Analyzing the Dispersion of Wealth in Fiscal Economies
Paul Kuechenmeister
Econ 4331W
April 8th, 2014
Introduction
Multiple theories have been developed to observe the correlation between income inequality and economic growth. This paper aims to grow off of theories developed in Galor and Zeira (1993) , Barro(2000) , MacDonald and Majeed(2010) . In some countries wealth distribution is fairly even and in other countries the distribution of wealth is extremely disproportional. Which is better off, an economy with low-income inequality or high-income inequality or does wealth distribution not affect the overall economy. In this dissertation I will analyze the effects of income inequality on a country’s economic growth, arguing that the bases of correlation between income inequality and economic growth is dependent on a country’s initial state of economic standing. This thesis will argue that countries with an initial state of developed see a positive correlation between income inequality and economic growth, whereas countries with an initial state of developing see a negative correlation between income inequality and economic growth.
This study examines the impact of income inequality to an economy’s growth rate. To better understand the effect of income inequality’s relation to growth rate, pieces of literature such as Kuznets (1955) as well as Galor and Zeira (1993) will be analyzed and implemented in a fashion similar to Barro (2000) literature analyzing developing economies. This study utilizes a nonparametric regression model to compare cross-country regressions.
Literature Survey
Economic Growth and Income Inequality by Simon Kuznets (1955) was one of the initial papers theorizing the long-term effect of inco...
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...between the gini coefficient and growth rate of Developing countries is -3.789 with a P-value of .398 and R squared of .132 and .103.
Interpreting the statistical significance of the data, the p-values both hold a significance level greater than 0.05, thus we do not reject the null hypothesis. While both developed and developing countries show correlation between income inequality and economic growth, it can be seen that developed countries hold a stronger correlation with less significance and developing countries hold a slightly less correlation than developed but a stronger argument of significance.
In summary, when countries are classified as developed vs. developing the income inequality shows statistical significance that in developed countries income inequality furthers economic growth and in developing countries income inequality impedes economic growth.
David J Lynch says that, “ [s]ocieties that manage a narrower gap between rich and poor enjoy longer economic expansions”, however, in the United States the gap between the have and have-nots has widened (source C). “This country is just getting worse and worse and worse … and that is not a recipe for stable growth” (source C). If we do not do something soon our capitalist country will fall. In order for the income inequality gap to lessen to create a more stable economy the government must invest in education and unionize workers and not provide higher taxation for the top one percent.
Wealth inequality did not always exist in human life. In fact, “Human life have not only been changed, but revolutionized, within the past hundred years” (Carnegie 1). There used to be
Wealth inequality and income inequality are often mistaken as the same thing. Income inequality is the difference of yearly salary throughout the population.1 Wealth inequality is the difference of all assets within a population.2 The United States has a high degree of wealth distribution between rich and poor than any other majorly developed nation.3
Fletcher, Michael. “Income Inequality Hurts Economic Growth, The Washington Post. N.p., 24 Jan. 2010. Web. 29 Apr. 2014.
Wealth inequality is a real issue that needs to be fixed. The imbalanced growth of the upper class compared to the middle class is a danger to American society as a whole. The rich becoming richer while the middle class remains the same leads to a power imbalance, with the rich using their money to run the country the way they see fit while the middle class speaks to ears that do not listen. The issue of wealth inequality needs to be fixed by raising taxes on the rich.
Income inequality in the United States has increased and decreased throughout history, but in the recent years, the widening gap has become a serious issue. Income inequality is usually measured by Gini coefficient. According to this method coefficient varies between 0 and 100; while 0 represents complete equality (income is distributed equally among all the population of the country), 100 represents complete inequality (only one person receives all the country’s income, while the rest of the population receives nothing). According to the Census of Bureau, the official Gini coefficient in the U.S. was 46.9 in 2010. This is way higher than the all-time low coefficient of 38.6 set in 1968 (qtd. in Babones).
“A Guide to Statistics on Historical Trends in Income Inequality.” cbpp.org. Center on Budget and Policy Priorities, 2013. Web. 06 April. 2014. .
Income inequality is not necessarily harmful to our society because if the rich is getting richer they are able to invest more of their money to create business which will lead to more employment of people in the lower and middle class. A topic we also discussed in class was about the income mobility. The idea behind income mobility is that the poor does not always remain poor. People who were poor in the past are usually not poor later on in the future because the size of the economic pie increase too. People may think that the rise of income inequality is bad, but I do not really think it is as bad as many make it out to be. A solution should be put in place for a better distribution of the wealth, but I do not believe it should really be a concern because it seems to be something that will always exist. Even though income inequality exist or even if it is rising, people are better off today than they were before. The middle and poor class as discussed in class are getting a smaller peace of the pie, but it is larger that before, and with income mobility, the poor keep pushing forward regardless of the rich getting richer. Income inequality is a debated subjected, and I believe it will always be a debated subject. However in this class, so far, I have leaned that income inequality is not such as a bad thing as people make it sound. Income inequality has two side
Pettinger, Tejvan. The “Pros and Cons of Inequality.” Economics Help. 18 Oct. 2011. Web.
The distribution of income and wealth is a crucial factor in determining the level of inequality in an economy. Personal income is the flow of funds received in a given period of time by persons or households, and personal wealth refers to the value of net assets of a person or household, it represents the value of items owned less any debts owed by the person or household. Income and wealth are the economic resources that households use to support their consumption of goods and services. There are many benefits of inequality, however many costs as well.
The causes of income inequality can differ significantly by gender, education, region and social status. Education is a factor that is known to affect income equality. Individuals with low income earnings may not have had access to education resulting in having a lack of education. Family and social interaction can also impact the earning potential. Skills for interactions are crucial to lead a quality life, however are not with a high percentage of low income families with economically troubled areas. Stagnant wages is a major role in inequality. The average income for middle to low income workers has been mainly still whilst exclusive payment has increased. The reducing effect on labour has also led to even or falling wages among workers.
If income inequality continues to grow, the economy will break down. For example, if the housing price continues to rise because of the rich people, poor people will not have a place to live since they cannot afford to buy these expensive houses. When this happens, it will create another housing bubble because the houses are not worth buying, which means the market value of the house exceeds the house’s value; therefore, nobody will buy the house including the riches since they already have houses to live. Moreover, poor people do not believe they can get access to wealth because they cannot afford anything, and they cannot afford the tuition fees for a good education, which is the traditional route to success.
Stewart, Charles T., Jr. "Inequality of Wealth and Income in a Technologically Advanced Society." The Journal of Social, Political, and Economic Studies 27.4 (2002): 495-512. Print.
What makes economic growth so interesting is that it enables a country to do so much more than they are financially capable of to date, through economic growth a country can also help to lower the countries deficit. To date The Bahamas government have invested millions of dollars into the economy such as new roads and highways, schools, hospitals, hotels etc. If an economy makes an investment it is to improve and encourage growth within their economy. In my opinion economic growth is beneficial to any economy although there are a number of hurdles that must be crossed to really feel and see the economic growth. This research paper is to enable a better understanding of the economic growth and how The Bahamas has grown and investments that they have made to sustain the economies developments.
Economic growth is the most effective instrument for reducing poverty and enhancing the quality of life in developing countries. The benefits brought about from economic growth is strong growth and business opportunities enhance incentives. This may lead to the rise of a strong and growing group of entrepreneurs, which should generate pressure for enhanced administration. Strong economic growth therefore advances human development, which in turn promotes economic growth. But, under different conditions, comparative rates of development can have altogether different consequences for neediness, the occupation prospects of poor people and more extensive pointers of human development. The extent to which growth decreases neediness depends on the extent to which the poor take an interest in the growth process and share in its returns (Riley, G.