The vertical axis on this chart is a measure of how likely you are to have an income that differs from that of your parents.  The horizontal line is the usual measure of income inequality.  So if you live in the UK or the US I recommend picking good parents.

So we now know that income inequality has high social costs, or to say it in a more technical way inequality is negatively correlated with social welfare.  I don’t know that that would surprise most people.    A society where the lower classes are more distant from the upper classes is going to have greater social stress – at least I don’t see that as surprising.

But what else is income inequality correlated with?    There is a very scary possibility:  That inequality drives greater economic growth.  Not hard to make up an insta-theory for that: e.g. that the social gradient drives people to strive, and this drives significant economic growth.

That would be really horrific.   A Hobson’ choice: pick one economic growth v.s. social well being.  Societies that grow faster carry their social norms carried along with them.  They become the standard.

Which is why it’s a very important question.  And you’d think there would be libraries full of research on this question.  There is not.  Pick your insta-theory for why that is.   As far as I can tell the data seems to suggest that growth and inequality are largely related.  But, it is very frustrating not to be sure.

Income is never distributed uniformly.  What matters is how severe that becomes.   Since what the top 10% want from their tax payments is fundamentally different from what the other 90% want this leads directly to class warfare.  Denying that isn’t insane.  The top 10% don’t need the government to provide: health, schools, etc. etc. — at least not outside their increasingly isolated enclaves.  Which in turn is why your schools, your healthcare suck, your safety net suck.

Oh man that is ugly, and as the column on the right shows household net worth is even worse.

Or this scatter plot nations showing the height of inequality v.s. their per-capital GDP.  The US, an outlier, is highlighted.

Lots of thought provoking stuff over there, for example this fine grain map what real estate is productive.  I wish this was GDP/capital.

The original sources can be found in the postings I pulled these from; though sadly many of the links are broken.

The paper by Brent T. White is ”Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” (pdf) and it’s abstract:

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater.  This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

It isn’t surprising that these two groups would have very different perceptions of what the rules and ethics of the situation are.  Maybe what is surprising is that people tend to deny that; or having admitted it they then pick a very firm opinion about what the right position is about this.  I.e. bank smart, borrower stupid, consequence is borrower’s fault; or bank ethical, borrower ethical, consequences be damn’d.   You could setup three spinners and use them to assign a position to your high school debating club.

I love those sociology terms ‘social control agents,’ and ‘norms.’   I observe a lot of management cultism and it’s less black and white fellow travelers, e.g. MBA training, is focused on how engineer and manipulate such levers.  Most practical men are indeed in thrall to the ideas of some long dead sociologist and current events are proving him nearly correct.

Bonus video:

The Newcomen fire water pump consumed vast amounts of coal, but waste coal was free at the mine head.

I enjoyed this video (ht Brad) of Professor R.C. Allen outline the theory he presents in his recent book.  The question at hand is what triggered the Industrial Revolution.  Why Britian and associated questions.  To hear him tell it the existing theory seems to be that they finally stumbled into the right institutional frameworks; reasonably good governance, property rights, etc.  That theory has always struck me as suspect since it smells too much like what everybody says about the others.

His alternative theory is, roughly, that Britian was pregnant with possibility when something happened and the resulting babe thrived.  Why it thrived is another story.

The fertile context amounted to two things.  Northeastern Europe’s rising standards of living had created a consumer/commercial economy with urbanization, literacy, and consumer demand.  He suggests that had happened before, say during the Roman era.   Secondly a few key general technologies had emerged.  Computers are the modern exemplar of a general, i.e. extremely widely applicable, technology.  In this story a good example of a general technology was precision gears and rollers an outgrowth of clocks.  Clocks emerged for navigational purposes and consumer demand goosed up the supply.

The trigger was a sky rocketing cost of labor in Britain, it happened thru out North Eastern Europe but was most severe in Britain.   Rising labor costs always the calculus of production.  If labor is expensive then substituting capital equipment becomes more attractive.  Actually there is a more general statement.  If the cost of any input rises or falls that changes the shape of how best to configure your production.  So if labor gets horribly expensive, and fuel gets really cheap then you get a shift to production techniques that reduce labor, increase capital equipment by using fuel.   And that’s the trigger.  The Brits started building equipment which traded coal for labor costs.

He has a nice example.  The French were making plate glass and cheerfully helped the Brits setup a production facility.  It was obvious to the French that given the cost of labor in Britian there was no way they could become a serious competitor.  What they miscalculated was how cheap coal was.

He highlights a key point about how these shifts in the factors of production play out.  The new forms of production need only clear a minimal profit.  Such schemes can survive only in the new niche; they can not be exported to the rest of the planet.  If early in the industrial revolution you visited England, admired their cool new machines for spinning cotton, you might be tempted to head home and try the same trick.  But it wouldn’t work out; absent a high cost of labor the numbers just don’t work for you.  Casual observers back home will pen editorials about how your falling behind.   But there is something else: learning curve.   New production scheme but a babe, it has a lot to learn.  That’s because it’s new.   So while you get started with a minimal profit as you climb the learning curve those profits grow.  Which sets up a virtuous cycle, particularly for the owners of the means of production.  We used to call these guys capitalist mill owners, but now we call them VC.  And as that plays out the scheme becomes exportable to countries of progressively lower and lower labor costs.   The late adopters don’t get to capture the benefits of climbing the easy part of the learning curve; they don’t even get learn how to climb it.

How the Brits climbed the learning curve is another story.  Having a literate urban population was good.  It may have been important that the rich had fallen into a fad of amateur science and taken up hobbies involving the building of mechanisms; but this was engineering, a craft of tedious hill climbing.

It is fun, and useful, remixing this model with other models of innovation.  It is surprising how often the trick of juggling the means of production into some patently inefficient, but yet slightly profitable, repeats it’s self.  We are seeing a lot of that in cloud computing these days and that card was played when FPLAs where invented or in the invention of Ethernet.

When the economic engine slows you get a recession.  It’s shocking how much labor is going underutilized right now.  This chart shows what percentage of the population is working.

These two charts aren’t looking at exactly the same thing.  The second chart is looking at the entire population.   The first chart is only looking at the slice of population which self identifies as participating in the labor market.

Incidentally and amazing is the big 20 year change (starting about 1975) was women entering the workforce so that another 7% of the population is now in the game.   But each business cycle pushes that along a bit more and the mix has changed, a lot.   Men have suffered 82% of the job losses so that now men and women are 50/50 in the workforce.  That’s a huge transformation of the society.  We now draw on the entire population, but the percentage of that population we employ is only up by a few percentage points.

Not illustrated here is the huge transformation in the wealth distribution since the mid 70s.  The labor force has crappier jobs than they did 40 years ago.

Note how the recent fall off is the largest in the post World War II era.

There is something else interesting to note in the shape V shape of each recession.  The recession in the mid-50s is uniquely symmetric as is the one in the 1980s.  The mid 1970′s recession tossed people out of the workforce fast, and the recovery brought them back slowly.  The recession just after 2000 is frightening.  How’s that for something to worry about!

You can make your own charts like this here.

Here for example is my state.

That shows how the mix of taxes effect things.  In Massachusetts it’s the sales tax that really does the damage.  New Hampshire is extremely regressive; using a different mix.

If you want to screw the poor then here some hints:

• Avoid an income tax
• If you have to have an income tax be sure it’s flat. (that’s what we do in Massachusetts)
• Adopt a sales tax and some excise taxes
• Use property taxes
• Exclude capital gains from income
• Use tax credits to counteract progressive taxes; say on federal taxes or certain property taxes
• Be sure your sales/excise tax includes groceries, smokes, beer, and gas
• Don’t index to inflation if forced into tax brackets, exemptions, or earned income payments
• Empower local governments to raise funds using regressive means

No doubt there are much more creative schemes for assuring your tax system screws the poor.  I certainly can think of quite a few without much effort.  This posting is based entirely on this report, from www.itepnet.org.

This is Washington state, which makes me wonder how those Microsoft and other high tech winners feel about this.

We have known about these charts for a while now; i.e. there is a sharp difference between how the economy changes under Democratic v.s. Republican presidents.  The economists have apparently made no real progress on explaining why.

Note how the cartoon Republican, i.e. the cigar smoking plutocrat, apparently votes against his interests.