Kieran Healy

Risks, Rewards and the Wage Bargain

David Adesnik has a long post ruminating on some complaints by Kevin Drum on the amazingly rapid rise in income and wealth inequality in the United States over the past twenty five years or so. Kevin does some basic math to calculate how the increase in GDP over that time would have been distributed if rates of inequality hadn’t changed. David responds:

While I don’t understand much about economics, I tend to accept that growth in market economies reflects the willingness of those with capital to invest it in projects that carry with them a certain degree of risk. If the projects fail, so be it. If they succeed, those who put up the capital reap a far greater share of the profits than those employees who enjoyed the security of wage-based income.

Writ large, this process ensures that when the economy grows, the rich will always get richer far faster than everyone else.

This is the standard rationalization for rising wealth inequality. But it isn’t true, for several reasons.

On its own terms, I don’t think the story implies that the rich must get richer at a faster rate, which was Kevin’s original point. It just says there should be a lot of turnover in the class of rich people. If getting rich is just a matter of risk taking, you may win or lose on any given spin of the wheel and the rich have more to lose.

Neither do the empirical data bear out the idea that rapidly increasing inequality is an inevitable feature of capitalism. Look at the comparative cases—- other advanced capitalist democracies don’t have nearly as much wealth inequality as the U.S., and the U.S. itself for most of its history didn’t have such severe inequities either. So it’s hard to argue that the changes we’ve seen over the past 25 years are simply a matter of the Iron Laws of the Market.

Perhaps the most important point is that, when you get right down to it, the amount of risk borne by CEOs or very wealthy investors doesn’t seem nearly proportionate to the profits they make. Conveniently, John Quiggin and Ken Parish have informative posts on just how difficult it is to fail once you’re in the CEO position. John cites David Gordon’s Fat and Mean, a great attack from the mid-1990s on the idea that corporations were downsizing and becoming leaner and more efficient. What was really happening, Gordon convincingly showed, was that the social wage bargain was changing. Middle-managers and workers were being forced to bear a much larger part of the risk inherent in the capitalist enterprise, and owners and executives were becoming increasingly well-insulated from the downside. David talks about “the security of wage-based income,” a laudable institution but sadly a part of history for most workers in today’s economy. Check out Vicki Smith’s illuminating book, Crossing the Great Divide: Worker Risk and Opportunity in the New Economy for a close look at the world of work in different sectors of the U.S. economy.

If you want to know more about wealth and income inequality in the U.S., the books to read are Edward Wolff’s Top Heavy and Lisa Keister’s Wealth in America. (If you are Megan McArdle, you should buy the Wolff book, because it’s written by an economist and therefore is scientific, whereas Lisa is a sociologist.)

Towards the end of his post, David says “I have no idea what proportion of income inequality reflects natural trends in the American economy as opposed to Republican policy objectives.” It’s exactly this idea of “natural trends” in the economy that’s at issue. The standard description of this natural trend—wealth accrues to the risk takers, who also bear the downside of that risk—isn’t really true. As Marx said a long time ago, capital is not a thing, it’s a social relationship. (Don’t panic because I just mentioned Marx.) You don’t have to be a Marxist to see that the social relations of production have changed in the U.S. over the past generation, and that they bear little relation to the stylized story of virtuous accumulation through risk-bearing.

Economics 101

David from Oxblog takes a stab at economic issues today. Standard fare of center-left economic concerns expressed here. General idea

If your guests panicked at your mention of Marx, I have a feeling that recommending Edward Wolff’s book is going to cure their constipation something wonderful.

Opportunity Knocks

David Adesnik ends a long post with the following conclusion:Instead, I think it would be better for all of us—right, left and center—if the Democrats sought to gain a few percentage points at the polls by…

Opportunity Knocks

David Adesnik ends a long post with the following conclusion:Instead, I think it would be better for all of us—right, left and center—if the Democrats sought to gain a few percentage points at the polls by…

Thank you so much for the suggestion, Mr. Healy. Both books are rather out of my budget right now, but I’ve added them to the list of items I’ll be looking for in my local library.

“Look at the comparative cases —- other advanced capitalist democracies don’t have nearly as much wealth inequality as the U.S…”

Can I get an example of an “advanced capitalist democracy” that has a lower unemployment rate, a healthier economy, and more productivity than the U.S.? Even now? Most of Europe would give an arm to have an unemployment rate as low as 6 percent.

America is filled with sociologists, economists, and others who are absolutely certain that if only they could just get rid of the inequitable market forces and get their own hands on the controls, paradise would certainly result.

That they can still think like this in the face of a century of almost total failure of planned economies amazes me.

“That they can still think like this in the face of a century of almost total failure of planned economies amazes me”

You know, navigation is a complicated thing, and back in, say, the late 18th Century, it was not uncommon even for expert professional sailors to find themselves off by a couple of hundred miles in their reckonings. This circumstance, of course, lead to the total abandonement of any attempt to navigate, and today’s preference for travelers arriving at their destination, not through any “planning,” but through the natural and infallible operation of market forces. The trick lay in getting travelers to accept that where they ended up was where they should have been going all along.

“Can I get an example of an “advanced capitalist democracy” that has a lower unemployment rate, a healthier economy, and more productivity than the U.S.?”

Do you mean to say that you don’t think income/wealth equality is a worthwhile thing to consider, or are you putting forth productivity and efficiency as indicators of income/wealth equality?

“Navigation is a complicated thing.”

Not sure what point you’re trying to make here. An analogy between centralized economic planning and the individual planning of private endeavors doesn’t hold up. Or are you assuming that unless the government personally tells me what roads to take to drive from here to Sacramento that I would become hopelessly lost?

“Do you mean to say that you don’t think income/wealth equality is a worthwhile thing to consider?”

No. I don’t. Every place I can think of where income has been forcibly “equalized” is a poverty-stricken hellhole. And, not surprisingly, said hellholes are usually ruled by a tiny elite which seems to have a special exemption to the idea of “income equalization.”

And if anyone tries to draw some form of moral equivalence between mass murdering thugs like Saddam and American billionaires like Bill Gates, simply because both have a lot of money, I wouldn’t if I were you.

Is our goal equality or improvement? I don’t mind if the rich get richer faster than I get rich, so long as I get richer too. I never saw the virtue in us all being equally unemployed, waiting for Healthcare and having our lives assigned by central planners. Maybe having an economy thats only half-fair is better than having one that doesn’t work at all.

What I fear is cementing in place an hereditary leisure class with such massive wealth (and subsequent control of the political process) that there is NO turnover in the ranks of the affluent.

Eliminating the inheritance tax, and removing taxes on dividends and capital gains would go a long way toward fostering such a system…

Every place I can think of where income has been forcibly “equalized” is a poverty-stricken hellhole.

Bearing in mind that we’re not talking about absolute income or wealth equality, would you consider the 1950s and 1960s in the US to be a poverty-stricken hellhole?

I mean, obviously you’re thinking of a few specific places, which are far to the extreme of what anyone here is talking about. Care to pull away from the extreme, and talk about something more reasonable, like this country thirty to fifty years ago? I’m not saying you can’t still have your point of view, but the moderate places make for a much more interesting discussion.

I don’t mind if the rich get richer faster than I get rich, so long as I get richer too.

I am also curious about this. My gut reaction says that extreme inequality is bad in and of itself, but so far (and not, mind you, that I’ve looked much) I can’t really support that.

Well, as people here have started to mention, if you “look at the comparative cases” you may see a greater spread in income distribution, but you have to take into account a few other things. If by some of these cases you mean countries in Europe, you then have to consider that they’ve consciously chosen a different route for society. Through much, much larger governmental presence financed by dramatically higher taxes, countries like France, Denmark, Sweden, Germany, etc. have chosen to address the problem of inequality by providing much more robust social services. The minimum wages are higher, unemployment benefits are more generous and last for much longer, and the basic benefits of social services are at a higher level (transportation assistance, medical leave, maternity/paternity leave, etc).

The problem is, by attacking issues this way these countries have been created an unemployment problem as trenchant (if not more so) than the poverty problems of the US. People have become so dependent on services provided by the government that, even in the face of governmental bankruptcy, they protest against any change whatsoever to things such as pension plans and unemployment benefits. Productivity in Europe is starting to feel the effects, and is rapidly falling farther behind the US.

Not that I know them offhand, but one of the things that would be interesting to see is the distribution in income growth, rather than asking about change in the very top and bottom rungs of the ladder. Have the second-from-bottom quintile and the second-from-top quintile been growing at rates similar to the very top or bottom, or simply inbetween as might be predicted? (Meaning, could this rise in inequality be a spread of the distribution such that the very bottom is now truly lower and includes more people, or is it that the very bottom tail is simply much worse off, though not much greater in population?)

Tom – The navigation analogy:
navigation = (some degree of) economic planning; and so on from there.

in other words, just because we haven’t mastered the delicate art of economic policy doesn’t mean we should abandon our course to the vagaries of winds and waves (=market forces) and pretend that whatever port we end up (=greater inequality) was where we meant to go.

And when you think about it, in a way the government is telling you what roads to drive from here to Sacramento.

http://www.statcan.ca/Daily/English/000728/d000728a.htm

This is an interesting topic. I finished reading the article I linked and a few things come to mind:

(1) Canada is obviously not the United States with different economic policies (duh)
(2) I haven’t looked, but its main industries may or may not be significantly different
(3) Canada or some regions of Canada have low business taxes which might create some sort of displacement in incomes elsewhere
(4) both countries rely on cheap labor elsewhere, hence economic policy determinism doesn’t win by default (to what extent I have no idea)

etc. I’ll read my economics textbook someday…

If you support progressive taxation, then, I claim, you should be quite comfortable with rising economic equality. (See my argument here.)

America is filled with sociologists, economists, and others who are absolutely certain that if only they could just get rid of the inequitable market forces and get their own hands on the controls, paradise would certainly result.

But this argument is a straw man. It implies that there are no “hands on the controls” in our economy now, which of course couldn’t be farther from the truth.

The market is defined, shaped, and regulated by interested parties. The question should be, which parties’ interests should the market address? The recent shift in inequality has been accompanied by policies that favor corporate and shareholders’ interests over workers’ and consumers’. Not by “natural” market forces.

(1) Unemployment comparisons b/w US and Euro countries (including UK) is extremely misleading, since in the US there is much greater underemployment—people working for 10 hours a week at US minimum wage are considered employed; just accounting hypocrisy, since such a job guarantees no livable income.

(2) Unemployment is an acute political issue in Euro because people there for the most part still associate a “job” with an ability to sustain one’s family. In the US, this association is no longer “deemed sensible”: the label “working class” is now applied routinely not to people who do manual work for a living, but to people who do jobs that don’t pay enough for a living.

(3) A more interesting comparison is not between the US and other countries (which, to be sure, may have different cultural priorities than just the extra $.70/day from the latest tax cut), but between the US now and the US when inequality was lower and (more importantly) when redistributive policies had not been completely gutted. Was productivity growth in the US lower, say, in the 60s and 70s? I doubt it very much, but I don’t have data handy.

There is a common assumption that not wanting the rich to get richer means preventing the next Andrew Carnegie from getting rich at all and denyong the American Dream.
That doesn’t seem to be the same thing as doing away with estate tax, reducing dividend taxation for those who are already very very rich or different treatment of children of alumni and donors and the potential beneficiaries of affirmative action. I have read but can’t find a link that social mobility is actually decreasing in the US.
That seems to me to be completely at odds with the rhetoric of opportunity that seems to be the basis of most defences of growing inequality. Anyone think different?

There’s one factor acting against social mobility which seems to be rarely considered (particularly by academics). That’s the increasing emphasis on credentials, especially in the form of degrees.

There are many jobs for which college degrees are required, not for any rational reason but simply for knee-jerk reasons. There are many people in America whose advancement is being retarded not because they lack skills or motivation, but because they lack a piece of paper.

There is much idocy at work on this page’s comments.

First there’s the demographic distorions of the baby-boomer generation which is now in its prime earning years.

And then there are other considerations when evaluating the data…
as was noted in Reason magazine Janauary 2000:
(by Michael W. Lynch)

“You’ve heard the complaint:… there is far too much income inequality in America. This gripe is grounded in data from the U.S. Census Bureau’s annual report on income, the latest version of which was released in September. According to those data, the 20 percent of Americans with the lowest incomes earn a mere 3.6 percent of all wages paid, while the top 20 percent take home 49 percent of the loot. Translated into money terms, that means for every $1 earned by someone in the bottom quintile, a top quintile person earns more than $13.

“Not true, says a recent report…identifies three significant sources of bias in the Census Bureau figures.

“[1] First, the quintiles are not really quintiles. The top quintile actually has 24.3 percent of all income earners, while the bottom contains only 14.8 percent. That’s because the bureau counts households, rather than individuals, and high-earner households are more likely to be composed of married couples with multiple earners than are low-income households.

“[2] Second, the bureau leaves out some forms of income, including government benefits such as food stamps, and fails to adjust for the significantly higher taxes paid by high earners.

“[3]Third, the bureau doesn’t account for the fact that ***those in the top quintile work nearly twice as many hours as those in the bottom.***

“***After these adjustments…the [income] spread is reduced to $3.08 for every $1 earned. Which sounds almost European.***”

[***emphasis mine***]

Conclusion? Widening inequality is more apparent than real. In fact, long-term rates of US income inequality are close to their historic norms. Nothing to get alarmed about. Except by bloviating socialists.
—Orson

(1) With respect to income, “inequality” is not necessarily “inequity” – it’s a lot harder to solve, for ten or twelve hours a day, complex problems in an environment where you need to develop, draft and communicate the solution to succeed, where if you make a mistake you are fired, than it is to perform a repetitive, perfunctory task for a 7.25 hours per day. People who leave a factory floor when the whistle blows are called “working class” while those of us still in the office at 9 pm are the lucky few? That’s a torture of the language.

(2) Inequality of income in the US is in large part a function of geography and therefore is more even than you think – people get paid more in Connecticut than in Arkansas and it costs more to live in Connecticut than in Arkansas.

(3) Inequality of income in the US is also in large part a function of timing – people who take up a trade after high school start making moderate incomes and move up slowly, while others forgo income for four to eight years and take on substantial debt and live on macaroni and cheese during that period, and (hopefully) move up faster after graduation.

(4) The problem with citing “growing income inequality” in a vacuum (how do you make money in a vacuum?) is that the question itself is misleading, particularly with respect to the 1980s, during which time ALL income “quintiles” (the Census Bureau measures in quintiles – this isn’t an attempt to group conveniently) saw increases in income, and during which time relative income mobility (i.e., among quintiles) grew modestly.

(5) The fact that relative income grew modestly does not refute the idea of a widespread economic improvement – remember, all groups’ income rose. If slightly more households made it one or two bars up at the same time those bars were being raised, it means that ABSOLUTE income mobility grew DRAMATICALLY.

(6) All of this is pre-tax – - in the 1980s, post-tax incomes grew by fiat.

(7) Taken together, this means that the average family making $50K living in a Philly suburb went from making $55K in a good year and keeping $2K of the extra $5K to making $60K in a good year and keeping $6K. That’s a THREEFOLD increase in that “good year benefit.” This doesn’t show up in savings because people invested that money – in a bigger house, in the market, in college tuition….

(8) There’s no debating it. I was an ultra-liberal – I voted for Dukakis – before I decided that, you know what, I really find this interesting and want to read more about it. When I saw the actual numbers, I was really, really angry – the whole idea that the poor got poorer and the rich got richer at the expense of the rest of us is a complete sham.

And THAT’s exactly what the libs don’t want you to find out. When the libs tell you the rich got richer, they want you to think it means what it sounds like – that the rich when the dust settled were primarily the same people who already were rich before Reagan came into office – that’s just insupportable.

Make no mistake about it – it’s true that the Wellesleys of the country became nicer, in the absolute and relative to the Framinghams. But the Framinghams got nicer too, and more importantly the people who live in Wellesley now are a LOT more likely to have grown up in Natick or Framingham than they were pre-Reagan. The fundamental principle of the American dream – start out in industrial center, work hard and get to townie suburb, send kids to college and they can move to tony suburb, was a myth for most of us in 1979, an in the 1980s it was not only rescued but accelerated.

But this begs the question – sure, in politics everyone lies, to get ahead, to get into office, so you can achieve your policy and personal goals. But the liberal lie is that loosening econommic restraints, period, failed to weaken economic barriers between classes. It isn’t true – and they know it, because they know enough to use 1978 as their benchmark for median family income (it dropped through the floor from 1978 to 1980 and slowly improved thereafter), and they know enough to talk of the “share of the national income” earned by different groups without telling you that the national income almost doubled and that membership in those groups is very fluid and became more so.

So here we are – the libs say they want to help a certain constituency – the “working poor” – the bottom 40%. We have the clearest of evidence that shows that a stark policy shift helped those very people a great deal. If the libs’ motive is to help that constituency, then they’d adopt the policy that inured to its benefit. Instead they try their damnedest to cover it up.

It’s absolutely shameless, these liberals telling Manuel Gonzales making $5.75 an hour that he should vote for them because they’ll make the minimum wage $8 – they know damn well that’ll just freeze Manuel out of the labor market, but they also know that he doesn’t know it (or else he wouldn’t be making $5.75 an hour) and that the unions do. It’s one thing to admit what you’re doing, to take the union’s endorsement and openly advocate a price floor that will eliminate Manuel as competition for jobs – like they did with the Davis Bacon Act. It’s another to lie to face of the very guy you’re stabbing in the back. How Dick Gephardt sleeps at night is beyond me.

Hillary either. She’s just like her husband with the careful wording. Her “It Takes a Village” book says that “the lowest paid German worker” makes more than “the lowest paid American worker.” But she doesn’t tell you that “worker” means just that – someone with a job – and that Germany typically as 2.5X our rate of unemployment – they simply apply a higher price floor, and freeze more people out of the labor market. You could have a $20-per-hour minimum wage and say the “lowest paid US worker” gets paid more than the lowest paid worker in ANY other country – and have 25% unemployment. What would that prove? That it’s better to employ coy semantics than to allow businesses to employ more people?

The libs are NOT well-meaning people who just don’t understand economics. They are clever machine politicians who are motivated by their own self-interest, even at the expense of the very people whose interests they claim to protect.