Transcript Chairmen's Forum - Professor Richard Roll

Inequality:
Envy, Grandiloquence, Evidence
Richard Roll
Onassis Chairmen’s Forum
Cass Business School
September 15, 2015
Allegations, Corrections, Consequences
Allegation:
Income and wealth inequality has grown dramatically over the past
few decades
Super rich are particular beneficiaries and are undeserving (envy)
Advocated Corrections:
Income taxes (up to 90%) on the “rich”, (Hollande, Piketty,
Krugman,…)
Taxes on financial transactions
Controls on compensation and on freedom of action
Consequences:
Existential threat to the City and other centers free market activity
Possible threats to innovation, economic growth, prosperity
The Grandiloquence of Populists
Income redistribution is a zero-sum game. Any action that
hurts one income class helps another
Data can be manipulated to make this seem valid
For example, compare the percentage of each country’s
total income earned by the poorest decile against the
percentage of income earned by the richest decile
Here are four snapshots of this plot over the past 28 years,
seven years at time
From World Bank Database (as are all data in this talk)
1992-1998
6
5
4
3
2
1
0
15
25
35
45
55
Percentage earned by highest decile
65
6
Percentage earned by lowest decile
Percentage earned by lowest decile
1985-1991
5
4
3
2
1
0
15
5
4
3
2
1
0
65
Percentage earned by lowest decile
Percentage earned by lowest decile
6
25
35
45
55
Percentage earned by highest decile
35
45
55
Percentage earned by highest decile
65
2006-2012
1999-2005
15
25
6
5
4
3
2
1
0
15
25
35
45
55
Percentage earned by highest decile
65
Measures of Inequality
But percentages of income earned by citizens in different
income groups must add to 100% by construction
Specious arithmetic or even tautology?
Two Better (?) indicators
Average incomes of richest versus poorest groups
The Gini coefficient
• The favorite inequality indicator of many academics, the
World Bank, and government statistical bureaus
• Takes into account everyone, not just the poorest and richest
• If everyone is equal, Gini=0. If one person gets everything,
Gini=100%
Incomes per capita of richest and poorest deciles
1992-1998
8
7
6
5
4
3
2
1
0
3
4
5
6
7
8
Income of Highest Decile (log scale)
9
10
Income of Lowest Decile (log scale)
Income of Lowest Decile (log scale)
1985-1991
8
7
6
5
4
3
2
1
0
3
4
8
7
6
5
4
3
2
1
0
3
4
5
6
7
8
Income of Highest Decile (log scale)
9
10
9
10
2006-2012
9
10
Income of Lowest Decile (log scale)
Income of Lowest Decile (log scale)
1999-2005
5
6
7
8
Income of Highest Decile (log scale)
8
7
6
5
4
3
2
1
0
3
4
5
6
7
8
Income of Highest Decile (log scale)
Explanation of the Gini Coefficient
Figure A-1
1
0.9
0.8
Fraction of Income
0.7
0.6
0.5
0.4
Gini/2
0.3
L
0.2
Lorenz Curve
0.1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
Fraction of Population
0.7
0.8
0.9
1
Three-decade trends in Gini by Region
Trend in Inequality
The trends shown in the previous regions all seem to
portray the same pattern: There is no trend in most
countries
Countries that were relative unequal three decades ago
remain unequal, and vice versa
Note that some countries, important countries such as
India, have sparse information and are missing;
They very well could be exceptions; (a recent Gini for India is
about 34%)
Richer countries are more equal, but the relation is not
strong as indicated in the following graphs of Gini vs. GNI
1992-1998
65
65
60
60
55
55
50
50
45
45
Gini
Gini
1985-1991
40
40
35
35
30
30
25
25
20
4
5
6
7
8
9
10
11
20
12
4
GNI/Capita (log scale)
5
6
8
9
10
11
GNI/Capita (log scale)
1999-2005
1999-2005
70
70
65
65
60
60
55
55
50
50
45
Gini
Gini
7
40
45
40
35
35
30
30
25
25
20
4
5
6
7
8
9
GNI/Capita (log scale)
10
11
12
20
4
5
6
7
8
9
GNI/Capita (log scale)
10
11
12
The Big Puzzle
There seems to be a (minor) connection between prosperity and
equality
Which is the cause and which the effect?
Or, cum hoc ergo propter hoc; are both endogenous to other influences
that are now widely accepted as causative for prosperity, such as
Property rights (+)
Corruption (-)
Press Freedom (+)
Other institutional features related to the judiciary, democracy, the
monetary authority, unionization, trade barriers, etc.
The populist grandiloquence does not appear to be based on evidence
Thanks for your kind attention