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Friday, February 16, 2007
Inequality: The Search for Solutions
Federal Reserve Chairman Ben Bernanke has spent this week on Capital Hill addressing various Congressional committees on the state of the U.S. economy (we're doing OK). The topic du jure (de la semaine?), however, has been wealth and income inequality. Senate Committee on Banking, Housing and Urban Affairs chairman Chris Dodd's (D-CT) first question to Bernanake was:
Do you share Chairman Greenspan's concern, Mr. Chairman, that continued economic growth of inequality is a significant threat to our nation's fundamental promise of economic opportunity?
Sen. Chuck Schumer (D-NY) followed suit and opened his line of questing with this:
My first question deals with the issues of income inequality and the speech you gave yesterday, where you pointed out that this is just in an ideas, almost instantaneous economy, wealth agglomerates to the top.
Wealth and income inequality is a real and growing problem (despite the carping of the Wall Street Journal's editorial board). Policy makers are now in hot pursuit of the causes and possible remedies (if any).
Bernanke believes "[t]he very important drivers of economic growth and prosperity in this country include free and open trade and technological progress," but that the gains from these changes will have deleterious effects on some workers while "those who are going to benefit the most from globalization and technology are those who have the skills." In other words, income inequality is the result of an unequal distribution of education and skills.
Income distribution is not lumpy or even steep - it's spiked. Paul Krungman wrote about this phenomenon a year ago. In his column entitled "Graduates versus Oligarchs", Krugman cites the following statistics that cast doubt on the effects of education on income distribution:
Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains.
But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent.
Stagnating income gains among college graduates over the past few years also calls into question the cause (and potential remedies) for this trend in inequality. This is not to say, however, that education has no effect on the distribution of wealth and income, but it certainly is not the singular cause. Investment in education is definitely warranted, but the point here is that the search for other policies should not end at finding the most efficient methods of national education.
Posted by Craig Jennings
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