Posts tagged with: income

income-inequalityIn his recent State of the Union address, President Obama has signaled that income inequality will be his domestic focus during the remainder of his term in office. The fact that the president considers income inequality, rather than employment or economic growth, to be the most important economic issue is peculiar, though not really surprising. For the past few years the political and cultural elites have become obsessed with the issue.

But what should Christians think, and how should we approach the issue? Should we also be concerned? And if so, what should we do about it?

Here are ten points about income inequality that every Christian should understand:

givingmoney“Do economic incentives help or hinder ‘business as mission’ (BAM) practitioners?” In a forthcoming study, Dr. Steven Rundle of Biola University explores the question through empirical research.

Unsatisfied with the evidence thus far, consisting mostly of case studies and anecdotes, Rundle conducted an anonymous survey of 119 “business as mission” practitioners, focusing on a variety of factors, including (1) “the source of their salary (does it come from the revenues of the business or from donors?),” and (2) “the outcomes of the business in terms of the four ‘bottom lines’ of economic, social, environmental and spiritual impact.”

The reason for focusing on such areas? “Many people in the ministry/missions world believe that donor support helps ensure that practitioners stay focused on the ministry goals.”

Rundle summarizes his findings as follows:

This study essentially found the exact opposite. It found that practitioners who are fully supported by the business tend to out-perform – sometimes significantly – donor-supported BAM practitioners, and are no less fruitful in terms of spiritual impact. This finding holds up even after controlling for things like geography, firm size, and firm type.

…. The moral of the story is that economic incentives matter. Contrary to the mission community’s concern that self-support will take one’s attention away from the ministry goals, the truth is that only by creating a successful business can a practitioner hope to have a meaningful and holistic impact on a community. (more…)

David Deavel’s review of Mitch Pearlstein’s From Family Collapse to America’s Decline: The Educational, Economic, and Social Costs of Family Fragmentation has been picked up by First Things and Mere Comments. Deavel’s review was published in the Fall 2011 issue of Religion & Liberty.

In his review, Deavel declared:

His [Pearlstein] new book, From Family Fragmentation to America’s Decline, laments this inability of many to climb their way up from the bottom rungs of society. But rather than fixating on the one percent, he focuses on the 33 percent. This is the percent of children living with one parent rather than two. These children, victims of what many call “family fragmentation,” start out with tremendous social and educational deficits that are hard to narrow, nevermind close. These are most often the children for whom upward mobility has stalled. Their economic well-being has led to decline in American competitiveness and also the deeper cleavages of inequality that have been so widely noted.

There was a good deal of discussion in the media over “unfair” executive compensation, especially in light of the bonuses, golden parachutes, and other forms of remuneration received by CEOs during the bailout.

I have yet to hear much complaint about CEOs being underpaid, though.

But this might change as it becomes apparent that under-compensation of executives might well be a way to wriggle out of higher payroll tax liability. Consider the case of CPA David Watson, who “incurred the wrath of the IRS by only paying himself $24,000 a year and declaring the rest of his take profit.” The Slashdot piece makes the compelling conceptual connection between Watson’s case and that of “the much ballyhooed $1 Executive club like Steve Jobs, Larry Ellison, Sergey Brin, Larry Page, and Eric Schmidt.”

The outcome of this? According to a WSJ overview of the Watson case, “Pay can vary—but it can’t be too low.”

I think if we follow the golden rule we’ll get a golden mean for the golden parachute so that it won’t strangle the golden goose.

On Friday April 11, the Vatican newspaper, L’Osservatore Romano, featured a front-page article on the progress made in international development since Pope Paul VI wrote the encyclical Populorum Progressio in 1967. The author of the article, Fr. Gian Paolo Salvini, S.J., is director of the journal La Civiltà Cattolica. He has a degree in economics and since he has lived in Brazil for many years, he has first-hand experience of development issues.

Salvini’s article is entitled “Incomplete Development” (“Uno sviluppo incompleto”) but his overall assessment of what has happened over the last 40 years is positive. He cites various statistics showing that “spectacular progress” has been made in terms of reducing absolute poverty. The number of people who have to live on less than one dollar a day has fallen from 29 to 18 per cent between 1990 and 2004. Also the data for longevity, child mortality and literacy show clear improvements.

Salvini identifies international trade as one of the key factors that has contributed to this trend. He is aware that progress has been uneven and that improvements in Asia have been far more marked than in Africa. This highlights that “the greatest success stories are due to the formula industrialize for exports”.

His most striking example to illustrate this point is that of South Korea. The fact that the country’s economic indicators were similar to those of Zaire (today the Democratic Republic of Congo) in the 1960s reflects the central importance of engaging with international trade: Korea’s achievement is largely due to its ability to export its manufacturing products to North America and Europe. This also explains why Dependency Theory, which was fashionable in the sixties and which advised developing countries to disengage with global trade, “is not taught anymore”.

The power of trade to transform poor countries is nowadays beyond doubt and Salvini notes that today it is often “the developing world which is asking for more free trade”, whereas Europe and the United States are obstructing the free flow of goods in agriculture.

But towards the end of the article, Salvini raises a more critical point regarding achievements in international development. He says that in contrast to absolute poverty, relative poverty is increasing: “The distance between those who are doing well and those doing badly, or to put it better, those who are doing well and those who are doing less well is growing.”

Salvini does not provide any data to illustrate this point and his assertion is, in fact, questionable. At the Populorum Progressio conference organized by Istituto Acton in Rome in February, Prof. Philip Booth from the Institute of Economic Affairs in London, specifically addressed the issue of relative poverty:

We should recognise that relative poverty has decreased during the process of globalisation .… Most dramatically, the gap between countries that have recently seen rapid growth and those countries that have been relatively well off for many decades has narrowed significantly … Whilst European Union countries, the US, the UK and Japan grow well below the world average (indeed disposable incomes are broadly stagnant across much of the developed world), over half the world’s population now lives in 40 countries that are growing at more than 7% per year. Development is happening and is benefiting huge numbers of previously-poor people.

Salvini may be referring to an increase in income inequality within countries but in that case he is not looking at poverty in terms of human needs and real deprivations, but as compared to an abstract “ideal”.

Reducing income inequality may seem like a noble aspiration, but it is of minor importance. Prioritizing the alleviation of relative poverty would yield the absurd situation where society as a whole is made poorer only to make it more equal. A desire for greater equality should not justify giving up the real and tangible benefits globalization has brought the poor over the last couple of decades.

A recent NBER paper, “Distributional Effects of Globalization in Developing Countries,” by Pinelopi Koujianou Goldberg and Nina Pavcnik examines some effects of trade liberalization on low-skill workers.

Les Picker summarizes the findings, “Not surprisingly, the entry of many developing countries into the world market in the last three decades coincides with changes in various measures of inequality in these countries. What is more surprising is that the distributional changes went in the opposite direction from what the conventional wisdom suggests: while trade liberalization was expected to help the less skilled, who are presumed to be the relatively abundant factor in developing countries, there is overwhelming evidence that they are generally not made better off relative to workers with higher skill or education levels.”

There’s a lot more here to digest and the article has some predictably necessary nuances and caveats, not least of which concerns the problematic elements of trying to find a causal link between temporally related phenomena: “The authors’ findings suggest a contemporaneous increase in various measures of globalization and inequality in most developing countries, although establishing a causal link between these two trends has proven more challenging. However, the evidence has provided little support for the conventional wisdom that trade openness in developing countries would favor the less fortunate.”

It’s one thing to say that globalization proportionally rewards more highly educated and skilled workers relative to less educated and skilled workers. This by itself is not obviously unjust, and indeed, it seems to pass a basic sense of justice that jobs that require more skills and training ought to command a higher wage. Maybe a system that distributes more unevenly according to a measure of merit such as education or skill-level is more just than another system which is more equitable in purely distributive terms.

That said, it’s quite another thing to say that low-skilled workers are not made better off in absolute terms by globalization. I’m inclined to think that we shouldn’t be so concerned about relative disparities as we are by comparing in absolute terms the state of the working poor under systems of liberal versus illiberal trade.

If the working poor are better off under a liberal trade regime than an illiberal one, and higher educated workers are paid relatively more, there is a simultaneous increase in the poor’s immediate economic prospects as well as a relative increase in the economic incentive to improve their skills.

But his latter point only is effective in a situation where labor mobility is a real option, and as the NBER paper points out, “the strict labor market regulation that many developing countries had in place prior to the recent reforms is a potential source of labor market rigidities.”

So, for the promise of globalization to be realized, trade not only needs to be liberalized, but so does labor. Workers need to be free to move between sectors, both within and without national boundaries. As I’ve argued before in another context, we need both free trade and free labor.

For more on international labor mobility among low-skill workers, see this NYT piece, “Short on Labor, Farmers in U.S. Shift to Mexico.” See also, “New UN Report Underscores Ties between Poverty and Productivity.”

Gary Becker and Richard Posner examine the increasing gap between the rich and poor in terms of wealth and income. This gap was most recently highlighted in a report that “the richest 2% of adults in the world own more than half of global household wealth,” and the richest 1% hold 40% of wealth. The report was issued by the World Institute for Development Economics Research of the United Nations University (PDF).

Becker seems to accept that wealth inequality is essentially a problem, and seems at pains to show that “the inequality in wealth appropriately defined is not nearly as large as the report might suggest, and wealth inequality in the world has almost surely become smaller over time, not larger as some in the media reported.”

Posner acknowledges that income inequality is increasing in the developed world and in some rapidly developing nations, but seems less concerned. He raises three possible negative social consequences of “the existence of a stratum of exceedingly wealthy people.”

Of the three, the third I think is the most important and real: “Huge personal wealth may play a disproportionate role in political competition. Personal wealth confers an enormous advantage on a candidate, but also permits a person who does not want to be a candidate to exert an influence on candidates and policies.”

I don’t think income or wealth inequality in itself is necessarily negative, and so I tend to agree with Posner’s emphasis rather than Becker’s. The problem comes when the economic power of the wealthy is used to disproportionately skew policy in their favor at the expense of less economically powerful classes. But as a whole, I think the concern about wealth disparity is more due to its effect on subjective well-being, or happiness, and the resulting envy that is engendered.

But, as Ron Sider of Evangelicals for Social Action admitted in a recent debate with Rev. Sirico, the concern for policy-makers should not be primarily the happiness level or sense of subjective well-being of citizens, but rather how the poorest of the poor are doing, whether the objective floor of material well-being is being raised or not.

Sider has said that he would not be concerned with an increasing gap between rich and poor so long as the living standards of the poor were also increasing (so long as that increased concentration of economic power does not manifest itself in corruption of the political process, via rent-seeking, et al.)

People are much more likely to vote with regard to their subjective sense of well-being, however, so that politicians are easily manipulated into catering to their constituency’s sense of happiness rather than appealing to their objective betterment.

Mark Whitehouse reported in the September 25th issue of the Wall Street Journal that the living standards of average Americans will have to be adjusted downward in coming years because a larger share of our national debt is going to debt-service. He writes,

That means Americans will have to work harder to maintain the same living standards—or cut back sharply to pay down the debt.” Catherine Mann, a senior fellow at the Institute for International Economics notes, “Our net international obligations are coming home to roost. It’s as if on our personal MasterCards we have run up large obligations and never had to make personal payments. You can’t believe that is going to last forever.

I am not a professional economist but such news makes me wonder how we will really handle these things as a nation when the spend-spend-spend spigot is finally turned off. The pay day is coming, maybe sooner than later. Our prosperity is always one really bad cycle from a serious implosion and then the country will either adjust corporately, and grow stronger morally and spiritually, or it will begin to break down in ways that could be alarming over the long term. Let us pray that we learn how to adjust sooner than later. Churches that spend so much on themselves, and their upwardly mobile lifestyles, should take note. The kingdom calls for sacrifice and frugality, not lavish expenditures on empire building.

John H. Armstrong is founder and director of ACT 3, a ministry aimed at "encouraging the church, through its leadership, to pursue doctrinal and ethical reformation and to foster spiritual awakening."