As I have said before on this subject, I remain sympathetic to the idea that income inequality in the United States constitutes a problem. The degree of inequality seen now certainly doesn’t comport with my ideal version of the country, something approximating a 21st century version of Jefferson’s nation of yeoman farmers. Further, the direction in which I see the country moving, a slow but certain transition into a country of padrones and peones, the padrones largely native-born and government employees or working in industries enjoying the favor of the government, the peones a combination of immigrants and poor, frequently rural native-born, with a struggling, shrinking middle class in between is not the country in which I was born. It is a Third World parody of the United States.
However, the attempts I’ve seen at demonstrating that income inequality does, indeed, constitute a problem have been pretty feeble, relying mostly on slippery slope arguments. The proposed solutions have been laughable, in my view most likely to have the effect of creating the very conditions they’re presumably intended to prevent.
This morning Steven Pearlstein, writing in the Washington Post, considers the case that income inequality constitutes a problem:
There are moral and political reasons for caring about this dramatic skewing of income, which in the real world leads to a similar skewing of opportunity, social standing and political power. But there is also an important economic reason: Too much inequality, just like too little, appears to reduce global competitiveness and long-term growth, at least in developed countries like ours.
We know from recent experience, for example, that financial bubbles reduce equality by siphoning off a disproportionate share of national income to Wall Street’s highly-paid bankers and traders. What may be less obvious, but not less important, is that the causality also works the other way: Too much inequality can lead to financial bubbles.
The liberal version of this argument comes from former Labor secretary Robert Reich in his new book, “Aftershock.” Because so much of the nation’s income is siphoned off to the super-rich, Reich says, a struggling middle class trying to maintain its standard of living had no choice but to take on more and more debt. I have some problem with the argument that the middle class had no choice, but it’s certainly true that the middle class and the economy as a whole would be in better shape today if households weren’t burdened with so much debt.
The more conservative version of this argument comes from University of Chicago economist Raghuram Rajan. In his new book, “Fault Lines,” Rajan argues that in order to respond to the stagnant incomes of their constituents, politicians took a number of steps to keep the “American Dream” within reach, including subsidization of home mortgages and college loans. He might have added that politicians also were quick to cut taxes for the middle class even when it meant running up the national debt to pay for popular entitlement programs and government services.
I note that he makes no moral case, merely assumes that it is so. What moral case he makes relies on innuendo rather than argument. So, for example, “the nation’s income is siphoned off to the super-rich” and “the rich have used their winnings to bid up the prices of artwork and fancy cars, the tuition at prestigious private schools and universities, the services of celebrity hairdressers and interior decorators, and real estate in fashionable enclaves from Park City to Park Avenue”. This is worse than buying television sets, non-fancy cars, getting your hair done by non-celebrity hairdressers, and renting apartments how? The issues he’s worried about are only concerning if you want to buy artwork and fancy cars, send your kids to prestigious private schools and universities, employ the services of celebrity hairdressers and interior decorators, and buy real estate in fashionable enclaves. They are not the concerns of the poor.
There is an assumption there that the incomes of the ultra-rich have risen at the expense of the rest of us. That may or may not be true I think it’s far truer of the rapid rise in incomes of those with post-graduate degrees relative to those with college only or without degrees who, as I have previously documented, have seen earnings rise in greater amounts than the incomes of the ultra-rich albeit at lower rates. When you remove barriers to foreign goods while retaining them on services via credentialing, certification, and so on you convey benefits to those who provide the privileged services at the expense of everybody else, particularly those who make things and are, consequently, subject to overseas competition. That they have secured those privileges via rent-seeking is IMO a legitimate concern.
Mr. Pearlstein’s column falls short, as so many treatments of the subject of income inequality do, in proposing solutions. I look forward to his proposals.
One final word on morality. In the United States those defined as poor can make over $20,000 per year, about $70 dollars per day. In India or China the poor can make as little as $1 per day. Said another way, the gap between the poor in India or China and the poor in the United States is greater than the gap between the rich and poor in the United States. Doesn’t that mean that there is a stronger moral argument for solutions that improve the lot of the poor in India or China than for narrowing the gap between rich and poor within the United States? Let alone narrowing the gap between the ultra-rich in the United States and the rich in the United States, which is what most of the proposals for addressing income inequality I’ve seen to date accomplish.
I’ll take a crack at defining the problem, at least, and I’ll try to leave slippery slopes out of it..
Income inequality is not really one but two problems, which are only somewhat related to each other, and are really representative of other problems that we talk about here. The first problem is primarily political, the second is primarily cultural.
The first problem is that the very wealthy have an undemocratic level of influence over the political process, and in turn use that process to enrich themselves further, a cycle that necessarily reinforces itself. The Wall Street lobby and its impact on the recent financial reform bill is only the most obvious example of this; as you’ve frequently noted, the same dynamic is very much present in the healthcare system. (Please note that I’m not arguing that “more government” is the solution to this problem, just that it is a problem, and rapidly escalating upward variance in income is a major component of it).
The other problem is an insider/outsider labor market, which is defined by both cultural and educational elements. This leads to the less dramatic but still pernicious form of inequality that has become so evident during this recession, which is stratification between the upper middle, lower middle, and lower classes. So the recession has only affected upper-middle class, highly educated people in terms of their property values. It has had a far more deleterious effect on the working class who are now struggling in a persistently worse labor market. The healthcare problem shows itself here as well, in terms of its effect on wage stagnation for the lower three quintiles over the past decade.
In both cases the problem can be broadly described as plutocracy or corporatism. What brings these problems together is that they are both the result of interactions between political and market forces. Libertarians tend to cast this in terms of government interference in the market, whereas liberals tend to cast it in terms of market purchase of government. Although I’m more of a liberal than anything else, I think these phenomena are basically different ways of describing the same thing.
Dave, have you read this CATO report, questioning whether income inequality is getting worse? I think it raises reasonable questions about whether the divergence is largely the result of changes in the tax code influencing reporting of income.
http://www.cato.org/pub_display.php?pub_id=6880
Ultimately, though it raises in my mind the question of why we are focusing on income, when income is a middle class concept. The poor get transfers, the rich get property.
I don’t think the issue is so much one of defining the problem (I think we have income inequality, I think it’s worse than it was, and I think that it’s getting worse still). I think the solutions are elusive.
Education is sometimes proposed as a solution. How do we plan to reach the 50% of those in inner city high schools who drop out before graduation? I might add that I think that the payback on post-graduate degrees so often quoted is largely illusory, attributable to very high earnings among lawyers working for large law firms (which are expecting to shrink substantially in size in the immediate future) and healthcare providers.
PD:
To the best of my knowledge Ted Kennedy never proposed a tax on wealth. A tax on income is the wealthy’s method of keeping the riff-raff out.
I was responding to this: However, the attempts I’ve seen at demonstrating that income inequality does, indeed, constitute a problem have been pretty feeble, relying mostly on slippery slope arguments
I think education reform could be part of the solution to the second problem I described, but only a part. And we’ve seen little evidence that large-scale education reform is even possible. But I’m all for continuing experimentation in that field.
Like you I think, especially with regards to the second problem, that global inequality is more urgent, and addressing it will in some ways only heighten the low-flying inequality here in the US.
I am disposition ally unconcerned about the one percent of much of anything. Outliers. I am concerned though that an education-focused economy is going to be inherently less equal than one in which employment and advancement are based more on work experience and other skill sets.
Musings:
1. The phenomenon of widening income disparity appears to be numerically undeniable. Is it bad? I think at the end of the day the answer is “yes.” In the extreme we would trend toward fuedal times. Is it acutely bad. I think less so. But that observation demonstrates no insight as to what to do. And, of course, standard leftist solutions advocating just confiscating the incomes of the well off – the most successful economic engines – are absurd (and inherently cruel to the less well off; and unsustainable) on their face.
2. So what to do? Let’s come back to that.
3. “Further, the direction in which I see the country moving, a slow but certain transition into a country of padrones and peones, the padrones largely native-born and government employees or working in industries enjoying the favor of the government, the peones a combination of immigrants and poor, frequently rural native-born, with a struggling, shrinking middle class in between is not the country in which I was born.”
I find this a bit hyperbolic. Government employees are currently in clover. That’s true. But I suspect many are about to get slaughtered: abrogated pensions and lack of continued employment will result in their demise. The private sector is tired of subsidizing their inefficient asses.
Second: The country has a rich history of immigrants choosing to come here with just the clothes on their back to make a better life. Their circa 1900 poverty and income disparity stats would stink too. It seems to me the difference is the modern welfare state. Yes, many still come here with the 1900 dream. But many come to just get on the dole, because the dole is better than their home country situation. By definition, this will drag down the “poor” statistic, and increase “widening income disparity.” But I find no income disparity related moral dilemma here, other than to kick their parasitic asses out.
3. You know my views on healthcare and financial industry subsidy. One can only hope it ends.
4. So? What do we do? Everytime I’ve intoduced the notion of re-introducing price to the consumer in health care decision issue I’ve been slapped down. I think those who have done so are somewhere between delusional, ignorant or self interested. We must do it. Pensions? (SS) Raise the retirement age. Have to.
General government expenditures? Hold steady at current levels for 3 years. Deny the bleating and moaning. Businesses and households do it every day. They find the savings. Why shouldn’t governent?
Notice I didn’t touch on income, but on middle class expenditures.
I’m flummoxed on income. I know Dave has long questioned the value of higher education. I just disagree. If you are a welder, and you can’t become a welding robot design engineer, then we will have widening income disparity. If you are a low level financial number cruncher, but you can’t migrate to serious financial analysis and interpretation, we will have widening income disparity. If your sales skills stop at selling a car, but the world needs sales people to sell global information systems, we will have widening income disparity. And on it goes………
Alvin Toffler described this 40 years ago, and I took heed, and have never forgotten.
“So? What do we do? Everytime I’ve intoduced the notion of re-introducing price to the consumer in health care decision issue I’ve been slapped down. ”
Figure out a way to do it. Every time someone makes suggestions about how to do it I want to laugh, but it cuts off conversation when you do that. Most of the ideas are either excruciatingly dumb or not practical. I had lunch with our marketing VP yesterday. Our internal studies show that at best, about 5%-10% of people are responsive to anything other than location. Quality, cost, nicest staff, facility, whatever. Then, in over (wont say how much) 25 years in medicine I have had maybe 5 patients ask how much something costs. Come up with a plan that does not involve insurance. As long as you have insurance in any form, it is easy to run up costs.
“However, the attempts I’ve seen at demonstrating that income inequality does, indeed, constitute a problem have been pretty feeble”
Set the bar high enough and nothing can be proved. So, try this. Make a case why income inequality is good, the kind that we have. The kind where everyone stagnates except for those at the top. The kind with limited mobility. Explain why it would be good for our economy to have so much of our income and wealth concentrated into the hands of a few people. Why would that be advantageous for our politics?
Just a note. Florida has been experimenting with no certification sites for surgery. The death rate running 10 times higher than expected is a bit disappointing.
Steve
Drew:
I can’t speak to other states but here in Illinois either they’d need to amend the state’s constitution or the state would actually have to go through bankruptcy to abrogate pensions. The state’s constitution prohibits it.
Even if they went through bankruptcy I’m not certain they could do it. Even judges are bound by the law and the law says the state can’t reduce public employee pensions.
Disparity doesn’t (didn’t) worry me when the low quintiles were rising as well. Our condition is much worse, with the mid-to-low incomes battered in the last few recessions (with their jobless recoveries) and the rich booming.
We aren’t near a solution. Most people haven’t got their heads around the problem. They can’t see poverty and dispairity at the same time.
Or they flip out like Newt and blame the food stamps, as if we only had to stop feeding the poor to make it all right.
steve –
I think you completely missed my point. The reason that all other factors are low on the consumer decision tree is that issue numero uno – price – has been eliminated by the third party payer system. I’ll say it again, and it will probably fall on deaf ears again: health care expenditures and consumer decisions are no different than most others – they respond to price. Without a direct price/consumer decision nexus (and I’m implicitly agreeing with Dave’s historical lament: subsidy) there will be no reduction in health care expenditures unless a third party, like government, limits access or quality. Its not rocket science. So your observation that no one has questioned price is simply an obvious result of our flawed system. The “how to do it” is a rhetorical question that hides behind political considerations. But the reality of unsustainability is upon us. We can make bad policy decisions and collectively shoot our units off, or we can wean ourselves off a terribly flawed system. Only time will tell. But I have to ask a question of you, steve, is your defeatist attitude born of personal self interest, or steely eyed political observation?
Dave – I understand the constitutionality, but I’m “musing” that the public employees may have overplayed their hands. Its going to be hand to hand combat between private and public employees, played out through politics. I have a friend in CA who suggests my “musing” may not be as far fetched as you suggest. Further, and perhaps this is the more likely scenario, public employee headcount may decline precipitously. I guess I’m calling a tipping point.