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The growth of European inequality
Giuseppe Bertola writes:
Just as the Eurozone countries began to enjoy full and irreversible economic integration, inequality increased very sharply in the EU15 and more sharply in the 12 Eurozone countries, bringing its previous decline to an end and reverting to the 1996 level by 2004...one finds that EMU does appear to improve economic performance (both in terms of per capita income and in terms of unemployment) and the intensity of international transactions (especially as regards foreign direct investment flows). But it also appears to be associated with higher inequality, and with lower social spending. Interestingly, the inequality variation associated with EMU is fully accounted for by changes in social policy expenditure (excluding pensions) as a share of GDP, and in GDP and unemployment (both of which are of course likely to be influenced by integration policies, as well as by global cyclical and technological development).
We will of course see how far this trend goes, but it is consistent with my view that Europe will, in economic terms, become like the United States more rapidly than vice versa.
Posted by Tyler Cowen on October 14, 2007 at 05:46 AM in Economics | Permalink
Comments
And, as in the U.S., I suspect that this greater inequality is due largely to a disproportionately increased prosperity of a few that is not at the expense of the less increased prosperity of the majority. The alternative is the economic equality "enjoyed" in Egypt, where professionals make less money than cab drivers and hustlers of tourists, with the predictable result that professionals neglect their jobs to moonlight in economically un-beneficial (but remunerative) jobs.
Posted by: Geoff Hamilton at Oct 14, 2007 8:13:44 AM
One has to be sensible about inequality of income. Tyler thinks that not only is inequality morally irrelevant per se but that it is the result of a more efficient system than those that promote more equality. I agree with the former - I am yet to see a compelling argument for why it should be morally relevant. I also agree with the latter in the short-term but I am doubtful in the long-run. Vast swathes of people generally think large inequalities to be unjust. Whether right or wrong about that, I think it's a very human reaction which only a certain type of person is able to intellectualise away. You can get away with counter-intuitive states of affairs for a while but not forever. The poorest Americans will at some point realise they won't get rich and that it is a bit silly that some people have 100 million dollar homes while they struggle to make ends meet. That may not be a just state of affairs or even the most economically efficient state of affairs - but an economic system that ignores people's basic intuitions and urges will not last forever.
Posted by: Finnsense at Oct 14, 2007 8:47:50 AM
Every time a European friend smirks at me about something they find wrong with America -- no matter what it is -- I just tell them the US is a leading indicator for the rest of the world. Don't count your chickens.
Posted by: Henrik Mintis at Oct 14, 2007 10:36:40 AM
Kripa's elegant equations are charming.But as a person who belongs to the "Kshatriya" caste and as one from her study area "Cochin", I must say that caste is becoming a thing of the past due to sweeping changes in social policies and welfare programmes for the backward castes.Caste system among Hindus is an old story atleast in some progressive states.
A hidden caste system operates among the Christians also..for example, the Latin Catholics and converted Christians are considered as lower castes by forward Christians.
Posted by: GVV at Oct 14, 2007 11:45:58 AM
Finnsense:
It may be the case that the poor want to deprive the rich of their possessions, but stopping them from doing so is a core function of the government (more precisely, anyone depriving anyone of their possessions). If you are making the case that this is a cause of governments failing, I'd probably agree with you, but if you are making the case that re-distributive policies are good for the longterm efficient functioning of states, I would take heed. Redistribution of goods based on political or physical strength is the very definition of tyranny.
Posted by: nordsieck at Oct 14, 2007 1:28:15 PM
nordsieck,
I have yet to hear anyone come up with a compelling justification for how goods ought to be distributed in a moral sense. Thus, I would question the legitimacy of your first sentence that the poor wish to deprive the rich of their possessions. I am arguing that the poor may well consider the rich to have acquired their possessions unjustly.
We are not going to resolve disputes about distributive justice here (and indeed my own view is that disputes about distributive justice are not able to be resolved). Given that this is my view, I would also question your final sentence. Forcing market outcomes onto people is no less tyrannical than forcing some kind of redistribution. I strongly doubt even Tyler thinks that market outcomes are especially just - though he may well, and with justification, find them efficient.
As a pragmatist I am all for finding solutions that work given how people are - rather than how we think they ought to be.
Posted by: Finnsense at Oct 14, 2007 2:17:43 PM
finnsense: "but an economic system that ignores people's basic intuitions and urges will not last forever."
Jealousy cannot be legislated away. It will always exist.
The U.S. has had both wealthy and poor people for all of its 230 years existence. So have just about every other nation on earth. What makes the U.S. so different from almost everywhere else is the ease at which poor people can become rich people.
A 1996 study by Thomas Stanley and William Danko revealed that 80% of all millionaires in the U.S. were not first-generation rich. that is, 80% became wealthy through their own efforts. That's what is so great about the U.S.
Posted by: John Dewey at Oct 15, 2007 10:45:42 AM
"Vast swathes of people generally think large inequalities to be unjust. Whether right or wrong about that, I think it's a very human reaction which only a certain type of person is able to intellectualise away."
Is this really true? I'm not at all sure that people generally think large inequalities to be wrong, I think people don't like ill gotten gains. They typically are fine with other types of gains (earned income, lucky windfalls etc.) Now there is indeed a commonly held mistake much-encouraged on the left that wealth is a sign of ill-gotten gain. But the inherent moral insight you are talking about is really with respect to ill-gotten gains, not large inequalities per se.
Posted by: Sebastian Holsclaw at Oct 15, 2007 12:07:50 PM
John Dewey,
"What makes the U.S. so different from almost everywhere else is the ease at which poor people can become rich people."
I think you'll find a look at the statistics reveal that the US has less social mobility than many European countries - including my own, Finland.
Sebastian,
I think a lot of people who are working hard and scraping by think it unfair that some people live in palaces. That's just an intuition though - I haven't seen any studies on it.
Posted by: Finnsense at Oct 15, 2007 1:48:50 PM
Finnsense,
What statistic measures social mobility? Certainly not the GINI coefficient.
I'm not even sure what you mean by "social mobility". Are you meaning economic opportunity? Economic opportunity is what I was referring to.
As the U.S. Council on Competitiveness reports:
"Over the past two decades .... the U.S. has led all major developed economies in terms of long term growth and standards of living, and has also been responsible for one-third of the economic growth around the world."
"The U.S. leads all major industrial economies in the percent of the adult population engaged in entrepreneurial activity."
Posted by: John Dewey at Oct 15, 2007 2:32:28 PM
John Dewey,
Social mobility is people moving through income quintiles. It determines precisely what you mentioned which was "the ease with which poor people can become rich" and visa-versa.
Take a look at "a paper by Markus Jäntti, Bernt Bratsberg, Knut Roed, Oddbjørn Raaum, Robin Naylor, Eva Österbacka, Anders Björklund, Tor Eriksson: "American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility in the Nordic Countries, the United Kingdom and the United States (IZA version)". The authors find that social mobility is lowest in the United States, and highest in the Nordic countries (Denmark, Finland, Norway and Sweden), with the United Kingdom located imbetween. These are important findings, exposing the myth of the 'American dream', and using more robust methodology than previous studies."
If you take a look at the PISA studies of educational attainment at age 15, you will find that not only does the US perform very poorly but that educational attainment is also tied far more to background there than in most other developed countries.
Posted by: Finnsense at Oct 15, 2007 3:02:58 PM
Finnsense,
We view the world very differently. You seem to assume that if intergenerational mobility is lower in the U.S., it must mean that the opportunity does not exist. I presume you would then have the government do something to "fix" this problem that you see.
On the other hand, I look at the study of Stanley and Danko, see that the top 3% today is populated by those who were not wealthy as children, and conclude that the opportunity for success exists.
If the children of the poor do not take advantage of the many opportunities available to them, it should not be the government's role to force a result on the rest of us.
In fact, the attempts of the government to "fix" the results have harmed the children of the poor. That is particularly true for affirmative action in many university programs.
I do not want my nation to become "European". I abhor the socialism I read about. I will fight like hell against attempts to institute an "equal results" economy.
Posted by: John Dewey at Oct 15, 2007 5:35:33 PM
finnsense,
I cannot download the paper you suggested, but I did read the abstract.
Please consider reading the very short post by Brink Lindsey entitled "Is the American Dream Dying?", which can be found about halfway down the page at this link:
Mr. Lindsey makes these important points:
"Measured intergenerational mobility in the U.S. is relatively lower because the payoff for talent and hard work (surely conscientousness and diligence are forms of human capital) is higher here."
"If continental Europe truly were more open and less stratified than we are, then why are Europeans worried about a “brain drain” to the supposedly class-stratified U.S. and U.K.? Why in particular did Nicholas Sarkozy make a campaign stop in London and urge the estimated 300,000 French expat’s living in the U.K. to come home and “make France a great nation”?
Posted by: John Dewey at Oct 15, 2007 6:24:14 PM
James Heckman, University of Chicago, and Bas Jacobs, University of Amsterdam, provide these insights about intergenerational mobility:
"Findings of high income mobility may not only suggest more equality of opportunity, but again may also be a sign of weak economic incentives. ... More able and therefore richer parents invest relatively more in the education of their children when the returns increase and parental ability is positively correlated with the child's ability. Therefore, it is not surprising that measured intergenerational mobility is higher in the Nordics than in the Anglo-Saxon countries because the returns to education are much lower."
Policies to Create and Destroy Human Capital in Europe
Posted by: John Dewey at Oct 15, 2007 7:08:10 PM
Dewey,
"You seem to assume that if intergenerational mobility is lower in the U.S., it must mean that the opportunity does not exist."
No, I assume it means there is less opportunity in the US. Are you really arguing now that in spite of having greater opportunity in the US, Americans simply choose not to take those opportunities?
The tone of your post suggests you have considerable emotion invested in your position (why on Earth would anyone abhor Nordic socialism? - trust me, life here is very similar to life in the US. Perhaps you've been watching too many movies.).
I think it's best to end this discussion now. I doesn't seem like it's going anywhere.
Posted by: Finnsense at Oct 16, 2007 3:40:04 AM
finnsense: "Are you really arguing now that in spite of having greater opportunity in the US, Americans simply choose not to take those opportunities?"
Opportunity certainly does exist in the U.S., but it requires hard work. Many Americans "simply" choose not to work hard. Their untruthful leaders have convinced them they are entitled to success regardless of individual effort.
The American economic system rewards effort and good decision-making. Its rewards have motivated the talented and industrious to high levels of productivity. That's why our economy is so strong, and why even the so-called "poor" lead a life that most of the world envies. The poor of the U.S. are not sneaking across deserts and oceans to Mexico or Africa or Asia or South America or even Europe. Millions are crossing deserts and oceans to take advantage of the opportunity in the U.S.
Posted by: John Dewey at Oct 16, 2007 6:27:13 AM
Are we comfortable with the assumption that inequality is contingent upon decreased social spending? I
And if inequality is simply limited to the range of income and the number of people in low and high income margins respectively, then could it not be true that in the eurozone countries of which we speak consumption habits and the price of "luxuries" as citizen as the united states would have it differ from that of our own experience? The Difference being that it might cost less to have a higher quality of life in these countries, despite a relaxation of social spending.
Giuseppe, I am respectfully tempted to think that "But it also appears to be associated with higher inequality, and with lower social spending. Interestingly, the inequality variation associated with EMU is fully accounted for by changes in social policy expenditure..." is an slightly unqualified collection of statements. Correct me if I am absolutely wrong.
Posted by: Williams8302 at Oct 18, 2007 10:07:24 AM
