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Brookings Institution: "Inequality Rising and Permanent" (so where will regeneration capital give an acceptable return?)

Link to web site

"The distinction between permanent and transitory inequality is important for various reasons.

"First, it is useful in evaluating the proposed explanations for the documented increase in annual cross-sectional inequality. 
  • For example, if rising inequality reflects solely an increase in permanent inequality, then consistent explanations would include, for example, skill-biased technical change or long-lasting changes in firms’ compensation policies. 
  • By contrast, an increase in transitory inequality could reflect increases in income mobility, driven perhaps by greater flexibility among workers to switch jobs.

"Second, the distinction is useful, because it informs the welfare evaluation of cross-sectional inequality increases. 
  • Specifically, lifetime income captures long-term available resources, and hence an increase in permanent inequality would reduce welfare according to most social welfare functions. 
  • By contrast, increasing transitory inequality would have less of an effect on welfare, especially in the absence of liquidity constraints restricting consumption smoothing.” 

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