Political Causes, Political Solutions
The International Monetary
Fund is absolutely right that inequality is bad for stability. But even before
the I.M.F. documented this relationship, the United Nations Commission of
Experts on Reforms of the International Monetary and Financial System
identified increasing inequality as one of the most important factors contributing
to the Great Recession of 2008.
In “The Price of Inequality,”
I explain the channels through which inequality commonly leads to instability.
Both were in evidence in our recent crisis.
Well before the crisis, there
was ample evidence that financial market deregulation was systematically
associated with instability. One is that inequality leads
to weak aggregate demand — or demand that would be weak in the absence of
countervailing actions, say by the Federal Reserve. The reason is simple: Those
at the bottom and middle consume essentially all of their income; those at the
top save 15 percent, 20 percent, or more. When money shifts from the bottom to
the top — as has occurred in recent decades in the United States — this low
demand would lead to unemployment and an anemic economy. The Fed, though,
stepped in, with low interest rates and lax regulation. It worked, creating a
bubble, which supported a consumption boom. But it was clear that it was only a
temporary palliative.
Another channel is the link
between economic inequality (at least in the extreme form that it has reached
in the United States) and political inequality, imbalances in politics that
have allowed corporations undue influence in shaping our laws and regulations,
especially those pertaining to financial markets.
Well before the crisis, there
was ample evidence in experiences throughout the world that financial market
deregulation was systematically associated with instability. I saw it up close
as chief economist of the World Bank. So, too, for the United States. The
allure of the extra profits that would accrue to the banks from deregulation
was irresistible, and they invested heavily. Their returns on these political
investments — in deregulation and bailouts — were far higher than their return
on their more conventional investments. Financial market deregulation led to
more instability, not higher sustained growth.
A policy basket that addresses
inequality would be multifaceted. A large component would be a more equitable
tax system – including closing the loopholes that benefit the wealthiest, and
making capital gains taxed at the same rate as wages and salaries -- the pay
that people get from their work. Much of the excesses at the top are a result
of lack of enforcement of competition laws, deficiencies in corporate
governance, and inadequate regulation of the financial industry. Better and
more equal access to education -- including more Pell Grants and better student
loan programs -- are essential if we are to strengthen incomes in the middle
and bottom. So too are stronger unions and more effective enforcement of
anti-discrimination laws. And stronger systems of social protection are
necessary if we are to reduce poverty.
The critical decisions are
taken in the political arena -- and that's why the most important reform is
stronger protections of our democracy against the disproportionate influence of
money in politics.
Unfortunately, the policies
advocated by one of the candidates in this election would almost surely make inequality
worse. Meanwhile, the recession has increased inequalities, both in income and
wealth. This does not bode well for our future.
A Big Gap Means There Is Room to Move Up
Diana Furchtgott-Roth
Increasing income inequality
isn’t an obstacle to economic growth; it’s a natural result of economic growth.
And growth is unlikely to reduce inequality. As economies grow, people get
richer, and some people get much richer — think Steve Jobs of Apple or Mark
Zuckerberg of Facebook. At the same time, low-wage jobs allow unskilled
workers, like teenagers, to get their foot on the first rung of the career
ladder — think summer jobs as a lifeguard or scooping ice cream at Baskin
Robbins.
What’s important to economic
growth and to social cohesion is job mobility. Can ice cream scoopers become
accountants or successful entrepreneurs? For this we need to dramatically
improve our education system and raise high school graduation rates above the
current level of 75 percent.
A Pew Research Center survey
released on Tuesday indicates that almost half the adults in China are
concerned about inequality. But 70 percent say they’re better off than they
were five years earlier, and 92 percent say they have higher standards of living
than their parents. No one believes that the Chinese would be better off poorer
and more equal.
In America, growing inequality
has been caused partly by rising numbers of two-earner couples. In the 1980s,
women moved into previously male-dominated professions. At the same time,
Americans delayed marriage and divorces increased. In 2011, 75 percent of
households in the top fifth of the income distribution had two income earners,
and 22 percent had one income earner. In the lowest fifth, only 5 percent of households
have two income earners, and 95 percent have one or no income earners.
No one is suggesting that
women stay home or remain in their traditional professions, like teaching and
nursing. But one of the fastest ways to create more equality would be to rule
that only one member of a family is allowed to work full-time.
What’s important to economic
growth is job mobility. It's fine if the ladder is tall, as long as someone on
the bottom rung can climb. Redistributionist measures to
reduce inequality, like higher taxes, discourage growth. Two years ago, Britain
raised its top tax rate to 50 percent from 40 percent, but will lower it to 45
percent next year. The chancellor of the exchequer, George Osborne, said the
higher rate was not raising revenue as forecast. “No chancellor can justify a
tax rate that damages our economy and raises next to nothing,” he said. “It’s
as simple as that.”
Working Harder, and Earning Less
Michael C. Dawson
The social consequences of
extraordinary levels of economic inequality within the United States directly
and indirectly harm the prospects for economic growth. The direct effects are
substantial. The country’s ability to remain economically competitive is
undermined when four million qualified young people are, for economic reasons,
unable to attend a four-year college. This is a growing pool of talented
individuals who should be, but will not be, fulfilling their potential, and
therefore will not be contributing as much as they could to economic growth.
There is an indirect obstacle as well: As we have seen in Western Europe, these
young people will become increasingly disenchanted, which brings the increased
probability of social unrest, which in turn also undermines growth.
How much longer can economic
growth be sustained if it does not benefit the overwhelming majority of
Americans? The rise in the number of
qualified students unable to attend school is correlated with the devastating
shrinking of programs like Pell grants to provide adequate aid for academically
able but economically distressed youth. We have all seen that the huge tax cuts
enacted during the Bush administration have fueled vast gains for the very
richest Americans while providing virtually no gains to the bottom 60 percent
of the income distribution. But we should remember that those cuts also have
made it harder and harder for the government to invest in the country’s youth
and in our future prosperity.
Another correlate of the
growing income inequality has been the increasing swath of the American public
that is becoming permanently detached from labor markets. Growing income
inequality has led black and Latino workers to suffer sustained unemployment at
a disastrous level. Once again, the result of sustained economic distress is
most likely an increase in civil unrest that is not only socially and
politically costly to the polity, but fiscally costly as well.
Those at the bottom have
greater health problems and are more likely to use expensive medical services,
and in general they need more aid from the state. By the standards of modern
industrialized countries, our nation’s health care system is both ungenerous
and expensive; the rise of health care spending for these permanently
devastated populations will serve as another brake on economic growth.
The harmful effects of
economic inequality on growth go on and on, but I will make only one final
point: Economists are analyzing what some have called the “decoupling” of productivity
from economic gains. Americans today work more than any of their counterparts
abroad — a lot more. Yet wages have remained stagnant, while greater
percentages of wealth go to the very wealthy here than do in other nations or
than went to wealthy Americans in past eras.
Social mobility is much less
common in the U.S. than it once was, and much less common than in other
economic powers today. How long will middle- and working-class Americans be
willing to work so much harder than their peers if the American dream largely
no longer applies to the great majority of citizens? How much longer can
economic growth be sustained if it does not benefit the overwhelming majority
of citizens within the United States?
All Will Benefit If More Are
Secure
Jacob S. Hacker
In the wake of the financial
crisis, an increasing number of thoughtful analysts are arguing that inequality
threatens growth. Yet the biggest effects of rising inequality are probably not
on growth itself, but on the ability of growth to translate into rising living
standards, opportunity and security for the broad middle class.
And the most likely reason for
these negative effects is that rising inequality distorts our politics —
leading to weaker representation for the middle class and increased gridlock —
so that sensible policy choices are more difficult.
Economic inequality creates
political inequality, making it harder to increase middle-class living
standards, security, opportunity and, yes, growth.
Let’s start with the facts.
Over the last generation, less equal countries like the U.S. do not seem to
have grown consistently faster. If rising inequality doesn’t lead to higher
growth, then, by definition, it lowers middle-class income gains. In the United
States, overall productivity has grown relatively strongly. The rewards of this
growth, however, have gone mostly to the top.
Yet even this understates the
problem. In addition to income growth, Americans also care about opportunity
and security. And both have stalled or declined despite growing productivity.
Long-term upward mobility has stagnated as inequality has grown.
Intergenerational mobility — how kids do relative to their parents — is lower
in the United States than in almost any other rich nation.
At the same time, economic
security has eroded. Private health insurance is less common, income
instability has risen, people’s private safety net of wealth has been
decimated, and Americans are less well prepared for retirement.
These are not insoluble
problems, and recent research and historical experience strongly indicate that
tackling them would accelerate, not hinder, overall growth. As we have argued
in a recent report titled, “Prosperity Economics,” such win-win policies
include immediate investments in productive physical capital like
infrastructure (which would put people back to work and increase future growth)
as well long-term investment in pre-K and college education.
They would also include
measures to tackle health costs and give workers (particularly in low-wage
sectors) greater bargaining power and more professionalized career paths. And
they would require a serious assault on special deals for industries like the
financial and energy sectors that impose risks and costs onto our society for
which they don’t have to pay.
The problem of course is the
politics, and here we come to most fundamental means by which rising inequality
has affected the economic lives of most Americans — for the worse.
As growing inequality has
translated into rising political inequality, it has been harder and harder to
act on sensible prescriptions that would increase middle-class living
standards, security and opportunity, as well as overall economic growth.
Ensuring that today’s economic winners don’t dominate our political process may
be the most important way to improve the quality of economic life for all
Americans.
Inequality Is Not What We
Imagine
Scott Winship
Rising inequality in America,
according to a number of economists and many more pundits and political actors,
has hurt economic growth. By reducing economic mobility, it is said to have
inefficiently allocated talent. Similarly, outsize salaries in the financial
sector are said to distort career decisions of college graduates. Inequality,
others say, reduces worker motivation and happiness and social trust, which
affect productivity. It lowers aggregate demand because the rich consume a
lower percentage of their income and in ways that do not promote future growth.
It reduces entrepreneurship by saddling college graduates with student debt.
These contentions make
intuitive sense and are eminently plausible. The problem with most analyses of
rising inequality is that they do not take the all-important step of actually
examining the evidence. Such ad hoc hypotheses about inequality’s effects on
growth are easy to spin. From the right, Edward Conard and others have just as
plausibly argued that rising inequality gives people the incentives to take
risks and work hard — elements crucial for robust economic growth; if it would
induce more people to pursue Steve Jobs levels of innovation, maybe we need
higher inequality still!
The evidence does not give
much reason to worry that inequality saps growth, or much reason to think that
it increases it.
What does the evidence show?
The liberal Center for American Progress recently released a report purporting
to show how inequality hurts the economy. If the research on the link between
inequality and growth persuasively showed a strong connection, you can be sure
that the center would have trumpeted it. Here is what the authors, Heather
Boushey and Adam S. Hersh, instead wrote:
There is, of course, a rich
literature on the relationship between inequality and growth. Although there
are many conflicting views, there is ample evidence that inequality can, in fact,
hurt growth under many circumstances. But this literature focuses mostly on the
experience of developing countries, and its applicability to the challenges
currently facing the United States is not entirely clear.
Widely cited research by
I.M.F. economists — embraced by the chairman of the Council of Economic
Advisors, Alan Krueger, in a speech in January and highlighted by Annie Lowrey
in The New York Times this week — has this very problem of focusing primarily
on developing countries. Inequality in dictatorships and oligarchies with mass
poverty is a very different matter than inequality in rich democracies.
Indeed, research by
Christopher Jencks of Harvard University looking at the experience of 12
developed countries over the past century indicates no relationship across
those countries between the share of income received by the top 1 percent and
economic growth rates. Since 1960, however, countries with higher inequality
have experienced more growth. Boushey and Hersh do not cite Jencks’s study but
nevertheless conclude that, “Ultimately, data and methodological issues mean
that analyses are too imprecise to deliver definitive answers to this old and
central question in economics research.”
Studies that look at some of
the specific hypotheses mentioned above also are inconclusive or refute the
idea that inequality is harmful to growth. Inequality does not appear to lead
to financial crises. Its link to opportunity is highly questionable. The
evidence that it distorts political outcomes is similarly thin and again based
largely on developing countries.
It is not enough to construct
arguments about why inequality might matter; in the end this is a question we
can subject to empirical testing. The evidence does not give much reason to
worry that inequality saps growth, or much reason to think that it increases
it.
We Need Latin American Style
Affirmative Action
Tanya Katerà Hernández
While the public conversation
in the United States has only recently broached the concern that income
inequality is an obstacle to economic growth, the rest of the Americas have
been much more cognizant of the deleterious effects of income inequality. In
fact, because Latin America has one of the highest levels of inequality in the
world, its efforts to address inequality offer a useful comparison. Notably,
part of the growing Latin American discussion about income inequality has been
the observation that the social exclusion of persons of African and indigenous
ancestry has inextricably linked race and class in ways that impede economic
growth. Indeed, the Organization of American States has stated that the
pervasive existence of racial discrimination in the region will hinder the
ability to meet the objectives of the United Nations Millennium Development
Goals for 2015, which each nation committed to in 2000 as a precise and
measurable manner of reducing extreme poverty.
The U.S. could benefit from
policies that address both race and class barriers to economic growth.
This has led some Latin
American countries to institute national policies that overtly address the
intersection of class-based and race-based inequality. For example, in August
2012 Brazilian legislators enacted “The Law of Social Quotas” which requires
public federal universities to reserve half of all new admission spots for
public high school graduates who meet the socio-economic threshold requirement.
In addition the law requires that the 50 percent quota reserve spots for
Afro-descendants and persons of indigenous ancestry in number proportional to
their relative populations within each state.
The race requirement in the
legislation is an acknowledgement that solely a class-based approach to racial
disparities (as some U.S. scholars have proposed in their lobby for a unitary
class-based affirmative action policy) cannot fully resolve the income
inequality that results from the continued conscious and unconscious racially
biased decision-making across all sectors of the society. Another Latin
American context like Cuba serves as the example of how unitary class-based
equality policies are an incomplete remedy for the continued unequal status of
many Afro-Cubans.
In short, Latin America
provides a useful comparison for the United States to consider the importance
of reducing its own income inequality in ways that can effectively address the
combined race and class barriers to economic growth.
Revive Labor’s Power
Timothy Noah
The simplest thing government
could do to reverse the 33-year growth in income inequality is to make it
easier to start and maintain a union.
Although income inequality is
growing in comparable nations around the world, it is more extreme and growing
more rapidly here. A big reason is that labor unions, which have faced rough
times everywhere with the rise of globalization, have declined much more in the
United States.
You can't even discuss solving
inequality without considering how government can help rebuild — really, stop
suppressing — unions.
Private-sector union density
peaked in the early 1950s at almost 40 percent. Today it’s down to 7 percent,
which is about where it was when Franklin Roosevelt entered office. It’s as if
the New Deal, which made possible the rise of America’s labor movement, never
happened.
Revitalizing labor is not a
popular cause nowadays, even among liberals, but there’s little point in even
discussing how to solve the inequality problem if you won’t consider ways the
government could help rebuild — really, stop suppressing — unions. If you graph
a line charting the decline in union membership and then superimpose another
line charting the decline in middle-class income share, the lines will be
nearly identical. That is not a coincidence.
The uniquely American decline
of organized labor was brought about in large part by the slow-working effects
of the 1947 Taft-Hartley Act, which made it considerably more difficult to
organize. (The "card-check" bill that labor failed to push through
Congress in 2009, which would have reduced obstacles to unionization, was aimed
at repealing one of Taft-Hartley’s more onerous provisions.) Repealing
Taft-Hartley would be the best single thing Congress could do to reverse income
inequality, but that’s a tall order.
Richard Kahlenberg and Moshe
Marvit have proposed passing a law that would make organizing a civil right
protected under federal law. That would allow any worker fired for trying to
start a union to sue the boss. As things stand now, such firings are illegal,
but the penalties are so minuscule that it’s economically irrational for
businesses to obey the law.
Another helpful step — one
more easily within reach — would be for Congress to raise the minimum wage
(preferably to $10 an hour; it's now $7.25). As a candidate in 2008, Barack
Obama promised to raise the minimum wage, but he never followed through, even
though raising the minimum wage would be one stimulus that wouldn’t cost the
government a dime. An economic consensus is emerging that whatever negative
effect increasing the minimum wage has on hiring is easily counterbalanced by a
rise in productivity; workers, it turns out, perform better on the job when
they’re treated with at least minimal decency.
Mitt Romney actually favors
indexing the minimum wage to inflation, which is a terrific idea. Lately he’s
hedged a bit to justify not raising the minimum wage just now, but it’s notable
that he hasn’t abandoned this position entirely.
Train Americans to Make
Their Own Safety Nets
Douglas Holtz-Eakin
The seminal economic event of
the early 21st century is the entry to the global labor market of billions of
workers in China, India, and elsewhere around the globe. The simplest economics
suggest that this plentitude will lower the earnings of unskilled laborers and
raise the return to higher-skilled workers and capital investment. This is bad
news for poor wage-earners and an advantage to those with human and financial
capital.
Focus on building human
capital. And rather than relying on government relief, create accounts where
all can accumulate wealth
Some will be tempted to react
by ramping up pure redistribution using the traditional tools of high-income
taxes and low-income spending programs, attempting to empower unionized labor
or closing borders to flows of goods, capital and labor. Global market forces
will overwhelm such ill-conceived government attempts to reverse the
fundamentals at play.
A better strategy is to
harness these very forces by building human and financial capital. The merits
of fundamental reforms to the K-12 education system that emphasize choice and
competition that reward performance and attainment are no longer a source of
partisan divide. But a more thoroughgoing focus on building human capital at
every stage of the career is necessary.
From a budgetary perspective,
the goal should be not only to rein in the over-promises of existing
entitlements, but also to reverse the basic strategy. Why provide an
entitlement for retirement income, health care and elder assistance? Why not
provide the entitlement early in life so that pre-K school, primary education,
nutrition and preventive care provide the capacity for strong returns to human
capital and the capacity to finance those same old-age needs in a vibrant
market setting?
Why structure unemployment
insurance, food stamps, Temporary Assistance for Needy Families and other
low-income programs as cash flows, conditional on meeting eligibility criteria?
Those programs send checks based on income and/or work status, regardless of
the individuals' economic past or future. Why not integrate these programs with
individual-specific accounts that can be managed to accumulate wealth and
provide strong incentives for reliance on work and timely exit from support.
Staying at work would mean more wealth in the future. If work is interrupted
and individuals are running down their own nest egg, they will not overstay
their time on unemployment rolls or other support programs.
Critics have focused on the supposed
inability of participants to manage financial accounts and the riskiness of
financial investments. The greater risk is to fail to build the human capital
needed to address the former and to forgo forever the potential returns to the
latter.
Fairness is at the heart of
the debate over inequality, and that misses the fundamental economic and moral
challenges.
When Too Many People Are in
Prison
Tehama Lopez Bunyasi
If we’re worried about rising
income inequality further dampening the nation’s economic growth, then we need
to do something about the 2.2 million people behind bars in the country — 60
percent of whom are people of color — and the fact that once they serve their
time they find little recourse for rebuilding their lives. Their absence from
the economy, the voting booth, and most of all, their homes, has reverberating
effects for their children, partners and fellow community members.
The huge population of men of
color who are currently in prison means they are absent from the economy, the
voting booth and their families.
To address the huge
incarceration rate in the U.S., Congress should repeal the Anti-Drug Abuse Act
of 1986 that instituted mandatory minimum penalties for drug offenses, and
produced the infamous 100 to 1 disparity between distributions of powder versus
crack cocaine. Both practices have disproportionately affected black and brown
communities, keeping these groups relatively impoverished in comparison to
whites and ultimately increasing the inequality gap.
The Fair Sentencing Act of
2010 reduced the disparity to 18 to 1 but this is not enough. We need to bring
the ratio down to 1 to 1, make it retroactive and release more people from
prison so they can become productive, working members of society.
For fresh ideas on how to put
ex-felons to work, our legislators could learn from the efforts of Homeboy
Industries in Los Angeles which helps the prison-bound and the formerly
incarcerated by developing their social and professional skills so that they
can compete in a challenging economy.
By keeping more people out of
prison and rehabilitating those who were in prison, growth is bound to follow.
All Growth Is Not Created
Equal
Sheldon H. Danziger
Poverty and inequality can’t
be reduced without economic growth. But in the U.S., it has been 40 years since
the rising tide lifted all boats. We need substantial government help to raise
the economic prospects and family incomes for those who benefit little from
today’s economic growth. Their higher incomes together with increased support
for their children’s educational attainment, from preschool through college,
would increase social mobility and contribute to more rapid, less-unequal
growth in the future.
Many still believe that a
growing economy raises wages and family incomes across the board, so that the
rich, poor and middle class prosper together. The economy did work like this
during the “golden age” from the end of World II until the early 1970s, when
prosperity was widely shared and income inequality declined.
In the U.S., it has been 40
years since the rising tide lifted all boats. Government could help struggling
Americans, and we all would benefit.
For the last 40 years we have
experienced a “gilded age of inequality.” The rich have gotten fabulously
richer, while the middle class has struggled and more workers have fallen into
poverty. We now have record numbers of professionals with annual compensation
in the millions and record numbers of families worth billions. The news media
report on working families struggling to pay rent and utility bills, and on
million-dollar birthday parties for the 1 percent.
Most economists cite several
factors that have contributed to rising inequality -- labor-saving technological
changes, the globalization of labor and product markets, immigration of
less-educated workers, the declining real value of the minimum wage, and
declining unionization. Many of these factors are at work in other nations, but
most of those nations have government programs that do more to reduce
market-induced inequalities.
The best examples for reducing
poverty and inequality can be found in the American Recovery and Reinvestment
Act of 2009 -- the much-maligned stimulus. It contained many policies that kept
poverty and inequality from increasing even more after the Great Recession than
they did. These include expansions of unemployment insurance, food stamps and
the earned-income tax credit for working low-income families, and funds for
state and local governments to subsidize firms to hire welfare recipients and
the long-term unemployed. These policies increased consumption and kept growth
from being even lower and poverty and inequality from being even higher.
The act also expanded Pell
grants, funding for Head Start and Early Head Start and other policies to
promote educational attainment and social mobility for low-income children and
young adults. These policies will contribute to higher productivity and
economic growth when these young people enter the labor market.
Unfortunately, these
growth-enhancing provisions have expired or will soon expire, leaving us in our
gilded age in which economic growth does little to reduce poverty and
inequality.
