Monday, July 21, 2014

Inequality and income support

Villarreal, Francisco (2014). "Monetary Policy and Inequality in Mexico," MPRA Paper 57074.
What happens to household income inequality when there is an unexpected increase in interest rates? "Monetary policy shocks are identified using a structural model, and inequality is measured from household survey data. Then the effect of shocks on inequality is evaluated using a time–series model." Earlier work on the US finds that an unexpected increase in interest rates increases inequality. In Mexico he finds that inequality decreases because median hourly wages drop and workers don't increase labor enough to make up for it, but this effect only lasts for about two years.

Sumner argues in a lot of places that we should focus much more on consumption inequality than on income or wealth inequality; even though the three should be correlated, it's actual standards of living we should be worried about. Oddly enough, then
The correct response to economic inequality (from utilitarian perspective) is to abolish all taxes on capital income, and institute a progressive consumption tax.
Unfortunately, most of the Piketty supporters seem to think it's better to have lower tax rates on a wealthy person who devotes his wealth to riotous living, as compared to a wealthy person who is thrifty, putting the money into capital formation, charity, and/or his children's welfare. I have yet to see a persuasive justification for this bizarre policy preference.
If what we're really concerned about, then, is increasing incomes for the bottom, how do you do it? Economists are best at telling us how not to do it. One example I am likely to mention in my intro macro class next semester from Carden tries to remind people of what is not seen when we choose to pay more to buy American. The broken window fallacy as seen in socks. Meanwhile, here are some comments on a universal basic income, none of which are very satisfying to me but at least it's being discussed.

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