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Tuesday, February 20, 2007

Inequality is Still Rising - Part 2

I have a new post up at Cato Unbound:

It’s Time to Ask the Next Question, by Mark Thoma, Cato Unbound: I had hoped to move on to new issues, but that will have to wait as I want to respond to some of what Alan Reynolds says in his reply essay...

This is part of the Conversation phase and reacts to Reynolds' "Why Change the Subject." After pointing out several ways in which Reynolds mischaracterizes the evidence on inequality and what I say about it, here's how it ends:

...If you only look at evidence on one side of the issue, cherry pick results, start in specific years (and insist everyone else follow suit), use the “right” measures of income or wealth, ignore data problems that work against your results, and so on, and so on, you might be able to argue, if everything falls in your favor, that inequality is no worse since 1988. But that does not fairly characterize the overall evidence.

This debate reminds me of the debate over global warming, though using the word debate implies there is more disagreement than there really is. There are three questions in the global warming debate. The first question is whether global warming exists. The second question is, if it does exist, what is causing it. The third question is what to do about it. In order to avoid the consequences involved with the third step, doing something about it, there are many who try to cloud the issue and keep the first question alive and kicking for as long as possible, or claim the cause is from natural forces that we can do nothing about.

The inequality debate appears to be unfolding similarly with those who would like to avoid policies to address inequality, policies such as more progressive taxation, hoping to keep the first question open as long as possible or claiming that the rise in inequality is the inevitable result of natural market forces and we should not interfere. 

There is a role for skeptics, but there is also a time to accept that the preponderance of evidence points in one direction and to begin to think about and implement corrective measures. I believe an important question is how we respond to inequality – will it be through progressive taxation, minimum wage legislation, changes in the structure of health care, investments in education and retraining programs, wage insurance and so on, or will we do nothing? 

The question of what to do is linked to the causes of rising inequality. Has inequality been rising because of tax policy, the decline in unions, the rising skill premium, global competition and changing technology, a falling minimum wage in real terms, or for other reasons? How much does each factor contribute? Is the income of  those who have experienced the largest gains based upon economic fundamentals, i.e. does their pay reflect their contribution to production, or does the pay of, say, CEOs depend upon market failures that allow departures from competitive market outcomes? 

There are lots and lots of important questions to be answered involving both equity and efficiency (many of which do not require rising inequality since 1988, just its existence) and as I said in my first essay, it will be too bad if attempts to cloud the issue divert us from discussing how best to respond to income and wealth inequality.

So far, we have:

Lead Essay

Reaction Essays

Conversation

    Posted by on Tuesday, February 20, 2007 at 04:11 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (133)

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