Income Inequality – News Analysis

Discussions of increasing income inequality are common but disconnected from facts after disparity is established. By disconnected from facts I mean, what facts should guide policies to reduce income inequality?

In general I favor reducing income inequality (substantially) so that gives you an idea of where I fall in the discussion.

I am not entirely sold on the ideas discussed in A 26-year-old MIT graduate is turning heads over his theory that income inequality is actually about housing (in 1 graph) by Greg Ferenstein, but the analysis by Matthew Rognlie is different enough from the usual positions to merit your attention.

From the post:

Wealthy tech founders and the automation of middle-class jobs are often blamed for increasing concentrations of wealth in fewer hands. But, a 26-year-old MIT graduate student, Matthew Rognlie, is making waves for an alternative theory of inequality: the problem is housing [PDF].

Rognlie is attacking the idea that rich capitalists have an unfair ability to turn their current wealth into a lazy dynasty of self-reinforcing investments. This theory, made famous by French economist Thomas Piketty, argues that wealth is concentrating in the 1% because more money can be made by investing in machines and land (capital) than paying people to perform work (wages). Because capital is worth more than wages, those with an advantage to invest now in capital become the source of long-term dynasties of wealth and inequality.

Rognlie’s blockbuster rebuttal to Piketty is that “recent trends in both capital wealth and income are driven almost entirely by housing.” Software, robots, and other modern investments all depreciate in price as fast as the iPod. Technology doesn’t hold value like it used to, so it’s misleading to believe that investments in capital now will give rich folks a long-term advantage.

Housing policy. Now there’s a minefield of conflicting interests. Still, if you want to follow where the “data leads” then it is worth a comparison to other policy alternatives and explanations.

To be sure, you can create topic maps that replicate the fanatical ravings of any economic theorist you care to follow but my prejudice is in favor of a critical examination of news reports and policy recommendations. Reasoning you can further your clients goals if your analysis has some resemblance to reality as experienced by others. (That may explain the long term and persistent failures of U.S. policy in the Middle East but I digress.)

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