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Tuesday, February 09, 2010

Inequality as Policy?

On the run -- late for a meeting -- so I'll toss this one to you to hash over in comments. What do you think of this argument about the cause of the increase in inequality in recent decades? It's from Inequality as Policy, by John Schmitt, Center for Economic and Policy Research:

...Inequality as Policy: Changing Power Relations Early on, many conservative analysts in the United States went to great lengths to deny the increase in inequality, a particularly difficult task given that a host of survey and administrative data sets covering wages, compensation, incomes, and even net worth all showed sharp increases in inequality. From the late-1980s, however, the mainstream of the economics profession had turned its attention instead to explaining the rising inequality. The bulk of the profession fairly quickly settled on two likely suspects: “skills-biased technical change” and, to a lesser degree, “globalization.”
According to the first explanation, the diffusion of computers and related technology in the early 1980s steadily increased the demand for skilled workers relative to less-skilled workers, driving up the wages and incomes of more-educated workers and depressing the wages and incomes of less educated workers. From a political perspective, the skills-biased technical change view had several convenient features. At face value, it appeared to be broadly consistent with the data (even though economists on the left, such as David Howell and Lawrence Mishel, and more mainstream economists including David Card, John DiNardo, Alan Manning, and others have presented strong critiques3). At least as importantly, however, the technological explanation removed policy, politics, and power from the discussion of inequality, by attributing rising economic concentration to “technological progress,” a force that could be resisted only at our peril. The skills-biased technical change explanation also put significant limits on the terms of policy debates: the problems of the three-fourths of the U.S. workforce without a university degree were either the result of the poor personal decision not to pursue enough education, or, at most, a sign that, as a society, we needed to invest more in education.
The second standard, though less favored, explanation for rising inequality was the elusive idea of “globalization.” In the most common view, globalization is supposed to have lowered the earnings of less-educated workers by putting them in direct competition with low-wage workers around the world. This competition put pressure on wages through international trade in goods and services; through the relocation or threat of relocation of production facilities to overseas locations; through competition with immigrants in local labor markets; and through other channels.4
Globalization is the less favored explanation in the standard political discourse not because it does not offer what is at face value a coherent explanation of the rise in inequality, but because, by acknowledging the social costs of the increased integration of markets, the globalization explanation threatens to derail an important economic project of the elite. Economists and politicians in the United States spent much of the 1980s and 1990s arguing that the expansion of trade was the only path to national prosperity. In this context, blaming widening inequality on the same process of globalization that was supposed to be making us richer became quite awkward. (As an aside, I note that globalization has proved itself to be a flexible political tool in the U.S. and European debates. On the one hand, it seems, U.S. and European workers are told that their future prosperity depends on more globalization. On the other hand, they are also told that globalization means that our societies can no longer afford a generous welfare state.)
But the main problem with globalization as an explanation for rising inequality is that the typical ways in which the discussion is framed obscure the underlying process through which globalization actually acts on inequality. The standard framing presents globalization, like technological process, as an exogenous force, something that happens to us. In reality, globalization is a complex process of integrating capital, product, and labor markets, where almost every characteristic of those newly integrated markets is the subject of, or should be the subject of, political and regulatory debate.
Contrary to the standard framing, which presents globalization as something that no nation can escape or even attempt to shape, we can choose the terms under which we integrate capital, product, and labor markets across countries. Over the last 30 years we have indeed “chosen” a particular form of globalization in the United States – a form that benefits corporations and their owners at the expense of workers and their communities. If we had chosen globalization on different terms, however, economic integration would not have required rising inequality. Another globalization is possible.
In opposition to these two standard explanations for the recent rise in inequality, I want to offer an alternative view, one that explains inequality as a function of power, sustained by politics, and implemented as policy. In this alternative view, it is not technological progress nor the inevitable march of globalization, but rather the sharp shift in the strength of capital and employers relative to workers that explains the increasing concentration of wages, income, and wealth over the last three decades.
The decline in inequality from the end of the 1920s through the end of the 1970s – evident in the Piketty and Saez graph – was a function of a series of social movements over that same period that worked to reduce economic and social inequality. The 1930s saw the ascendancy of the U.S. labor movement, which went from a small force scattered across the national geography and industrial structure to an institution representing over one-third of U.S. private-sector workers by the mid-1950s. The civil rights movement of the 1950s and 1960s pressed for political, social, and economic equality for blacks. The women’s movement of the 1960s and 1970s fought for social and economic equality for women. The labor movement, the civil rights movement, and the women’s movement separately, but especially together, changed the way U.S. corporations did business.
Wages and benefits rose for all workers, union and non-union. Employers were legally and socially prohibited from paying minority and women workers less than white men for the same work.
Together with the environmental and consumer movements of the 1960s and 1970s, which sought to constrain U.S. businesses engaged in endangering the environment and consumers, these social movements had the effect of increasing incomes for those at the bottom and lowering incomes for those at the top (by raising the cost of doing business).
Throughout the entire period, employers resisted each of these movements (labor, civil rights, feminist, environmental, and consumer) but employers especially resisted the corresponding legislation that accompanied each of these efforts. The economic elite, while eventually comfortable with the social aims of all of these movements, almost uniformly opposed the accompanying legislation, including: making union organizing easier; guaranteeing workers’ health and safety; prohibiting discrimination against racial minorities and women in labor markets and in other markets such as housing and credit; protecting the nation’s air and water; and ensuring the safety of consumer products. From the 1930s through the 1970s, capital generally fought a losing battle, able to shape and contain the specific policies that grew out of the various social movements, but ultimately unable to prevent the enactment and enforcement of a host of policies that worked strongly against employers’ immediate economic interests.
By the end of the 1970s, however, employer opposition coalesced and the economic disruption caused by two oil crises in the 1970s gave capital and employers a political opening. Even while Jimmy Carter, a Democrat, was in the White House, a subtle but important shift in U.S. politics occurred – a shift away from the core constituency of the Democratic party (labor, women, racial minorities, and environmentalists) – and toward employer interests.5 By the time Carter lost the presidency to Ronald Reagan in 1980, the corporate backlash against almost fifty years of social progress was in full swing.6
The backlash was sold as a response to the economic crisis of the 1970s and the emphasis was overwhelmingly on improving the efficiency of the U.S. economy, which was described (and is still described today by many on the right) as sclerotic, overly unionized, and overly regulated. Each of the major policy initiatives of the last three decades claimed to offer important efficiency advantages. The long decline in the inflation-adjusted value of the minimum wage was supposed to correct a distortion in the low-wage labor market. The deregulation (more accurately, re-regulation) of the airline, trucking, railway, financial, and telecommunications industries was supposed to lower consumer prices in those markets. The liberalization of foreign trade through a plethora of bilateral and multilateral trade agreements was similarly supposed to lower consumer prices on imported goods. The privatization of many federal, state, and local government functions – from school bus drivers to the administration of welfare policy and even much of the U.S. war in Iraq and Afghanistan – was supposed to lower the cost of government. The steady, policy-enabled, deterioration of unionization in the private sector – from over one-third of workers in the 1950s to about eight percent today – was supposed to improve the competitiveness of U.S. firms.
These policies, sold as ways to enhance national efficiency, however, also had another common thread. They all worked to lower the bargaining power of workers relative to their employers. In many cases, the alleged efficiency gains have not materialized.7 In every case, however, the negative impact on workers has been obvious and substantial. The inflation-adjusted value of the minimum wage is now about 30 percent lower than it was at its peak in the 1960s. Workers in deregulated industries –airlines and trucking, most obviously – have seen their wages and benefits stagnate and fall. Even many mainstream economists acknowledge an important role for corporate-oriented international trade and commercial agreements in depressing the wages of less-educated workers, who have been forced to compete directly on world markets with workers often making only a small fraction of U.S. manufacturing wages. Privatization has been a windfall for the companies who win government contracts, while their main efficiency gains hinge on their ability to pay nonunionized, private-sector workers less than more unionized public-sector employees. The huge decline in unionization in the private sector has decimated the U.S. working class, which depends on the union wages and benefit premium to secure a middle-class standard of living.8
Taken together, these policies – a low and falling minimum wage; the de- or re-regulation of major industries; the corporate-directed liberalization of international capital, product, and labor markets; the privatization of many government services; the decline in unionization; and other closely related policies – are the proximate cause of the rise in inequality. Of course, the underlying cause is a shift at the end of the 1970s in the balance of economic and political power following almost five decades of ascendancy of labor and other social movements.
I am not simply arguing that the explosion of inequality was a side-effect of these policies. I am arguing, rather, that the explosion of inequality – what is, effectively, the upward redistribution of the large majority of the benefits of economic growth since the late 1970s – was the purpose of these policies. The purported efficiency gains, which were realized in some cases but not in others, were merely a political distraction.  ...

    Posted by on Tuesday, February 9, 2010 at 03:33 PM in Economics, Income Distribution | Permalink  Comments (108)


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