Capitalism & Inequality
Is widening inequality an inherent characteristic of capitalism or a consequence of the events of the past several decades?
Capitalism and inequality was our first of many deep dives exploring economic institutions. Inequality has been on the rise for the past forty years in advanced economies, which is an issue of both human welfare and social stability.
What are the drivers of this trend? Is widening inequality an inherent characteristic of capitalism, or a consequence of the events of the past several decades? What are the most compelling policy opportunities to address this trend and yield more equitable economic outcomes? These are the key questions we sought to answer in this deep dive.
Capitalism & Inequality Essentials:
Why did decreased inequality persist from 1940 to 1980?
- Increase in political power of the working class
- Economic growth funding the welfare state
Drivers of the rise of inequality in the US since 1980
- Neoliberalism emphasized a focus on growth over equality, minimal taxes and regulation
- Elite capture of politics and corporatism led to less progressive tax and transfer policies
- Shift from class to identity politics
- Structural changes in the US economy via globalization and automation weakened bargaining rights and created downward pressure on wages
- Decline in unionization rates, labor union membership down from 20% in 1983 to 12% in 2007
- Immigration pressured wages in both directions —> high skilled labor into service economy and low skilled labor into other sectors
- Growth and diversification of the financial sector post new influxes of capital in the 1970s (pension funds, foreign investors, endowments)
- Huge increased in executive compensation, CEO pay at the largest 350 US companies was 20x higher in 1965, 273x higher in 2012
- Stock buybacks, reached an all time high in 2018 of $806B (up from $519B) on the heels of the Tax Cuts and Jobs Act. The Gini coefficient (a key metric economists use to measure inequality in a country) hit an all time high the same year of 0.49
Why this is a problem?
- At odds with notions of liberty and equality that underpin the social contract
- Increased risk of social unrest
- Drives populism (especially concerning is rise of authoritarian populism)
- Slower GDP growth due to lower aggregate demand
- Creates plutocracy as wealthy establish outsized influence in politics
Four distinct types of interventions (Denizen's framework):
- Equality of initial conditions: Address the inputs to the economy to create equal opportunity and access to opportunity ex-ante, e.g. improving investments in human capital prior to entering education systems, investments in education, improved access to education
- Tax and Redistribute: Let market outcomes be what they will, tax the winners and redistribute / provide social programs to improve the lives of those at the bottom of the distribution
- Marginal Regulation: Make market outcome less unequal by regulating on the margins to change incentives; e.g. caps / taxes on CEO pay, raising minimum wage, mandating benefits
- Structural Reform: Change the rules of the game (via policy or voluntary adoption of new structures) such that outcomes lead to lower inequality inherently; e.g. stakeholder governance models