Economic Inequality: The Wall Street Journal is Just Wrong

Many of the same people who argue that inequality is caused by the market rewarding highly productive people for their efforts -- that it's a good thing because it encourages productive effort -- also deny that inequality is increasing. If inequality is predominately the result of rewarding people for hard work that benefits everyone, you'd think they'd be eager to point out that inequality has been growing, and will likely continue to do so.

Recently, the Wall Street Journal claimed, as it has in the past, that inequality hasn't really been growing like just about everyone else says it has. And in any case, the WSJ says, the recession will take care of it. Bruce Judson explains why this is "just plain wrong" (there's more detail on the data and other issues in the full article):

Economic Inequality: The Wall Street Journal is Just Wrong, by Bruce Judson: For anyone with even a passing familiarity with issues associated with economic inequality, The Wall Street Journal front page story last week was shocking. Its use of bad data was a misuse of this important forum. In effect, the article says that economic inequality was never really a problem, and even if it is we no longer have to worry about it. These conclusions are just plain wrong.

The Journal article effectively leads the reader to two conclusions: First, any issues that may exist around economic inequality are disappearing, because of the likely decline in the outsize incomes of the top 1% of Americans... Second, the problem was never really that bad in the first place. ...

Unfortunately, few conclusions could be further off the mark.

In some eras, when America did well everyone did well. However, this has been far from true for the past thirty years. Moreover, as a result of the Great Recession we may have to worry more about economic inequality rather than less.

First, let’s start with what we know about economic inequality. ... The basic conclusion ... that the nation suffers from extreme and growing income inequality is essentially irrefutable. ...

[T]he Journal based its claims on data that is, with very few exceptions, considered essentially worthless for measuring income inequality. ... It is ... impossible to understand how The Journal could seriously assert that the income gains at the top occurred because of a widely shared growing pie, as opposed to one group taking a far larger piece of the growth. ...

In addition, I am forced to wonder about what interviews the reporters conducted before releasing the story. The central argument in the article, that the percentage of total income received by the top 1% will decline, gains enormous legitimacy by stating near the start of the piece that  “Mr. Saez and other economists expect income going to the top 1% of taxpayers…will drop..by 2010.” I cannot speak for Professor Saez, and I don’t know whether he was interviewed for the Journal article, but any reading of his work suggests that the article provides a skewed representation of his views.

In a short paper..., Professor Saez concludes that “the most likely outcome is that income concentration will fall in 2008 and 2009.” But, he follows this conclusion by stating that in the absence of significant policy actions such declines will be temporary:

“Based on the US historical record, falls in income concentration due to recessions are temporary unless drastic policy changes, such as financial regulation or significantly more progressive taxation, are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration till the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.” (references to charts omitted).

My intense study of past history, which will soon be released in It Could Happen Here is in line with Professor Saez’s conclusion. Once income concentration becomes a reinforcing cycle of the kind we are witnessing, it is never stopped by pure market forces. Only extensive government intervention, of the kind that will inevitably create high controversy, reverses this trend. Indeed, the policies of the New Deal, which led to the rapid decline of inequality, reflected bitter and hard fights. Time magazine reported in April 1936, that:

Certainly no President in recent times has so bitterly aroused the enmity of a whole class as Franklin Roosevelt has aroused the economically substantial element of the U. S. Regardless of party and regardless of region, today, with few exceptions, members of the so-called Upper Class frankly hate Franklin Roosevelt.

It’s possible that the growth in income concentration may take a brief respite, but without substantial intervention the long-term trend toward ever greater concentration will march forward. ... The Journal article give us the false impression that, counter to all historical evidence, we no longer need to worry about economic inequality. It will take care of itself.

Finally, it is not even clear that the central point of the article is correct. Yes, the rich are suffering relative to the past. However, the middle class and underclass are suffering as well. Jobs continue to disappear and housing could still decline substantially. With each job loss or foreclosure, another family joins the ranks of the former middle class. Simon Johnston, in a New York Times blog post, The Two-Track Economy: Inequality Emerging From Today’s Recession, among others, has pointed out that the Great Recession may be creating an even less economically equal society:

The overall numbers on outcomes by groups can get complicated (here’s a partial guide), but the simple version is: The top 10 percent of people are going to do fine, those in the middle of the income distribution have been hard hit by overborrowing, and poorer people will continue to struggle with unstable jobs and low wages. ...

All of this suggests that we have a lot to worry about. On its front page, The Wall Street Journal may say that it never happened, and even if it did it is fixing itself. Everything we know suggest that this reading of the past is wrong, and such a future –without determined government action — is unlikely. The larger worry is that we will emerge from the Great Recession as a society sharply divided between a small privileged upper class, and an underclass that lacks basic economic security. What happens then?