Accounting for Inequality

A quick thought: what effect do accounting rules have on inequality? If you look at Gini coefficients and income shares, you see that around the early to mid 90s inequality increases. Mark to market accounting became accepted in the early 90s. It also allowed lots of firms to essentially create fictitious profits and draw bonuses based on that. Consider assets traded on OTC markets such as mortgage backed securities. These assets had no market price since they were not traded on exchanges. As a result, banks would mark-to-model, which basically means you can make up the value of these assets. So, why not lie, make them incredibly valuable and then draw a bonus based on that. Enron did it. We know that banks did it because their assets were worthless yet in the run up to the credit crisis they looked rock solid.

Essentially, a segment of the population is able to make up how much money they made and the rest of the world can’t.