Wednesday, January 22, 2014

my two cents on income inequality

David Brooks wrote in the New York Times this past Friday on "The Inequality Problem", taking issue with recent rhetoric from the Obama administration on the issue. This morning, a response appeared from Robert Reich on Salon (and elsewhere, I think) with a title and tone that only served to support Brooks' argument that the topic is polarizing and should maybe be dropped. Since I think it definitely should not be dropped, what follows is an attempt to mediate the debate without the name-calling.

I started studying economics at the University of Maine online in the spring of 2012 in order to be able to weigh in on this conversation from a more informed place. In 2011 I had watched the culture war screaming contests intensify, sort of wished I could join my friends at Occupy Oakland, and had a few great conversations with family members brave enough to gently tell me where they thought my sound analysis ended and liberal hogwash began.

The microeconomics class I took first was great fun, tables and math I was able to make some use of this year as Art started selling paintings and t-shirts. (I also learned why a tax on yachts falls almost entirely on boat builders rather than on buyers.) There were not, as I feared there might be,  assumptions with which I fundamentally disagreed. Then, a few semesters later, I moved on to macro (there was a human resources class in between). I was able to take the underlying assumptions in stride there, too, except for this one: more and faster economic growth is always best for everyone, because "a bigger pie" means more real income for anyone with income. It  doesn't and it hasn't, in this country in the last 30 years (graph published by the Atlantic, from Center for Budget and Policy Priorities numbers):


So today's debate is between this guy, who I look forward to hearing on All Things Considered every Friday, with whom I think I would have no trouble finding compromise if we ever had to work together:


...and this guy, who I think has a good record (if you remember Clinton Labor Department decisions you didn't like, I'd like to know about them. honestly.) I usually agree with his analysis, but I've been getting increasingly frustrated with his rhetoric:



Back to the graph, to start, a point of agreement from both corners: something is not okay at the top. "Perverse compensation schemes on Wall Street" and superstar economics (Brooks) have led to a very few getting very rich in an age-of-the-robber-barons, pre-antitrust law sort of way.

Hey, lots of jobs in my town require the presence of one-percenters, many of whom are lovely people. No one's getting out a guillotine. I think Brooks probably supports shareholder resolutions that have come forward in recent years attempting to reign in executive compensation. To my mind, there's no way that an executive of a U.S. firm is hundreds of times better at her job than her 1950s counterpart at the same firm, or than a leader at a Japanese firm today (for this argument, remember not to confuse said Japanese firm with that country's government in the "lost decade"). Put another way, productivity gains have not all been due to the genius of top management.

"If you have a primitive zero-sum mentality," Brooks said, "you assume greater affluence for the rich must somehow be causing the immobility of the poor."

The zero-sum thing is important to understand. Conservatives often say, "look, we shouldn't be talking about who gets how big a piece of an existing pie. What we need is to make a bigger pie. When we do, everyone gets more." To the extent that the "bigger pie" conversation reminds us that we're talking about very complex systems, that's great. Gains from trade can work that way. A dollar of investment generates many more dollars of total economic activity.

But as Reich points out and Henry Ford famously understood, you've got to have purchasing power in the middle class in order for an economy to grow. I can agree to look at the bottom and top of the graph separately; at the bottom, real wages have not kept up with GDP growth as promised in the textbooks. If that has nothing to do with executive compensation, fine. I can even buy some of the arguments that changing the federal minimum wage may not be the way to change it. But it needs to change.

Brooks likes to talk about the poor, and he's well versed in relevant social science. "The primary problem for the poor is not that they are getting paid too little for the hours they work. It is that they are not working full time or at all." Hear, hear! I'm not sure how to go about changing the culture in big-firm HR strategy (the not-full-time thing predates the Affordable Care Act). I agree with Brooks that the "human capital problem" is a better bet for bipartisan legislation than a minimum wage bill, but I'm not aware of a human capital lobbying firm on K-street, so I'm not hopeful that they'll get to it.

As Reich points out, whatever we come up with for policy to address what Brooks calls human capital problems, it will cost some money and "the fiscal cabinet is bare." That missing middle class needs to be making money in order to pay taxes, too.

You're both right, gentlemen. Could you cut out the name-calling?

2 comments:

Mark Messer said...

I recently explained to a friend that when I invest in riskier stocks, I don't mind when one or two go bankrupt because I can only lose what I invested, but when I pick a winner, there's no guaranteed peak price for that stock. It can go up and up. I've lost, say, $1000 in two stocks in about eight months, but I've seen 500% growth in another in the same period.

Wages are a different subject, though. When they go way up for the top 20% as in the chart, those wages tend to create inflationary pressure where those people live, not just for luxury goods, but also for homes, cars, clothing, fresh fruits and vegetables, and other things that the bottom 20% can't afford to pay more for.

If income growth were more equally distributed, there'd still be inflationary pressure, but everyone would be in a better position to pay.

As the rich get richer, the bottom is still flat broke. That doesn't change without a chance in the minimum wage. What changes is how hard it is for folks on the bottom to get by.

Liz said...

Interesting. The reporting on, for example, the San Francisco housing market definitely bears out your point on inflationary pressure.
Isn't the Fed currently concerned that inflation is actually a little too low overall, though?