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Sunday, October 28, 2012

DeLong: Inequality: Living in the Second Gilded Age

Brad DeLong:

Inequality: Living in the Second Gilded Age, by Brad DeLong: A third of a century ago, all of us economists confidently predicted that America would remain and even become more of a middle-class society. The high income and wealth inequality of the 1870-1929 Gilded Age, we would have said, was a peculiar result of the first age of industrialization. Transformations in technology, public investments in education, a progressive tax system, a safety net, and the continued decline in discrimination on the basis of race and sex had made late-20th century America a much more equal place than early 20th century America, and would make early 21st century America even more equal — even more of a middle-class society — still.

We were wrong.

America today is at least as unequal as, and may be more unequal than, it was back at the start of the 20th century when Republicans, such as President Theodore Roosevelt of New York condemned the power wielded by “malefactors of great wealth,” and Democrats such as perennial losing presidential candidate William Jennings Bryant of Nebraska denounced shadowy conspiracies that had somehow manipulated the financial system to rob the typical family of its proper share in America’s prosperity.

Four major and a host of minor factors have driven rising inequality over the past third of a century: ...[continue reading]...

One complaint: It's more than just economics. In my view, Brad doesn't put enough emphasis on the changing political tide over the last few decades, and how that has altered public policy towards institutions such as unions that were able to help workers get a fair share of the output they produce (unions aren't even mentioned in the article). The explanation for rising inequality makes it appear that economics -- factors such as winner-take-all markets in an increasingly globalized world and skill based technical change -- can fully account for the problem. I don't see it that way. Economics surely contributed to the inequality problem, but the idea that those at the top haven't received a penny more than they earned, that their incomes can be explained by economics alone, is hard to defend. Workers incomes have not kept up with productivity -- they did not get a fair share of the output they produced over the last few decades -- and that means some other group got more than it deserves. Given the stagnant incomes at lower levels and widening inequality from growth at the top, it's not hard to think of who that group might be, and it is not the least bit surprising that this just happens to be the group with the largest amount of political influence.

I don't have any problem with the statements made in the article about taxes on the wealthy and educational opportunity for working class households -- we need more of both -- but we also need to reform our institutions so that they work for all of us, not just the (ahem) job creators at the top.

(To be fair, Brad acknowledges that there has been a misallocation of resources with too much going to finance and health care administration, and not enough elsewhere, and he also notes that the political power of the wealthy make it hard to change the tax code. But for the most part his argument about rising inequality relies upon economics, and the political and institutional arguments are not emphasized. Again, I am not quarreling with the economics, I just think the political and institutional factors deserve more weight.)

But this is an old debate with Brad DeLong and others on one side, and Krugman. et. al. on the other, e.g. see here:

To a good neoclassical economist, the statement that the relative price of a factor of production--like the labor of the elite top 1% of America's wage and salary distribution--has risen is the same thing as the statement that the relative productivity of that factor of production has risen. But we need to distinguish between these statements in order to make sense of the ongoing argument between Andrew Samwick on the one hand and Paul Krugman and Mark Thoma on the other.
In a nutshell: Is the statement that there is a higher return to education today merely an assertion that the rich today earn more in relative terms than their counterparts in the past? Or is it also a statement that the rich today are more productive in relative terms than their counterparts in the past?
Andrew Samwick takes the first definition, and concludes that rising inequality is the result of a higher return to education. By his lights, he is clearly correct.
Paul Krugman and Mark Thoma take the second definition and conclude that that rising inequality is not primarily the result of a higher return to education but instead primarily the result of socio-political factors that have raised the relative price of what the rich and well-educated do. And they too have a strong case. Piketty and Saez's latest numbers estimate that top 13,000 American households have multiplied their relative real incomes nearly fivefold since the 1970s. Then they received some 0.6% of national income. Now they receive nearly 2.8% of national income--an average of $25 million each, compared to roughly $5 million each had the relative income distribution remained at its 1970s levels. What are the CEOs, CFOs, COOs, elite Hollywood entertainers, investment bankers, and the very highest levels of professionals doing differently now in their work lives that makes them, in relative terms, worth five times as much as their predecessors of a generation and a half ago?...

    Posted by on Sunday, October 28, 2012 at 11:21 AM in Economics, Income Distribution | Permalink  Comments (39)



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