Wednesday, April 25, 2012

Inequality: Finance and Geography

I’ve just finished watching Jamie Galbraith’s INET talk on inequality (thanks, Yves) and was struck by his geographic discussion toward the end.  Most of the increase in US inequality in the last decade or two has been concentrated in just a handful of counties, particularly Manhattan, San Francisco, King (Seattle) and a few others.

Let’s suppose the explosion of high incomes in the financial sector accounts for about a fourth of the increased share claimed by the top 1%.  (Does anyone out there have a real number for this?)  Given geographic concentration, we should look also at the services consumed by the financial elite.  A rough law has it that the earnings of a service provider are proportional to the income of his or her clients.  A dog walker to the rich makes more than a preschool teacher in a low-income neighborhood.  We can therefore propose a sort of inequality multiplier associated with the initial bounty bestowed on those in finance: much more prosperous decorators, physicians, restauranteurs, etc.  These spillovers would be concentrated in close geographic proximity to the location of financial centers. The point is that there are both direct and indirect effects of finance’s grip on profits, much of which would not be captured by existing empirical methods.

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