And Then There’s Wealth Inequality

Recently, I’ve posted several times about income inequality but there are other sorts of inequality, including wealth inequality and social inequality. You might find Michael Heise’s observations on wealth inequality at Project Syndicate interesting. Among the points he makes are the difficulty of defining inequality:

Even the most basic question – how much inequality is too much – is virtually impossible to answer. There is no “natural rate of inequality” characterizing an economy in equilibrium, a level at which policymakers can aim. Instead, countries’ rates of inequality are measured against one another – a narrow approach that ignores everything from broader economic trends to differences in the impact of wealth inequality on populations in different social environments.

On the effects of central banks’ monetary policies:

On the national level, inequality is rising, but only in some places. In the emerging economies, the share of wealth owned by the middle class is increasing, indicating a drop in wealth inequality. It is primarily in the industrialized world that inequality is on the rise, with the share of wealth held by the top 10% growing the most.

This discrepancy may be explained partly by the fact that the global financial crisis was most painful for the advanced countries, especially in Europe. But the expansionary monetary policies that advanced-country central banks pursued after the crisis made a bad situation worse.

Those policies pushed up prices of assets – especially bonds and equities – that were held largely by wealthy households. At the same time, they hurt middle-class savers, who typically rely on duller savings instruments like bank deposits. With zero or, later, negative interest rates, those savers lost out. Though median households are generally benefiting from lower borrowing costs, wealthier households are benefiting much more, thanks in part to savings on mortgage loans, which are highest relative to income for the upper middle class.

But the impact of ultra-loose monetary policy extends far beyond today’s wealth and income effects. With advanced-country populations aging rapidly, saving for old age is more important than ever. With very low interest rates reducing the rate of accumulation of pension assets, all but the wealthiest households will probably have to boost savings and/or reduce consumption, now and in the future. The decline in lifetime spending will ultimately have a negative impact on growth and potentially generate social fault lines for the coming generations.

And the differences in the acceptability of wealth inequality between societies:

Complicating the inequality narrative further are differences across individual economies, including among those that, technically, have similar levels of inequality. Consider the disparities between the US, Denmark, and Sweden – all three of which are among the world’s most unequal societies, with respect to the distribution of wealth.

Denmark and Sweden are known for their well-developed social-welfare systems, free education, and high labor-market participation. Moreover, Denmark took the top spot in the United Nations’ World Happiness report last year, suggesting that wealth inequality does not trouble Danes too much.

By contrast, in the US, which lacks many of the social protections provided by its northern European counterparts, inequality is very troubling indeed. The increase in wealth inequality there over the last decade has been the most pronounced of any country. Today, the US has the smallest middle class, holding just 22% of total net financial assets, half the average of other industrialized countries, and the highest concentration of wealth than in any other country.

I’m more concerned about the distribution of wealth or income within societies than comparing those distributions between societies. I think that there are just too many variables whose effects are not well understood to make meaningful comparisons.

I also think that a just income or wealth distribution should be thought of as a distribution, i.e. when income and wealth occur in distributions other than a normal distribution there are probably factors other than chance or even merit at work.

In the United States as I’ve shown before the distribution of wealth and income are somewhat weighted toward the richest five or ten percent. We should be thinking about the factors that produce that and the cost of addressing them.