"The Inequality Conundrum"

Roger Lowenstein of the New York Times on "The Inequality Conundrum":

The Inequality Conundrum, by Roger Lowenstein, NY Times: In 1976, Richard Freeman wrote a book called “The Overeducated American.” So many Americans had been getting college degrees that the relative wages of white-collar professionals had started to fall. It no longer paid to go to college and, for most of the ’70s, fewer people did. Just so, incomes of the educated began to rise again.

People like Freeman, a labor-market economist, waited for the cycle to turn. They expected that with white-collar types riding high again, more people would stay in school, and incomes at the top would level off once more.

But they never did. Instead, the rich kept getting richer. Across the spectrum of American society, the higher your income category, the more your income continued to grow. And for a quarter-century, albeit with zigs and zags along the way, that rich-get-richer pattern has held. ...

[W]hat puzzled Freeman remains a mystery to this day. Why isn’t prosperity spreading more equally? The leading theory has been that a global, high-tech economy creates big winners and losers. That is surely part of it. But Europe has computers, too, so where are all of its billionaires? ...

You can boil down most economic policy debates — starting with Hamilton versus Jefferson and moving to Bush versus the Democrats — to this tension: how can you promote equality without killing off the genie of American prosperity? The trade-off is clear at the extremes but fuzzier in the middle. A little redistribution, cleverly designed, doesn’t hurt. ...

Some redistribution is clearly good for the entire economy — providing public schooling, for instance, so that everyone gets an education. But public education aside, the United States has a pretty high tolerance for inequality. Americans care about “fairness” more than about “equalness.” We boo athletes suspected of taking steroids, but we admire billionaires.

The extreme divergence of American incomes we see today, however, is actually rather new. For most of the 20th century, America was becoming more egalitarian. The United States seemingly conformed to the standard theory of development, which held that industrialization produces fat cats at first (as factory owners rake it in) and then a more general prosperity as workers become more productive. It’s a feel-good theory that says, “Don’t worry if the rich are prospering; the poor will have their day.” ...

When it comes to raising the bottom in the short term, Washington basically has two choices: it can try to change market outcomes or it can redistribute after the market results are in. The first method is more intrusive. It includes limiting trade, regulating the workweek or restricting access to certain jobs, through mechanisms like licensing. Since the ’70s, the United States has moved away from such market interventions, but Congress seems to be acting on two of them. It just voted to raise the minimum wage, for the first time in 10 years, and it is seeking a compromise to revise the immigration laws.

And what about redistribution after the fact? The United States does less of it than Europe, and less of it than we used to. Even though the United States is richer than Belgium, a poor person in Belgium is better off than one here. On the other hand, the price for being Belgian is steep: Belgium’s median disposable income — what people have left to spend after they pay taxes and collect welfare-type payments — is only 72 percent as high as ours. ...

There is little agreement on how much redistribution is too much. But common sense tells you that a small increase in taxes when rates are relatively low, as they are now, isn’t going to curb people’s animal spirits. .... Though such thinking is a good argument for further expanding the E.I.T.C., which rewards people for working, in the long run you want to get folks moving up the skills ladder, so fewer people are in need of wealth redistribution. That this hasn’t happened is rather a conundrum. The incentives are certainly there. College grads make more than 40 percent more than high-school grads. Those with postgraduate degrees earn twice as much. ...

The Americans that Freeman once called overeducated are plainly undereducated today. Only about a third of the population graduates from college. Among the poor, there has been only a very slight increase in college-graduation rates.

To get more Americans to enroll in and complete college, the theory goes, you can either fix the schools (more teachers, longer school years, more student loans) or fix the students (more nurturing of kids from disadvantaged homes). Both approaches would cost a lot. But if you’re worried about inequality, it’s hard to see any alternative. Hamburger flippers simply don’t command a high wage. We can pass laws to change that — a minimum price for cheeseburgers, maybe — or we can, finally, invest in teaching the flippers to do something else.