Understanding the anti-regulation agenda: The basics [feedly]

Understanding the anti-regulation agenda: The basics
http://www.epi.org/publication/understanding-the-anti-regulation-agenda-the-basics/

One of President Trump's first actions after taking office was to issue an executive order requiring federal agencies to identify at least two existing regulations to "repeal" when proposing a new regulation. Republicans in Congress also moved quickly to make it more difficult to regulate. Within the first 90 days of the session, the House and Senate have considered a number of bills limiting regulation and more than a dozen resolutions that would repeal existing regulations.

One way to understand this agenda is to consider who benefits from rolling back existing regulations and limiting agencies' ability to regulate.

Regulations help implement laws

While much has been said about the value and burden of regulations, they are merely an administrative tool aimed at achieving a policy goal that was legislated by Congress—such as safe workplaces, or secure retirement.  Congress passes a law and, often, directs an agency to issue a regulation to implement the law. Think of it this way: Congress says bake a cake and it is up to the agency charged with the baking to determine how much sugar, how many eggs, and the temperature. Regulations (sometimes referred to as "rules") are the details that implement the laws.

Regulations adapt laws to changing times

Laws aren't static. Take the Occupational Safety and Health Act of 1970. It established the Occupational Safety and Health Administration, an agency within the Department of Labor (DOL) charged by Congress with ensuring "safe and healthful working conditions." Through the Act, Congress requires that OSHA periodically review new threats, including workplace exposure to harmful chemicals. In recent years, research showed that roughly2.3 million workers in construction, fracking, and other industries were being exposed to cancer-causing silica dust in their workplaces.1 So DOL experts and scientists studied the threat and, in June 2016, issued a final rule to limit workers' exposure to silica dust. The rule defines how much exposure is safe and how to prevent exposure to unsafe levels.

Winners and losers under the current attack on regulations

In reviewing the attacks on regulation, it is helpful to consider which interests are served by rolling back specific rules. The following text boxes summarize the three main regulation-related actions by the administration and Congress. A review of the targeted regulations and proposed limits on rulemaking reveals a policy agenda that favors corporate profits ahead of worker protections and public health.

More details on the rules and measures and their impact can be found in EPI's Worker Rights and Wages Policy Watch.2

The box below examines Department of Labor regulations that Congress has blocked or is attempting to block under a rarely used procedure, the Congressional Review Act (CRA), which provides for a quick process to overrule recent regulations. It is being used to block regulations that were issued in the last several months of the Obama administration.

Labor regulations targeted by Congress using the Congressional Review Act

Fair Pay and Safe Workplaces rule

Helps ensure that taxpayer dollars are not awarded to contractors who violate basic labor and employment laws.

Who benefits from the regulation? Workers, taxpayers, law-abiding contractors.

Who benefits from repeal? Contractors that have violated health and safety protections or failed to pay workers. For example, more than 300,000 workers have been the victims of wage-related labor violations while working under federal contracts in the last decade.3

Occupational Safety and Health (OSHA) record-keeping rule

Ensures that employers maintain accurate records of injury or illness of workers for five years.

Who benefits from the regulation? Workers, law-abiding employers.

Who benefits from repeal? Employers who violate health and safety laws. Without this rule, unscrupulous employers were able to cheat the record-keeping requirements and avoid liability for health and safety violations.

State and local retirement savings initiatives for workers

Clarifies the legal status of specific savings arrangements, enabling states and localities to establish retirement savings arrangements for private-sector workers who would not otherwise have access to retirement accounts.

Who benefits from the regulation? The estimated 55 million private-sector workers age 18 to 64 who do not have access to a retirement savings plan through their employers.4

Who benefits from repeal? The financial industry, by keeping out competition for their services. When state and local governments provide mechanisms for workers to save for retirement, those workers do not have to purchase services from the financial industry.

Rule establishing occupations for drug testing

Narrows circumstances under which individuals filing for unemployment benefits may be subjected to drug testing by clarifying when drug testing may be imposed.

Who benefits from the regulation? Workers who have lost their jobs and seek the unemployment benefits they are entitled to without barriers or stigma.

Who benefits from repeal? Opponents of unemployment benefits who seek to reduce benefit take-up by attaching requirements and employers seeking to reduce payroll taxes (which help finance unemployment benefits).

The box below examines a proposed set of laws targeting regulations in general.

Legislation limiting the ability to modernize regulation to respond to new challenges and threats

Regulations from the Executive in Need of Scrutiny (REINS) Act

Requires congressional approval for a major rule to take effect.

Who benefits and who loses? Corporate interests and their lobbyists stand to gain. Groups that lack the financial resources to lobby Congress stand to lose.

The bill shifts regulatory power from agency officials with subject-matter expertise to members of Congress, enabling regulated entities to lobby against proposals that would benefit the public but impose burdens on businesses.

Searching for and Cutting Regulations that are Unnecessarily Burdensome (SCRUB) Act

Targets regulations for elimination based on only the costs associated with the rule, not on benefits, which would be part of a true cost-benefit analysis.

Who benefits and who loses? Corporate interests benefit and workers, consumers, and the environment lose.

By focusing on costs, SCRUB Act makes policies that benefit the public—including environmental, health and safety, and consumer protections—vulnerable to repeal.

Regulatory Accountability Act

Fundamentally alters the regulatory process by requiring agencies to place cost considerations ahead of all other considerations. The act also gives regulated entities the opportunity to control the rulemaking process by requiring that agencies analyze "any substantial alternatives" submitted by "interested persons."    

Who benefits and who loses? Corporate interests benefit and workers, consumers, and the environment lose.

The bill provides corporate interests with unprecedented power to interfere with and delay the regulatory process, and prioritizes industry profits over health, safety, and other public goods.  Opponents of the bill include numerous public health groups, including the American Heart Association, American Lung Association, American Public Health Association, Asthma and Allergy Foundation of America, and Trust for America's Health.5

OIRA Insight, Reform, and Accountability Act

(OIRA stands for the Office of Information and Regulatory Affairs; it is part of the Office of Management and Budget in the Executive Office of the President)

Imposes additional, burdensome requirements on the rulemaking process and undermines the role of independent agencies by giving the Executive Office of the President oversight of their regulatory actions. 

Who benefits and who loses? Corporate interests benefit and workers, consumers, and the environment lose.

Requiring independent agencies (for example, the Consumer Financial Protection Bureau, Consumer Product Safety Commission, and the Federal Trade Commission) responsible for monitoring Wall Street and protecting consumers to report to the president when issuing regulations exposes the process to political influence.  This goes against congressional intent in designating these agencies as independent.  It is more likely that corporate interests will be able to exert control over the process when it is politicized.

Regulatory Integrity Act of 2017

Prohibits agencies from issuing communications that directly advocate for a pending regulatory action and requires agencies to produce a list of public communications on regulations.

Who benefits and who loses? The public loses. The benefits go to those who have the resources to get the information they need regardless of public communications, like corporate interests, when the broader public is kept in the dark regarding regulation.

Agencies are likely to limit communications on regulations to avoid violating the act, depriving the public of information on proposed rules and depriving agencies of the opportunity to get feedback from public engagement.

For example, a 2015 report from the White House Council of Economic Advisers estimated that investment advice that steers retirement savers into high-cost products that generate fees and commissions for financial advisers costs savers $17 billion each year.6 This is the kind of fact that the DOL communicated when explaining the need for the "fiduciary rule" (see case study below).

The box below examines President Trump's actions limiting regulation.

Executive actions limiting the ability to modernize regulation to respond to new challenges and threats

Executive Order on Enforcing the Regulatory Reform Agenda

Requires that agencies designate a "regulatory reform officer" and establish a regulatory reform task force to identify existing regulations for replacement or repeal.

Who loses? Workers, consumers, and the environment—all of which benefit from workplace health and safety requirements, and consumer protections.

Executive Order on Reducing Regulation and Controlling Regulatory Costs

Mandates that for every new regulation issued at least two prior regulations be identified for elimination.

Who loses? Workers, consumers, and the environment—all of which benefit from workplace health and safety requirements, and consumer protections.

By focusing on costs in targeting regulations for repeal, the executive order makes policies that benefit the public—including environmental, health and safety, and consumer protections—vulnerable to repeal.

Presidential Memorandum on Fiduciary Duty Rule

Delays the fiduciary rule by directing the DOL to examine the rule and prepare an updated economic and legal analysis on the rule, and directs the labor secretary to rescind or revise the rule if he determines that it would, among other things, result in "dislocations or disruptions within the retirement services."

Who  loses? Middle-class families who stand to lose tens of thousands of dollars in foregone retirement savings.

The fiduciary rule requires that financial professionals act in their clients' best interests when giving retirement investment advice. Each affected family loses tens of thousands of dollars over a lifetime from getting "conflicted advice"  that leads to lower investment returns. However, delaying the rule benefits the financial services industry, by enabling predatory practices by financial professionals to continue.

Case study: The fiduciary rule

The "fiduciary rule" (issued by the Department of Labor in April 2016 and originally set to go into effect April 10, 2017) requires that financial professionals act in their clients' best interests when giving retirement investment advice. The rule updates the Employee Retirement Income Security Act of 1974 (ERISA). ERISA, which set minimum standards for retirement plans in private industry, was enacted a time when employer-managed pensions that provided a guaranteed income were still the norm. This rule acknowledges the new workplace reality that the vast majority of workers with any retirement plan at all now have defined contribution plans—like 401(k)s and individual retirement accounts—instead of the defined benefit plans that were more common in past decades. Unlike defined benefit plans, defined contribution plans depend on individual savers making investment decisions to ensure a secure retirement.

Without the fiduciary rule, financial advisers can, for example, legally steer clients to investments that provide the adviser with a commission but offer a lower rate of return to the client. "Conflicted" advice is estimated to cost retirement savers $17 billion a year. This rule will benefit middle-class families by saving them tens of thousands of dollars per affected family for their retirement over a lifetime of savings. However, it will be costly to the financial services industry, which benefits from loopholes that allow predatory practices by financial professionals.

Under direction from President Trump—in a thinly veiled attempt to ultimately weaken or rescind the rule—the Department of Labor has delayed implementation of the rule by 60 days. Even the delay itself will be expensive for retirement savers. Every seven days that the fiduciary rule's applicability is delayed costs retirement savers an estimated $431 million over the next 30 years. Thus, the costs of a 60-day delay to retirement savers is $3.7 billion over 30 years.7

Case study: The silica rule

The Trump administration announced that it would delay enforcement of an Occupational Safety and Health Administration rule limiting workers' exposure to silica dust, which has been linked to lung cancer. Roughly 2.3 million workers are exposed to silica dust in their workplaces. The rule, which was to be enforced on June 23, was projected to provide net benefits of $7.7 billion annually. It would have saved over 600 lives and prevented more than 900 new cases of silicosis each year.8

Why regulations come under attack

When a particular constituency is unhappy with a law, they can then attack the regulation that implements that law. Highlighting only the burdens of the regulation while ignoring its benefits in order to weaken the law's effect has been a dismayingly effective strategy; the word "regulations" is routinely paired reflexively with "burdensome."

Let's examine the most frequent attacks on regulation.

Myth: Government regulations cost net jobs

Research on the relationship between employment and regulations generally find that regulations have a modestly positive or neutral effect on employment.9

How could regulations create jobs? Though regulations sometimes reduce jobs in one area, they create jobs in another. For example, factories making lead paint shut down after regulations banning lead paint were issued in the late 1970s, but enterprises manufacturing lead-free alternatives arose in their place. And some of the older factories hired people to retool their machinery to begin manufacturing lead-free paint.

Mass layoffs are not caused by regulations. "Mass layoff events" are incidents in which at least 50 unemployment insurance claims are filed against an employer during a 5-week period. According to the latest data available (2011 and 2012), employers cite regulations as the reason for mass layoffs in just a tiny share of mass layoff events—one-quarter of one percent.10

Importantly, the lack of sensible regulations can lead to economic catastrophe and the loss of millions of jobs. The belief that financial markets can "self-regulate" led to a wave of deregulation and lax enforcement beginning in the late 1970s and persisting right up to the financial crisis in 2007–2009. Deregulation and lax enforcement played a major role in the housing bubble and the financial and economic crisis that ensued when the bubble burst.11 Nearly nine million jobs were lost in the Great Recession in 2008 and 2009. In the wake of this crisis, officials in charge of the nation's two main financial regulatory agencies stated that self-regulation had failed. As Christopher Cox, then-chairman of the Securities and Exchange Commission, stated, "We have learned that voluntary regulation does not work. … The lessons of the credit crisis all point to the need for strong and effective regulation."12

Myth: Costs of regulation outweigh the benefits

To assess whether a regulation should be undertaken, agencies consider a comprehensive set of benefits and costs over a broad time horizon. Of course, the effects can be difficult to monetize and compare with one another. For example, regulations establishing workplace safety standards save lives and environmental protection regulations result in conservation of natural resources and improved public health which may provide benefits for generations. The "silica rule" described earlier may have substantial up-front costs as businesses invest in safety equipment to reduce workers' exposure to harmful silica dust. But the benefits pay off in terms of reduced illness and saved lives over decades. And the need for the safety equipment creates jobs for the people producing the equipment.

Federal regulations are providing a net benefit to society of over $100 billion per year

Despite the challenges in rigorously assessing costs and benefits, federal agencies typically undertake a cost-benefit analysis when promulgating a major rule. Each year the Office of Management and Budget (OMB) reports to Congress on the costs and benefits of federal regulations, with a focus on regulations for which agencies are able to estimate and monetize both costs and benefits. In its most recent report, OMB found that during the last administration, from January 21, 2009, to September 20, 2015, the estimated annual net benefits (benefits minus costs) of major federal regulations was between $103 and $393 billion.13 In other words, federal regulations are providing a net benefit to society of over $100 billion per year. And these numbers are consistent with prior OMB reports.

Consider regulations to combat climate change. Without regulation, firms that emit greenhouse gases—such as coal-fired power plants—face zero costs for their emissions. But these emissions lead to global climate change that threatens to impose truly enormous economic costs in the future. Climate change is forecast to cause enormous damage to global gross domestic product (GDP) in coming decades. In the long run, this damage is forecast to be 5 to 20 percent of global GDP each year. To give a sense of how much damage this is, 5 percent of U.S. GDP alone in 2017 is just under one trillion dollars.14

In 2007, the Supreme Court ruled that greenhouse gases were air pollutants that were a danger to public health. Because of this ruling, when the Clean Air Act of 2015 was enacted and Congress failed to pass legislation curbing greenhouse gas emissions, the Environmental Protection Agency became obligated to regulate coal industry emissions under the Clean Air Act. So, in 2015, the EPA issued the Clean Power Plan, which set limits on emissions in the generation of electricity at power plants. The EPA estimates that when the rule is fully in place in 2030, the reduction in pollutants as a result of the rule will lead to net climate and health benefits of $26 to $45 billion dollars per year. These benefits include preventing hundreds of thousands of missed school days and work days, tens of thousands of asthma attacks, and thousands of premature deaths each year.15

The ratio of benefits to costs is about 7-to-1

OMB reviewed major regulations from 2000 to 2010 and estimated that the average annual benefit of major regulations is about seven times the cost.16 OMB's findings are even more significant when you consider studies showing that the cost estimates used by government regulators generally are too large.17 Also, lots of benefits are never monetized but almost all costs are. In the mercury rule, for example, the benefits of higher IQ for infants due to less heavy-metal exposure was never monetized, even though it was the primary reason the rule was adopted. But because it was a clear endangerment to public health the rule didn't need to pass a cost-benefit test.

Conclusion

The administration and congressional Republicans are advancing an anti-regulatory agenda, with little consideration for the importance of these regulations to workers, consumers, and the environment. Considering that many of the rules targeted for repeal provide broad benefits in terms of public health, environmental protections, and worker protections that vastly outweigh the compliance costs for businesses, this agenda reveals a willingness to place corporate concerns ahead of the American people.

Endnotes

1. Occupational Safety and Health Administration. "OSHA's Final Rule to Protect Workers from Exposure to Respirable Crystalline Silica," accessed April 7, 2017.

2. Economic Policy Institute, Worker Rights and Wages Policy Watch, last updated March 30, 2017.

3. Office of Senator Elizabeth Warren, Breach of Contract: How Federal Contractors Fail American Workers on the Taxpayer's Dime, March 2017.

4. David John and Gary Koenig, "Workplace Retirement Plans Will Help Workers Build Economic Security." AARP Public Policy Institute fact sheet 317, October 2014.

5. American Public Health Association, "Health Organization Letter Opposing H.R. 5, the Regulatory Accountability Act of 2017,"  January 10, 2017.

6.  White House Council of Economic Advisers, The Effects of Conflicted Advice on Retirement Savings, February 2015.

7. Heidi Shierholz, "EPI Comment on the Proposal to Extend the Applicability Date to the Fiduciary Rule," Letter to the U.S. Department of Labor Office of Regulations and Interpretations, March 17, 2017.

8.  Occupational Safety and Health Administration. "OSHA's Final Rule to Protect Workers from Exposure to Respirable Crystalline Silica," accessed April 7, 2017.

9. Josh Bivens, "Testimony before the Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law," February 24, 2016; John Irons and Isaac Shapiro, Regulation, Employment, and the Economy: Fears of Job Loss Are Overblown, Economic Policy Institute, April 12, 2011.

10. U.S. Bureau of Labor Statistics, "Extended Mass Layoffs in 2012," BLS Reports, September 2013.

11. See, for example, Joseph Stiglitz, "Regulation and Failure," in New Perspectives on Regulation, David Moss and John Cisternino, eds. (Cambridge, Mass.: The Tobin Project, 2009), p. 21; Financial Crisis Inquiry Report, (Washington, D.C.: Financial Crisis Inquiry Commission), January 2011, p. xviii; Alan Greenspan, testimony before the House Committee on Oversight and Government Reform, October 23, 2008; Christopher Cox, testimony before the House Committee on Oversight and Government Reform, October 23, 2008; Ben S. Bernanke, "Monetary Policy and the Housing Bubble," speech presented at the Annual Meeting of the American Economic Association, Atlanta, Ga., January 3, 2010.

12. Christopher Cox, testimony before the House Committee on Oversight and Government Reform, October 23, 2008.

13. Office of Management and Budget. 2016 Draft Report to Congress on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates Reform Act, 2016.

14. The Forum on Religion and Ecology at Yale, "The Stern Review on the Economics of Climate Change," accessed April 7, 2017.

15. U.S. Environmental Protection Agency. "Fact Sheet: Overview of the Clean Power Plan." Accessed April 7, 2017.

16. John Irons and Isaac Shapiro, Regulation, Employment, and the Economy: Fears of Job Loss Are Overblown, Economic Policy Institute, April 12, 2011.

17. John Irons and Isaac Shapiro, Regulation, Employment, and the Economy: Fears of Job Loss are Overblown, Economic Policy Institute, April 12, 2011.

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House Health Plan Would Jeopardize Substance Abuse Treatment For Thousands of West Virginians [feedly]

House Health Plan Would Jeopardize Substance Abuse Treatment For Thousands of West Virginians
http://www.wvpolicy.org/house-health-plan-would-jeopardize-substance-abuse-treatment-for-thousands-of-west-virginians/

[Charleston, WV] West Virginia's opioid crisis, already responsible for the highest incidents of drug-related deaths in the nation, could be further exacerbated under the House plan to repeal the Affordable Care Act (ACA). According to new estimates released today by the Center on Budget and Policy Priorities, the House ACA repeal would cut West Virginia's Medicaid funding by more than $5 billion over the next ten years, jeopardizing the Mountain State's ability to provide adequate coverage for substance use disorder (SUD) treatment to all eligible residents. Read the report, Building on the ACA's Success Would Help Millions with Substance Use Disorders.

Despite the AHCA's failure to even reach the House floor for a vote, Republicans are reportedly continuing negotiations to try and revive it or may pursue ways to severely cut and cap funding for the Medicaid program – a move that could disproportionately affect millions of people for SUD treatment.

The ACA's expansion of Medicaid to low-income adults have allowed million of people with SUDs to get health coverage and access to SUD treatment services, according to a comprehensive report last year from the U.S. Surgeon General. In addition, because the ACA deemed it an essential health benefits, millions of people bought coverage in the individual and small-group markets, including those getting coverage through the health reform's marketplace, have also gained coverage for SUD treatment.

"With the highest rate of drug-related deaths in the country, the last thing West Virginia needs it to reduce access to life-saving treatment," said Ted Boettner, Executive Director of the West Virginia Center on Budget and Policy. "But the House Republican health bill would do just that."

The House Republicans' ACA repeal bill, the American Health Care Act, would have threatened the gains in coverage for SUD by effectively ending the Medicaid expansion and capping and cutting Medicaid funding, in addition to other provisions that would have weakened individual and small-group market coverage and affordability. The bill would have left 24 million more people uninsured and shifted hundred of millions of costs to states, including those that have been hit disproportionately by the opioid epidemic.

"Rather than cutting access to SUD treatment, policymakers in Washington and here in the state should take steps to build on the success of the ACA to increase insurance eligibility and coverage for people with SUD," Chantal Fields, Executive Director of West Virginians for Affordable Health Care said. "West Virginia has made tremendous strides under the ACA and its Medicaid expansion. We need to build on that success, not go backward."

These steps include:

Maintaining Medicaid's current financing structure. As currently structured, Medicaid expands to meet need, which ensures that states receive federal support to meet increasing demand for health care services, including public health challenges such as opioid addiction. Radically restructuring Medicaid's financing system by converting it to a per capita cap, as House Republicans proposed, would eliminate Medicaid's automatic response to need, and shift costs to cash-strapped West Virginia, likely forcing the state to cut services, reduce eligibility, and stop testing new models of treatment or recovery supports.

Rejecting state medicaid proposals that would restrict eligibility or benefits for people with SUDs. Requirements such as drug testing beneficiaries, instituting work requirements, or requiring excessive cost-sharing would be particularly harmful for people who need SUD treatment. People need to keep their coverage regardless of their drug use, ability to pay, or job status. Working is difficult for people enrolled in a treatment program, and drug testing Medicaid beneficiaries is likely to deter people from seeking coverage and keep them from getting the treatment they need.

Keeping the essential health benefit requirements for plans in the individual and small-group markets to ensure that substance use treatment is covered. Before the 2008 Mental Health Parity and Addition Equity Act (MHPAEA) and the ACA, health plans routinely did not include substance use treatment or tightly constrained what they covered and for how long, so enrollees rarely used the benefits. The ACA went a step further, requiring all health plans in the individual and small-group markets to provide a package of minimum federal standards, known as "essential health benefits" (EHBs), for the services that health plans must cover including SUD services.

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Nature: Why people prefer unequal societies

An important bit of research on what "equal" and "fair" mean to people.


Why people prefer unequal societies
Christina Starmans
, Mark Sheskin
 & Paul Bloom

Nature Human Behaviour 1, Article number: 0082 (2017)
doi:10.1038/s41562-017-0082
Download Citation

Human behaviour
Psychology

Published online:07 April 2017

Abstract

There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness.

We live in an age of inequality—or at least in an age of worrying about inequality. Pope Francis remarked that "inequality is the root of social evil", while President Obama called economic inequality "the defining challenge of our time". A recent Pew report found that Europeans and Americans judged inequality as posing the greatest threat to the world, beating religious and ethnic hatred, pollution, nuclear weapons, and diseases like AIDS. A majority of respondents in each of the 44 countries polled said the gap between rich and poor is a big or very big problem facing their country1. And a new report by Oxfam2 revealed that the wealth owned by the eight richest people in the world is equivalent to the wealth owned by the poorest 50% of the world, sparking widespread outrage.

Academics—from philosophers, economists, and political scientists to psychologists, archaeologists, and even physicists—are also fascinated by the causes, consequences, and extent of economic inequality. This interest is reflected in the extent of attention to Thomas Piketty's book, Capital in the Twenty-First Century3,4, and is grounded in a growing public and scholarly appreciation of the startling extent of economic inequality. Globally, the top 1% of the population owns 50% of the wealth, and the bottom 70% owns only 3% of the wealth5.

Many are particularly concerned about the level of inequality in the United States, which has been growing rapidly since the 1970s6 (see Fig. 1). The Gini coefficient (a measure of inequality whereby 0 is perfect equality and 100 is perfect inequality, or one person owning all the wealth) in the United States is now 85—the highest of all western nations, and sixth highest worldwide among countries with populations over 1 million (refs 6,7). A typical American CEO currently makes about 354 times as much as a typical worker, while just 50 years ago the ratio was 20/18. Although the United States has been getting richer overall, the vast majority of this increase in wealth (over 95%) has gone to the top 1% of wealthiest Americans6.

Figure 1: Income inequality in Europe and the United States, 1900–2010.

The graph shows the share of the top income decile in total pre-tax income. Figure adapted with permission from ref. 6, AAAS.

Full size image

The concern that people express about inequality is also found in controlled laboratory studies, which find that a desire for equal distributions of goods emerges early in human development and is apparent in many different cultures9. As such, Frans de Waal nicely summarizes a broad consensus across many fields when he writes: "Robin Hood had it right. Humanity's deepest wish is to spread the wealth."10

A puzzle arises, however, when we consider a largely separate body of research in political psychology and behavioural economics: it turns out that when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies11. This preference for inequality materializes in a wide range of countries12,13, across people on opposite sides of the political spectrum11, and even in adolescents14. So, when people are asked to distribute resources among a small number of people in a lab study, they insist on an exactly equal distribution. But when people are asked to distribute resources among a large group of people in the actual world, they reject an equal distribution, and prefer a certain extent of inequality. How can the strong preference for equality found in public policy discussion and laboratory studies coincide with the preference for societal inequality found in political and behavioural economic research?

We argue here that these two sets of findings can be reconciled through a surprising empirical claim: when the data are examined closely, it turns out that there is no evidence that people are actually concerned with economic inequality at all. Rather, they are bothered by something that is often confounded with inequality: economic unfairness.

We should stress that our argument is not that scholars and researchers fail to notice the distinction between inequality and unfairness. On the contrary, the scientists we cite below are often careful to distinguish equality and fairness in their studies. However, researchers, public figures, and the media often claim that people are specifically concerned about inequality of outcome. Much political discourse frames the problem in terms of growing economic inequality, with no reference to fairness concerns. And, as we discuss immediately below, many experimental studies claim to have discovered 'inequality aversion' or 'egalitarian motives'. We leave open the question of whether these researchers intend to claim that there is evidence for a specific aversion to inequality, above and beyond an aversion to fairness, or whether this is just 'loose talk'. However, to our knowledge, none of these researchers have made the specific claim we wish to make here: that there is no empirical evidence so far that people have any aversion to inequality itself.

We suggest that the perception that there is a preference for equality arises through an undue focus on special circumstances, often studied in the laboratory, where inequality and unfairness coincide. In most situations, however, including those involving real-world distributions of wealth, people's concerns about fairness lead them to favour unequal distributions.

An equality bias in the lab

Anyone looking for evidence that people have a natural aversion to inequality will find numerous laboratory studies that seemingly confirm their view. For example, studies have found "a universal desire for more equal pay"12, "egalitarian motives in humans"15, "egalitarianism in young children"16, and that "equality trumps reciprocity"17. A Google Scholar search for "inequality aversion" yields over 10,000 papers that bear on this topic.

And, indeed, when subjects in laboratory studies are asked to divide resources among unrelated individuals, they tend to divide them equally18,19. If a previous situation has led to a pre-existing inequality, people will divide future resources unequally in order to correct or minimize the inequality between others15,17. This bias is so powerful that subjects sometimes prefer equal outcomes in which everyone gets less overall to unequal outcomes where everyone gets more overall15,20,21. The desire for equality, even at the expense of better average consequences, appears in non-monetary domains as well. For example, people object to medical interventions that would save more lives overall by reducing cure rates for a small group of people and increasing cure rates for a larger group of people22.

Furthermore, people appear to view the equal distribution of resources as a moral good; they express anger toward those who benefit from unequal distributions15. This outrage is sufficiently strong that subjects will pay to punish unequal distributors23. One study examining this across 15 diverse cultures found that members of all populations demonstrated some willingness to administer costly third-party punishment for unequal division of resources (costing themselves the equivalent of a half-day's wages in some cases)—although the magnitude of this punishment varied substantially across populations24,25. Moreover, people expect others to engage in this kind of costly third-party punishment for those that make unequal offers23.

Studies of children between the ages of three and eight years find a similar equality bias26,16. Three-year-olds divide resources equally among third parties27,28, and, although they are typically selfish when they themselves are involved in the interaction, even three-year-olds report that they should share equally29.

Six-year-olds show an even stronger commitment to equal distribution, insisting on throwing out extra resources rather than allowing them to be unequally distributed between two absent third parties28,30. In one study, six- to eight-year-olds were tasked with distributing erasers to two boys who had cleaned up their room. When there was an odd number of erasers, children insisted that the experimenter should throw the extra eraser in the trash rather than establish an unequal division28,31. They responded this way even if the recipients would never know that one of them received less, suggesting that children weren't worried about the recipients' feelings, but were opposed to creating the inequality even if none of the recipients knew about it28. Even more tellingly, children are just as likely to reject unequal distributions when they reflect generosity (the distributor gave up all her candies to the receiver) as when they reflect selfishness (the distributor kept all the candies for herself). This suggests that the rejections are specifically an aversion to inequality, rather than punishing selfishness30.

This bias shows up not only in children's behaviour, but also in their evaluations of others. In one study, six- to eight-year-old children were asked who they liked better: someone who split four erasers equally between the participant and another child, or someone who gave all four erasers to the participant. Children reported liking the equal distributor more than someone who gave them more than the other child32.

Some suggestive evidence for a similar bias shows up in babies and toddlers. When twelve-month-old infants saw a puppet distribute two items to two other puppets, they looked at the scene longer when the distributor gave both toys to one puppet than when she gave the puppets one toy each, suggesting that they were surprised by the unequal distribution33,34,35. Infants not only expect people to equally distribute resources, they also actively prefer those who do. After watching two puppets distribute equally or unequally, 16-month-olds preferred to approach the equal distributor34.

An inequality bias in the real world

Given these findings, one might expect that when people are asked to distribute resources across a real-world group of people, they would choose an equal distribution of resources across all segments of society. But they do not.

A recent study by Norton and Ariely11 received well-deserved media attention, as it showed that people both underestimate the amount of inequality in our society and prefer a more egalitarian society to the one they think they live in. The authors describe their studies as examining "disagreements about the optimal level of wealth inequality", and report the finding of "a surprising level of consensus: all demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo". And an article by Ariely in Atlantic was titled, "Americans want to live in a much more equal country (they just don't realize it)"36.

These summaries are accurate: participants in these studies did prefer more equality than the current situation. But the results also suggest that they were not particularly worried about large inequalities. Instead, these subjects claimed that, in the perfect society, individuals in the top 20% should have more than three times as much money as individuals in the bottom 20% (see Fig. 2). And when they were given a forced choice between equal and unequal distributions of wealth, and told to assume that they would be randomly assigned to be anyone from the richest to the poorest person (that is, a 'veil of ignorance'37), over half of the subjects explicitly rejected the option of an equal distribution of wealth, preferring inequality11. Thus, the data suggest that when it comes to real-world distributions of wealth, people have a preference for a certain amount of inequality.

Figure 2: The actual US wealth distribution plotted against the estimated and ideal distributions across all respondents.

Because of their small percentage share of total wealth, both the fourth 20% value (0.2%) and the bottom 20% value (0.1%) are not visible in the actual distribution. Figure adapted with permission from ref. 11, SAGE.

Figure 2 : The actual US wealth distribution plotted against the estimated and ideal distributions across all respondents.

• View in article
• Full size image

Figure 3 : Percentage of children earning more than their parents, by birth year.

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This preference for inequality materializes in 16 other countries12,13, across people on both the left and right of the political spectrum11, and in teenagers14. As Norton38 puts it, "people exhibit a desire for unequality—not too equal, but not too unequal".

Indeed, these data might underestimate people's preferences for unequal distributions. One follow-up study39 contrasted Norton and Ariely's question about the percentage of wealth that should correspond to each quintile of the American population with a question about what the average wealth should be in each quintile. The former question resulted in an ideal ratio of poorest to wealthiest of about 1/4, but for the latter question the ratio jumped to 1/50. When the connection between the two questions was explained to participants, a majority chose the higher inequality ratio as reflecting their actual beliefs for both measures.

Fairness in the lab

How can this preference for inequality in the real world be reconciled with the strong preference for equality found in laboratory studies? We suggest that this discrepancy arises because the laboratory findings reviewed above—which report the discovery of egalitarian motives, a desire for more equality, or inequality aversion—do not in fact provide evidence that an aversion to inequality is driving the preference for equal distribution. Instead, these findings are all consistent with both a preference for equality and with a preference for fairness, because the studies are designed so that the equal outcome is also the fair one. This is because the recipients are indistinguishable with regard to considerations such as need and merit. Hence, whether subjects are sensitive to fairness or to equality, they will be inclined to distribute the goods equally.

This idea is supported by numerous studies, including follow-ups of the experiments described above, by the same researchers, in which fairness is carefully distinguished from equality. These studies find that people choose fairness over equality. For example, in the study in which children had to award erasers to two boys who had cleaned up their room and chose to throw out the extra eraser, both boys were described as having done a good job. But when children were told that one boy did more work than the other, they awarded the extra eraser to the hard worker28,40. In fact, when one recipient has done more work, six-year-olds believe that he or she should receive more resources, even if equal pay is an option26,41,42,43. Likewise, although infants prefer equality in a neutral circumstance, they expect an experimenter to distribute rewards preferentially to individuals who have done more work35.

This preference for inequality is not restricted to situations where one person has done more work, but also extends to rewarding people who previously acted helpfully or unhelpfully. When three-year-olds witnessed a puppet help another puppet climb a slide or reach a toy, they later allocated more resources to the helpful puppet than to a puppet that pushed another down the slide, or hit him on the head with the toy44.

As a final twist, consider a situation with two individuals, identical in all relevant regards, where one gets 10 dollars and the other gets nothing. This is plainly unequal, but is it fair? It can be, if the allocation was random. Adults consider it fair to use impartial procedures such as coin flips and lotteries when distributing many different kinds of resources45. Children have similar views. In the erasers-for-room-cleaning studies described above, if children are given a fair 'spinner' to randomly choose who gets the extra eraser, they are happy to create inequality46. One person getting two erasers and another getting one (or ten and zero for that matter) can be entirely fair and acceptable, although it is clearly not equal.

Fairness in the real world

It follows, then, that if one believes that (a) people in the real world exhibit variation in effort, ability, moral deservingness, and so on, and (b) a fair system takes these considerations into account, then a preference for fairness will dictate that one should prefer unequal outcomes in actual societies. The ideal distributions of wealth proposed by participants in the Norton and Ariely study, then, may reflect how fairness preferences interact with intuitions about the extent to which such traits vary in the population.

Tyler47 uses a related argument to explain why there is not a stronger degree of public outrage in the face of economic inequality. He argues that Americans regard the American market system to be a fair procedure for wealth allocation, and, accordingly, believe strongly in the possibility of social mobility (see Box 1). On this view, then, people's discontent about the current social situation will be better predicted by their beliefs about the unfairness of wealth allocation than by their beliefs about inequality.

Box 1: Non-fairness motivations for inequality.

In addition to concerns about the unfairness of an equal distribution, people might have other motivations for preferring an unequal distribution of wealth in their society. Here we consider two such motivations more closely: a selfish desire to have more than others, and a belief that inequality is necessary to allow for mobility.

Selfishness

One consideration underlying an inequality preference has little to do with an abstract desire for fairness, but instead reflects a desire to have more than others. Obviously people have selfish motivations, but what is interesting here is that these desires are not always for increasing one's absolute amount, but are often for increasing one's standing relative to others78,79,80. For example, studies of income and happiness have revealed that, once a basic level of wealth is achieved, relative wealth is more important for overall happiness81,82,83. Similarly, a vast body of research in social psychology finds that people engage in constant comparison of themselves with others84,85. Knowing that one's income is much higher (or lower) than that of a neighbour has a substantial impact on happiness80. As Gore Vidal put it, "every time a friend succeeds I die a little".

This motivation for relative advantage can motivate a desire for unequal distributions. Indeed, to achieve the warm glow associated with relative advantage, people are even willing to pay a cost themselves to reduce others' incomes86. Even young children show this relative advantage-seeking behaviour. Five-year-olds often reject equal payouts of two prize tokens for themselves and two prize tokens for another child, and choose instead only one token for themselves, if that means that the other child will get none87. That is, the inequality associated with relative advantage is so appealing that it overrides both a desire for fairness and a desire for absolute gain.

Motivation and mobility

A further motivation for inequality may come from the idea that inequality is necessary to motivate industriousness and allow for social mobility. For example, Norton38 argues that people prefer inequality because they see it as a motivating force that leads people to work harder and better, knowing that doing so can improve their station in life, and that of their children.

This belief entails a sort of meritocratic mobility, and, indeed, such mobility is a necessary condition for an unequal society to be a fair one. After all, a society lacking mobility is a society in which those born into poverty remain in poverty, regardless of their hard work and ingenuity. Hence, unless people view merit as being entirely heritable, fairness requires mobility. Not surprisingly, then, a belief in meritocratic mobility is associated with more tolerance for inequality, as reflected in less discomfort with existing wealth inequality, less support for the redistribution of educational resources, and less willingness to support raising taxes on the rich88.

From this perspective, cultural differences in expectations about mobility may account for differences in tolerance of inequality across cultures. For example, Americans might have an unreasonable tolerance for inequality in part because they tend to overestimate the extent of mobility in the United States77, which is in fact lower than in places like Canada and most of Europe89,90,91,92. One reason for this lack of mobility is that the income distribution in the United States—the distance between the poorest and richest citizens—is much greater than in rival countries. Moving from the tenth percentile to the ninetieth percentile in Denmark requires a US$45,000 increase in income, but making the same jump in the United States would require an increase of US$93,000 (ref. 93). And the situation is not improving—while 92% of American children born in 1940 would go on to earn more than their parents, only 50% of children born in 1980 have done so94.

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We have argued that a preference for fair outcomes is early emerging and universal. But it is also clear that people differ in their intuitions as to which resources should be distributed on the basis of merit. Most Americans now believe that a fair system is one in which every adult gets a vote, but this is a relatively modern intuition. In our own time, there is controversy over whether fairness dictates that everyone should have equal access to health care and higher education. Put differently, there is some disagreement over what should be a right, held equally and unchanged by any sort of variation in merit.

There are also political and cultural differences. Norton and Ariely11found that women, Democrats, and the poor desired relatively more equal distributions than men, Republicans, and the wealthy, and were also more accurate in estimating the extent of current inequality. Or consider that a recent survey of wealthy technology entrepreneurs in Silicon Valley found that all predicted that a strict meritocracy, where everyone's income was strictly proportional to their productivity, would result in an extremely unequal society, with the top 10% earning more than 50% of the nation's wealth48. This intuition is probably considerably more extreme than one would find in a more typical sample. Looking outside of the United States and Europe, it is clear that there are wide differences in fairness concerns across world cultures25,49,50,51,52.

Finally, there are developmental differences. While even the youngest infants tested show some sensitivity to fairness over equality35, young children may place a greater emphasis on an equality 'heuristic' than do older children53,54,55. Indeed, the relative weighting of various factors that can justify inequality—such as luck, effort, and skill—develops even through adolescence56.

Why fairness is central

We are hardly the first to posit a universal moral concern with fairness. For instance, fairness is claimed to be one of the universal foundations of morality by scholars working in moral foundation theory52,57, and has been argued by many developmental and comparative psychologists to be a universal and unlearned human capacity10,58. The universality of this concern raises the question of its evolutionary history.

Under one analysis, a desire for fairness—such as fair distribution of food to the members of a group—can be seen as a prosocial motivation, evolved to constrain our natural selfishness. A propensity to favour fair distributions is sometimes seen as arising because it benefits the group, a proposal developed in the context of cultural group selection59 and, more controversially, genetic group selection60,61; see refs 62,63 for critical discussions. But a sensitivity to fairness might also benefit individuals, consistent with a more standard evolutionary approach. For example, fairness may serve as a signal of impartiality, avoiding the problems of signalling favouritism to one coalition over another64,65.

But these analyses don't provide an explanation for why a propensity toward and sensitivity to fairness would emerge, as opposed to a presumably simpler equality bias. One proposal is that fairness intuitions are rooted in adaptations for differentially responding to the prosocial and antisocial actions of others. For cooperation and prosociality to evolve, there has to be some solution to the problem of free-riders, cheaters, and bad actors. The usual explanation for this is that we have evolved a propensity to make bad behaviour costly and good behaviour beneficial, through punishment and reward66,67. That is, we respond differently to individuals based on what one can see as their 'deservingness'—responses that are present even in infants68. It's possible that fairness intuitions more generally develop from this moral foundation.

A related proposal focuses on shunning selfish individuals, rather than punishing them. When individuals can choose the people with whom they interact for mutually beneficial tasks, cooperative individuals gain benefits from being included and selfish individuals lose out on those benefits by being shunned69,70. But individuals who are too cooperative—too generous—run the risk of being taken advantage of by others71. So a balance must be struck. To treat everyone equally would entail penalization of more productive individuals when they collaborate with less productive individuals relative to highly productive individuals. In contrast with equality, fairness allows individuals with different levels of productivity to share the benefits of their collaboration proportionately72. This focus on fairness is particularly important for humans (compared with even our closest evolutionary relatives), due to the critical importance of collaboration in human hunting and foraging73.

Conclusions and future directions

Fig.3 Here we have explored the notion that, contrary to appearances, people are not troubled by inequality for its own sake; indeed, they often prefer unequal distributions, both in laboratory conditions and in the real world. What really troubles people about the world we live in today are considerations that are related to inequality (see Box 2), such as adverse social consequences, a corrosion of democratic ideals, poverty, and, of most interest to us here, unfairness.

Figure 3: Percentage of children earning more than their parents, by birth year.

Figure adapted with permission from ref. 94, National Bureau of Economic Research.

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Box 2: Consequences of inequality.

While concerns about fairness, along with other considerations, may motivate a preference for inequality, there are, of course, various countervailing psychological forces that lead to an equality preference. One of these forces is a worry about the consequences of an unequal society. That is, even if people have no problem with inequality itself, it might have negative consequences that people are motivated to avoid.

For one thing, as inequality increases, self-reported happiness diminishes, especially among the bottom 40% of income earners95. One reason for this is that relative disadvantage has a larger negative impact on well-being than relative advantage has a positive impact96. When people know where they stand in the overall income distribution, those on the lower end of the scale report less job satisfaction, but those on the higher end of the scale do not report any greater satisfaction97. This has negative effects for productivity too: workers who know they are on the low side of the distribution decrease their effort, but knowing that one is on the high end does not lead to an increase in effort98.

Still, as Tyler47 points out, it is not clear whether the corrosive effects of inequality on happiness are due to inequality per se, or due to the perception of unfair inequality. That is, it is an open question whether people who get less than others would suffer decreases in happiness and productivity if they believed that they were in a fair system, one in which increased efforts on their part could lead to social mobility.

Nevertheless, inequality in a society also predicts a greater degree of violence, obesity, teenage pregnancy, and interpersonal distrust99. Areas of the United States with high income inequality also tend to have higher divorce and bankruptcy rates than areas with more egalitarian income distributions100 and they suffer from higher homicide rates101. Similar negative effects show up in laboratory studies with simulated public goods games in which the extent of inequality is set by the researchers—when the inequities are made salient, there is less cooperation and inter-connectedness102.

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Indeed, we believe that there is no evidence so far that children or adults possess any general aversion to inequality. A related case against a focus on equality has been made recently by Frankfurt74, who argues on normative grounds that people shouldn't care about reducing inequality. What really matters, he argues, is that everyone has a sufficient amount to live a decent life. Frankfurt acknowledges that a focus on improving the situation of the most needy may reduce inequality as a side effect, but argues that this reduction is not, in itself, a moral good.

Our own argument against a focus on inequality is a psychological one. In this paper we have outlined a wealth of empirical evidence suggesting that people don't care about reducing inequality per se. Rather, people have an aversion toward unfairness, and under certain special circumstances this leads them to reject unequal distributions. In other conditions, including those involving real-world distributions of wealth, it leads them to favour unequal distributions. In the current economic environment in the United States and other wealthy nations, concerns about fairness happen to lead to a preference for reducing the current level of inequality. However, in various other societies across the world and across history (for example, when faced with the communist ideals of the former USSR), concerns about fairness lead to anger about too much equality. To understand these opposite drives, one needs to focus not on whether the system results in a relatively equal or unequal distribution of wealth, but whether it is viewed as fair.

Of course, it may be that there really is a preference for equal outcomes that exists above and beyond a preference for fair outcomes. But to explore this, researchers need to construct studies that carefully distinguish equality from other related considerations. For example, perhaps if a procedure results in too large an inequality, people would be motivated to reduce that inequality, even if they believe the procedure to be fair and the inequality to have no other consequences. This is an empirical question.

Furthermore, the idea that people's discontent with the current distribution of wealth has to do with fairness, rather than inequality itself, opens up a wealth of new questions about which factors (for example, hard work, skill, need, morality) are psychologically relevant for fair distributions. In particular, the developmental trajectory of concerns for these different factors is largely unexplored, including questions relating to how children determine which factors are relevant to resource distribution (for example, effort, need, and so on) and which are not (for example, height). Emphasizing the role of fairness intuitions in population-level distribution preferences also raises some interesting and under-explored psychological questions relating to how people perceive the existing distribution of factors such as merit, skill, and deservingness in their societies.

What about practical implications? As with most psychological claims of this sort, our proposal has, at best, indirect implications for public policy. Even if the average individual desires a somewhat unequal society, one might argue that people are mistaken in what they want. Perhaps people would actually be better off in a perfectly equal society—they just don't know it. Also, even if it is assumed that people are correct in their desires for a society with some economic diversity (but not as much as we currently have), this doesn't tell us how to achieve such a society. It's perfectly coherent to be in favour of reduced inequality, but against certain plans for redistribution75.

We do see two implications of this work, however.

First, it's clear that many people are misinformed about how well their society matches their ideals. They are wrong about how much inequality there is, believing the current situation to be much more equal than it actually is11,12,39, but see ref. 76. Furthermore, Americans have exaggerated views about the extent of social mobility in the United States77, and thus the extent to which the current American market system is a fair procedure for wealth allocation. We have argued that views about fairness will be most predictive of discontent with economic inequality, and thus public education on the actual current rate of mobility will help to ensure that people's moral assessment of the world that they live in is grounded in the relevant facts.

Second, as Frankfurt74 points out, contemporary political discourse often blurs together various concerns that should be thought of as distinct. Worries about inequality are conflated with worries about poverty, an erosion of basic rights, and—as we have focused on here—unfairness. If it's true that inequality in itself isn't really what is bothering people, then we might be better off by more carefully pulling apart these concerns, and shifting the focus to the problems that matter to us more. The recognition that fairness and equality are different cannot merely be a footnote on empirical studies and cannot be a rarely invoked piece of trivia in political conversations that wrestle with unfairness but frame the conversation in terms of equality. Progress in the lab and in the real world will be facilitated by centring the discussion on exactly what people do care about—fairness—and not on what people do not care about—equality.

Additional information

How to cite this article: Starmans, C., Sheskin, M. & Bloom, P. Why people prefer unequal societies. Nat. Hum. Behav. 1, 0082 (2017).

Publisher's note: Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

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John Case
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IMF Blog: Emerging Markets and Developing Economies: Sustaining Growth in a Less Supportive External Environment [feedly]

Emerging Markets and Developing Economies: Sustaining Growth in a Less Supportive External Environment
https://blog-imfdirect.imf.org/2017/04/10/emerging-markets-and-developing-economies-sustaining-growth-in-a-less-supportive-external-environment/

By Bertrand Gruss, Malhar Nabar, and Marcos Poplawski-Ribeiro

Versions in عربي (Arabic), Français (French), 日本語 (Japanese), Русский (Russian), and Español (Spanish)

It is quite likely you are reading this on a smartphone or tablet assembled in an emerging market economy. The beverage beside you could well be tea grown in Sri Lanka or Kenya. And there is a chance that you are —or soon will be—on a plane headed for Shanghai, Sao Paulo, or St. Petersburg.

The list could go on. But even from a few examples around us, it is easy to detect the pervasive role of emerging market and developing economies in the global economy these days—a role that has grown more important over time.

Improved policy frameworks and structural reforms in emerging market and developing economies over the past twenty years have been crucial for this transformation. But as our research in Chapter 2 of the April 2017 World Economic Outlook shows, the external environment has also played its part in facilitating their rise.

These economies now face a possibly more complicated external environment than they have grown accustomed to in recent decades. Nevertheless, they can still enhance the growth impulse from less supportive external conditions with the right policy mix and by continuing to strengthen their institutional frameworks.

Role of external conditions

Emerging market and developing economies now account for close to 80 percent of global economic growth, almost double their share from two decades ago. Their relevance for the global economy isn't simply as centers of production or trading hubs packaging and shipping goods to advanced economies. They have also become increasingly important as final destinations for consumer goods and services, now accounting for close to 85 percent of the growth in global consumption, more than double their share in the 1990s.

These economies have become more integrated into the global trading system and international capital markets since the 1990s. And as this process has unfolded, the relative prices of their exports and imports, external demand, and, in particular, external financial conditions, have increasingly influenced their growth in real income per capita.

Our study finds, for instance, that about one third of the 1½ percentage points pickup in the average growth rate of income per capita since 2005, relative to the 1995-2004 period, can be attributed to stronger capital inflows. Over time, demand for exports from other emerging market and developing economies has also exerted a more powerful force on these economies' medium-term growth.

Beyond the numbers, the influence of the external environment has extended to the nature of their growth process. Several of these economies have experienced episodes of growth accelerations and reversals with sustained changes in growth rates. These episodes appear to have a long-lasting effect on the level of income per capita. The chapter finds that favorable external conditions increase the likelihood of growth accelerations and lower that of reversals.

Growth in a more complicated external environment

Emerging market and developing economies enjoyed exceptionally favorable external conditions over long stretches of the post-2000 period—strong external demand, relatively abundant capital inflows, and an upswing in commodity prices.

Over the past few years, however, the external environment has become more complicated for these economies. The slow recovery from the crisis in advanced economies has weakened demand for emerging market and developing economy exports. China has relied less on commodity imports as it rebalances its economy toward consumption and services. And the commodity cycle, more broadly, has turned since 2014, reducing growth rates among commodity exporters.

Some of these shifts in the external environment may persist. Additional elements in the mix are a risk of protectionism in advanced economies, and a general tightening of external financial conditions as US monetary policy normalizes. Emerging market and developing economies are therefore likely to experience a weaker growth impulse from external conditions than in the past.

Room for convergence

Despite this more complicated environment, the chapter's analysis finds that these economies can still get the most out of a weaker growth impulse from external conditions by strengthening their institutional frameworks, protecting trade integration, permitting exchange rate flexibility, and containing vulnerabilities from high current account deficits and large public debts.

Some of these policies can also directly help boost growth in emerging market and developing economies, regardless of the shift in external conditions. After all, with 90 percent of the group at levels of income per capita less than half that in the United States, there is still considerable room for catch-up growth and convergence.

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Drivers of Declining Labor Share of Income [feedly]

Drivers of Declining Labor Share of Income
https://blog-imfdirect.imf.org/2017/04/10/drivers-of-declining-labor-share-of-income/

By Mai Chi Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian

Versions in عربي (Arabic), Français (French), Русский (Russian), and Español (Spanish)

After being largely stable in many countries for decades, the share of national income paid to workers has been falling since the 1980s. Chapter 3 of the April 2017 World Economic Outlook finds that this trend is driven by rapid progress in technology and global integration.

Labor's share of income declines when wages grow more slowly than productivity, or the amount of output per hour of work. The result is that a growing fraction of productivity gains has been going to capital. And since capital tends to be concentrated in the upper ends of the income distribution, falling labor income shares are likely to raise income inequality.

Trending down

In advanced economies, labor income shares began trending down in the 1980s. They reached their lowest level of the past half century just prior to the global financial crisis of 2008, and have not recovered materially since. Labor income shares now are almost 4 percentage points lower than they were in 1970.

Despite more limited data, labor shares have also declined in emerging market and developing economies since the early 1990s. This is especially the case for the larger economies in this group. In China, for example, despite impressive gains in poverty reduction over the past two decades, labor shares still fell by almost 3 percentage points.

Indeed, as growth remains subpar in many countries, an increasing recognition that the gains from growth have not been broadly shared has strengthened a backlash against economic integration and bolstered support in favor of inward-looking policies. This is especially the case in several advanced economies.

Our study takes an in-depth look at the symptoms and drivers of this downward trend in labor share of income.

Technology: a key driver in advanced economies

In advanced economies, about half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.

Global integration—as captured by trends in final goods trade, participation in global value chains, and foreign direct investment—also played a role. Its contribution is estimated at about half that of technology. Because participation in global value chains typically implies offshoring of labor-intensive tasks, the effect of integration is to lower labor shares in tradable sectors.

Admittedly, it is difficult to cleanly separate the impact of technology from global integration, or from policies and reforms. Yet the results for advanced economies is compelling. Taken together, technology and global integration explain close to 75 percent of the decline in labor shares in Germany and Italy, and close to 50 percent in the United States.

Global integration: largely benign in emerging market economies

In emerging markets and developing economies, global integration has allowed for expanded access to capital and technology and, by raising productivity and growth, has led to a rise in living standards and lifted millions from poverty.

However, these forces may also be associated with declining labor income shares, by shifting the production in emerging market and developing economies towards more capital-intensive activities. We find that global integration, and more specifically participation in global value chains, was the key driver of declines in labor shares in emerging markets.

This effect could, however, be interpreted as benign: it is the result of capital deepening that is not necessarily accompanied by dislocation of employment or reduction in wages.  In Turkey, for example, the decline in labor income share of around 5 percentage points is explained almost exclusively by the rapid rise in participation in global value chains.

Technology, in contrast, has played a small role in these economies. This reflects a smaller decline in the relative price of investment goods as well as a lower share of automatable jobs.

Hollowing out of the middle-skilled labor share

Another key finding of our research is that the decline in labor shares in advanced economies has been particularly sharp for middle-skilled labor. Routine-biased technology has taken over many of the tasks performed by these workers, contributing to job polarization toward high-skilled and low-skilled occupations.

This "hollowing-out" phenomenon has been reinforced by global integration, as firms in advanced economies increasingly have access to a global labor supply through cross-border value chains.

Dealing with disruption

We conclude that although technological advancement and global economic integration have been key drivers of global prosperity, their effects on labor shares challenge policymakers to find ways to spread those benefits more broadly. The design of specific policy responses, of course, will have to depend on country circumstances and be anchored in their social contracts.

In Part 2 of this blog, we will discuss our findings on the skill and sectoral trends in labor income shares as well as possible policy responses. We also elaborate on a new cross-country index to measure the share of occupations that are at risk of being automated.  Stay tuned!

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Bernstein: Larry Summers, of all people, misses China’s role in “secular stagnation”

Larry Summers, of all people, misses China's role in "secular stagnation"

Jared Bernstein

April 10th, 2017 at 8:57 am

My old Obama admin econ team colleague Larry Summers gets some important aspects of the China story wrong in this oped today. Weirdly so, given his exposure as a top (and very effective) policymaker the last time the downsides of financial imbalances whacked the globe.

Larry argues, and I agree, that none of the stuff team Trump is worrying about re China's economy and international accounts makes sense. The problem, he argues, is China's grab for "soft" power, filling an international gap while making an international power-grab, as the US goes insular. That may well be true. I don't like when economists, myself included, get all policy sci on us, but it happens, and Larry may be onto something important.

He's also clearly right that China is not intervening in currency markets to depreciate their currency. The Trump team is about 20 years late on that one.

But Larry is surprisingly blasé about a China problem: excess savings (really, an East Asia problem, as Brad Setser points out). I associate this problem with Summers' own work on "secular stagnation"—persistent demand shortfalls even in recovery. Another way to view sec stag is as a function of excess savings: the globe is awash in more savings that we have good, productive uses for. That, in turn, can lead to depressed interest rates, credit bubbles, large trade surpluses in savings glut countries, which in turn force large trade deficits elsewhere, and high unemployment, depending on what offsets are in play in trade deficit countries. Larry himself has recognized this problem (as has Ben Bernanke since the mid-2000s in his seminal savings glut speech) and wisely called for public infrastructure investment to help offset it.

Our trade deficit with China is 1.6 percent of GDP; that's a significant drag on demand. In terms of offsets, the Fed is pushing in the other direction (tightening) and the fiscal authorities…um…Congress…can't find the light switch. We're of course doing better than most other advanced economies, but here we are in year eight of an expansion and (slight) output gaps still persist.

Just last week, Martin Wolf at the FT wrote about the threat China's close-to-50-percent-of-GDP savings rate poses for the rest of the world (our savings rates are typically in single digits). He worries about excessive internal investment, enforced in part by capital controls prohibiting outflows, generating an asset bubble. Or, if the controls break down, large-scale exports of their surplus savings to a world that is already demand constrained. Interestingly, a smart paper by Larry et al. provides an explicit role for such capital flows in dampening demand and making it harder for the US to hit higher growth rates ("We find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor.")

If a Chinese asset bubble forms and implodes, and/or they export a lot more of their excess savings, that will slam down their currency—no matter what propping up they try to do—and our trade deficit with them will grow, perhaps sharply (Setser's worried about this too, though less so than Wolf). Unless offsets are in play, a big "if" in the Trump-Republican-Congress world, this will hurt American workers.

There's a problem in economic criticism today where people argue, essentially, if Trump does it, it's wrong. Re China, the Trumpists are shooting at the wrong target—currency vs. excess savings and capital flows. But that doesn't mean all's clear on the Asian financial front.

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John Case
Harpers Ferry, WV

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