Honest Inquiry

Ross Douthat takes on the income inequality issue in a NY Times op-ed piece.   The issue of income inequality is at the very heart of liberal thought development.  It stems from the early 1800’s, when the excesses of capitalism (long hours, low wages, child labor, etc) demanded reform.  Britain passed the Poor Law to provide subsistence level support for all citizens.  By 1900 the call expanded beyond subsistence to an argument that all members of a just society had a right to a ‘living wage’, and that if the economy did not provide a job with a ‘living wage’ it was by no fault of the worker, and the just state should step in to ”make good” the promise of a living wage.   This was to be provided by taxing the rich; redistribution of income.

The problem was, how much redistribtion was the right amount?  The early writers took no position, and essentially adopted the Utilitarian principle of the ‘greater good’.  Applied, the idea was we should tax the wealthy and redistribute their income until it caused more harm than good.  This cavernous gap in ideology has remained an open question for over 100 years.  How to resolve it?

One of the more popular methods became comparasions of income between the top and bottom tiers.  I have not yet come to the exact argument as to why a widening gap between top and bottom is a de facto social injustice.  Nonetheless, it is widely considered a ‘bad thing’.  But is it?

Mr. Douhat introduces us to factors that effect changes in income inequality:

For instance, inequality is driven in part by low-skilled immigration: it nudges wages downward for native workers, and the immigrants themselves are taking longer to achieve upward mobility than earlier generations did…

Inequality is also driven by the collapse of the two-parent household, which disproportionately affects the poor and working class, depriving them of the social capital they need to rise…

Inequality is perpetuated by our failing education system — and especially by the bloated cartel responsible for educating the nation’s poorest children.

Lacking an objective statement of the ideal income equality, the US is usually compared unfavorably to European countries.  A 1994 paper by Richard Freeman and Lawrence Katz addresses the comparasion:

Why did wage inequality and educational wage differentials rise more in the United States than in other advanced countries?  We attribute the exceptional experience of the United Sates to the way shifts in the supply of and demand for skills work themselves out in the decentralized U.S. labor market, compared with how they operate in other labor markets.  Our explanation has three parts…

The first is that changes in the supply of and demand of labor skills substantially alter wages and employment of different groups of workers in the manner predicted by economists’ supply and demand market-clearing model…We further expect supply and demand to have their largest effect on young or less experienced workers on the active job market as opposed to experienced workers with substantial job tenure…

The second part of our explanation identifies…differences in wage setting and other labor market institutions across countries…The stronger the role of institutions in wage determination, the smaller will be the effect of shifts in supply and demand on relative wages…[E]ducation and training institutions also mediate the effect of market forces…Social insurance and income maintenance institutions also affect labor outcomes…generous income maintenance or unemployment benefits that allow workers to remain unemployed for a long period can reduce their willingness to take low wages to obtain work… 

For the third part of our explanation we turn to institutional changes, such as product market deregulation and changes in unionization…The important institutional changes in the 1980’s were the decline in trade union power, which was exceptional in the United States, and the decentralization of collective bargaining that characterized diverse European countries.  Both of these developments are likely to produce greater earnings differentials. 

To simplify, one explanation for income inequality is that the U.S. labor market is shifting towards higher paying jobs requiring education and away from lower paying jobs.  A bad thing?  Should we ‘fix’ the ‘problem’ by taxing the higher paid?  Mr Douthat concludes:

The European experience suggests that specific policy interventions — the shape of the tax code, the design of the education system — may matter less in the long run than the sheer size of the state. If you funnel enough of a nation’s gross domestic product through a bureaucracy, the gap between the upper class and everybody else usually compresses.  But economic growth often compresses along with it.  This is already the logic of our current fiscal trajectory: ever-larger government, and ever-slower growth.  That combination could eventually create the more egalitarian America that Democrats have long promised to deliver. The question is whether Americans will thank them for it.