforms.
 
 
 
 
But, according to Ilyana Kuziemko, an economist at Princeton University, there is also evidence that low growth does indeed increase inequality. Public-opinion data and experimental research indicate that people (or at least Americans) become less favorable to income redistribution during economic hard times. Gallup polls, for example, show support in the US for reducing inequality falling from 68% to 57% during the current recession, despite all of the public rhetoric – and evidence – that the top 1% of income earners have captured almost all of the gains from economic growth in recent years.
 
 
 
 
Curiously, hard times may actually trigger among the economy’s losers a psychological mechanism known as “last-place aversion.” Experimental economists have found that subjects asked to play distribution games become much less generous toward those below them when they are in second-to-last place. They would rather distribute money to those above them on the totem pole than help those at the bottom to surpass them.
 
 
 
 
This finding dovetails with the work of Harvard University’s Benjamin Friedman, who argues in The Moral Consequences of Growth that “economic growth more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.” Similarly, lack of growth tends to breed xenophobia, intolerance, and a negative attitude toward the poor – the US and Europe in recent decades serve as cases in point for Friedman. “People in the 30th percentile are desperate not to fall into the 20th or tenth percentile,” he concludes.
 
 
 
 
Thus, a slow-growth/high-inequality economy may become a self-perpetuating cycle. But both Stiglitz and Piketty do not think that it must be so. “First of all, the Scandinavian countries, which have the greatest equality, are also among the fastest-growing advanced economies, and take the example of Japan, which has experienced deflation for about 20 years but successfully maintained a decent level of equality and standard of living,” Stiglitz argues.
 
 
 
 
Piketty believes that the key may lie in making a psychological adjustment to a period of slower growth: “We may need to accept the fact that the post-WWII years of 4% and 5% annual growth were the exception, and that 1% annual growthafter allowing for population growth – is much more the norm.”
 
 
 
.
Indeed, Piketty argues that our “obsession with growthmerely serves as an excuse for not doing anything about health, about education, or about redistribution.” And it is an obsession rooted very much in the present. “We forget that for centuries growth was essentially zero,” he writes. “One percent real growth means doubling the size of your economy every 30 or 35 years.”
 
 
 
 
Piketty sees that as grounds “to be a little optimistic.” But, as he suggests, the share of inherited wealth may turn out to be a strong indicator of whether that rate of growth will be enough to ensure greater social mobility and reduce economic inequality.
 
 
 
.
 
Alexander Stille is Professor of International Journalism at Columbia University and the author of The Sack of Rome and the forthcoming The Force of Things: A Marriage in War and Peace.



August 23, 2012
.
Galt, Gold and God
.
By PAUL KRUGMAN

 


 
 
 
So far, most of the discussion of Paul Ryan, the presumptive Republican nominee for vice president, has focused on his budget proposals. But Mr. Ryan is a man of many ideas, which would ordinarily be a good thing.
 
 
 

.
In his case, however, most of those ideas appear to come from works of fiction, specifically Ayn Rand’s novelAtlas Shrugged.”


 
.
For those who somehow missed it when growing up, “Atlas Shrugged” is a fantasy in which the world’s productive people — the “job creators,” if you likewithdraw their services from an ungrateful society. The novel’s centerpiece is a 64-page speech by John Galt, the angry elite’s ringleader; even Friedrich Hayek admitted that he never made it through that part.



.
Yet the book is a perennial favorite among adolescent boys. Most boys eventually outgrow it. Some, however, remain devotees for life.
 
 
 
.
And Mr. Ryan is one of those devotees. True, in recent years, he has tried to downplay his Randism, calling it an “urban legend.” It’s not hard to see why: Rand’s fervent atheismnot to mention her declaration that “abortion is a moral right” — isn’t what the G.O.P. base wants to hear.
 
 
 
.
But Mr. Ryan is being disingenuous. In 2005, he told the Atlas Society, which is devoted to promoting Rand’s ideas, that she inspired his political career: “If I had to credit one thinker, one person, it would be Ayn Rand.” He also declared that Rand’s work was required reading for his staff and interns.
 
 
 
 
      
And the Ryan fiscal program clearly reflects Randian notions. As I documented in my last column, Mr. Ryan’s reputation for being serious about the budget deficit is completely undeserved; his policies would actually increase the deficit. But he is deadly serious about cutting taxes on the rich and slashing aid to the poor, very much in line with Rand’s worship of the successful and contempt for “moochers.”
 
 

. 
This last point is important. In pushing for draconian cuts in Medicaid, food stamps and other programs that aid the needy, Mr. Ryan isn’t just looking for ways to save money. He’s also, quite explicitly, trying to make life harder for the poor — for their own good. In March, explaining his cuts in aid for the unfortunate, he declared, “We don’t want to turn the safety net into a hammock that lulls able-bodied people into lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives.”
 
 
 
      
Somehow, I doubt that Americans forced to rely on unemployment benefits and food stamps in a depressed economy feel that they’re living in a comfortable hammock.
 
 
 
      
But wait, there’s more: “Atlas Shruggedapparently shaped Mr. Ryan’s views on monetary policy, views that he clings to despite having been repeatedly, completely wrong in his predictions.
 
 
      
.
In early 2011, Mr. Ryan, newly installed as the chairman of the House Budget Committee, gave Ben Bernanke, the Federal Reserve chairman, a hard time over his expansionary policies. Rising commodity prices and long-term interest rates, he asserted, were harbingers of high inflation to come; “There is nothing more insidious that a country can do to its citizens,” he intoned, “than debase its currency.”
 
 

 
Since then, inflation has remained quiescent while long-term rates have plunged — and the U.S. economy would surely be in much worse shape than it is if Mr. Bernanke had allowed himself to be bullied into monetary tightening. But Mr. Ryan seems undaunted in his monetary views. Why?
 
 
 
      
Well, it’s right there in that 2005 speech to the Atlas Society, in which he declared that he always goes back to “Francisco d’Anconia’s speech on money” when thinking about monetary policy. Who? Never mind. That speech (which clocks in at a mere 23 paragraphs) is a case of hard-money obsession gone ballistic. Not only does the character in question, a Galt sidekick, call for a return to the gold standard, he denounces the notion of paper money and demands a return to gold coins.
 
 
      
For the record, the U.S. currency supply has consisted overwhelmingly of paper money, not gold and silver coins, since the early 1800s. So if Mr. Ryan really thinks that Francisco d’Anconia had it right, he wants to turn the clock back not one but two centuries.
 
 

.  
Does any of this matter? Well, if the Republican ticket wins, Mr. Ryan will surely be an influential force in the next administration — and bear in mind, too, that he would, as the cliché goes, be a heartbeat away from the presidency. So it should worry us that Mr. Ryan holds monetary views that would, if put into practice, go a long way toward recreating the Great Depression.
 
 
 
.
And, beyond that, consider the fact that Mr. Ryan is considered the modern G.O.P.’s big thinker. What does it say about the party when its intellectual leader evidently gets his ideas largely from deeply unrealistic fantasy novels? 



Up and Down Wall Street
.
SATURDAY, AUGUST 25, 2012
.
Bullish on Bullion
.
By ALAN ABELSON

Gold's safe-harbor status has attracted some big hedge funds, and the metal's price could keep climbing. Also, more signs of a hard landing in China.
 .


 


It used to be that saying "I'm from Missouri" connoted you were a born skeptic, someone who found suspect any proposal or just plain exclamation that smelled a little fishy. Inhabitants of that quintessentially Midwestern state took great pride in the "show me" attitude those familiar words exuded. But, without a modicum of warning and just in the past week, the phrase has undergone a radical change in import that expunges even a trace of the heralded skepticism it long has been synonymous with.


.
Not to keep you in suspense, the new version of "I'm from Missouri" has been replaced by the somewhat less inspiring "I'm linguistically and anatomically challenged." All due credit for this metaphoric transformation goes to the GOP senatorial candidate Todd Akin, whose surname eerily describes the discomfort he has inadvertently caused his fellow Republicans, including Mitt Romney and Paul Ryan, who have used every nonlethal instrument within reach to try to persuade him to hop the next space shuttle to the moon and not come back until the election's over.




What triggered Mr. Akin's fall from grace is that English obviously is not his mother tongue, so when he lapses into it and departs from his native gobbledygook, he tends to commit industrial-strength gaffes. Which would do him no great harm except on those rare occasions when he's coherent enough to be understood.




The utterance that brought down on him the collective fury of his party was sounded during the course of an interview on a local TV station when he referred to a "legitimate rape," as opposed, we guess, to an illegitimate rape. We can only assume that the difference between the two is that legitimate rapes are committed by duly licensed members of a rapist trade group, while perpetrators of illegitimate rapes are lacking any such imprimatur.




Moreover, to demonstrate his deep immersion in medical lore, Mr. Akin went on to explain that women who are victims of "legitimate rape" rarely get pregnant because the "female body has ways to try to shut that whole thing down." Mr. Akin apparently is privy to hormonal activity that has completely eluded specialists in obstetrics and gynecology. As a public-spirited citizen, he should lose no time in rushing to share that critical knowledge with those specialists. Until he does, though, we're afraid we must rely on expert opinion like that of Professor Michael Greene of Harvard Medical School, who is quoted as saying of Mr. Akin's notion: "There's no words for this -- it's just nuts."


.
Sounds like a pretty definitive diagnosis to us.



.
To be fair, Mr. Akin buttressed his take on rape and pregnancy as having been relayed to him via someone who heard it from a doctor. We have no reason to doubt the veracity of his source, however circuitous the route that brought the would-be senator the vital information. But we were reminded of claims made some years ago by a certified M.D. that he had cured patients suffering from AIDS with aloe vera, whose alleged curative powers were enough to get any number of Wall Street boiler shops working overtime. Then-staffer Eric Savitz did a nifty expose in this magazine that helped squeeze the speculative juice out of aloe vera, which now is found mostly in body fresheners.



.
However misguided his medical observations, Mr. Akin deserves recognition as having rescued the election from the slough of boredom into which it had been unwittingly thrust by the two contenders for the presidency. The big issue for Mr. Obama and Mr. Romney seemingly is who can fill his campaign coffers with more cash. Everything else appears to be an afterthought.



.
It's as if both were vying hammer and tongs for the job as the lead auctioneer at Sotheby's rather than sweating over minor matters like how best to pump life into the moribund job market or navigate a perilous global economy, the better part of which is either listing toward or sinking deeper into recession.




Forgive us if we seem a tad disgruntled. Perhaps we're just impatient. After all, there's still slightly more than two whole months left for the pair of political poseurs to serve up something modestly substantive in the way of blueprints for the next four years.





THE STOCK MARKET, WE'RE HAPPY TO REPORT, has pretty much been ignoring the exchange of barbs between the opposing sides that passes as political discourse in any electoral season and especially in this one. We reckon investors find it very much an exercise in futility trying to separate promise from likely performance and so prefer to concentrate on less ephemeral stuff like, will the Fed ease and will Angela Merkel go whole hog in trying to keep the euro zone from imploding, or continue to play the waiting game?




Our own hunch is that good old Uncle Ben is frantically searching for another rabbit to pull out of the hat to give the lame recovery a bit more vigor, a search that probably took on fresh urgency with Mitt's vow last week to replace Ben as Fed chairman if and when he becomes president. The likelihood of some action come the Open Market Committee powwow early next month was more or less telegraphed by the minutes of the last FOMC meeting at which an inordinate amount of concern was voiced about the fragility of the economy.



.
Apart from a fast lift, it's not at all clear that an easing move would act as a sustained quickening agent for a determinedly sluggish economy, with the fiscal cliff growing ever more forbidding with each passing day, especially in a market so dominated by nano-second trades. And this is a market in which anticipation provides the boost and reality all too often the disappointment.




As to what Merkel will do, no one knows, more than likely even Merkel herself. If she had her druthers she'd just as soon do as little as possible, which for the most part has served her pretty well. But Germany's economy isn't exactly going gangbusters. Global trade is far from robust, and the euro zone is vulnerable to another shock. So however reluctantly, circumstances may compel her to adopt, no matter grudgingly or graciously, a more aggressive stance.




All of which gives us pause and makes us more than a bit wary. And so, oddly, does the brisk surge in gold to a four-month high. We say oddly because bullion has been one of the few investments that we've written about this year with consistent enthusiasm. Everything that was wrong with the global financial system seemed to us to add fresh luster to the yellow metal. More than ever, it seemed a reasonably safe harbor in a debt-laden world where paper currencies are being routinely debased to prop up failing economies. It didn't hurt, either, that the gold-mining stocks have been conspicuous laggards for quite a spell.
.
 
image


.
What touched off the latest pop was a mess of publicity about hedge-fund operators John Paulson and George Soros piling into bullion in the second quarter via one form or another. That inevitably was the signal for the copycat hedge funds, whose numbers are legion, to follow the big guys' ravenous accumulation of the metal, although we recall that Paulson hasn't enjoyed an a untarnished investment record of late. Moreover, India, a major buyer of gold, has cut back sharply this year in reflection of its economic disarray and other woes.



.
Bullion remains some $300 an ounce below the all-time high of $1,921.15 set in September of last year. Although it has racked up gains for 11 years in a row, it has also suffered some wobbly going earlier this year, dogged by hedge-fund unloading and fretting market technicians as well as the lure to clueless investors of Facebook and its ilk. Once the day traders take their profits from last week's burst upward and the copycats have their fill, we'd expect the gold rush to subside a trifle and set the stage for another run to a new peak.




In short, although we wish the flighty hedge funds had kept their sticky hands in their pockets, we're still bullish on bullion.



THE TABLE THAT ADORNS THESE LINES was compiled by Markit and came to us through the kind agency of HSBC (end of commercial). What it displays is a breakdown of the components of the bank's China Manufacturing PMI (which stands for purchasing managers index).


.
What it reveals on even rapid scrutiny is that, in August, across the board, every facet of production contracted, except inventories, the expansion of which is a sign of glut rather than improvement. Not for nothing are wealthy Chinese engaging in the dangerous business of securing their money by sending it abroad.




That remarkably reliable barometer of the Sino economy, the Shanghai stock exchange, reacted to the news by sinking to its lowest level since the dark and chilly days of 2009. For some time now we've been ringing the tocsin, warming of the vulnerability of China's command economy, especially during this period of a change of leadership, and its dire implications for global trade.




So forgive us if we repeat our increasingly rhetorical question -- hard landing, anyone?