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Course: Macroeconomics > Unit 8
Lesson 2: National income and inequality- Capital by Thomas Piketty
- Difference between wealth and income
- What is capital?
- Piketty's two drivers of divergence
- Is rising inequality necessarily bad?
- Convergence on macro scale
- Education as a force of convergence
- Gilded Age versus Silicon Valley
- Inverse relationship between capital price and returns
- Connecting income to capital growth and potential inequality
- r greater than g but less inequality
- Return on capital and economic growth
- Critically looking at data on ROC and economic growth over millenia
- Simple model to understand r and g relationship
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Is rising inequality necessarily bad?
Inequality means not everyone gets the same income or wealth. In a fixed pie economy, rising inequality can be bad. But if the economy grows, even with inequality, everyone might be better off. Balancing inequality and economic growth is important. Created by Sal Khan.
Want to join the conversation?
Maybe I'm missing something fundamental, but why is inequality an inevitable by-product? (6:44)(21 votes)
it's inevitable because in a market economy some people do well, some do bad. It might be due to luck, talents or whatever. You can think of it like random fluctuations.
The question is: is there some mechanism that accelerates these disparities once they have been created by luck or talent? Well, I can think of at least one. The power to bypass or influence the law to your own benefit :) But it is really interesting if there is some fundamental law of economics that drives inequality in a market economy.(37 votes)
Let's consider the other spectrum: what would possibly happen to inequality in the event of an economic recession ? Would inequality still be rising propotional to the rate of decrease of the economy or would it fall ?(11 votes)
Inequality of income would generally fall. It's certainly possible to have a dramatic net loss in wealth in a given year if all your savings is invested in stocks. Ie, your "income" could be zero or negative, depending on how you look at it.(3 votes)
A point is made that by getting a bigger quantity of the pie in size but not in percentage, the poor are still better off. But, what if the inflation is greater than the percentage increase in their incomes? And considering economic growth almost always results in inflation, how does it make the poor better off?(5 votes)
Actually, economic growth normally results in deflation. It is just that monetary authorities try to increase the money supply faster than the supply of goods and services.
When we say that the economy is growing, we mean that there is real growth, which is adjusted for inflation.(5 votes)
- Could one argue that although the bottom 90% is richer in period 2, the increased wealth of the top 10% means that in goods and services that members of the bottom 90% compete with members of the top 10% to access (e.g., college degrees, housing, lawyers, niche healthfoods, gym membership etc.), the increased wealth of the 10% means that the price of these goods and services increase too, to the point where they might become unaffordable to members of the bottom 90%, despite their own increase in wealth. Essentially, they haven't been able to keep up with the top 10% and can't compete with their higher purchasing power. This would presumable only affect those in the top 20% or 30%, the class of people who send their kids to expensive colleges, live in expensive cities and consume similar consumer goods and services to the top 10%.(3 votes)
If the national income of a country increases, the country starts producing more goods and services. Because the wealth of the top 10% increases, they want more goods and services. It could be they suddenly decide they want more and better cars. Because of that the price of cars will go up so the bottom 90% will no longer be able to afford those cars.
However, we know the bottom 90% got more national income so overall their welfare increased. Since the price of cars went up their welfare didn't increase because they got more cars, but you can get more welfare in many more ways. Maybe the bottom 90% got better houses, maybe they finally got some electricity, maybe more schools were build so now more people can go to school. Whatever it is, the bottom 90% now has more wealth.
Now, it is thinkable that the top 10% starts buying so many luxury goods and services the next 20% will struggle to buy those goods. Because of that their wealth barely increases. So maybe most of the extra wealth for the bottom 90% went to the bottom 70%.
TLDR: it's possible the top 10% wants so many goods or services of one type those goods or services become very hard to get for the bottom 90%. However, the bottom 90% will get more welfare overall. Also, like you already said, it's realistic that the top 20% or 30% will be hit the hardest by the change in equality.(6 votes)
So what is the wealth inequality of china?(1 vote)
One measure used to capture inequality is the Gini coefficient, a number between 0 and 1. A higher value means higher inequality.
There's a chart of Gini inequality for different countries on wikipedia:
http://en.wikipedia.org/wiki/Gini_index#Gini_coefficients_of_income_distributions
As the chart shows, China's Gini coefficient has increased dramatically during the last 30 years, and it's gotten now to a level comparable to the US.(9 votes)
Is it right to say economic growth won't help with relative poverty and ability to fully participate in society? With rising inequality and economic growth, it's clearly possible for someone be better off in year 10 relative to where they were in year 1 in terms of their $ income. Is it even possible for that person to be earning a higher percentage of the median income than they previously were though? I suspect not. In other words, I suspect economic growth will not compensate for inequality if what you're worried about is relative poverty and ability to fully participate in society. Is that correct?(3 votes)- When most people are concerned about poverty, they are really concerned about the hunger, lack of shelter, inadequate healthcare etc. of people living in poverty. With economic growth, those problems do diminish, even if some people are relatively poorer than others.(3 votes)
We are living in a world with limited means or goods. So what you said is that as soon as the economy can´t grow any more, our part of the pie is gona be reduced untill de 10% of the population has de 100% of the pie.(2 votes)
Economic growth does not always mean an increasing consumption of natural resources. For example, replacing incandescent lightbulbs with fluorescent ones is considered an aspect of economic growth because it saves the consumer money, even though the amount of electricity being used is now lower.(4 votes)
- At the beginning of this lecture, Sal asks the question "Is wealth Inequality a bad thing?" I think most people agree that the most talented and successful people deserve a greater reward, and incentives are important to deliver a vibrant economy. However, there is an unanswered question surrounding what is deemed reasonable and fair reward by society.
Do Sal and my fellow students have a view on this? Could a system be implemented which regulates wealth distribution in line with public consensus?
This question has been asked recently in polls and research, and compares the actual split in wealth distribution with public perceptions and a distribution that would seem fair.
In the TED Talk Dan Ariely: How equal do we want the world to be? You'd be surprised (see link at bottom), research for USA wealth distribution shows:
What the Top 20% Own (USA):
Perception 59% -- Ideal 32% -- Actual 84%
What the High 20% Own (USA):
Perception 20% -- Ideal 22% -- Actual 11%
What the Middle 20% Own (USA):
Perception 12% -- Ideal 22% -- Actual 4%
What the Low 20% Own (USA):
Perception 6% -- Ideal 14% -- Actual 0.2%
What the Bottom 20% Own (USA):
Perception 3% -- Ideal 11% -- Actual 0.1%
A similar poll was conducted in the UK by Inequality Briefing in 2013, with similar results:
What the Top 20% Own (UK):
Perception 42% -- Ideal 27% -- Actual 62%
What the High 20% Own (UK):
Perception 22% -- Ideal 22% -- Actual 21%
What the Middle 20% Own (UK):
Perception 16% -- Ideal 19% -- Actual 11%
What the Low 20% Own (UK):
Perception 12% -- Ideal 17% -- Actual 5%
What the Bottom 20% Own (UK):
Perception 9% -- Ideal 15% -- Actual 1%
_____________
Links:
https://www.ted.com/talks/dan_ariely_how_equal_do_we_want_the_world_to_be_you_d_be_surprised?language=en#t-505346
http://www.theguardian.com/commentisfree/video/2013/oct/08/inequality-how-wealth-distributed-uk-animated-video(1 vote)- Possibly a spin on socialist economy. But then again the government owns it all so.... Everyone (except the government) gets an equal 0% share! applause and people cheering is heard in the background(3 votes)
- Khan Academy,
What would happen to income inequality in the United States, if there was economic growth?(3 votes)
Income inequality would still be the same because income inequality is measured as a percentage and the percentage won't change even if there is economic growth. I would like to think of this scenario like the static chart that Sal had in the video. Economic growth only makes the "square" bigger, but doesn't do anything to the overall distribution of national income (income inequality); the fractions are the same.(1 vote)
- As a lifelong republican I am reevaluating whether investment income should be taxed at a lower rate (currently 15%) since it's part of income for those with much extra money. Maybe it would be more fair to tax such income as "earned income" and stop making a distinction. Maybe this should apply to safe as well as higher risk investments. At a debt of $20T something will have to change.
How about a deal where both sides give up some of their wish list so that we can close the annual deficit down.
I also remember the tremendous growth when taxes were lowered from the insanely high levels of the Carter administration - when we had both stagnation and inflation. This growth led to both inequality and tremendous prosperity and job growth throughout the 80's and into the 90's because taxes were cut from such an extremely high level on the upper wage earners.(2 votes)- What do you suggest the poor give up? A wish for decent housing? A wish for affordable and accessible health care? A desire for quality education? Access to affordable and healthy food?
What do you suggest the rich give up? After all, the US is not their only investment vehicle. Raise investment income tax here and they will continue to move money offshore.(1 vote)
6:44Video transcript
- [Instructor] The word
inequality by it's very nature at least sounds, sounds
a little bit unfair. Obviously everyone's not
getting the same thing. They're not getting the same income or they don't have the same wealth. But the question needs to be asked is is this necessarily a bad thing? And even if it is a bad thing, are the ways of fixing it
or trying to address it, could they make matters worse in some ways especially for the people
that you're trying to help. And once again my goal
here is to not tell you one way or the other, but to at least give you a
framework for thinking about this So let's just think about a world where he have kind
of a fixed pie economy and there increasing inequality is clearly not doing good for for the people who have less resources. So let's imagine a fixed pie economy. So let's say this, this this rectangle right over here represents the total national
income in a given period. So year one, this is the
total national income. Total national income. And let's say that in year one, the top 10% of earners, the top 10% of earners make a third of the national income. So they make a third
of the national income. This is the top 10%. Now let me very clear. This area right over here is
not 10% of the whole rectangle. This is 35%, or actually this not I said this is a third,
so this is going to be 33. This is 1/3 of the entire rectangle but it's the income from the top 10%. Income from the top 10%. Now that would mean that the other 90%, other 90% is essentially splitting the remaining 2/3 of
national income between them. So if you go, if you take this reality and if the total pie, so let's do a static pie right over here. So pie stays the same. So pie, now I say pie, I'm talking about the square thing here. I guess it doesn't look
to, to much like a pie so we better call it a pie. So national income,
national income static, so it's not changing right over here. So then you have, let me try to draw a
rectangle of the same size, of the same size. And if you have increasing
inequality in this situation, then you might have the
top 10$ of earners by, let's just say this is year 10, year 10 right over here. Maybe instead of having
1/3 of the national income, maybe they have 50% of
the national income. I'm just picking round
numbers for simplicity. So this right over here is
1/2 of national income now from the top 10%. From the top, from the top 10%. So clearly if this happens, the other 90% are now splitting only 1/2 of the national income. So this is the other,
other 90% right over here. So here it's essentially a zero sum game. If you had a static economy, if it was not growing at all, then of course rising
inequality would mean that these people,
right over the other 90% are going to have lower per capita, I think you could say
income lower per capita GDP, they're going to have a
lower standard of living. So they're not doing
good in this situation. But let's think of the other way of where do you have economic growth. And economic growth that's enough so even if you have some inequality, the growth more than offsets that so that the, the other
90% is still better off. So let's se if we could visualize that. So, so economic growth. Economic, economic growth. Now let's your pie has grown
dramatically over 10 years and I'm just, maybe I'm exaggerating a little bit for the sake of, for
the sake of discussion. Let me draw them like this. So I'm trying about the same height, but now, our whole economy, let's say our whole
economy has, has doubled. Our whole economy has doubled here. And now at this situation, let's say you still have this
wealth and equality growing. So the top 10% in year one
having 1/3 of national income. Let's say that it still grows
to 1/2 of national income in year 10. So 1/2 of national income, so I can draw that a little bit neater. So half of national
income right over there. Half of national income, so 1/2 of national income. So this is still the situation where you've had inequality increase but the half of national income, that's half going to have to be split between the other, other 90% has still grown
fairly dramatically. If we assume that I've
drawn it pretty close to proportional, so let me just copy and paste this. So copy and paste. So this is how much was being split amongst the other 90% in year one. And notice, it's much smaller
than how much is being split by the other 90% and naturally I'll put it right over here to the other 90% in year 10. If we assume that the
population hasn't grown by this amount. It's grown by something smaller than this or maybe the population
has been relatively stable, then your per capita, your per capita GDP,
your per capita income is actually going to improve. So this is a situation here, where even though
inequality has increased, because the pie has gotten bigger, these people are better off. These people are better, are better off. And so that leads to really one of the fundamental questions, especially when you're thinking
about economic systems, is that you have this, you have this market system,
this capitalist system, this market economy, market economy and at least in recent
history it's shown us that hey, this is, this leads to growth, wealth creation. So pie, so economic growth, economic growth but it also leads to inequality. It also leads to inequality. Inequality is an inevitable by-product. Inequality. Now the question you might have to ask is well look, is this necessarily bad? If this economic growth is enough, everyone is better off. It doesn't matter if some
people are even more better off than other people but
everyone is better off and it's important to think about if you try to just focus on inequality, just focus inequality, are you also going to
stop this from happening? Another way of thinking about it. If you're one of the people in this in this situation right over here, you're the other 90%, would you rather stay in this world where you're in a static pie and inequality is not increasing, or would you rather go to
this world right over here. Now once again, the point of my video isn't to say that this world
is necessarily going to happen. There could be a world where
your total economic growth was less than this and the pie got bigger and these people are not as well off. But I, the whole point of this is just to highlight that inequality is not necessarily always going to lead to the people on, I guess who
are getting less of the pie, being worse off if the
pie grows fast enough and the other thing to realize is well, if you sometimes, you
might in an attempt to lessen inequality, you might also stifle economic growth. And that might keep everyone
from being better off in this scenario right over here. So once again, it really
depends on the context, it really depends on the
situation and the variables and then the numbers you're looking at, but I really just wanna emphasize that there's no such thing as hey,
if there's rising inequality it's going to hurt always the other 90%. It will definitely benefit the people who are maybe in the top 10%, but it also, because that's a
by-product of economic growth, it might make these
people better off as well.