Inequality: Maybe a Worse Problem than Liberals think, because Conservatives are Right about its Cause

For at least the last quarter of century the sense among most folks is that inequality in wealth in the US is growing.  I see a couple of conclusions being drawn about this fact.  One is attributing this inequality to unwinding of New Deal policies:  allowing unions to be weakened; and reducing the progressiveness of income taxes (reducing income taxes on high income individuals, while raising the regressive payroll tax). Liberals who buy this explanation, tend to be the very concerned about the impact of the growing rift and its impact on society and our democracy.   The alternative is that the return to superior ability and special skills are growing relative the simple willingness (and need as well) to work at routine jobs.  Those who subscribe to this point of view (usually conservatives) seem much more sanguine about the resulting inequality.

The disturbing thing to me, is that I think both sides are aligning themselves based on ideology not examination of the facts and thinking.   In the end they may both be understating how serious a problem this is.

Too many liberals seem unwilling to look at the number of things other than the rise of the Reagan Republican revolution as the cause of pressure on the middle class and a tendency to push a few people to very high incomes and the rest to much, much lower incomes.  This week a mass walkout from Greg Mankiw’s introductory course in economic at Harvard took place.  Mankiw was coincidentally discussing inequality in the class.  You can here what he has to say on the subject here.  I think it’s notable that he doesn’t deny the shift toward a less flat distribution of incomes at all.  He says:

Oh, there’s no question that the gap between rich and poor has risen substantially. It’s been a long term trend since the 1970s, with pretty steady increases. And I lecture about this every year. It was a pure coincidence that I was lecturing on this topic the very day they decided to walk out….if you look at the data, one thing is very clear is that the changes in the tax code – even between, say, the Clinton era and the Bush era – are very, very small compared to the huge changes in inequality we’ve seen. So very little of the changes we’ve seen are due to taxes. It’s almost in data quality, almost all in before-tax incomes. So, you know, we can debate as to whether we want an extra few percent at the top or not, but that’s not really going to do much to change the long-term trend.

The point I take away is that the reason for growing inequality mostly isn’t reduced taxes on the high income individuals.  The protestors understand what’s the problem but have actively chosen to walk away from a chance to understand the cause.   There are more fundamental changes that won’t be undone with changes in the tax code.

A similar view to Mankiw’s is put forth in piece from Arnold Kling.  He writes:

I wish to suggest that structural change is an important factor in the current rate of high unemployment. The economy is in a state of transition, in which the middle-class jobs that emerged after World War II have begun to decline….

He notes the Greate Depression and the Post War period was one of similar transition, but of a happier sort:

The structural-transition interpretation of the unemployment problem of the 1930s would be that the demand for uneducated workers in the United States had fallen, but the supply remained high. The high school graduation rate was only 8.8 percent in 1912 and still just 29 percent in 1931. By 1950, it had reached 59 percent.3 With a new generation of workers who had completed high school, the mismatch between skills and jobs had been greatly reduced.

What took place after the Second World War was not the revival of a 1920s economy, with its small farming units, urban manufacturing, and plurality of laborers. Instead, the 1950s saw the creation of a new suburban economy, with a plurality of white-collar workers. With an expanded transportation and communications infrastructure, businesses needed telephone operators, shipping clerks, and similar occupations. If you could read, follow simple instructions, and settle into a routine, you could find a job in the post-war economy.

The trend away from manual labor has continued. Even within the manufacturing sector, the share of production and non-supervisory workers in manufacturing employment went from over 85 percent just after the Second World War to less than 70 percent in more recent years. To put this another way, the proportion of white-collar work in manufacturing has doubled over the past 50 years. On the factory floor itself, work has become less physically demanding. Instead, it requires more cognitive skills and the ability to understand and carry out well-defined procedures.

Now Kling suggests that

The economy today differs from that of a generation ago. Mortgage and consumer loan underwriters have been replaced by credit scoring. Record stores have been replaced by music downloads. Book stores are closing, while sales of books on electronic readers have increased. Data entry has been moved off shore. Routine customer support also has been outsourced overseas.

These trends serve to limit the availability of well-defined jobs. If a job can be characterized by a precise set of instructions, then that job is a candidate to be automated or outsourced to modestly educated workers in developing countries.

The result is what David Autor calls the polarization of the American job market.  Autor and various research collaborators have documented a number of findings that reflect this polarization:4

•    In recent decades, wage and employment growth have both been lowest at the middle segment of the skill distribution. Wage improvements have tended to be concentrated at the high end, and employment gains have tended to be largest at the low end of the skill distribution.

•    This particular symptom of polarization is also prevalent in OECD countries other than the United States.

•    In the United States, this polarization was exacerbated by the economic downturn. While both high- and low-skill jobs have held steady, the brunt of the recession has been borne by mid-skill workers. For example, growth in employment in sales was 54 percent from 1979 to 1989, 14 percent from 1989 to 1999, 4 percent from 1999 to 2007, and -7 percent from 2007 to 2009. Employment in sales was a key component of upward economic mobility after World War II, but technological change and globalization appear to have stalled or perhaps reversed this engine of middle-class affluence.

•    From 1980 to 2007, real wages for male workers with only a high school degree fell by 12 percent, real wages of male workers with only a college degree rose by 10 percent, and real wages of males with post-graduate degrees increased by 26 percent. Female workers show a similar pattern, although wage gains were generally higher for females over this period.

Using the latest Census Bureau data, Matthew Slaughter found that from 2000 to 2010 the real earnings of college graduates (with no advanced degree) fell by more in percentage terms than the earnings of high school graduates. In fact, over this period the only education category to show an increase in earnings was those with advanced degrees.5

The Great Depression of the 1930s can also be interpreted in part as an economic transition.

The outlook for mid-skill jobs would not appear to be bright.

So what do I conclude from all this?  That the sources of inequality are much deeper than the Bush tax cuts and the slow death of unions (thought I think they might be contributors).  This makes the whole issue more worrisome I think.  I suggest you read the whole Kling article.

I think he does a good job of outlining the things that are making it basically much harder for someone with a willingness to work, but not otherwise extraordinary skills to live a middle class life.   It’s also been noted that we see more sorting of high income earners marrying other high income earners.  This makes the gap between those well adapted to the job market of the future, and Joe Six pack who just wants a factory job even larger.

So do liberals react to this wisdom with a better understanding of the sources of inequality and start thinking about how to address them…

Judging from the comments on Kling’s article:  no.  The reaction seems like that of Mankiw’s student protestors.  Here’s one:

Kling thinks that he and his fellow propagandists can prevent it by deceiving the rubes. Their strategy is to relate a steady stream of tales of strapping young bucks buying t-bone steaks with their food stamps, and stress the importance of attacking some country that looks ripe for the invading.

If you read the Kling article, I think it is fair to say he really doesn’t offer a public policy solution, or even exhibit a lot of concern about trends that he acknowledges are taking us to a have and have not world.

That said though, I think liberals or moderates who acknowledge that inequality eventually undermines the basis for support of a social system should try to learn from the Kling article and the research it is based on.  Doing so leaves you see the problem as more intractable and perhaps even more serious than you might otherwise think.

Conservatives seem to draw the lessen that growing inequality is just a reflection of return to greater ability.  There evidence to support that.  However, the problem is that distribution of ability is itself somewhat random is it not?  Does that justify being sanguine about growing inequality in incomes.  I don’t think it does.  David Frum for one thinks the ability to sustain democracy may be in question.

To wrap all this up, inequality may be a more intractable issue than liberals realize, but more serious than conservative do.  I think less realiance on ideology might make that clearer to all involved.


2 responses to “Inequality: Maybe a Worse Problem than Liberals think, because Conservatives are Right about its Cause

  1. I think it’s true that inequity is a result of structural changes in the domestic and global economy, in part due to the internationalization of capital and the shift away from ‘good’ manufacturing jobs. The idea is that our comparative advantage is moving to something more “high tech” and clean, but it’s not clear if and how that’s to happen. The problem was covered by the bubble economies that made it seem like consumerism and service sector employment was enough.

    I’m not sure what the best approach would be to change this course. It’s not something that can be fixed by redistribution. I do think tax rates on the wealthy should be increased, but only in order to deal with debt and try to figure out a way to invest in finding ways to produce “stuff” (whatever it may be, intellectual or material) that others want. China and India are large markets – what can we produce for them that they’d want to buy? How can we get our economy positioned to create jobs that fulfill those needs? I think the one two punch of globalization (and the restructuring it entails) and the bubble economies (and the illusions of wealth and a healthy economy they created) have put us in a real bind. I agree completely that ideological thinking on the left and the right often miss the depth of the problem.

    • The Kling piece is pretty disturbing. I think it suggests that more stratification of society is going to be hard to unwind. I think the ability to do with redistribution will be limited (though I’m not necessarily against trying).

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