Applied economics professor Jay Coggins of the University of Minnesota
Does income inequality retard
economic growth, reduce competitiveness?
A Civic Caucus
Focus on Competitiveness
Interview July 11, 2014
John Adams, Dave Broden
(vice chair), Jay Coggins, Paul Gilje (coordinator), Sallie Kemper,
Dan Loritz (chair), Paul Ostrow, Dana Schroeder, Clarence Shallbetter.
By phone: Amir Gharbi.
Economic inequality in
Minnesota and the United States continues to grow, says Jay Coggins of
the University of Minnesota. He co-authored a 2013 Growth and Justice
report that makes the case that those at the very top of the income
scale are pulling away in income growth, while middle-class income
stagnates and poverty rates increase. Coggins argues that current
levels of income inequality threaten overall economic growth, both
nationally and in Minnesota.
Minnesota is richer in income than the
national average and has less income inequality than the U.S. as a
whole, according to Coggins. But that advantage is slipping. He notes
that there are counties in Minnesota where inequality is as high as in
Mississippi, which is among the most unequal states in the country.
Minnesota's state and local taxes are more regressive than federal
taxes, but less regressive than most other states' taxes.
Coggins argues that part of the job and
skills mismatch problem that helps contribute to income inequality is
due to inadequate financial support for the preK-12 school system. And
he contends that the corporate world could help the middle 80 percent
of people (by income) by once again paying for on-the-job training for
Coggins and his report co-authors conclude
that increases in inequality are not inevitable. They recommend
development of an "Economic Inequality Impact Assessment" to determine
the economic inequality impact of new government policies, legislation
or regulations before they go into effect.
Jay Coggins is a Distinguished
University Teaching Professor in the Department of Applied Economics
at the University of Minnesota, where he joined the faculty in 1995.
He is also policy fellow at Growth & Justice,
a research and advocacy organization whose mission is to make
Minnesota's economy simultaneously more prosperous and fair. He is
co-author of the 2013 Growth & Justice report Widening Economic
Equality in Minnesota: Causes, Effects, and a Proposal for Estimating
Its Impact in Policymaking.
Before coming to Minnesota, Coggins was on
the faculty at Montana State University and the University of
Coggins' expertise includes agricultural
policy, air and water pollution, common property resources,
environmental policy and regulation, and poverty and welfare. His
current research includes studies on market-based pollution control,
option value of natural resources, equity-respecting economic policy
and dynamic policy analysis. Among his recent publications are papers
appearing in the following publications: Journal of Environmental
Economics and Management, Public Choice, Social Choice and Welfare,
and the International Economic Review.
He received his PhD in Agricultural and
Applied Economics from the University of Minnesota in 1989, where he
also earned an M.S. degree in 1985. He holds a B.S. in Animal Science
from the University of Wisconsin-River Falls.
The report makes the case that economic
inequality in Minnesota and the United States continues to widen, as
those at the top pull away in income growth, while middle-class income
stagnates and poverty rates increase. The authors support the view
that, due to inequality increases over the last 30 years, current
levels of income inequality have crossed a threshold, so that the
inequality threatens overall economic growth. Comparing measures of
economic inequality among counties and among selected high-income
countries, they conclude that recent and future increases in
inequality are not inevitable and that we could reduce inequality in
The authors recommend development of an
"Economic Inequality Impact Assessment," a systematic assessment of a
new policy's economic inequality impact. This assessment would then be
required at all levels of government in Minnesota before passage of
economically significant legislation, implementation of new
regulations affecting inequality, or other policy decisions that could
further exacerbate inequality. The inequality assessment would be
similar to Environment Impact Statements required before decisions are
made on pending development projects or policies with possible
negative environmental effects.
The richest people in
the U.S. and in Minnesota are getting richer and richer. According
to Jay Coggins of the University of Minnesota, data from the World Top
Incomes Database, which is based on Internal Revenue Service (IRS)
tax-return data going back to 1913, shows that the top 10 percent of
income-earners have achieved only modest income gains over the past 30
years. But the top one percent of income-earners are pulling away from
the rest of the top 10 percent; the top 0.1 percent are pulling away
from the rest of the top one percent; and the top 0.01 percent are
pulling away from the rest of the top 0.1 percent.
Coggins said French economist Thomas
Piketty's book on wealth inequality,
Capital in the
(2014), shows his concern about the effect of this inequality on the
future of democratic, capitalist societies. Piketty points out that
the level of economic inequality is, in Coggins' words, "an
unsustainable situation that could lead to very bad outcomes
Income inequality in the U.S. has risen from
1967 to 2011. An important and widely used measure of inequality,
shows that income inequality has increased by roughly 14 percent over
that time period. Meanwhile, the share of all income flowing to the
richest one percent of Americans has more than doubled since 1978,
from nine percent then to over 22 percent in 2013.
Wealth inequality nationally is even greater
than income inequality
richest one percent owned 24 percent of U.S. wealth in 1978, but by
2013 that share had risen to 40 percent.
Since 1979, Census data show that the people
who've benefited the most in income growth rate are the richest in
income, while the bottom 20 percent are actually worse off.
Economies with less income inequality grow
faster; as income disparity grows, the overall economic performance
(measured by growth in GDP) is degraded.
The U.S. has higher income inequality than
most other developed countries, but inequality is much higher
in developing countries than in the U.S. Coggins commented
that Brazil and China have terrible problems with inequality, even
though the average income in China is growing rapidly.
There is evidence that inequality in the
U.S. is keeping the middle class stagnant and dragging down GPD.
Minnesota is richer in income than the
national average and has less income inequality than the U.S. as a
whole. Coggins said the measure of inequality shows that Minnesota
has less net income inequality than the nation as a whole. Even so,
there are counties in Minnesota where inequality, measured by the Gini
coefficient, is as high as in the state of Mississippi, among the most
unequal states in the country.
Poverty in Minnesota is below the national
average. According to the report, in 2011, 15 percent of all
Americans, or a record 46.2 million, lived below the poverty line.
That compares to 10 percent of all Minnesotans, or about 500,000,
living below the poverty line. Poverty rates both nationally and in
Minnesota declined from 1995 to 2000, but have increased since then.
Minnesota compares favorably to the country
as a whole in income, inequality and poverty, but the advantage is
slipping. Minnesota's median household income remains higher than
the national average, but much of that relative standing has
disappeared since 2000. The state's median income is declining and
inequality is rising both absolutely and relative to other states.
Over the last 10 years, Minnesota has fallen from ninth lowest to 13th
lowest in income inequality. Our poverty rate has worsened from third
lowest to 11th lowest.
Compared among states nationally and among
counties in Minnesota, income inequality is highest where median
household income is lowest. Coggins pointedout that there is a lot
of poverty in many northern Minnesota counties, partnered with high
levels of inequality. But he agreed with an interviewer that many
Minnesota counties with strong agricultural economies have moderate to
high incomes and less inequality.
Adjusted for inflation, U.S. median
household income has risen by about eight percent over the last 30
years and has actually fallen since 2000. Median income in
Minnesota has risen more, by about 19 percent. But the drop
since 2000 has been greater as well.
The standard explanation for why inequality
has gone up, globalization and skills-based technological
changes, does not explain why the U.S. stands almost alone among
developed countries in its rapid raise in inequality.
When taxes and transfers are taken into
account, income inequality in many countries is generally lower.
Coggins said after taxes and transfers, though, income inequality in
the U.S. "hardly budges," while it decreases significantly in France.
He noted that the U.S. federal income tax is progressive, while all
other U.S. taxes tend to be regressive.
The total effective tax rate in 2009 in the
U.S. (including all federal, state and local taxes together)starts at
16.0 percent for the lowest 20 percent in income and keeps going up to
28.5 percent for the 60th-to-80th percentile
income group. Then the effective tax rate going through the highest 20
percent in income flattens off somewhat, with the rate reaching 31.6
percent for the 95th-to-99th percentile income
group. The effective tax rate then actually decreases to 30.8 percent
for the top one percent income group.
Minnesota state and local taxes are more
regressive than federal taxes and most other states' taxes are more
regressive than Minnesota's; Washington State is the most regressive.
Coggins said after state deduction of the federal income tax, the
share of family income going to pay state and local taxes in Minnesota
is 8.8 percent for the lowest 20 percent income group. It increases a
bit to 9.6 percent for the 20th to 40th
percentile income group and stays at that same level for the 40th-to-60th
percentile group and the 60th-to-80th percentile
group. The rates then start falling for the top 20 percent of income
earners, reaching 6.2 percent for the top one percent income group.
For nonelderly taxpayers in Washington
State, the share of income going to state and local taxes (after state
deduction of the federal income tax) actually declines across the
board as income levels increase, from 16.9 percent for the lowest 20
percent income group to 2.8 percent for the top one percent in income.
There is no state income tax in Washington.
Several economists have recently proposed
alternative solutions to economic inequality.
The Price of
Inequality: How Today's Divided Society Endangers Our Future(2012),
American economist and Columbia University Professor
Joseph Stiglitz recommends curbing
excesses at the top and helping everybody else.
Coggins said Stiglitz "sees graft
everywhere" and wants to rein in the financial sector, limit CEO pay
and restore a meaningful estate tax. Stiglitz wants to help those
not at the top, especially poor people, by improving access to
education, strengthening social protection programs and removing
barriers to unionization. He says improving the ablity of poor
people to take risks will lead to a more vibrant economy.
Dean Baker, co-founder and co-director of the Washington,
Center for Economic
and Policy Research,
recommends reducing the rents those at the top receive from
government interventions and helping those at the middle and bottom
of the economic ladder.
Coggins said Baker favors helping those at the middle and the bottom
with a higher minimum wage and the reform of labor laws.
At least one study suggests inequality could
affect the long-term competitiveness of Minnesota. Coggins noted
that a 2010 PhD dissertation by Ramaprasad Rajaram at the University
of Georgia looked at the effects of income inequality and poverty on
economic growth, using 1980 and 2000 Census data from 3,072 U.S.
counties. He found that counties with lower poverty rates in 1979 grew
significantly more quickly in per capita income over the next 20
years. Similarly, the counties with less inequality in 1979 grew
significantly more quickly than those with higher income inequality in
1979. He also found that the counties that grew more quickly between
1979 and 1999 had lower poverty rates and lower overall inequality at
the end of the period.
Changes in corporate governance have led to
sharp increases in CEO-to-worker compensation ratios since 1990,
reaching a peak of 411.3-to-one in 2000. "It used to be unseemly
to take this much money from the company," Coggins said.
Part of the job and skills mismatch problem
stems from not enough financial resources going into the preK-to-12
school system. "I don't think we're doing enough to financially
support our schools," Coggins said. "We're cutting off our nose to
spite our face."
The corporate world could help the worker
shortage and the middle 80 percent of people (by income) by reverting
to paying for on-the-job training of its new and existing employees.
Coggins said companies around the country no longer think they
should have to take responsibility for training smart people for jobs
and he wondered why that has changed.
Immigration turns out to have little effect
on inequality and wages. Coggins said when immigrants come into an
area, there is downward pressure on wages for immigrants already here,
but little pressure on wages of Minnesotans who've been here longer.
There is little effect on inequality.
We need to figure out how to create an
environment where the right mix of jobs is available. Coggins
asked whether we generate a better economy by producing a
better-trained crop of students, which will make us more competitive,
or by inducing people to create good jobs, causing the economy to grow
and produce enough money to afford to fund the schools to get our
students trained. "I think we have to do them simultaneously," Coggins
said. "What policies can we adopt as a state to make those things
Using public funds or tax breaks to attract
businesses and jobs to various communities or to the state can hurt
the quality of schools, roads and other public services. "We give
them tax breaks that hurt schools' budgets," Coggins said.
There are steps state government can take to
assure more jobs in the middle and a better match between workers and
1. Do more to protect people at the bottom
from the risks they face. "That involves public services,"
Coggins said, "such as making sure people have health care, so one
unfortunate incident doesn't devastate them; making sure single moms
have access to affordable childcare; and generally protecting people
from the risks endemic to the bottom.
2. Increase funding to schools. "I
really regret that we're not spending more on schools," he said.
"There are not enough resources. The dollars per pupil are down and
the demands placed on schools are up."
The share of the economy (GDP) going into
labor (i.e., compensation) is at a record low, while corporate profits
are at a record high. Coggins said corporate profits now make up
more than 10 percent of the economy. "Labor compensation and corporate
profits have been diverging for about 12 years," he said. "The trend
is pretty steady now. I don't understand why."
A number of policy recommendations for
reducing inequality are aimed at people in the middle 80 percent of
income. Coggins said it would help "an awful lot of people" if
labor unions were allowed to be more effective, without right-to-work
laws all over the country; if the minimum wage were higher; and if
school funding were higher. He said those measures are aimed at the
middle 80 percent.
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Interview Group
includes persons of varying political persuasions,
reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
S. Adams, David Broden, Audrey Clay, Janis Clay, Pat Davies, Bill
Frenzel, Paul Gilje (coordinator), Randy Johnson, Sallie Kemper, Ted
Kolderie, Dan Loritz (chair),
Tim McDonald, Bruce Mooty, John Mooty, Jim Olson, Paul Ostrow, Wayne
Popham, Dana Schroeder, Clarence Shallbetter, and Fred Zimmerman