Thursday, October 18, 2012

Vast Income Disparity is Bad for Business (Someone Tell Mitt)

In yesterday's New York Times, Annie Lowrey wrote about new findings by the International Monetary Fund economists (not a radical or lefty bunch by any means), laying out the clear and present danger the current disparity in incomes and wealth presents to the American economy and the global economy.

This is what the president was addressing during the debate the other night, and Romney was denying. Romney has built his fortune on the basis of income inequality, squeezing pay and benefits out of company after company, loading them with debt and looting pensions to enrich his small group of investors.

Turns out it's bad for business and bad for the broader economy––no real surprise––because employees of one company are the customers of other companies. It doesn't help the economy when one man's wealth is derived from another man's poverty. It's against the American grain.

Lowrey writes:

Since the 1980s, rich households in the United States have earned a larger and larger share of overall income. The 1 percent earns about one-sixth of all income and the top 10 percent about half, according to statistics compiled by the respected economists Emmanuel Saez of the University of California, Berkeley and Thomas Piketty of the Paris School of Economics.

For years, economists have thought of such inequality in part as a side effect of policies that fostered the country’s economic dynamism — its tax preferences for investment income, for instance. And organizations like the World Bank and the I.M.F., which is based in Washington, have generally not tackled inequality in the world head on.

But economists’ thinking has changed sharply in recent years. The Organization for Economic Cooperation and Development this year warned about the “negative consequences” of the country’s high levels of pay inequality, and suggested an aggressive series of changes to tax and spending programs to tackle it.

The I.M.F. has cautioned the United States, too. “Some dismiss inequality and focus instead on overall growth — arguing, in effect, that a rising tide lifts all boats,” a commentary by fund economists said. “When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.”

But it's worse than "Oh well, bad things happen to some people". Maybe the investor class that is backing Governor Romney will pay attention when the numbers people spell out how their pet tax cuts and cozy pay deals actually harm their outlook. Shouldn't businessmen be concerned when their own behavior is bad for business?

The concentration of income in the hands of the rich might not just mean a more unequal society, economists believe. It might mean less stable economic expansions and sluggish growth.

That is the conclusion drawn by two economists at the fund, Mr. Ostry and Andrew G. Berg. They found that in rich countries and poor, inequality strongly correlated with shorter spells of economic expansion and thus less growth over time.

And inequality seems to have a stronger effect on growth than several other factors, including foreign investment, trade openness, exchange rate competitiveness and the strength of political institutions.

And the kicker...

“What worries me is the idea that we’re in a vicious cycle,” said Joseph E. Stiglitz, a Nobel laureate in economics who has studied inequality extensively. “Increasing inequality means a weaker economy, which means increasing inequality, which means a weaker economy. That economic inequality feeds into political economy, so the ability to stabilize the economy gets weaker.”

Unfortunately, wrongheadedness is a habit with some people. Paying taxpayer funded tribute to rich people is a behavior that's hard to unlearn. It took a long time to convince people the world isn't flat.

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