Economic Inequality Through the Ages
by Travis Pantin
Wed, 5 Dec 2007 at 9:48 PM
A professor of economics at University of California, Davis, Peter Lindert,
asks in a paper published on VoxEU (voxeu.org) how modern economic
inequality compares with that of the Roman Empire and other ancient
societies.
His research, conducted with economist Brank Milanovic of the World Bank and
a Harvard economics professor, Jeffrey Williamson, finds that income
inequality in today's developing countries is not very different than it was
in distant times. However, the average degree of ancient inequality was much
closer to the maximum amount that ancient economies could profitably
sustain.
Mr. Lindert and his colleagues looked over historical records to determine
how much inequality ancient economies could bear without sacrificing
productivity. Laborers require a certain degree of livelihood to remain
efficient, they explain.
The authors then calculated how closely the inequality in those societies
came to reaching that maximum, thereby producing a new number that they
dubbed the "inequality extraction ratio."
"This new measure of inequality may capture our notions of inequality more
accurately than any actual measure," they claim. "This ratio measures how
powerful and extortionary are the elite, its institutions, and its
policies."
Thus, when we say that a society is "unequal," we may really be trying to
assert it has a high inequality extraction ratio. The numerical size of the
gap between the rich and the poor may matter less because it could still be
the case that the elites have extracted only a small amount of the maximum
feasible inequality.
The authors contrast their new measure of inequality with a popular one
commonly used today, arguing that the income share of the top 1% is not a
good measure of inequality. Instead, they found "it was the gap between the
working poor at the bottom and those near the top that mattered."
The Ethics of Subprime Loans
On Economist's View (economistsview.typepad.com), a University of Oregon
economics professor, Mark Thoma, asks whether the subprime mortgage business
is inherently immoral.
His reasoning goes like this: Suppose a hypothetical subprime loan officer
knows that 15% of the people he loans to are going to have serious troubles
and default. The officer would like to be able to weed out the ones who will
default, but there is no accurate way to determine that.
Should the loan officer feel guilty about making these loans? Mr. Thoma
wonders: "Is it ethical to make them at all, i.e. to knowingly send 15% of
your customers into foreclosure (even though you don't know for sure who it
will be)? … If you think it's okay to make these loans, would your answer
change if, say, the chances of repaying/defaulting were 50-50 or worse? Is
it okay no matter the default rate so long as it's profitable? I have a
feeling that different answers to this question explain a lot about who we
think ought to be held accountable for the subprime mess."
In the end, Mr. Thoma sides with the subprime lenders. "The 85% of the
customers who benefit more than compensate for the 15% who do not," he
writes.
On the Health of Banks
At Carpe Diem (mjperry.blogspot.com), professor Mark Perry presents a nugget
of data that gives him reason to think that American banks may be stronger
now than they ever have been. What admirable optimism.
His reasoning is contained in two graphs that reveal that, compared to the
early and mid-1990s, the total number of nonperforming loans at American
commercial banks today is 3-4 times lower. Moreover, considering that only
three commercial banks have failed "during the last three years, out of
about 8,500 banks, the commercial banking system in the U.S. has probably
never been stronger at any point in American history than today."
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