ECONOMY AUGUST 27, 2010
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By most counts, the U.S. economy started growing in the middle of last year. For many Americans, though, it does not feel as if the Great Recession has ended—unemployment and underemployment are still alarmingly high, and job growth is weak. Many causes have been suggested for both the economic collapse and mediocre recovery, but one that is hardly ever mentioned is income inequality. This is a mistake. Growing income inequality in the United States and the policy responses it has spawned have done tremendous damage to our economy. And because we continue to ignore this underlying problem, the risks of our policies leading to another calamity will not go away, no matter what we do to reform the financial sector.
Since 1968, income inequality has been steadily increasing in the United States. I am not referring to the Croesus-like income of a John Paulsen, the hedge fund manager who in 2008 netted over $3 billion, about 75,000 times the average household income. I refer to a more worrying everyday phenomenon that confronts most Americans, the disparity in income growth rates between a manager at the local supermarket and the typical factory worker or office assistant. Since the 1970s, the wages of the former, typically workers at the 90th percentile of the wage distribution in the United States, have grown much faster than the wages of the latter, the typical median worker. Or consider the table below, which shows that the wages of occupation groups that are paid more than the national average in 2002 have grown much faster since then than the wages of occupation groups below the average:
Economists argue over the reasons for the growing inequality—changes in taxation, increasing trade, weaker unions, stagnant minimum wages, and growing immigration have all been flagged. Perhaps the most important, according to Harvard professors Claudia Golden and Larry Katz, is that although technological progress requires the labor force to have ever greater skills, our educational system has not kept pace by providing the labor force with greater education and skills. While a high school diploma may have been sufficient for our parents, an office worker in many knowledge-based industries today can’t get hired without an undergraduate degree. Yet, according to Golden and Katz, rates of graduation from high school in the United States have barely budged since the 1970s, and neither have male graduation rates from college. For the middle class, that has meant a stagnant paycheck and growing job insecurity, as the old well-paying, low-skilled jobs with good benefits disappear.
Politicians feel their constituents’ pain and anxiety. And they recognize that to stay in office, they have to respond in some way. But it is very hard to get at the real source of middle-class discontent by improving the quality of education. The causes of lackluster education are complex and difficult to remedy (poor nutrition and the lack of a safe learning environment just skim the surface of potential problems), and schools are especially difficult to reform because of the many vested interests that favor the status quo. Moreover, any change will require years to take effect and therefore will not alleviate the current anxiety of the electorate. What results, then, is a series of short-term policy fixes that may do more damage than good—in fact, some of these fixes helped to create the Great Recession.
Politicians are resourceful people. Their political skill lies partly in proposing solutions that keep their constituents happy without venturing into the rocky terrain of real reform. In the case of inequality, politicians know intuitively that households ultimately care most about their consumption over time; incomes are only a means to obtaining that consumption stream. A smart politician can see that if somehow the consumption of middle-class householders keeps rising, if they can afford a new car every few years and the occasional exotic holiday, and best of all, a new house, they might pay less attention to their stagnant monthly paychecks. And one way to expand consumption, even while incomes stagnate, is to enhance access to credit.
As a result, the government’s response to rising inequality—whether carefully planned or the path of least resistance—has been to encourage lending to households, especially but not exclusively low-income ones (the government push for housing credit was just the most egregious example). The benefit—higher consumption—is immediate, and paying the inevitable bill can be postponed into the future. Cynical as it may seem, recent administrations have used easy credit as a palliative to address the deeper anxieties of the middle class directly. As I argue in my recent book Fault Lines, “let them eat credit” could well summarize the mantra of the political establishment in the go-go years before the crisis.
The Federal Reserve has aided and abetted this explosion of credit. In response to the dot-com bust in 2001, Alan Greenspan’s Fed cut short-term interest rates to the bone. Even though over-stretched corporations were not interested in investing, artificially low interest rates were a boon to housing and finance. And an important benefit of an expansion in housing construction (and related services like real estate brokerage and mortgage lending) was that it created construction jobs, especially suitable for the unskilled. Unfortunately, the Fed-supported housing boom proved unsustainable, and many of the unskilled have lost their jobs, and are in deeper trouble than before, having also borrowed to buy houses that they could not really afford.
Depressingly, the policy response to the recent recession has been more of the same—tremendous government support to housing and housing loans, as well as ultra-low interest rates. Government housing policies are only delaying the inevitable adjustment in house prices (consider that whenever some support is withdrawn, as when the first-time home buyer’s credit recently expired, the housing market weakens). In the meantime, valuable taxpayer resources are wasted that could be spent on a more enduring fix. It would be better for the housing market to find its equilibrium quickly, with the government’s role focused on facilitating the adjustment process—for instance, easing the process of renegotiating underwater mortgages.
Similarly, the Federal Reserve’s ultra-low interest rate policy is having little useful impact on unemployment because the interest-rate sensitive sectors of the economy such as housing and automobiles have been over-extended by the last bout of monetary stimulus. It is unlikely the Fed will kick off a fresh housing or commercial real estate boom. Moreover, overleveraged households are trying to rebuild savings, and low interest rates are unlikely to tempt them to splurge once again on new cars or kitchens, and even if they were, these kinds of folks might have trouble getting a loan from local banks that have become far more circumspect on retail lending.
What is the alternative to creating new mountains of consumer debt? Instead of looking for ways to resuscitate spending by those who can ill afford it, and creating unsustainable bubbles in the process, we need to think creatively about how Americans can acquire the skills they need to enhance their incomes. The central problem is that too much of the U.S. workforce is unqualified for the good knowledge-related jobs that are being, and will be, created by its economy. Even though the unemployment rate is high across the workforce, it is much higher among those without college degrees.
Upgrading skills and education, however, is not easy. Retraining programs have a checkered history. And not all degrees are equally useful. Moreover, it is incredibly hard for a 40-year-old single mother of two to go back to school. But while realizing there are no quick fixes, we should be using resources during this tepid recovery to help out-of-work Americans, and those still in school, to build better futures for themselves. Active labor market policies—econo-speak for the kind of policies operative in Scandinavian countries that help the unemployed train for new jobs and then support them while they search actively—are well worth examining. So are new scalable technologies that reduce the cost of university education or skill acquisition. We also need to encourage stronger alliances between schools, local authorities, and businesses to create comprehensive learning programs whose end product is employable youth. Fortunately, there are many experiments and pilot projects already underway across the country. We need to learn quickly from them and scale up those that are most promising.
If the United States does little to address inequality, and instead repeatedly tries to stimulate its way out of trouble, government and household finances will get even more fragile. Inequality, as studies suggest, will likely also cause U.S. politics to become even more fractured and polarized than it already is, making it harder for our politicians to make the right kinds of legislative decisions. And a slow-growing, politically-fractured United States that agrees only on penalizing the foreigner, could turn its back on openness and trade, attempting to protect domestic jobs even while hurting growth domestically, and elsewhere. Not just the United States but the entire world would be worse off.
Here’s what I’d like to see instead: the United States improving the capabilities of all of its working-age population and then providing exactly the creative and knowledge-based services that growing emerging markets need. As the demand in these markets expands, the dynamic U.S. economy will grow alongside, banishing current fears about unsustainable debt and unfunded entitlements. But to reach this future, America needs to accept it has more than a cyclical problem. It has to give more Americans the ability to compete in the global marketplace. This is much harder than doling out credit or keeping interest rates really low, but it will pay off in the long-run.
Raghuram G. Rajan is professor of finance at Chicago’s Booth School and author of Fault Lines: How Hidden Fractures still Threaten the World Economy (Princeton University Press, 2010).
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31 comments
" I refer to a more worrying everyday phenomenon that confronts most Americans, the disparity in income growth rates between a manager at the local supermarket and the typical factory worker or office assistant. " I really can't see why the inequality amongst Main Streeters should deserve more attention than the inequality between Wall Streeters and Main Streeters. Perhaps it is this second one that's fueling the first one. And if it is so this article kills the main character of the story on the second paragraph. That admitting that enormous resources (public and private) are being channeled to Wall Street, and that society in general does not really benefit from them indirectly. At least it has not been benefiting, no matter what supply siders, including coveted ones, are still saying. And if it is so, the disproportional alocation of resources in Wall Street is damaging the possibilities of improvement (individual and collective) in Main Street, fuelling overall inequality. Perhaps this article -- even if a very serious and thoughtful one -- is still too much influenced by two myths that are still dominating Economics 101: the supply side myth, on the one side, and the myth that disparaties in education are the only factor determining inequality. In what concerns American inequality, I'm affraid such disparities are not the only factor, not even the predominant factor.
- Ideaot
August 27, 2010 at 4:25am
Of course, the title of the story ("Let them eat credit") is an anthological one. Really nice. But in order to understand the malevolous context, one has to understand that "to make them eat credit" is part of an overall scenario in which the privileged chaste (Wall Streeters) and their high priests (Economists) convinced the ruling class that, within supply side, a fair distribution of goods such as housing and education would be produced by "debt programs for the poor" with the privileged chaste getting the inherent interests (and creating derivatives on them). Indeed, the privileged chaste and their high priests convinced the ruling class that any benefit to society as a whole necessarily had to be mediated by them, involving the perpetuation (and even the increasing) of their disproportionate advantages. Obama's unsustainable health care program is still very much under that ideological spell. Not to mention his financial "reform" program.
- Ideaot
August 27, 2010 at 4:40am
One could make the case that the only reason the US economy hasn't been totally abandoned by the investor class is due to the US's relative political stability (as compared to obvious examples, such as China, but also less obvious examples, such as India); hence, the Fed's fixation with sustaining the value of the dollar and minimizing expectations for inflation, rather than reducing the rate of unemployment. When historians write the obituary of the American economy, I suspect much of the attention will focus on the the inadequacy of the education system and the inability of the American worker to adjust to the world economy, but that would confuse cause and effect. For if blame (if that is the correct term) is to be apportioned, the political structure should be at the top of the list. Yes, that which provides the stability to sustain the status quo also causes the inflexibility to adjust to a changing world economy. What the founders got wrong was used as the title of a book published several years ago, and who knew then just how accurate the author was. With a legislature (Senate) that is unrepresentative of the population and unable to respond to obvious challenges, a federal system that diffuses both authority and responsibility, and an electorate that prefers divided government, is there little wonder that time would eventually run out. The author of the TRB column in the 1970s endlessly promoted the adoption of a parliamentary system as a way out of the gridlock that persisted as the result of divided government at the time. His essays are as timely today as they were 35 years ago.
- rayward
August 27, 2010 at 11:34am
The two data points presented are very misleading. Why not present a longer term graph to try and make your point? Probably because then it would have been viewed as not so interesting. If you don't own the book "The state of working america" then get it. It's an excellent source of data. I don't always agree with the analysis. But the data is excellent. Link 1) below shows the hourly wages of for production/non-supervisory workers. I think you'll see in that graph that in 2007 wages were higher than they'd ever been, and up quite a bit since the mid 90's. So we are paying skilled workers more than ever. The trend there is strong, and very clear. The "problem" with wages seems to be how strongly they are tied to skill and education, and the fact that many of these jobs are moving away. So, if you fix the "moving away" part, then we'd expect the wage growth to return. How do you fix the moving away part? Intel's CEO just told people at a dinner the other night that it costs him a $1B premium to build a fab plant in the in the US compare to another country. That 1 billion extra dollars on a $4 billion dollar factory. And 90% of that money, he said, was tied up in regulations and paperwork. So if he builds in Taiwan, he saves a $1B in construction costs. If he builds in the US, he pays $1B premium for red tape. What would you do? And this current climate is pushing out big businesses with a vengence. Expect further declines. Afterall, this is what most here want, eh? It's working. Congrats. 1) http://www.stateofworkingamerica.org/tabfig/2008/03/SWA08_Chapter3_Wages_r2_Fig-3B.jpg This text is to make sure the link doesn't get eaten. This text is to make sure the link doesn't get eaten. This text is to make sure the link doesn't get eaten. This text is to make sure the link doesn't get eaten. This text is to make sure the link doesn't get eaten.
- seattleeng
August 27, 2010 at 11:59am
"we are paying skilled workers more than ever" At an absolute level (in adjusted 2007 dollars, it seems), yes, but check out the annual rate of growth: http://www.stateofworkingamerica.org/tabfig/2008/03/SWA08_Chapter3_Wages_r2_Table-3.4.jpg The annual growth rate in the wages for production workers was at its highest point in decades during the late 90s, and has since plummeted, so that the annual growth rate since 1979 is now on the wrong side of zero. But in any case, that's missing the point; the topic here is income inequality. Absolute wages are high for just about everyone, but for the wealthy, much, much higher. See this chart from your source: http://www.stateofworkingamerica.org/tabfig/2008/03/SWA08_Chapter3_Wages_r2_Table-3.5.jpg Here, we see that the income group roughly corresponding to the group shown in your chart -- those whose wages were in the $16-$17/hour range between 1979 and 2007, or the 60th percentile -- experienced a mere 2.7% in growth of wages during the Bush years, roughly a third of the growth for those top 10 percent (7.3% growth). Compare this to the period 1995-2000, where those in the 60th percentile saw 7.7% growth in wages, and those in the 90th saw 8.7% growth -- a much smaller gap. At least the Dubya years were kinder to the 60th percentile than the Reagan years, during which time the 60th p. saw a mere .1% growth, compared to the 6.7% growth of wages for those in the 90th percentile. Or, see this one, which takes taxes into account for the period 1979-2005: http://www.stateofworkingamerica.org/tabfig/2008/01/22.jpg Even leaving out the astounding growth in income for the very wealthiest 1%, the wealthiest fifth of Americans have, since 1979, seen a growth in income of 80%, after taxes, where as the next fifth down only 29%. Perhaps red tape does make it cheaper to outsource jobs overseas, but it's not hurting the income of the very wealthy, and we might expect those in the income brackets depending on those jobs to have done worse under Clinton-era regulatory schemes, but this is not the case. But thanks for the link to this valuable source of data.
- frippo
August 27, 2010 at 2:51pm
This problem is far, far worse than described here. Even if we knew what programs were needed it would be nearly impossible to put them in place. Because the populace doesn't read (anything), they are very unlikely to understand and agree with the right solutions. Obama tried the "trust me I'm a smart guy" routine and while I'm persuaded two few others are. The right would go into over-drive to distrort the truth, making it even harder to reach a national consensus. The public makes discisions by listening to the person standing next to them, informed or not. Too much of what they hear is totally wrong because it never came from a credible source to begin with. (My mother and her friends think Rush Limbaugh is a reliable source of information. Another relative sent me an article during the health care debate that aided in forming their opinion - it was mass emailed from the Heritage foundation.) Too few people reading leads to too few people thinking. This will take a class war to solve. I'm willing to be my entire life savings that investing in companies that create gated- communities is my ticket to the "good life." It's kind of like shorting mortgages. lc
- leftcoast
August 27, 2010 at 2:57pm
I do not understand how people could argue that inequality is a good thing. Yet, that argument has been leveled at Obama: He Wants To Make Everybody Equal. And this is bad why? Seriously, I'd like to ask people like seattle why they think inequality is so good? Do you guys honestly believe you are de facto superior because you have more stuff, which because of the system is becoming even more stuff? Whereas MOST of us are increasingly poor?
- Sophia
August 27, 2010 at 3:07pm
seattle, you're peddling the same line here as over at Judis's piece. You know what? You're right, real wages increased under Bush at all income levels. But you're missing the point--a point that was telegraphed in the headline of this article--it's not that incomes are not increasing (though I'd be interested to see what effect the recession is having on these numbers) it's that at all lower income brackets--the lower 95% or so--income growth under Bush, as well as under Clinton, was anemic compared with growth in the economy and with income growth at the top. Productivity increases, but the only folks who reap the benefits are the fat cats at the top. I'm knowledgeable enough to say whether this growing inequality--an inequality whose existence you seem inclined to do your best to ignore--is wrecking our economy. I do however argue, that it is threatening our democracy. I am an American living in Australia. A few years ago I lived in southern Africa for a while. I make it home to the States one or two times a year usually. The USA ranks 6th on the IMF's and World Bank's lists of countries by per capita GDP with 46K or 48K intl dollars per head. Australia is down the list a few spaces with per capita GDP of 36K or 38K per person. Namibia, where I lived in 2007, is way down the list with about 6.6K per head (interestingly that places it on par with China). But here's my point: when I visit my homeland--I was most recently home in July and had a good drive around the northeast--I'm continually struck by how, compared with Australia, where you will recall there is a significantly lower per capita GDP, the USA looks like shit. People look poor and unhealthy. The building stock is falling apart. The roads are potholed. In sum, compared with Australia, my American homeland reminds me of Namibia, where such wealth as gets generated remains in the hands of the few. So if you want to continue to indulge yourself in your fantasy of market rationality--as opposed to the truth of oligarchical manipulation--go right ahead. But don't be surprised as America comes to look more and more like Russia, Nigeria and Brazil where glittering skyscrapers tower over slums and a neglected, garbage-strewn countryside where bridges fall down, babies die of preventable disease and where the only viable business is the manufacture of methamphetamine.
- AaronW
August 27, 2010 at 5:25pm
I meant to write, 'I'm NOT knowledgeable enough to say...'
- AaronW
August 27, 2010 at 5:26pm
Wealth is created by those who create economic value: - Possess valuable skills - Are extremely productive - Invest and assume risk Given that liberals are genetically pre-disposed to NOT create economic value -- this is a problem. I propose creating a Moonbat Relief Fund for liberals who can't compete. I will contribute $10K myself. In return moonbats will cease whining and wrecking the economy Thoughts?
- mr_rationale
August 27, 2010 at 5:48pm
That $1B "cost of doing business" in the U.S. also means that those manufacturing jobs stay in the U.S. employing people who can actually afford to buy the products that Intel makes. I very much doubt that the Chinese worker making $3/day with no benefits (health, IRA, vacation) what-so-ever is not buying the newest laptop with an Intel chip. The position that over-regulation "takes jobs away" from Americans and "forces" companies to relocate is a false argument. If that were the case then Ford Motor Company would have left America all together. Regulations ensure to a certain degree that the public welfare is not overburdened by negligent business practices. The problem with stagnating wages across the board for those not in the top 10% is that Americans are not willing to invest in Americans. People contribute to their own economic decline by purchasing goods and services from companies that divest themselves of investing in America. There's a difference between operating in the U.S. as a business existing to exploit purely for profit margin and companies that are built to provide not just a product or service but also participate as positive entities in the communities in which they operate. A person's worth - economically is as important as that person's social worth in a community. And by that I mean the person feels they are a contributing member of society. Given that conservatives are genetically pre-disposed to NOT add value to society and instead act as community resource-sucking parasites - this is a problem.
- singlspeed
August 27, 2010 at 6:32pm
mr rationale, your continual use of the term "parasites" to describe large numbers of your fellow citizens has troubling totalitarian overtones. It is not far different from terms like "vermin." What do we do to actual parasites and vermin? We exterminate them. Do you propose that we exterminate those members of our society who are, by your cockeyed lights, insufficiently productive? I'm sure that you will respond, "Of course not. There you liberals go again, accusing me of being a closet fascist. I'm just trying to throw some incendiaries at this here boring-ass, liberal-infested web forum." But even online, your words have consequences, and connotations can be as important as denotations.
- AaronW
August 27, 2010 at 9:25pm
Aaron writes: "It's not that incomes are not increasing (though I'd be interested to see what effect the recession is having on these numbers) it's that at all lower income brackets--the lower 95% or so--income growth under Bush, as well as under Clinton, was anemic compared with growth in the economy and with income growth at the top" But I ask for the umpteenth time: Why do you expect our high school drop outs that smoke pot to get the same % raise each year as our doctors that invent a new drug? You do not, right? And you expect the guy that cures cancer should get a really sweet raise, right? Now, what about the guy that practically cures cancer year after year...and the guy that smokes pot year after year? Do you really expect their wages to track each other? Of course not. That is all you are seeing here. The middle 20% get a raise 1% higher than inflation, the top 20% get a raise 2% higher than inflation. That happens year after year. And over time, the top 20% accumulate more of the wealth. Why is that surprising to you? It's very simple math. Do you tip a waiter that does a crappy job the same as a waiter that does an awesome job? Do you reward equally for great and crappy haircuts? Do you go back to a doctor that misdiagnoses you all the time? No. This is now different.
- seattleeng
August 27, 2010 at 10:59pm
Sophia writes: "I do not understand how people could argue that inequality is a good thing." Inequality is not what is being discussed here. What is being discussed is whether or not we should reward those that can do some unique more than those that cannot. And I suspect you do this many times per day in your daily routine. This is no different.
- seattleeng
August 27, 2010 at 11:01pm
frippo writes: "But thanks for the link to this valuable source of data." Your welcome. As I noted, it's a great book. And then: "But in any case, that's missing the point; the topic here is income inequality." But income inequality is the BYPRODUCT of paying more for something that is unique. It is unavoidable. Let's say you own a business. You have two employees. One clocks in every day 2 minutes late, and leaves 5 minutes early. He never stays if work is backed up. He claims he's always busy on the weekends, and in 10 years has never been able to help when you are in a bind trying to get orders out. He's a bit grumpy, and rolls his eyes when asked to do a task. You've heard him tell other employee's that you are a jerk. And you think he might have stolen some merchandise, but you aren't sure. Another employee is always a bit early, willing to stay late, and never minds the time and a half on the weekends. He's always cheerful and eager to help, the other employees say he's great for morale. You heard him telling the grumpy guy that you were an OK egg, he just had to learn how to work with you. Now, it's time to give raises. You've been hearing that the great employee is thinking of leaving. Do you give them both the same raise? If you do, you are a fool. I suspect you will give the harder worker a sweeter raise, right? Now do that for 20 years. And along the way, make the good employee a manager, and then a 5% partner in your business. Congratulations. You just decided the rich get richer.
- seattleeng
August 27, 2010 at 11:12pm
Singlespeed: "The position that over-regulation "takes jobs away" from Americans and "forces" companies to relocate is a false argument. " How about a link to hard data instead of several paragraphs of rambling.
- seattleeng
August 27, 2010 at 11:18pm
"But I ask for the umpteenth time: Why do you expect our high school drop outs that smoke pot to get the same % raise each year as our doctors that invent a new drug?" Well, seattle, it's like this, where you and every other economic libertarian goes off the rails is in your invalid assumption that the free market rewards individual workers/producers according to their just deserts. This is idea that captains of industry and finance are so much more valuable to society than lowly service workers as to justify hundred or thousandfold differences in compensation is pure fantasy. How do you assign this value anyway? What does it look like? Value, I mean. How do you measure it? You can't. You, of course, will answer that the free marketplace measures value, that is that the marketplace assigns value to individual's labor. But this presumes that the market is free, and it isn't nor can it ever be. The marketplace is inevitably a rigged game. Now, being a medical doctor myself, I had to laugh at your choice of the cancer-curing medico as an example of someone who "deserves" a bigger piece of the pie. Never mind that in reality, though they're doing all right, researchers who work out on the cutting edge of biomedical science are not pulling down anything close to the biggest paychecks our economy cuts, you could quite logically argue that a cutting edge researcher should be payed only enough to make her happy to keep doing cutting edge research. To the degree that you pay her more, you're wasting money. And tell me this, seat, how to you account for the financial engineers who bundled and dealt in sub-prime mortgages? What value did they create? Did they "deserve" their massive compensation? But I'm getting off track myself. Your fundamental problem is your whole notion of just deserts. That's a woefully slippery concept upon which to base a system of wealth distribution. I say that pot-smoking high school dropout motel desk clerks deserve a proportional share in our growing economy not because they deserve it, but because to give them such a "fair" share makes our country a better place to live in. I mean, why did the desk clerk drop out of high school in the first place? And why does he smoke so much pot? Is it really because he's intrinsically a moronic loafer, or might it be because our society, as currently organized, has offered him little in the way of educational and employment opportunities such that his decision to drop out and to continue dropping out by getting high is in some sense rational? It's a simple question: would you rather live in Australia, where income inequality is kept within bounds by means of progressive taxation and a high minimum wage and where there is lots of public spending on free universal health care, on education and on infrastructure, or in Namibia, where a few wealthy people (And are they wealthy because they "deserve" it? If so, how come they're all either white or personally connected to the Owambo/SWAPO power structure?) live in mansions and drive BMWs while 56% of the populace scrapes by on less than $2 day, facing early death from HIV and TB? Right now the USA is trending towards the latter, and if we followed your prescription, America will get there all that much quicker.
- AaronW
August 28, 2010 at 12:03am
Aaron: " How do you assign this value anyway? What does it look like? " You hang out a shingle and offer to paint a house for $2000. Or do a liver transplant for $200,000. And if someone accepts, your price was about right. If they don't, your price was too high. How else would you expect to try and set prices?
- seattleeng
August 28, 2010 at 2:37am
Aaron, see my note to Frippo about you owning a business, and you have two employees. Please tell me how much of a raise (in percent) you'd give each worker.
- seattleeng
August 28, 2010 at 2:38am
seattle: "You hang out a shingle and offer to paint a house for $2000. Or do a liver transplant for $200,000. And if someone accepts, your price was about right. If they don't, your price was too high." I predicted such a response. You will recall that I predicted you would reply that labor's value is assigned by the market. But for this to work, the market must be perfectly free and perfectly efficient, and such a free and efficient market does not and cannot exist. Individuals and special interest groups inevitably will use every bit of leverage to which they can lay hand to rig the game in their favor. It is the duty--or at least it should be the duty--of a democratically elected government to mitigate such special interest corruption. I'm going to return to my Namibia example. In Namibia, where, as I said, 56% of the population subsists on less than $2 US a day (and 35% on less than $1 a day) despite a per capita GDP of close to $7000, you can get your house painted for peanuts. The only people painting houses are guys who live dirt floor "zinkies"--windowless boxes made of corrugated steel--and dump plastic buckets full of their shit into a stream of raw sewage running downhill alongside. You could easily round up a crew of ten men, pay them $5 each and get your house painted in two or three days, so long as you provided them with brushes and paint. Truth be told, you'd have to spend severalfold as much on paint and tools as you would on labor. So, what do you reckon? Is $50 the "value" of getting your house painted? In Namibia $50 is the price you pay, but is that what getting your house painted is truly worth? It's the price you pay because the government, the tour operators, the mining companies and the whole ugly back-history of apartheid South-African rule have created a set of labor market conditions where more than half the population can earn next to nothing and will work for next to nothing because next-to-nothing will at least put some cornmeal in the pot to boil. That's the ugly reality of Namibia's economy. The whites and international corporations control the means of production, and they pay workers shit wages because they can, because that's the way it's always been, because the workers have no other choice, and because moneyed interests buy off the SWAPO government funding a whole system of patronage for Owambo tribesmen. So, you'll say, "Oh, well, that's Namibia. That's a corrupt system. Things aren't like that over here in America. Here our labor markets are free and fair." Bullshit. The game here isn't as crushingly unfair as in Namibia, but still it's rigged. The conditions that underlie the market are set through negotiation and legislation and we try to make them as fair as we can--it's called politics--but the idealized market that can find some transcendent "value" for something like a house painting job is a nonsense. It doesn't exist. And the corollary to this is that when a person in power starts arguing that growing income inequality is not a problem so long as it is the result of market forces, that the Invisible Hand will point to the true, transcendent worth of every worker, almost invariably it turns out to be a smoke screen for some deregulation scheme or regressive tax-cutting measure that invariably benefits those with access to money and power at the expense of those with neither.
- AaronW
August 28, 2010 at 7:50am
AaronW: "...but the idealized market that can find some transcendent "value" for something like a house painting job is a nonsense. It doesn't exist. And the corollary to this is that when a person in power starts arguing that growing income inequality is not a problem so long as it is the result of market forces," No saying it's not a problem. But the inequality gap is present in EVERY country. Pointing it out is like pointing out the sun rises every morning. There's nothing sinister or odd about it. You are aware that Denmark has even more wealth concentration than the US. And France, Sweden, UK, etc, are very close to the US. I'll say it again: If you believe rewarding good behavior is a good thing, then a wage gap will materialize and widen over time. It is a mathematical certainty. The entire world has tried many things, and free markets are the best solution for this. Not perfect. But nothing works better. If it does, cite it. Now, the data shows that very clearly the gap is related to skill and education. There is really no ambiguity there. Knowing that, what do you propose should be done?
- seattleeng
August 28, 2010 at 11:05am
Seattle: I've never been to the Pacific Northwest, so maybe there 90% of all wage-earners are shiftless potheads, although gosh, that would be surprising. But hey -- you always talk about how engineers are poorly compensated compared to others; presumably this is for the same reasons?
- frippo
August 28, 2010 at 3:18pm
"You are aware that Denmark has even more wealth concentration than the US." By what definition? Have you heard of a Gini coefficient? The Gini coefficient is a statistical measure of the inequality of a distribution, often used for assessing levels of wealth and income inequality. Denmark's UN Gini coefficient is 24.7. The USA's is 40.8. What's more, Denmark has a robust (though admittedly shrinking) social safety net so that life for the poorest in Denmark is by far less horrific than for the poorest in America. You're fixated on the idea that income is or at least should be distributed by reason of merit. Why should it be? I certainly agree that there should be a range of incomes, that doctors, scientists and business managers should be paid more than burger flippers, but how you make those arrangements, how you regulate your economy doesn't have one damn thing to do with who DESERVES to get paid more. Rather it has to do with what kind of society you'd prefer to live in. BTW, Namibia's Gini coefficient is 74.3, the worst in the world, thus it provided me with an extreme example of income inequality. Plus I happen to have lived there.
- AaronW
August 28, 2010 at 4:03pm
"Knowing that, what do you propose should be done?" Reinstate a truly progressive system of taxation so that the wealthiest among us a much larger proportion of their income as taxes--say at levels that obtained in the USA in 1960--then use that increased revenue to support education, true universal health care, and infrastructure, including things like fiberoptic broadband networks, a smart electricity grid, and high speed rail.
- AaronW
August 28, 2010 at 4:09pm
Aaron writes: "Reinstate a truly progressive system of taxation" You are aware the US has the most progressive taxes among all OECD nations already, aren't you? See link 1. Tax "Progressivity" considers two factors: How much the wealthy pay, and how little the middle class pays. Our middle class pays a pittance compared to the EU. Since our wealthy already carry far more of the tax burden than the wealthy in Europe, and since we already have the most progressive tax system in the world, if you want more taxes, the only place to get it is from the middle class. You think there's more to be had from the wealthy, but really there's not. Sure, you can take it, but it won't change our deficit appreciably. To change that, you need to dial up taxes heavily on the middle class. Just like the EU 1) http://www.taxfoundation.org/blog/show/23856.html
- seattleeng
August 28, 2010 at 9:07pm
Aaron asks: "By what definition?" See table 9 in link 1. Specifically, I'm interested in what % of the wealth is held by the top 1%, 5%, 10%, etc. For the holders of the top 10% of the wealth, it ranks Denmark, Switzerland, US, France, Sweden, UK. Norway. We are so close to the EU here.... And then he asks: "You're fixated on the idea that income is or at least should be distributed by reason of merit. Why should it be?" I'm advocating income should be distributed based on how many people CAN do the job, how many people WANT to do the job, and how much someone VALUES the job. We can call this merit if you wish. You need an existence proof for your your argument. Can show a society in which people are rewarded for something other than merit, and it's working well? Aaron writes: " I certainly agree that there should be a range of incomes, that doctors, scientists and business managers should be paid more than burger flippers, but how you make those arrangements, how you regulate your economy doesn't have one damn thing to do with who DESERVES to get paid more. " OK, so how much should the best burger flipper in the city of Denver make, and how much should the best osteopathic surgeon make in the city of Denver? Or pick your own city. Ballpark numbers. I'm really curious with what you come up with here. 1) http://www.iariw.org/papers/2006/davies.pdf
- seattleeng
August 28, 2010 at 9:27pm
Seattle, the data from Denmark in the table you showed are from 1975. Hardly relevant. And anyway, a more usual measure of income inequality is to look at the ratio of income earned by the top 10% or 20% to the bottom 10% or 20%. By this measure Denmark is nowhere near as unequal as the USA. Regarding the relative tax progressiveness of the USA vs the rest of the world, well I'm starting to lose interest in this argument. Maybe in some sense the US does have a fairly progressive tax schedule. Nevertheless, top earners are undertaxed in the US. I'm a doctor living and working in Australia. My wife is a doctor too. We are in the highest tax bracket in Australia and our marginal tax rate is around 50%. The highest tax rate in the US is 35%. Wasn't always that way. In the 1950s the top tax rate was almost 90%. As for who should get paid what, I don't propose to set wage targets. What I propose is (1) that we acknowledge that growing income inequality is a problem, (2) that we work to enact broad policies that steer our economy in such a direction that the income gap will tend to narrow (such policies would probably best be directed at improving opportunities for the masses at the bottom, both through education and through the creation of new industries) and (3) that we stop allowing the richest 1 or 2% of our population to hoard such a significant proportion of our economy's wealth. This will be my final post in this thread. I think it's just the two of us, seat, and I'm getting bored.
- AaronW
August 29, 2010 at 8:10am
Don't give up Aaron, we are close to a breakthrough here. I can here the gears turning all the way from Australia. Who gives a crap how many are reading? It's all about one conversion at a time. Plant the seed. Pound them with data. Force them to question their fundamental bedrock assumptions. And from time to time, get corrected, get smarter, see things in a new way. That's why I love TNR. But this article was more like HuffPo, where a limited set of data is used to pound the ideological drum. The data the author presented here was awful. 1. Yes, the US does have one of the most progressive tax schedules in the world. OECD says so. 2. Despite, the 1975 data point on Denmark (good catch), you can see in the table recent data on Sweden (2002) that shows the top 10% have 59% of the wealth, very close to the US. What you claim is a problem in the US is present everywhere to almost the same degree 3. Yes, our GINI coefficient is out of whack. BUT it's not because we treat the poor any worse. It's because we let the wealthy keep more. That is what drives our innovation and GDP growth engine. Look at link 1) below. It shows the income dispersion in various countries for the bottom 10% and top 10% households. You can see our bottom 10% are right there with Canada, Ireland, France. We have not penalized the poor. But we have rewarded the top 10% better than any other country our there. What is wrong with that? 4. Our top 1% pay an effective federal tax rate (not marginal, but effective) of 31.4%. On top of that, they pay an effective state/local/sales/etc taxes of nearly 10%. In cities like NYC, it's very easy to see marginal tax rates overall approaching 60%. We are not undertaxed. 5. If you believe a doctor is worth more than a burger flipper, then a growing wage gap is a mathematically certainty. Whining about it is silly. Go to the source: Education. Anyway, I enjoyed the discussion. 1. http://www.stateofworkingamerica.org/tabfig/2008/08/15.jpg 2. http://www.cbo.gov/ftpdocs/88xx/doc8885/12-11-HistoricalTaxRates.pdf
- seattleeng
August 29, 2010 at 1:06pm
Seems to me the "gap" is largely supply and demand. Over the last three decades, the labor available to western capital has exploded (China, India, South America, etc). Labor is in glut relative to capital so it's price falls. Education can make some labor more valuable to capital, but the U.S. is increasingly of ethnic groups which have done poorly in academics. I doubt money alone will soon solve any of this.
- karlwk
August 29, 2010 at 3:19pm
I lied. I'm back. Seattle, what with your piecemeal approach to this subject, drawing on isolated data to answer every little point, your arguments slip into incoherence. In your last few posts you have argued that in terms of income (wealth?) inequality that Denmark and Sweden are as bad as the US, that the USA has the one of the most progressive tax systems in the world, and that given a system that rewards some workers with higher pay than others, growth in income (wealth?) inequality is a mathematical inevitability. At risk of repeating myself, let me answer these points one at a time, not with data gleaned from the interwebs but with thought. Regarding Scandanavian wealth concentration, my instinctual answer is "So what?" I'm willing to accept that in Denmark and Sweden the richest 10% control more than half the wealth, similar to the USA. (Though I'd me interested to see how the top 1% or 0.1% compare with America's.) What's germane to this discussion is how the top compare with the bottom. You might even be correct that in terms of pay, the poorest in Scandanavia aren't much better off than the poorest in America and the reason our that Gini coefficient is so much bigger than theirs is because our rich are so much richer, though I'm skeptical. But to assert that in terms of access to goods and services, things like health care, medication, childcare, public transportation, and education, the poor in Scandanavia are not far better off than those in my hometown of Hampton, Virginia, you must have your head in the sand. Regarding America's tax progressivity, maybe I should instead have emphasized the absolute level of taxation, which is far too low. For example, you could have a "progressive" tax system where the majority pay no tax at all and the rich pay 10%. It's just too little. Moreover, Setting America's highest bracket at $250K is silly. No reason that there shouldn't be $2M and $10M brackets with even higher percentages. And ahead and drink that supply-side Koolaid where you think that equity investment on the part of those super rich is the main driver of increased GDP. But that's an argument for another time. So are you saying that mathematically speaking income distributions MUST become unequal? How so? I mean, these things can be engineered. For example a government could create a robust minimum wage. And if you broaden your thinking to include non-pay income, such as the services I mentioned above in my paragraph about Scandanavia, then it is eminently possible for a government to tax the rich and redistribute this wealth downward.
- AaronW
August 29, 2010 at 5:06pm
Aaron: "So are you saying that mathematically speaking income distributions MUST become unequal?" No, I'm saying that if you consider a the best burger flipper in the world and the best osteopathic surgeon in the world, their salaries will diverge no matter what. The best burger flipper in the world will never bring enough value-add to a restaurant to warrant a sizable increase beyond COLA, while the best osteopath might indeed be a huge pull for a hospital, and thus they would be inclined to give him a raise in excess of COLA. NO, surprise, right? But if that happens, then boom, you have diverging salaries. And ultimately, diverging wealth. That's all we're seeing. But it's readily understood in the micro cases, why is it a surprise in the macro case? Aaron: "Regarding America's tax progressivity, maybe I should instead have emphasized the absolute level of taxation, which is far too low." Perhaps. But taxation pays for government. So are you saying that the size of government is too small? The US gov is nearly 40% of GDP (fed, state, local). UK is about 43%. France is about 52%.
- seattleeng
August 30, 2010 at 12:34pm