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Wealth inequality and economic growth: Evidence from the US and France
Abstract
Economic inequality, in terms of income or wealth, is one of the most complex and perplexing challenges of our current capitalist economic system. While the dynamic relationship between income inequality and economic growth has been extensively investigated (since the beginning of the last century), the dynamic link between wealth inequality (or wealth concentration) and economic growth has been largely ignored in the literature, taking more attention in recent years. This paper asserts that the accumulation of non-productive assets/luxury goods is an important determinant of wealth inequality, as well as a determinant of the relationship between wealth inequality and economic growth. In this paper our aim is to show that an increase in wealth inequality is associated with a slowdown in economic growth. In particular, the paper shows that there is a negative relationship between wealth inequality and economic growth in France because poor households own a relatively large fraction of non-productive luxury goods. Nevertheless, this is not the case in the US, which is what explains that such negative relationship is not observed there. We conclude that a redistribution of wealth (from the rich to the poor) is important for attaining a sustained economic growth performance.
... Their results showed that lower Gini coefficients, meaning a more equitable distribution of income, significantly contribute to carbon emission reductions. Similarly, Policardo & Sanchez Carrera [38] found that increased economic inequality in terms of income or wealth inhibits sustainable economic growth. Zhang et al. [39] analyzed the impact of educational inequality and crime in 288 cities in China. ...
... The likely reason for this is that inequality in wealth, socioeconomic status, or educational attainment is strongly correlated with people's health and well-being [43,80]. Increased inequality not only leads to a prevalent economic contraction but also increases healthcare costs, which in turn reduces well-being [24,38]. Another valid reason is that the uneven distribution of economic and social resources has led to significant stratification among groups, which is likely to result in a tendency for the underclass to prefer unsustainable ways of meeting their needs. ...
Enhancing the efficiency with which ecological consumption is transformed into human well-being is a necessary condition for achieving sustainable development. However, the current literature lacks systematic methods and applications for scientifically assessing Ecological Well-being Performance (EWP). How to value and index EWP is crucial to improve EWP. This study combines the Human Development Index (HDI), Life Satisfaction (LS), and Ecological Footprint (EF) to construct a new Index of Ecological Well-being Performance (IEWP). Meanwhile, human inequality and urbanization are two common and profound socio-economic phenomena with potential impacts on EWP. Therefore, this study uses panel data for 129 countries from 2010 to 2021 and applies the System-GMM approach to explore the impact of human inequality, urbanization, and the interaction between these two factors on EWP. Our results show that EWP has a cumulative effect in the long run. Human inequality has a negative effect on EWP, while the effect of urbanization is positive. Compared to developed countries, the negative impact of human inequality and the positive impact of urbanization are more pronounced in emerging and developing countries. This paper further reveals that the interaction term inhibits EWP, which indicates that urbanization exacerbates the negative effect of human inequality and that human inequality weakens the positive effect of urbanization. This paper contributes to understanding how human inequality and urbanization affect sustainable development from the perspective of EWP.
... Based on the ideology of materialism, this ultimately encourages humans to become economic actors who are hedonistic, secularistic, and materialistic in their outlook on life (Muldoon & Booth, 2024). The impact is the occurrence of calamities and disasters in the social life of society, such as exploitation, disparities in wealth between groups in society or between countries in the world, and what is even more tragic is the erosion of attitudes of togetherness and brotherhood and the emergence of social diseases (Policardo & Sanchez Carrera, 2024). ...
The main issue in the economy is growth. Economic growth is always an indicator of prosperity and a solution to every economic crisis. This growth is driven by increased resources, especially human resources and technology. The aim of this research is to explain in depth the study of welfare from an Islamic economic perspective. The type of research used is qualitative research with a literature review approach. The object of this research is, of course, texts and references or library literature related to welfare from an Islamic economic perspective. Data collection techniques used library and documentation methods. Data analysis techniques are used: data collection, data reduction, data display, and an overview of conclusions or verification. This literature review concludes that Sharia’s economic prosperity aims to achieve overall human welfare, namely Material, spiritual, and moral welfare. The Sharia economic concept of welfare is based not only on the manifestation of economic values, such as ethical, spiritual, social??, and Islamic political values. From this understanding, it can be understood that social welfare issues are in line with the mission of Islam itself. This mission is also the apostolic mission of the Prophet Muhammad. The contribution of this research provides an understanding and application of the concept of welfare in Islamic economics, emphasizing the importance of balancing material, spiritual, and moral well-being in achieving sustainable and inclusive development goals.
In light of the substantial rise in economic inequality in recent decades across the majority of economies, the relationship between inequality and economic growth has garnered significant attention. However, the specific impact of wealth inequality through various transmission channels on growth remains underexplored. This study underscores the limitations of relying on income inequality as a proxy for wealth disparities in growth research and emphasizes the importance of addressing nonlinearities in examining the relationship between inequality and growth. It pioneers the examination of transmission channels from wealth inequality to economic growth, employing an innovative nonlinear mediation analysis that incorporates both linear and nonlinear aspects, with the Generalized Additive Method utilized for the nonlinear part. Using the wealth Gini index as the primary measure of wealth inequality across a panel of 150 countries from 1980 to 2020, the findings indicate that inequality impedes growth via the human capital, socio-political stability, consumption, and innovation channels, while it exerts a positive influence through investment. The mediation effect of the rent-seeking channel is found to be nonsignificant. Above all, the study highlights the substantial negative impact of wealth inequality on innovation, a key driver of economic growth, underscoring the importance of addressing wealth disparities in future growth analyses and policy decisions.
We investigate whether inequality in wealth distribution is broadly associated with adverse socioeconomic outcomes across countries. There are few studies that investigate these relationships, likely due to data limitations. On the other hand, a substantial body of work suggests that income inequality correlates with undesirable outcomes. This paper evaluates the relationship between measures of wealth inequality and a number of outcomes across countries in a unified estimation framework that circumvents publication bias. While we fail to find support for a broad negative association, we do find a negative correlation between wealth inequality and institutional quality.
A long-standing interest in the relationship between inequality and sustainable growth continues to fascinate economists among other social scientists. It must be noted, however, that most empirical efforts have focussed on the income inequality--growth nexus, while studies on wealth inequality are much scarcer. This study attempts to fill such a gap in the literature by assessing the correspondence between the top 1 percent's wealth share and economic growth. Employing time series cointegration techniques, we study the experience of France and the United States from 1950 to 2014. Our estimates suggest that the output growth rate is an inverted-U-shaped function of the wealth share of the top 1 percent. The estimated relationship is robust to variations in control variables and estimation methods. We compute the local \emph{optimal wealth share}, understood as the share of wealth compatible with the maximum growth rate, and show that France is growing close to its long-run potential, while the United States is significantly below its.
We provide a systematic analysis of the properties of individual returns to wealth using 12 years of population data from Norway's administrative tax records. We document a number of novel results. First, individuals earn markedly different average returns on their net worth (a standard deviation of 22.1%) and on its components. Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within narrow asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the net worth distribution increases the return by 18 percentage points (and 10 percentage points if looking at net‐of‐tax returns). Fourth, individual wealth returns exhibit substantial persistence over time. We argue that while this persistence partly arises from stable differences in risk exposure and assets scale, it also reflects heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.
This paper examines the role of secondary property ownership (SPO) in Europe (EU). Focusing predominantly on residential properties used as rental-investments, it explores their role in the political economy of housing and welfare, contributing to respectively newer and older literatures about housing wealth and asset-based welfare and the ‘really big trade-off’ between outright homeownership and generous pensions. Both have hitherto largely been viewed as related to ownership of the primary residence. The empirical part of this paper is based on the Household Finance and Consumption Survey (HFCS), carried out by the European Central Bank in 2014, and providing information about property ownership by samples of households in 20 member states of the EU. The results show that the total wealth held in the form of SPO is considerable while also varying considerably from country to country. SPO held as an investment in the form of landlordism is most prevalent in countries characterised as corporatist-conservative or liberal welfare regimes. In the corporatist-conservative countries, SPO can be seen as a since long established proactive asset-based welfare strategy that compensates for the limitations of their fragmented pension systems, especially for the self-employed. In liberal welfare states, the recent upswing of buy-to-let landlordism is a manifestation of the concentration of housing wealth and limited access to homeownership for starters, which makes SPO an ever more attractive investment.
We investigate the causal relationship between the growth rate of top income shares and economic growth in 12 OECD economies for the period 1950–2010. To analyze patterns of short‐ and long‐run causality, we build upon recent advances in structural‐vector autoregressive modeling of non‐Gaussian systems. This framework allows us to discriminate between rival transmission channels by means of dependence tests, since independent shocks are unique for a particular causation pattern. We consider the share of income accruing to the top 1 percent (1), to the next 9 percent (9), and to the top decile (10). While structural models display considerable heterogeneity across countries, mean group and pooled results strongly favor a specific transmission pattern. In particular, 1 has a long‐run positive impact on economic development. This result, which is also confirmed by identified impulse‐response functions, is particularly evident for the post‐1980 period.
We investigate the relationship between inequality, redistribution, and growth using a recently-compiled dataset that distinguishes clearly between market (pre-tax and transfer) and net (post tax and transfer) inequality, and allows us to calculate redistributive transfers for a large number of advanced and developing countries. Across a variety of estimation methods, data samples, and robustness checks, we find: (1) lower net inequality is robustly correlated with faster and more durable growth, controlling for the level of redistribution; (2) redistribution appears benign in terms of its impact on growth, except when it is extensive; and (3) inequality seems to affect growth through human capital accumulation and fertility channels.
This paper analyzes the role of wealth distribution in macroeconomics through investment in human capital. It is shown that
in the presence of credit markets' imperfections and indivisibilities in investment in human capital, the initial distribution
of wealth affects aggregate output and investment both in the short and in the long run, as there are multiple steady states.
This paper therefore provides an additional explanation for the persistent differences in per-capita output across countries.
Furthermore, the paper shows that cross-country differences in macroeconomic adjustment to aggregate shocks can be attributed,
among other factors, to differences in wealth and income distribution across countries.
The relationship between inequality and growth has attracted a lot of attention in the previous literature. Estimation of this relationship may be biased by simultaneity, omitted variables and measurement error. The present paper contributes to the existing work by introducing the wealth Gini coefficient as a new inequality measure. The most reliable and recent data on income inequality are used for estimation. We employ the Arellano-Bond GMM estimation technique and we find that there seems to be a positive relationship between wealth inequality and real per capita GDP growth, but this relationship is not robust to different model specifications.
Each week, the Dutch Postcode Lottery (PCL) randomly selects a postal code, and distributes cash and a new BMW to lottery participants in that code. We study the effects of these shocks on lottery winners and their neighbors. Consistent with the life-cycle hypothesis, the effects on winners' consumption are largely confined to cars and other durables. Consistent with the theory of in-kind transfers, the vast majority of BMW winners liquidate their BMWs. We do, however, detect substantial social effects of lottery winnings: PCL nonparticipants who live next door to winners have significantly higher levels of car consumption than other nonparticipants. JEL: D14, D91, H23, H27
We estimate the level and distribution of global household wealth. The levels of assets and debts for 39 countries are measured using household balance sheet and survey data centred on the year 2000. The determinants of mean financial assets, non-financial assets, and liabilities are studied empirically, and the results used to estimate average wealth holdings for countries lacking direct evidence. Data on the pattern of household distribution of wealth are assembled for 20 countries, which together account for 59 per cent of the global population and 75 per cent of global wealth. The observed relation between wealth and income distribution in these 20 countries allows estimates of wealth inequality to be produced for many other nations. Combining the figures for individual countries reveals that net worth averaged US8,635 was needed to be in the top half of the global distribution, and US$518,364 to be in the top one per cent. The top 10 per cent owned 71 per cent of world wealth, and the Gini coefficient for the global distribution of wealth is estimated to be 0.802, indicating greater inequality than that observed in the global distribution of consumption or income.
We analysis the link between affuence and well-being using a simple general equilibrium model in which a pure Veblen good is consumed. Individuals derive utility from the pure Veblen good solely on how much they consume relative to others. Resources devoted to the Veblen good provide us with a measure of deadweight loss, as they make no contribution to utility in equilibrium. We ask: Under what preference conditions does the proportion of productive capacity devoted to the pure Veblen good increase as an economy becomes more affuent? In a very general preference framework we derive a necessary, but not suffcient, condition under which the Veblen good crowds out standard forms of consumption and leisure, resulting in an inverse relationship between affuence and utility. With additional structure on the model we are able to fully characterize the behavior of deadweight loss and utility as an economy becomes more affuent.
This paper studies inequality in America through the lens of distributional macroeconomic accounts—comprehensive distributions of the aggregate amount of income and wealth recorded in the official macroeconomic accounts of the United States. We use these distributional macroeconomic accounts to quantify the rise of income and wealth concentration since the late 1970s, the change in tax progressivity, and the direct redistributive effects of government intervention in the economy. Between 1978 and 2018, the share of pre-tax income earned by the top 1% rose from 10% to about 19%, and the share of wealth owned by the top 0.1% rose from 7% to about 18%. In 2018, the tax system was regressive at the top-end; the top 400 wealthiest Americans paid a lower average tax rate than the macroeconomic tax rate of 29%. We confront our methods and findings with those of other studies, pinpoint the areas where more research is needed, and describe how additional data collection could improve inequality measurement.
The Federal Reserve Board’s Survey of Consumer Finances for 2019 provides insights into the evolution of family income and net worth since the previous time the survey was conducted in 2016. The survey shows that over the 2016–19 period, the median value of real (inflation-adjusted) family income before taxes rose 5 percent, and mean income decreased 3 percent. Real median net worth increased 18 percent, and mean net worth rose 2 percent. This survey marks the first in the aftermath of the Great Recession in which between-survey changes in the median outpaced changes in the mean for either measure, indicating that families in large parts of both distributions enjoyed gains in economic well-being. And, while the data also reveal some disparities in the evolution of income and net worth since 2016 across families differentiated by economic characteristics, such as income or wealth, and demographic characteristics, such as age, education, or race and ethnicity, many groups with historically lower income and net worth saw relatively large gains. This article reviews these and other changes in the financial condition of U.S. families, including developments in assets, liabilities, debt payments, and credit market experiences. The findings in this article do not reflect the effects of the COVID-19 pandemic on family finances, as almost all of the data in the 2019 survey were collected before the onset of the pandemic.
We examine whether relative income differences among peers can generate financial distress. Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors. We also examine which factors may mitigate lenders’ bankruptcy risk in these neighborhoods. We show that bankruptcy filers obtain more secured, but not unsecured, debt, and lenders provide additional credit to low-risk, but not high-risk, debtors. In addition, we find evidence consistent with local lenders taking advantage of soft information to mitigate credit risk.
Received October 12, 2016; editorial decision January 15, 2019 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
We investigate wealth returns on an administrative panel containing the disaggregated balance sheets of Swedish residents. The expected return on household net wealth is strongly persistent, determined primarily by systematic risk, and increasing in net worth, exceeding the risk-free rate by the size of the equity premium for households in the top 0.01 percent. Idiosyncratic risk is transitory but generates substantial long-term dispersion in returns in top brackets. Systematic and idiosyncratic risk both drive the cross-sectional distribution of the geometric average return over a generation. Furthermore, wealth returns explain most of the historical increase in top wealth shares. (JEL D31, G11, G51)
This paper investigates the importance of status in household consumption and credit decisions using data from the Survey of Consumer Finances linked to tract-level data in the American Community Survey. We find that relatively richer households in the census tract use more debt and spend more on high-status cars. Also, county-level evidence shows that the consumption of high-status cars is higher in more unequal counties. These results suggest that greater income heterogeneity might shape household consumption and credit decisions, as relatively richer households signal their higher status to their neighbors through the consumption of visible status goods.
This paper was accepted by Tomasz Piskorski, finance.
Links between economic growth and inequality are of growing interest for researchers and policy makers. Previous studies of this relationship have focused mainly on inequalities in income rather than in wealth. Yet from many perspectives wealth inequality is arguably more important. Using a new panel data set from Credit Suisse for 45 sample countries over the period 2000–2012, this study investigates the effects of wealth inequality on economic growth. Empirical results from system GMM estimation suggest that the wealth inequality is negatively associated with cross-country economic growth. This result is robust to alternative estimators and measures of wealth inequality, as well as the econometric specification. Further empirical investigation reveals that impact of wealth inequality on growth is mitigated by better governance.
As normally measured, “global inequality” is the relative inequality of incomes found among all people in the world no matter where they live. Francois Bourguignon and Branko Milanovic have written insightful and timely books on global inequality, emphasizing the role of globalization. The books are complementary: Milanovic provides an ambitious broad-brush picture, with some intriguing hypotheses on the processes at work; Bourguignon provides a deep and suitably qualified economic analysis. This paper questions the thesis of both books-that globalization has been a major driving force of inequality between or within countries. The paper also questions the robustness of the evidence for declining global inequality, and notes some conceptual limitations of standard measures in capturing the concerns of many observers in the ongoing debates about globalization and the policy responses.
In the United States, concentration of income and wealth among the very richest households have become extreme, while middle-class employment opportunities have disappeared. Building since the late 1970s, the instability and inequity in the economic system is now undermining productivity growth. The important contribution of Servaas Storm, “The New Normal: Demand, Secular Stagnation, and the Vanishing Middle Class,” demonstrates the integral relation between the sources of slowing productivity growth and the downward mobility into low-productivity service jobs that characterizes the vanishing U.S. middle class. In this comment, I focus on the “financialization” of the U.S. business corporation, a phenomenon that is consistent with Storm’s general argument. From this perspective, I ask whether Storm’s contention that demand-side factors are stifling productivity growth and causing the middle class to disappear cannot better be viewed as a supply-side problem of corporate resource allocation. My perspective integrates Storm’s important findings on intersectoral differences in productivity growth with an analysis of how, since the 1980s, the financialization of the business corporation has destroyed middle-class career employment, pushing an increasing proportion of the U.S. labor force into low-productivity and low-paid service jobs. In the spirit of Storm’s analysis of the vanishing middle class and the failure of neoclassical economists to deal with this critical question, I call for a focus on the governance of the innovative business enterprise, with a view to reducing, and ideally eliminating, the power of “predatory value extractors” to enrich themselves while leaving most Americans worse off.
Published: 'The Review of Financial Studies', 2016, 29, 1007-1038. This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 7 percent, down from 11 percent for traditional uncorrected repeat-sales regressions, and Sharpe Ratios drop from 0.4 to 0.1. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy, once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously.
A central question of economics has been: how do we explain the distribution of income among factors of production, and the distribution of income and wealth among individuals.
This paper shows the importance of correcting for sample selection when investing in illiquid assets that trade endogenously. Using a sample of 32,928 paintings that sold repeatedly between 1960 and 2013, we find an asymmetricV-shaped relation between sale probabilities and returns. Adjusting for the resulting selection bias reduces average annual index returns from 8.7% to 6.3%, lowers Sharpe ratios from 0.27 to 0.11, and materially impacts portfolio allocations. Investing in a broad portfolio of paintings is not attractive, but targeting specific styles or top-selling artists may add value. The methodology naturally extends to other asset classes.
Past cross-national comparisons of socioeconomic segregation have been undercut by lack of comparability in measures, data, and concepts. Using IRIS data from the French Census of 2008 and the French Ministry of Finance as well as tract data from the American Community Survey (2006–2010) and the U.S. Department of Housing and Urban Development Picture of Subsidized Households, and constructing measures to be as similar as possible, we compare socioeconomic segregation in metropolitan areas with a population of more than 1 million in France and the United States. We find much higher socioeconomic segregation in large metropolitan areas in the United States than in France. We also find (1) a strong pattern of low-income neighborhoods in central cities and high-income neighborhoods in suburbs in the United States, but varying patterns across metropolitan areas in France; (2) that high-income persons are the most segregated group in both countries; (3) that the shares of neighborhood income differences that can be explained by neighborhood racial/ethnic composition are similar in France and the United States; and (4) that government-assisted housing is disproportionately located in the poorest neighborhoods in the United States but is spread across many neighborhood income levels in France. We conclude that differences in government provision of housing assistance and levels of income inequality are likely important contributing factors to the Franco-U.S. difference in socioeconomic segregation.
Social scientists have grappled for decades with the key question of whether inequality in control over a society’s resources facilitates or hinders economic growth. While there is a large theoretical and empirical literature on this topic, the question is far from settled.
We document that nonrich households consume a larger share of their current income when exposed to higher top income and consumption levels. Permanent income, wealth effects, and upward local price pressures cannot provide the sole explanation for this finding. Instead, we show that the budget shares that nonrich households allocate to more visible goods and services rise with top income levels, consistent with statusmaintaining explanations for our primary finding. Nonrich households might have saved up to 3% more annually by the mid-2000s had incomes at the top grown at the same rate as median income since the early 1980s. © 2016 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Using historical price records for Bordeaux Premiers Crus, we examine the impact of aging on wine prices and the long-term investment performance of fine wine. In line with the predictions of an illustrative model, young maturing wines from high-quality vintages provide the highest financial returns. Past maturity, famous châteaus deliver growing non-pecuniary benefits to their owners. Using an arithmetic repeat-sales regression over 1900–2012, we estimate a real financial return to wine investment (net of storage costs) of 4.1%, which exceeds bonds, art, and stamps. Returns to wine and equities are positively correlated. Finally, we find evidence of in-sample return predictability.
This paper combines income tax returns with macroeconomic household balance sheets to estimate the distribution of wealth
in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting
for assets that do not generate taxable income. We successfully test our capitalization method in three micro datasets where
we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations’
tax records. We find that wealth concentration was high in the beginning of the twentieth century, fell from 1929 to 1978,
and has continuously increased since then. The top 0.1% wealth share has risen from 7% in 1978 to 22% in 2012, a level almost
as high as in 1929. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of the economy’s labor
income. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth
inequality in recent decades is due to the upsurge of top incomes combined with an increase in saving rate inequality. We
explain how our findings can be reconciled with Survey of Consumer Finances and estate tax data.
How do aggregate wealth-to-income ratios evolve in the long run and why? We address this question using 1970–2010 national
balance sheets recently compiled in the top eight developed economies. For the United States, United Kingdom, Germany, and
France, we are able to extend our analysis as far back as 1700. We find in every country a gradual rise` of wealth-income
ratios in recent decades, from about 200–300% in 1970 to 400–600% in 2010. In effect, today’s ratios appear to be returning
to the high values observed in Europe in the eighteenth and nineteenth centuries (600–700%). This can be explained by a long-run
asset price recovery (itself driven by changes in capital policies since the world wars) and by the slowdown of productivity
and population growth, in line with the β = s g β=sg Harrod-Domar-Solow formula. That is, for a given net saving rate s = 10%, the long-run wealth-income ratio β is about 300% if g = 3% and 600% if g = 1.5%. Our results have implications for capital taxation and regulation and shed new light on the changing nature of wealth,
the shape of the production function, and the rise of capital shares. JEL Codes: E10, E20, D30, D31, D33.
This Review presents basic facts regarding the long-run evolution of income and wealth inequality in Europe and the United
States. Income and wealth inequality was very high a century ago, particularly in Europe, but dropped dramatically in the
first half of the 20th century. Income inequality has surged back in the United States since the 1970s so that the United
States is much more unequal than Europe today. We discuss possible interpretations and lessons for the future.
The top 1 percent of Americans control 40 percent of the nation's wealth. And, as Joseph E. Stiglitz explains, while those at the top enjoy the best health care, education, and benefits of wealth, they fail to realize that "their fate is bound up with how the other 99 percent live." Stiglitz draws on his deep understanding of economics to show that growing inequality is not inevitable: moneyed interests compound their wealth by stifling true, dynamic capitalism. They have made America the most unequal advanced industrial country while crippling growth, trampling on the rule of law, and undermining democracy. The result: a divided society that cannot tackle its most pressing problems. With characteristic insight, Stiglitz examines our current state, then teases out its implications for democracy, for monetary and budgetary policy, and for globalization. He closes with a plan for a more just and prosperous future.
Poor families around the world spend a large fraction of their income consuming goods that do not appear to alleviate poverty, while saving at low rates. We suggest that individuals care about economic status and hence we interpret this behavior as conspic-uous consumption that is intended to provide a signal about unobserved income. We show that if human capital is observable and provides some information about income, a signaling equilibrium can emerge in which expected expenditure on conspicuous con-sumption as a fraction of total income is decreasing with income. This equilibrium results in an increasing marginal propensity to save that might generate a poverty trap.
Poor families around the world spend a large fraction of their income consuming goods that do not appear to alleviate poverty, while saving at low rates. We suggest that individuals care about economic status and hence we interpret this behavior as conspicuous consumption that is intended to provide a signal about unobserved income. We show that if human capital is observable and provides some information about income, a signaling equilibrium can emerge in which expected expenditure on conspicuous consumption as a fraction of total income is decreasing with income. This equilibrium results in an increasing marginal propensity to save that might generate a poverty trap.
This paper develops a cointegrating nonlinear autoregressive distributed lag (NARDL) model in which short- and long-run nonlinearities are introduced via positive and negative partial sum decompositions of the explanatory variables. We demonstrate that the model is estimable by OLS and that reliable long-run inference can be achieved by bounds-testing regardless of the integration orders of the variables. Furthermore, we derive asymmetric dynamic multipliers that graphically depict the traverse between the short- and the long-run. The salient features of the model are illustrated using the example of the nonlinear unemployment-output relationship in the US, Canada and Japan.
This paper shows that, consistent with a signaling-by-consuming model à la Veblen, income elasticities can be predicted from the visibility of consumer expenditures. We outline a stylized conspicuous consumption model where income elasticity is endogenously predicted to be higher if a good is visible and lower if it is not. We then develop a survey-based measure of expenditure visibility, ranking different expenditures by how noticeable they are to others. Finally, we show that our visibility measure predicts up to one-third of the observed variation in elasticities across consumption categories in U.S. data. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.
What effect, if any, does the extent of economic inequality in a country have upon the political engagement of its citizens? This study examines this question using data from multiple cross-national surveys of the advanced industrial democracies. It tests the theory that greater inequality increases the relative power of the wealthy to shape politics in their own favor against rival arguments that focus on the effects of inequality on citizens' objective interests or the resources they have available for political engagement. The analysis demonstrates that higher levels of income inequality powerfully depress political interest, the frequency of political discussion, and participation in elections among all but the most affluent citizens, providing compelling evidence that greater economic inequality yields greater political inequality.
This paper shows how we can estimate VAR's formulated in levels and test general restrictions on the parameter matrices even if the processes may be integrated or cointegrated of an arbitrary order. We can apply a usual lag selection procedure to a possibly integrated or cointegrated VAR since the standard asymptotic theory is valid (as far as the order of integration of the process does not exceed the true lag length of the model). Having determined a lag length k, we then estimate a (k + dmax)th-order VAR where dmax is the maximal order of integration that we suspect might occur in the process. The coefficient matrices of the last dmax lagged vectors in the model are ignored (since these are regarded as zeros), and we can test linear or nonlinear restrictions on the first k coefficient matrices using the standard asymptotic theory.
We propose a test of the null hypothesis that an observable series is stationary around a deterministic trend. The series is expressed as the sum of deterministic trend, random walk, and stationary error, and the test is the LM test of the hypothesis that the random walk has zero variance. The asymptotic distribution of the statistic is derived under the null and under the alternative that the series is difference-stationary. Finite sample size and power are considered in a Monte Carlo experiment. The test is applied to the Nelson-Plosser data, and for many of these series the hypothesis of trend stationarity cannot be rejected.
This paper demonstrates that the coexistence of developed and underdeveloped countries can be a stationary equilibrium in a world economy with free trade in consumption goods and physical capital. An underdeveloped country is characterized by a high ratio of unskilled workers in the labor force, a small stock of physical capital, a low gross national product, a high rate of return on human capital and a corresponding large wage differential between skilled and unskilled workers. The critical assumptions are that future labor earnings cannot serve as collateral on a loan and indivisibilities in education.
Using nationally representative data on consumption, we show that Blacks and Hispanics devote larger shares of their expenditure
bundles to visible goods (clothing, jewelry, and cars) than do comparable Whites. These differences exist among virtually
all subpopulations, are relatively constant over time, and are economically large. Although racial differences in utility
preference parameters might account for a portion of these consumption differences, we emphasize instead a model of status
seeking in which conspicuous consumption is used as a costly indicator of a household's economic position. Using merged data
on race- and state-level income, we demonstrate that a key prediction of the status-signaling model—that visible consumption
should be declining in reference group income—is strongly borne out in the data for each racial group. Moreover, we show that
accounting for differences in reference group income characteristics explains most of the racial difference in visible consumption.
The happiness literature has established that, in the developed countries, increasing affluence has not increased well-being in recent decades. We seek an explanation for this in terms of conspicuous consumption, a phenomenon originally identified by Veblen. We develop some simple general equilibrium models that incorporate a Veblen good, among others. In all of our models, as productivity increases, the Veblen good eventually dominates the economy in the sense that, by reducing leisure, more than all the added productivity is dissipated in the production of this good. Also, in the presence of a Veblen good, productivity increases destroy social capital. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.
The paper offers a theory of income differences in which income inequality exists and persists despite identical tastes and talents. Teams of unskilled labor supervised by schooled managers produce goods with increasing returns to scale. Agents are assumed unable to borrow to fund the human capital investment needed to become managers. Despite ex ante identical agents, the model displays the following equilibrium phenomena: (1) risk-averse agents accept fair gambles, implying an unequal ex post distribution of unearned income; (2) agents agree to publicly subsidize education, although those receiving the subsidy have the highest material wealth; and (3) incomes and educational differences are perpetuated from generation to generation. Copyright 1996 by University of Chicago Press.
This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Becau se of capital-market imperfections, poor agents choose working for a wa ge over self-employment and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will ther e be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, the authors demonstrate the robustness of this result b y extending the model dynamically and studying examples in which initi al wealth distributions have long-run effects. Copyright 1993 by University of Chicago Press.