Inequality from a trade perspective

Stiglitz news article has argued that the increasing inequalities in the U.S. is alarming, and harming the most useful resources in the country - its people. Thomas Piketty and Janet Yellen has also raised the topic of inequality onto the table. This is my reactions to the Stiglitz arguments for inequality from trade emphasized perspective.

Joseph Stiglitz argued that the most clear trend in America is the alarming expanding inequality - "concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom". It is difficult to attribute this completely to one reason that leads to the exacerbating inequality, from the global perspective however, one can find several possible sources this income inequality can stem from.

As America is well endowed with capital and America trade based on its comparative advantage, naturally the main American exports are capital-intensive goods, which benefits the capital owners. Since most capital owners in America are the richest people in the country, the international trade will benefit the richest people who are the top 1% of the population, while make the working people worse off. The reallocation and condemnation of wealth is exacerbated by the cycle in which the richest people can invest more capital and export capital-intensive goods which bring them more wealth. The globalization makes the world much more tightened in trade, which also incentivize American capital owners to more heavily rely on trade to increase welfare and income, which benefit the richest American people. Moreover, severe rent-seeking in economy makes the inequality more deteriorated -- companies use monopoly powers and CEOs use political connections to influence policies and maximize their earnings.

It is not surprising that inequality rises during economic development. Growth and trade induces rent-seeking which distort the economies, also the market plays a role in resulting in inequality - the market is influenced by policies, policies are affected by politics and government, which eventually is shaped by money. Growing inequality is not inevitable. It is argued that there are some countries that are doing better in terms of both GDP and living standards while reducing the inequalities. This inequality triggers a higher economic growth thanks to the rich and superrich and everyone can get a larger share of the economic benefits. However, while the economy is growing together, the economy is also starting to grow apart.

To resolve the inequality in the U.S. is a difficult task. Helpman in his book suggested that reducing the price of the most commonly consumed goods, are redistribute tax income to the poor is a method to mitigate the situation of inequality. This government lump-sum tax regime ensures the individuals are equally well off in the trade regime as in autarky. This lump-sum tax can also bring a budget surplus according to Dixit and Norman, a necessary condition for a policy to be implementable. With this policy in place, every individual faces in the trading equilibrium the same opportunities and tradeoff as in autarky, and therefore every individual ends up choosing the autarky consumption that yields the autarky welfare level. Compared to trading situation where the rich and superrich get the most benefit of trade, the lump-sum tax regime makes the poor people relatively better off. The Dixit-Norman policy involves substantial distortions stemming from collecting tax, which shrinks the amount available for distribution. Nevertheless, this benefit amount is large enough for people to consume more than in autarky. As this policy suggested that the tax is collected as extra amount from the trading situation, the redistributed amount is the increase in welfare compared to autarky. Thus the poor people have increased opportunities and welfare, and this welfare will additionally generate more economic growth through consumptions by the people receiving this tax transfer.

Stiglitz alarmed the U.S. for its pressing social inequality problems. I analyzed the causes of this issue from trade perspective and provided a proposal to alleviate this inequality.