The Unassuming Economist

While it has been widely claimed by economists and social scientists that inequality and political polarization are on the rise today, an understanding of people’s perception of ideas of inequality, fairness, and equity has largely evaded critical study. Of late, we have come to realize that perhaps such an understanding could form the missing piece of the puzzle required for effective policymaking. Especially in the USA, researchers have begun to seek answers to questions like why so many voters vote against redistributive policies that would benefit them, such as more progressive income taxes, taxes on capital income or estates, or more generous transfer programs, and why voters have tolerated policies that have contributed to a stark rise in inequality over the past few decades.

A recent column in the The MIT Press Reader (2021) sparks discussion on the same by taking cues from the book ‘Combating Inequality: Rethinking Government’s Role’ by noted economists Oliver Blanchard and Dani Rodrik. The author of the column discusses the role of “intangibles” that cannot be observed even in high-quality administrative datasets but very closely affect the development of policies to combat the problem of high quality. These intangibles- perceptions, views on fairness, and people’s ideas about their own economic standing- are discussed at greater length.

Click here to read the full article.

On similar lines, the OECD’s recent report titled, ‘Does Inequality Matter?‘ (2021), goes a step beyond country-level averages to ultimately find out that people’s perceptions of and levels of concerns about inequality have become very widely dispersed.

“Such dispersion can only be partially explained by standard socio-economic divides across income, education, employment status, gender, age, and household size. In some instances, the dispersion of perceptions and concern becomes polarization between groups with starkly different views. Both dispersion and polarization of perceived disparities and concern have grown steeply over time. Higher levels of observed inequality are associated not only with greater perceived disparities and concerns, but with a more divided public opinion.”

The report also brings out some very intricate insights such as the fact that quite contrary to intuition, most of this increased dispersion in the perception of inequalities and concern for income disparities comes from people who are not less similar but very similar to each in socio-economic characteristics.

Click here to read Section 4 (Has the public opinion become more divided?) of the 2021 OECD Report: Does Inequality Matter?

“The COVID-19 is the fourth crisis to have hit the Middle East and North Africa (MENA) region in the decade following the Arab uprisings, the 2014-16 oil price declines, and the 2019 resurgence of protests.  It differs from the other crises because of its broad impacts and its distributional consequences. But even before COVID-19 arrived in March 2020, MENA had been facing a number of serious economic challenges — high rates of unemployment, high levels of informality, low annual economic growth, low female labor force participation, an unconducive business environment, a lack of quality jobs, food insecurity, and fragility and conflict (with large numbers of refugees).”

A recent report by the World Bank Group titled, Distributional Impacts of COVID-19 in the Middle East and North Africa Region (2021), attempts to find answers to pertinent questions regarding this, such as what are the welfare of individuals and households in MENA, and what are the key issues that policymakers should focus on to enable a quick and sustained economic convalescence? 

“The report’s findings suggest a substantial rise in poverty, greater inequality, the emergence of a group of “new poor” (those who were not poor in the first quarter of 2020 but have become poor since), and changes in the labor market (notably how hard people work and how many people work). Top policy options center on stepping up vaccination programs, resuscitating economic activity, rethinking the approach to the informal sector, boosting resilience to future shocks, and improving data quality and transparency.” 

Click here to read the full report.

Excerpts from Professor Dani Rodrik’s working paper, A Primer on Trade and Inequality (2021), for the National Bureau of Economic Research:

“In the public imagination globalization’s adverse effects have loomed large, contributing significantly to the backlash against the political mainstream and the rise of far-right populism. The literature on trade and inequality is in fact exceptionally rich, with important theoretical insights as well as extensive empirical findings that sheds light on this recent experience. Some of the key results of this literature, discussed here, are as follows: Redistribution is the flip side of the gains from trade, and it becomes larger relative to net gains from trade in the advanced stages of globalization. Compensation is difficult for both economic and political reasons. International trade often differs from other market exchanges, raising fairness concerns in ways that domestic markets do not. The economic benefits of deep integration are generally ambiguous. Dynamic or growth gains from trade are uncertain.”

Moreover, on the role of financial globalization and capital mobility the paper takes the following stand. “Researchers at the IMF have found that greater capital mobility produces strong inequality effects (Jaumotte et al., 2013; Furceri and Loungani, 2015; Furceri et al., 2017). In particular, they find that capital-account liberalization leads to statistically significant and long-lasting declines in the labor share of income and corresponding increases in the Gini coefficient of income inequality and in the shares of top 1, 5, and 10 percent of income.”

Click here to read the full paper.

State capacity refers to the government’s ability to do its job effectively: to raise taxes, maintain order,
and provide public goods. A series of calamities during the 21st century—the Iraq War, Hurricane Katrina,
the financial crisis, and most recently the COVID-19 pandemic- all indicate the erosion of state capacity. A recent report by the Niskanen Centre (2021) discusses the same.

“The decline in state capacity since the 1960s can be traced to two distinctive but mutually reinforcing intellectual movements. One occurred on the political right while the other is associated mainly with the left. Both represent dysfunctional responses to America’s longstanding (and well-founded) fears of centralized power. On the right, healthy suspicion of rapid government expansion has given way to a toxic contempt for government and public service per se. On the left, efforts to expand “citizen voice” in government as a check on abusive power have produced a sclerotic “vetocracy” that makes effective governance all but impossible.”

Bold policy changes on many fronts are needed to bring back dynamism and inclusive prosperity.

Click here to read the full report.

While it has been postulated for long that wealth and aggregate income in the economy go hand in hand, developments in the last several decades point to a different phenomenon as the wealth to GDP ratio has been rising rapidly, reaching 6.1 times the GDP currently.

In a recent column for the Conversable Economist, Timothy Taylor writes on the issue, drawing insights from a 2021 McKinsey Global Institute report.

“…At the level of the global economy, the historical link between the growth of wealth, or net worth, and the value of economic flows such as GDP no longer holds. Economic growth has been sluggish over the past two decades in advanced economies, but net worth, which long tracked GDP growth, has soared in relation to it. This divergence has emerged as asset prices rose sharply—and are now almost 50 percent higher than the long-run average relative to income. The increase was not a result of 21st-century trends such as the increasing digitization of the economy. Rather, in an economy increasingly propelled by intangible assets, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors. These (ex-ante) savings have instead found their way into a traditional asset class, real estate, or into corporate share buybacks, driving up asset prices.”

Source: McKinsey Global Institute. (2021). The rise and rise of the global balance sheet: How productively are we using our wealth?

Real estate, rather than an ongoing investment boom in the 10 countries under study, is attributed to this rapid rise in global wealth. Furthermore, the study offers possible explanations for the consequences that such a trend might bring with it in the future- some happy and some not so happy ones.

Read on to know more. Click here.