Why has inequality gone up so much?
The main reason鈥攖he outer layer of the onion, if you will鈥攊s the diminished ability of most Americans to claim as much of the economy鈥檚 growth as they once did.
I鈥檒l explain what I mean by that in a moment, but it may sound like a different explanation than you鈥檙e used to hearing.聽聽 Typically, we hear globalization (g), technological change (t), increased returns (ir) to high levels of education or superstar talents.聽 All of which play a role, but all of which have existed forever.聽 So something else must have changed.
Some of what鈥檚 changed relates to g, t, and ir themselves. US global trade, as measured by the sum of import and export shares of GDP, increased from around 10% in the 1960s to around 30% now, and the increased competition鈥攁nd large, persistent trade deficits鈥搘ith low-wage countries has held down wages and jobs in 鈥渢radable sectors.鈥澛� Technology appears to have become more 鈥渓abor saving鈥� in recent years, meaning if what you do is at all repetitive, you can be replaced by a machine.聽 If you write the software that runs said machines, that鈥檚 better.聽 College attainment has significantly slowed in recent years, and that鈥檚 been a factor as well.
But these are not the main reasons for the growth in economic inequality.聽 These are merely time honored forces that have the potential to deliver the benefits of growth toward a narrower sliver of the income scale.聽 What鈥檚 changed鈥攖he reason that potential is now realized鈥攊s the absence of a countervailing force pushing back the other way.
Unions, of course, come to mind, and there鈥檚 good research showing that less unionization is associated with faster growing inequality.聽 Other labor market institutions matter as well, including the erosion of the minimum wage, sectoral policies (e.g., promoting manufacturing), and the inattention to labor standards such as wage and hour rules, overtime regulations, and workplace safety.聽 Such policies provide some countervailing force to workers beset by the pressures of globalization, technology, and whatever else is skewing economic returns.
I鈥檝e stressed the importance of low unemployment here as well.聽 It鈥檚 no accident that periods of truly tight labor markets have consistently been ones where inequality鈥檚 growth was constrained.聽 And that makes sense: full employment labor markets give working people the bargaining clout they lack when the supply of workers much exceeds the demand.
An intimately related factor at the core of the inequality problem is the toxic combination of 鈥渞ational expectations,鈥� efficient markets hypothesis, trickle-down economics, and increased money in politics. The first two argue that anything that looks like a countervailing force鈥攚hether it鈥檚 full employment policy, a higher minimum wages, or even using policy to burst a financial bubble鈥攄istort market outcomes and must be stopped.
The latter two take that dangerously wrong theory and plug it into regressive tax policy, aggressive deregulation, and the dismantling of any countervailing force that might have pushed back on inequality in earlier times.
That鈥檚 about where things stand right now.聽 We鈥檙e way far away from full employment鈥攈ave been for over a decade.聽 Unions are fighting to stay alive, especially in the public sector, with little help from national policy. 聽Progressive taxation, another important force in dampening inequality鈥檚 growth (see the top figure ), is under constant attack. 聽 And while the Obama administration and a precious few in Congress fight the toxic combination of bad economic theory and its policy implications, they are too often no match for the power and reach of the deep-pocketed opposition, who continue to oppose any countervailing force, from health care and financial reform to countercyclical measures that might lower the jobless rate even just a tad.
As long as policy remains stymied in its ability to provide the majority of the workforce with some measure of force, some bargaining power, to push for their fair share of the growth they themselves are helping to create, inequality will continue grow apace.
Like they say in that movie, may the (countervailing) force be with you.
