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asked ago in General Economics Questions by (290 points)
I attempted to show how it would be harmful in this scenario through a paper that I wrote:

2 Answers

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answered ago by (930 points)
The section of your paper that begins to present an analysis, starts by claiming the result. This is not good. It is like you start with a result and then seek to prove it. The scientific method is to do the analysis, and then find the result.
This text is what I am referring to.
"A Large Increase in the Distribution of Household Income
If there is suddenly a large increase in the distribution of household income, basically meaning that suddenly there is less income inequality in an economy, then there could some harmful effects."

To really understand the distribution of income, you have to follow the labor share number. Let's say that a lot of money is distributed to lower incomes with a higher propensity to consume. Demand will rise as you say in your paper. But then that money becomes re-distributed according to labor share. If the labor share of income does not increase, the money will simply return to capital owners, and wealth inequality does not change in the end.
The key to reducing wealth inequality is to increase labor share of income. That process is a slower one than simply a one time shot at giving money to lower incomes. Increasing labor share is a more gradual process of balancing wages and salaries throughout the economy. It may involve government action and it would certainly involve labor power to obtain higher wages. Both of those are weak at the moment.
Even if minimum wages are increased, it takes time for higher wages to adjust. There will be resistance to adjust higher wages, since there is no legal mandate to do so.
So increasing labor share is not a sudden occurrence. The premise of your paper is not properly focused on labor share.
commented ago by (290 points)
Thank you very much for your comment Mr. Edward. Regarding labor share, I assume that you mean the total portion of the total expenditures of the economy that goes towards wages? Would you mind clarifying on how the money becomes redistributed according to labor share, since you said that would occur after an increase in demand? Like explained in my paper, wouldn't a sudden shift in labor share cause demand pull inflation? Of course, if it was done fairly gradually then that might be a good way to redistribute wealth and income inequality, as they are certainly getting worse over time. Overall, my paper wasn't trying to focus specifically on factors like labor share, but rather in terms of the big picture of if there was a sudden increase or decrease in the distribution of household income. However, I suppose that a gradual change in labor share could be a reasonable solution. Thanks again for the commend sir!
commented ago by (930 points)
Hello, Money that distributes through the economy follows labor share. For example, let's assume a labor share of 75%. Then give money to low incomes. As that money is spent 75% will go to labor, and 25% to capital. You will have the same the level of inequality between labor and capital as before. Nothing will change as the effects wash out. The only way to change inequality is to change the factors that determine labor share.
It is hard to have a sudden shift in labor share. However, we have seen big drops. Labor share dropped by 8% between 1st quarter 2001 to 4th quarter 2005. Then we say another drop between 4th quarter 2008 and 1st quarter 2010 of 6%.
So the drops happened quickly after recessions, That is to say as a result of bad situations.
Now the premise of your paper is if a sudden increase in labor share would cause a bad situation. Data from the past shows an increase in labor share before some recessions. We have not seen labor share rise yet in the past two business cycles.
Corporate profit rates reached record highs this business cycle, but the bad situation still continues for much of labor who have fallen behind the economy in the past two business cycles.
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answered ago by (930 points)
This is the news for today.
"BLS report just showed the top 5% took home the highest share of U.S. household income on record in 2017 and 2018."

Why have we not seen a recession? Increasing wealth inequality creates an effect that must be continual or else a recession will hit. It is like a drug addiction. As long as wealth inequality increases, the effects of withdrawal will not appear, namely recession.
But there is damage being done to society and people. The value of people has been lowered. The consequence is that self-value has been lowered. The psychology of society is developing a disorder as a result of economics increasing wealth inequality. It is not clear yet how this will heal itself.
commented ago by (290 points)
I agree that income inequality is certainly a problem, and that it would logical for it to have consequences to society even from a psychological standpoint. However, I am slightly confused what you meant by "inequality creates an effect that must be continual or else a recession will hit"? Thanks for the comment!
commented ago by (930 points)
Corporate profit rates have been slowly dropping for the past few years. If labor share all of sudden rises, corp. profit share would drop quicker and that would lead to some price increases to maintain profits. A bump in inflation would cause interest rates to rise and that would give reason for a recession to develop.
Thus, in order to forestall a recession, labor share is controlled. However, if a recession inches nearer, there is pressure to control labor's share. Normally labor can gain more share during the good years of a business cycle. However, in this business cycle, labor share did not rise. Now that we are near the end of the business cycle, corporations have little room to raise labor share.