Income Inequality XI

Kevin Drum pooh-poohs one explanation for stagnant middle class income and suggests several others:

As it happens, swelling health care benefits aren’t enough to account for more than a small amount of middle class income stagnation over the past three decades. The arithmetic just doesn’t work out. But Matt is right that the weakest part of my story is coming up with a good causal account of how the top 1% sucked up so much money from the middle classes. But I think it’s a mistake to get overly wonky and look for some kind of geometric proof of how this happened. You’re just never going to get that. You’re never going to be able to point to a specific policy at time X that caused a specific transfer of income share at time Y.

Still, I don’t think that a plausible story of causation is really all that hard. First, take a look at middle class income stagnation. What caused that? Matt already pointed to one cause: monetary policy since the late 70s that’s kept inflation low at the cost of keeping labor markets persistently loose. To that, I’d add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class.

much of which I agree with and then continues with something that I don’t agree with at all:

Now, if these policies hadn’t been in place, middle class wages would likely have grown at about the same rate as the overall economy—just as they did in the postwar era. But they didn’t, and that meant that every year the money that would have gone to middle class wage increases instead went somewhere else.

I think that this is highly suspect. It reeks of the “lump of labor fallacy” or something very much like it. I think it’s far more likely that, absent certain policies to which I’d add healthcare policy, the incomes of people in the middle quintiles would have remained stagnant, so would those of people in the top quintile, the incomes of those in the top 1% of income earners would have grown less, and the incomes of the topmost .1% of income earners would have grown just about as fast.

As I see it there are several telling questions in discussing income and income inequality:

1. How do you calculate income?

   In my view it makes a good deal more sense to talk about total compensation rather than just wage income. When you take total compensation into account, I think it reduces the “stagnation” argument considerably and total compensation certainly tells an interesting story about the changes in the lives of the poor, the working poor, the middle income, and those just above middle income. It doesn’t say much at all about why the incomes of the very rich are so high.

   And then there’s the question of changes in what people buy, an even thornier problem.

2. What changes in income have been the consequence of policy?

   Kevin’s remark addresses this to some degree. I think that changes in trade and immigration policy over the period of the last forty years have tended to reduce the income of the lowest income earners (while increasing their buying power) and that changes in technology have reduced the income of middle income earners over the last twenty years. This, too, is the result of policy but policy at another remove.

   I’m more skeptical about unionization than Kevin is—I think that as long as we’re not willing to build a wall around the United States that what’s going on in the rest of the world will leak through to us and you can’t pay unskilled and semi-skilled labor here an ever-rising multiple of what unskilled and semi-skilled labor is paid elsewhere. How does the increasing reliance of organized labor on public sector workers unions fit into Kevin’s narrative?

   Healthcare policy has all but certainly increased the incomes of those working in the healthcare sector and many of those are in the top 1% of income earners. Relatively few are in the top .1% of income earners.

   Monetary, banking, and securities policies have almost certainly helped to increase the income of those in the financial sector and that growth accounts for a substantial proportion of the rising inequality. It also accounts for some proportion of the increased income among the top .1%.

3. Is the increased income of the top .1% of income earners the result of lower income among those in the middle and lower income brackets?

   I’m not convinced of this. I think there’s a good argument that some of the income increases among the top 1% and the income stagnation or decline among those in lower brackets have common causes. But that the former causes the latter? Not so sure.

   I genuinely doubt that Bill Gates, Michael Jordan, or Mark Zuckerberg getting rich resulted in poor people getting poorer. I think they’re rich because they’re prodigies, there are a lot of people, and the economy is huge. How many of those in the top .1% of income earners fit into that category? I have no idea.

4. Is income inequality bad?

   As I’ve said before my ideal society is one in which people are much more equal and freer than they are now. I’m little more concerned about the political influence of the top .1% of income earners than I am about that of the top 1%. Both are disproportionate and I think a lot more of the latter are dependent on rent-seeking.

5. Can anything be done about it?

   In my view this is the really critical question. I have grave doubts that transferring income from the top .1% to the next .9% will actually do much about income inequality or reduce its negative social and political effects to the extent that there are any but that’s what most of the proposals I hear do.