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Why is there income inequality?

Apologies for the lateness of this post compared to the first two. There's lots of other work to be done, and this series has required me to do some hard work in the form of thinking through things. It's more time-consuming than the usual point-and-shoot of blogging. 

So we've established that there is, in fact, growing income inequality in the United States. And the evidence of history suggests that such inequality can be a societal problem over time. So the next question is this: Why is inequality growing here? And what can be done about it?

Paul Krugman—whose 2007 book, "The Conscience of a Liberal" forms the basis of this series of posts—seems to offer a simple, even seductive answer: It's the Republicans' fault. They're the ones who radically cut marginal taxes on top earners after 1980, and they've done all they can to weaken the power of unions, who were a major factor in lifting the tide for working-class Americans in the post-Depression era.

Here's the crux of it, he says:

Over the course of the 1970s, radicals of the right determined to roll back the achievements of the New Deal took over the Republican Party, opening a partisan gap with the Democrats, who became the true conservatives, defenders of the long-standing institutions of equality. The empowerment of the hard right emboldened business to launch an all-out attack on the union movement, drastically reducing workers' bargaining power; freed business executives from the political and social constraints that had previously placed limits on runaway executive paychecks; sharply reduced tax rates on high incomes; and in a variety of other ways promoted rising inequality.

Krugman, of course, is as interested in reining in the elites as he is helping the working and middle classes get ahead.  I'm more concerned with the latter part of the equation, and it seems to me he doesn't do a good enough job addressing why that second part failed to happen. There's no reason that rising executive pay should necessarily require stagnating worker pay in a growing economy, it seems to me. And despite the efforts of some more committed conservatives, there's not really been much reining in of the welfare state in the last 30 years—Republicans have even expanded it without bothering to pay for it.*

*If they somehow manage to slash and burn Social Security, Medicaid, and Medicare, however, this statement is null and void.

This is leading me to a conclusion about the cause of the inequality problem, but I want to prod at Krugman a little more first. He spends much of his time exalting the 1950s—when inequality was low, marginal tax rates were high, and everybody lived better than the generation before them. And that's true. But Krugman doesn't really address something I've got to believe has to be a major factor in all of this: the 1950s also happened to be a time when the United States was, more or less, the only industrialized power left standing. All the other ones had been destroyed by World War II, and it took the Marshall Plan to get a lot of those economies starting to roll in the right direction. The United States had a big head start on the rest of the world, which means its workers had a head start on the rest of the world, right?

Libertarian economist Tyler Cowen seems to make a similar case against Krugman in his new e-book, "The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better." The income of American workers is stagnating, he suggests, because there isn't much growth the be had right now. He writes:

In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That's it. That is what has gone wrong. 

So the argument against Krugman's "the Republicans did it" scenario would suggest the cause of stagnating incomes isn't so much political as it is structural—or maybe the two factors are more intertwined than anybody wants to admit. Certainly, there's a hint of that in the recent Atlantic article, "The Rise of the New Global Elite." The most notable quote in that article, to me, is this:

The good news—and the bad news—for America is that the nation’s own super-elite is rapidly adjusting to this more global perspective. The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

And, um, if one is to take a look at the big picture, it's not such a bad trade. But it's also not really the kind of argument that should lead working-class Americn voters to support free-trade agreements, either. Is that tradeoff actually necessary, though? It doesn't seem like it. Harold Meyerson recently pointed to Germany as an example. He deserves to be quoted at length:

Germany is anything but a low-wage country: The average hourly compensation -- wages plus benefits -- of German manufacturing workers is $48, well above the $32 hourly average for their American counterparts. Yet Germany is an export giant while the U.S. is the colossus of imports.

German multinationals have their own affiliates overseas, but they have also maintained robust, high-quality production at home. Siemens, which is more or less the German equivalent of General Electric, has hundreds of thousands of employees who work abroad, but it recently announced a deal with its major union, IG Metall, that included a pledge not to make any unilateral reductions in its 128,000-employee German workforce. BMW, ThyssenKrupp, and Daimler have gone even further, signing deals with IG Metall to maintain a fixed number of employees in Germany.

These domestic employee-retention pacts are an outgrowth of Germany's more consensual, stakeholder version of capitalism. German workers' organizations have a far greater say than American workers do in the conduct of their employers. By law, employees in large companies get the same number of seats on corporate boards that management does. Unions and management collaborate to ensure that German manufacturing retains and expands its high-quality products and markets. IG Metall has been working with automakers, for instance, to train workers to mass-produce electric cars. "Our goal is to really retain high-value-added manufacturing in Germany," Martin Allspach, the union's policy director, told me when I visited IG Metall headquarters in Frankfurt in November.

In other words, both German workers and German companies can do well at the same time! That doesn't seem to be the mindset of American capitalism, though. And I'm not sure why we would think our system is superior.

As Krugman notes: 

Bear in mind that the forces of technological change and globalization have affected every advanced country: Europe has applied information technology almost as rapidly as we have, cheap clothing in Europe is just as likely to be made in China as is cheap clothing in America. If technology and globalization are the driving forces behind rising inequality, then Europe should be experiencing the same rise in inequality as the United States. In terms of institutions and norms, however, things are very different among advanced nations: In Europe, for example, unions remain strong, and old norms condemning very high pay and emphasizing the entitlements of workers haven't faded away. 

So this is where I, a non-economist liberal with a slightly libertarian bent on some matters, end up: The rising income inequality in the United States is due to the stagnation of worker incomes. That stagnation is probably due mostly to the weak-and-getting weaker state of unions in this country. (Unions help build their own wages, and that tends to filter out even to non-union workers.) That weakening has been due, in large part, to legislation passed by business interests in Congress. In my ideal world, government doesn't have to do much in the way of redistribution—instead, it provides infrastructure and a set of rules that give workers substantial power to advocate for themselves, and gets out of the way. I suspect lots of problems would be solved under such a system. But it's not the one we have.

For me, then, the choice comes down to this: Empower workers or settle into a more redistributive welfare state.  Krugman wants to do both: Higher taxes on the rich, more social programs to help lower-income folks, and stronger rules in favor of unions. Conservatives want to do neither. All this raises a new question for me: What should the government's role be in helping lift the incomes of American workers?

My next two books on the list will help me start to answer that question. I'll be reading William Voegeli's "Never Enough: America's Limitless Welfare State" and Pierson/Hacker's "Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class" over the next month or so. I'll be back then to give you my take. 



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