Truth and Myth about Inequality


Two of my favorite columnists are the Brooking Institution’s William Galston, a social economist who has a weekly column in the Wall Street Journal and the economics journalist Robert Samuelson who writes for the Washington Post.  
Most people agree that income inequality in the U.S. is steadily getting worse.  Mr. Galston make a good case (see my last post) that it is primarily caused by the large gap between the rising productivity of American workers and the stagnant level of their pay which has developed since 1973.  He thinks that we need a fundamentally new social contract which links worker compensation to productivity.  This, of course, is a tall order and it is not at all clear how such a new order would be achieved.
CaptureMr. Samuelson has a different perspective: “Myth-making about Economic Inequality”.  For example:

  • The poor are not poor because the rich are rich
  • Most of the poor will not benefit from an increase in the minimum wage because only 6% of the 46 million poor people have full time jobs
  • All income groups have gained in the past three decades, even though the top 1% has gained the most (see the above chart from the CBO, December 2013)
  • Widening economic inequality did not cause the Great Recession

These two perspectives on inequality are quite different but not contradictory.  Basically what Mr. Samuelson is saying is that we have to be careful in how we address this problem or we’ll just make it worse.  Raising taxes on the rich is unlikely to help and might hurt if it slows down the economy.  Raising the minimum wage will only raise a fairly small number of people out of poverty and may cause a lot of unemployment along the way.
My solution: focus on boosting the economy to create more jobs in the short run (tax reform, immigration reform, trade expansion) and improved educational outcomes for the long run (early childhood education, increasing high school graduation rates, better career education).
But I agree with Mr. Galston that it is imperative to lessen income inequality, one way or another.  Otherwise as a society we’ll have big trouble on our hands.

6 thoughts on “Truth and Myth about Inequality

  1. Jack, I agree with Samuelson and your solutions with qualifications. The more rich people there are the better off the poor will be. A better way to say this is that freeing the economy to expand on its own without government interference will not only produce more rich but will benefit the poor even more. I also agree that education is key but the best long-term solution, as one of our Nebraska state legislators said today, is to establish free-market education to leverage the other ingredient necessary for better education outcomes, a healthy economy.

    Galston’s notion of tying compensation to productivity suggests that he believes that productivity is an objective value to be assigned by some authority in a command economy. Productivity can be quantified and is measurable but the value assigned to measurable productivity by employers and employees in free-market economy exchanges is inherently subjective. To paraphrase, beauty is in the eye of the beholder. Command economies fail miserably compared to free-market economies by failing to understand the Economics 101 concept of the subjective nature of the value of productivity, wages, products and prices in human decision-making.

    Command economy authorities flounder when they attempt to assign objective values to products and productivity and make pricing decisions and resource allocations without the benefit of a profit motive incentive. Free-market economies, on the other hand, shine by providing employers, employees, producers and consumers with a steady stream of “profit-oriented” decision-making data based on the billions of subjective value decisions made every day by free-market participants acting on their own subjective self-interest profit motive value assessments even if the market is distorted by government command economy interference.

  2. What Galston wants to do is to require businesses, either collectively or individually, to give their workers salary increases in line with productivity increases. For sure it would be very hard to create a mechanism to do this on a business by business basis. I think what you are saying is that even attempting to do this would turn our free market economy into a “command” economy such as communist countries have. Obviously we don’t want this to happen and we don’t want to take any action which could lead to it.
    Hopefully the American people understand that we’re not nearly doing everything we can to boost the economy to create more jobs and better paying jobs. If this is understood, and corrective political action is taken, then we’ll recover from our current stagnation and resume the steady economic growth that improves living conditions for a large majority of the population.

  3. Here are some questions that came to mind after reading your post. Isn’t there evidence that increases in minimum wage stimulate the economy due to increased consumption? Don’t I benefit from an increase in minimum wage even if I work less than full time? Why aren’t the income gains more evenly distributed? The disparity between the top 1 or 5% and the rest are dramatic, what is your reasoning about why increased profitability of a company isn’t shared more equally among investors, management and workers? You repeat Samuelson’s claim ‘The Great Recession’ wasn’t caused by income inequality (not sure who is making the case it was) but the recession does seem to punch a hole in the idea that our free market rewards the ‘best and brightest’, highly rewarded people made stunningly short sighted, self serving decisions that lead to the recession. FYI I don’t buy the argument that it was caused by government encouragement of low income home ownership, I would need to see where a regulation said don’t worry about a borrower’s ability to pay off a loan, or hide these shaky loans in bundles, falsely rate them, sell and resell them at great profit, then take the money and run. I do appreciate having the discussion and commend you for your efforts.

  4. My thoughts on the $10.10 minimum wage proposal are based on the February 2014 CBO report. CBO says that there will be a $2 billion net gain in income, based on 16 million workers receiving wage increases and 500,000 people losing their jobs. Assuming that the entire $2 billion gets spent, it would still be a pretty small boost to the overall economy. It is globalization and technology which are causing the increasingly unequal distribution of incomes. See the graph in my January 23, 2014 post. These forces are lifting much of the developing world out of poverty but, in the process, putting unskilled American workers under huge wage pressure. U.S. companies have to operate very efficiently in this environment and top quality (i.e. well paid) management is essential to do this. It was the bursting of the housing bubble (in my opinion) which caused the recession and this in turn was caused by low interest rates (i.e. the Federal Reserve) and the huge government push for subprime mortgages (from Congress, also initially from the Clinton administration and then the Bush administration and also from Fannie Mae and Freddie Mac). There also was incredibly lax government regulation along the way (read Sheila Bair’s “Bull by the Horns” for details).
    Thanks for your interest in my website raising these questions!

  5. The minimum wage hike proposal will help the over-qualified displaced workers that are scrambling to make ends meet before they can get back into higher paying jobs. You can bet that the bulk of the 500,000 folks losing jobs due to the minimum wage hike will be among the poor. The reality is that the bleeding heart modern liberals thoughtlessly pushing the minimum wage proposal will actually be sticking it to the poor, the people they allege they are trying to help. To be sure, the proposed minimum wage hike will garner some votes for the modern liberals, which is what this minimum wage proposal is really about as opposed to helping the poor.

  6. At the national level I think the best minimum wage policy would be either to 1) defer action until the unemployment rate drops, say, to 5.5% or 2) tie a minimum wage increase together with a significant action on tax reform (e.g. the new House plan) in order to boost the economy and create new jobs at the same time we’re destroying jobs with a minimum wage increase.
    On the other hand, it might make more sense to let high inequality cities (see my February 20 post) like San Francisco, Boston and New York City establish higher minimum wages on their own. These are the blue state areas where the need and the interest are greatest. Omaha and Nebraska have much lower inequality and also much lower unemployment than the country as a whole.

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