0.4 Income distribution  (Page 3/18)

We will see that by some measures the distribution of income in many Western societies has become sharply more unequal since 1980 and the position of middle income households has worsened. But by other measures that are at least as legitimate, income inequality has grown only moderately, and in particular, that middle income households, at least in the U.S. have had significant growth in income, but not nearly as much as that enjoyed by upper income ones.

Using the most restrictive measures of income (pre-tax, pre-transfer income of households) we may note that by 2008, income inequality in the U.S. was as high as it was in 1908. Thomas Piketty, Capital in the 21st Century. For emerging nations, the results are somewhat mixed, but new data indicate that income inequality has decreased compared to 30 years ago, due to falling inequality between rich and poor nations. Martin Ravallion (2014, May 23), “Income Inequality in the Developing World”, Science, 334(6186): 851. The distribution of income between rich and poor nations moved in favor of the latter. However, there have been some notable exceptions such as China where the Gini increased 34% between 1978 and 2008. Indeed in China, the richest 10% in 2013 had incomes 13 times the poorest 10%, as compared to the U.S., where the richest 10% makes 5 times as much as the poorest 10%. Mara Hvistendahl, (2014, May 23), “While Emerging Economies Boom, Equality Goes Bust”, Science, 344(6186): 832-835.

The share of the top 1% is particularly significant. Available evidence indicates that income inequality has increased in developed nations over the last 3 decades, especially in English speaking countries, and particularly in the United States, whereby one measure the share of the top 1% of income recipients has more than doubled. Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty&Emmanuel Saez (2013). “The Top 1% in International and Historical Perspective”, Journal of Economic Perspectives, 27(3): 3-20. Other countries, including Japan, France and Germany For an excellent study on Germany, see Alexandra Spitz Oener, (2014, Winter), “From Sick Man of Europe to Economic Superstar”, Journal of Economic Perspective, 28(1): 167-188. have exhibited growing inequality, but not nearly as that experienced in the U.S.

There is in fact wide agreement among economists that income inequality has grown over the last 30 years; there is less unanimity regarding how much , and sharp disagreement as to why this may have occurred.

The most discussed study of this topic has been a book translated from French and published in the U.S. in 2014: Thomas Piketty’s Capital in the 21st Century (Harvard University Press, 2014). This volume has been acclaimed by many as one of the most influential books of the past decade, and is sure to be a major factor in affecting debates over income distribution and economic policy worldwide. This alone is reason enough to devote substantial attention to his study in this textbook.

The author clearly expects that this study will have significant effects in shaping economic policy. The policy implications are stated quite seriously: rectification of income inequalities will require very high rate of tax on top income recipients and wealth owners. The central finding is that inequalities in income and wealth in much of Europe, and clearly in the U.S., have sharply been increased since 1970. Moreover, (see Figure 4-2) Piketty believes that this trend unless checked by high taxes on income and wealth will continue into the future under capitalism. Specifically he predicts a rise in capital’s share in national income as the rates of economic growth slows in the 21st century. He also assumes, based on his reading of the past that the return on capital (r) will remain relatively constant.