Inequality in US and India…

Gulzar points to rising inequality in US. Forget inequality between rich and poor. The gap is widening between mere rich and uber -rich.

This has profound implications for all social, political and economic policy making. This massive income differentials at the top and the resultant concentration of wealth has dramatically altered power equations within societies. The mere-rich have been replaced by the uber-rich as the power-elite.

The incentives and the psychology that drives the uber-rich are different from those of the mere-rich when the latter formed the power-elite. This has implications for economic policy making. For example, there arises the issue of a separate higher tax bracket for the uber-rich and other changes to the taxation system. Currently, the uber-rich are enjoying the taxation rate that was designed for the mere-rich.

This assumes greater significance in view of the major share of the incomes of the uber-rich coming from financial markets through some form of capital-gains. It cannot be any coincidence that in the US, such incomes are taxed at a marginal rate of 15%, compared to wage and other incomes which are taxed at 39.6%.

He points to a study done 10 years back estimating Indian inequality. He says the graph should be similar to US if reestimated now.

Reminds me of a recent Jagdish Bhagwati talk in the Indian Parliament (HT: Gold Standard blog). Bhagwati takes a contrarian stance compared to most who say inequality has risen in India. He says inequality has not worsened:

Perhaps the most articulate critics are the ‘progressive’ novelists of India, chief among them Pankaj Mishra whom the op-ed page editors of The New York Times regularly and almost exclusively invite to write about the Indian economy, a privilege they do not seem to extend symmetrically to American novelists to give us their profound thoughts on the US economy!

Mishra’s latest Times op-ed on October 2, 2010, writes of the ‘alarmingly deep and growing inequalities of income and resources in India’, ‘the waves of suicides of tens of thousands of overburdened farmers over the last two decades’, ‘a full-blown insurgency . . . in central India’ to defend tribals against depredations by multinationals, ‘the pitiless exploitations of the new business-minded India’, and much else that is allegedly wrong with India!

While economic analysis can often produce a yawning indifference, and Mishra’s narrative is by contrast eloquent and captivating, the latter is really fiction masquerading as non-fiction.

The fact is that several analyses show that the enhanced growth rate has been good for reducing poverty while it has not increased inequality measured meaningfully, and that large majorities of virtually all underprivileged groups polled say that their financial situation has not worsened and significant numbers say that it has improved.

I think there is some clarity needed here. One is relative inequality and absolute inequality. Relatively yes, things may have improved say compared to 1950s. Like Cowen says technology has made many things available to people which was not possible earlier. So people in lower income could be better-off now compared to 1950s.

But in absolute terms, like say in a given year inequality remains and has in all possibility worsened. Incomes may have risen for low income people but has increased much sharply for the top earners. Look at the number of billionaires in  India now. The list has multiplied manifold compared to hardly any even 10 years ago. And this wealth amidst few keeps rising leading to rise in inequality. Gulzar is most likely right saying that the graph could be much similar to US now.  

There is one difference though. Cowen says a bigger worry is how incomes of top 1% of people keep rising and most of these people are in finance. And in finance they are making money by taking more risks which when busted are passed off to the other 99% of the population. In India, the top earners are more widely spread and not limited to one sector alone.

But then like we saw in US, special favors are being given to the financial sector, recent developments in India also point in similar direction. So not much to choose from really. (see this on rise of crony capitalism). It is all boiling down to who the govt. is favoring at a given point of time.

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4 Responses to “Inequality in US and India…”

  1. Inequality in US and India… « Mostly Economics | Daily India News Update Says:

    […] the original here: Inequality in US and India… « Mostly Economics Share Blogs, Home, Politics articulate-critics Big B to host KBC for the next 2 […]

  2. rakesh Says:

    Interesting article. Bhagawati tries to debunk some doubtful analysis but the power of the corporate is growing. Corporate welfare and crony capitalism is wide spread and can be a danger in a democracy. There is too much black money. As far as I know the land prices in India increased exponentially.
    Common man cannot afford land or buy food. I think the bottom 20 percent are getting poorer with inflation and decreasing buying power. The middle class with better education is able to take advantage of the boom. The bottom is left to itself to fend.

    The government has to start programs to make people more skillful so that they can take advantage of the economic development. But how much is the government doing? In a corrupt democracy, all these government programs are more opportunities to steal people’s money.
    Hence urgent need to get rid of corruption and strict anti corruption laws.

  3. South Asian economies – a depressing paradox « Mostly Economics Says:

    […] a series of scams, the overall level of governance comes under a question mark. And in all this inequality keeps rising leading to further problems. The problem remains largely unchanged with worse […]

  4. State of India’s social development indicators… « Mostly Economics Says:

    […] continued surprise is the reported low inequality in India which is questionable prima facie . We have highest number of billionaires and also the highest poverty ratio in the world. Moreover, […]

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