Rather than read before I go to bed, I have taken to watching Netflix documentaries on the iPad. I thought this would lead to me falling asleep easier from the boredom of watching documentaries, but instead I find myself actually enjoying them leading to less sleep…and more questions.
Last night I watched Inequality for All, which is former U.S. labor secretary and now Berkeley professor Robert Reich's take on the causes and effects of growing income inequality in the U.S. I will admit that I was a skeptic going in knowing that Reich in a known socialist who wants to ride tax and spend policies to the Utopia of socialism. Beyond that, short people got no reason to live*.
Despite my misgivings, I gave Reich's documentary a go, knowing I'd fall asleep in the first 10 minutes. Two hours later, I found myself scratching my head and questioning my own conservative existence–or at least a little of what I thought before. I'm not going to go into a lot of detail here, as I still have a lot of thinking to do, but I did want to show you a little of my initial 'research.'
One of Reich's basic premises in Inequality for All is that income inequality causes decreased economic growth. This is a less than veiled attack on trickle-down arguments. In short (HA! Get it? He's 4'11". Get it? Nevermind.)**, Reich argues that when income accumulates at the top of the income distribution, little reinvestment occurs as would be required for trickle-down arguments to work. Again, I'm not ready to fully question that basic premise, but rather a thought occurred to me: If Reich is right (as opposed to left?), then we should see a negative correlation between measures of income inequality and income growth. That is, as income becomes less equal, income growth should slow down. And that is something I can do 'blog-level research' on.
So here goes. If we look at the U.S. Gini coefficient (roughly: a measure of income inequality where 0 indicates a uniform distribution and a value of 1 indicates all wealth concentrated with 1 person), from 1980-2013, the simple correlation between the Gini coefficient and GDP growth is -0.06–negative but probably not significantly negative to support Reich's argument.
So there you have it–Reich is a short nitwit who knows nothing about economics or politics or economic policy and Berkeley should immediately move to fire him and put me in his place. After all, I'm really tall.
Just kidding. As any good blog researcher knows, in today's hard hitting journalistic era where not just any schmuck can post stuff on the internet with no evidence (pfft), it takes more than one correlation coefficient to prove a point. So I thought, well, if income inequality causes decreased growth it might take a few years for the effects of today's inequality to affect GDP growth rates. So I decided to look at the correlation between the Gini coefficient in year X and GDP growth in years X+1, X+2, X+3,…,X+10.
When I did that, an interesting pattern emerged. Take a look at the graph below: On the horizontal axis is the # of years in the future. On the vertical axis is the correlation between the U.S. Gini coefficient and GDP growth. For example, if we are looking at 2 years in the future, the data point represents the correlation between the Gini coefficient from 1980 to 2011 with the GDP growth from 1982 to 2013. If we are 5 years in the future we are looking at the correlation between the Gini from 1980 to 2008 with GDP growth from 1985-2013.
The pattern that emerged is intriguing enough to add to my list of things that make me go hmmmm***. As we look 1,2 and 3 years into the future, the correlation between income inequality and GDP growth becomes more and more negative. That effect seems to start to wear off beyond 3 years and by 10 years is back to the baseline level of very little correlation.
So what might this mean?
A) It could mean that if this holds up, Reich is right. If income inequality increases there seems there could be a negative and lagging impact on GDP growth. So, if income inequality increases over a period of time, the cumulative effect on decreased GDP growth could be large. Or,
B) It could mean I'm an idiot.
Either way, I'm intrigued. And I look forward to those more Macro than me to tell me whether A), B) or both are correct.
*Google Randy Newman if you think I'm being mean.
**For those who think my short jokes are insensitive, my wife barely tops out at 5'.
***Google C+C and the Music Factory
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