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Monday, June 18, 2007
Is Inequality Unfair?
A final note on the Hamilton Project paper. A little less doom and gloom, this time.
Inequality, and the decoupling of productivity gains and growth in the median income, has not caused the Hamiltonians to reconsider their core beliefs about markets. They are generally concerned that living standards have not improved as much as one would expect, given productivity gains. But they do not draw from this well-known trend that there is anything either ineffective or unfair about how the market operates.
However, not all people in the advocacy and economics community are such true believers. In fact, interestingly enough, Hamilton Project co-founder Robert Rubin has said that institutional factors -or who has power in the marketplace- may have made a significant difference. In a recent interview with Jonathan Chait of the New Republic, he said (emph. mine):
To put that in harsh terms, it sounds like this troubling phenomenon might be out of the hands of public policy altogether, or at least not something you can control without massive harmful side effects?
RR: I don't think I'd agree with that. I think what we're both saying is that the economic environment is different from what we've experienced before. For the last 25 or 30 years there has been very low, almost negative, median real wage growth. It's been a longer term phenomenon, one exception being the last five years of the '90s. There's a lot of uncertainty and complexity, particularly with this enormous change in the global competitive environment. But I don't think I'd go from that to the conclusion that public policy can't play a very important role. I think I'd come to the conclusion that public policy needs to focus on this with tremendous intensity. I'd also add on the union thing one comment, I don't remember the name of the book, but wasn't it Countervailing Power by [John Kenneth] Galbraith, or do I have the name wrong?
That's certainly the phenomenon, I don't know if that was the name of the book.
RR: I think that was the name of the book, you can look it up and see. And the argument that [Galbraith] makes was something to effect that if you believe market-based economics, then you should have a market and labor as well. You need to have two sides to that market, that have at least enough power so that they can bargain with each other rather than one side having all the power and therefore being a price-setter. And that's always struck me as a rather sensible argument. Now where that leads you in terms of public policy, I'm not sure, but it does seem to me that the division of the benefits of productivity and of growth between labor and capital are based on some kind of negotiation in which you need some kind of, if not parity, then at least ... enough parity to have a real market.
Economists are also taking a fresh look at governmental institutions that influence market outcomes. In a recent paper (via Inclusionist), two MIT economists argue that changes in the global economy must be seen through in the context of changes in the minimum wage, unionization rules, and tax policy. This perspective leads them to conclude that government must strengthen interventionist policies to address inequality.
In our interpretation, the recent impacts of technology and trade have been amplified by the collapse of these institutions, a collapse which arose because economic forces led to a shift in the political environment over the 1970s and 1980s. If our interpretation is correct, no rebalancing of the labour force can restore a more equal distribution of productivity gains without government intervention and changes in private sector behavior.
Read the whole paper for more. But the point is that inequality is unfair- because market actors have been using their power to reward themselves for what they have not produced. Just because workers are more productive, doesn't mean that the market will reward them appropriately. Interventionist policies ensure that workers hang on to what they have earned by being more productive.
The authors even make the point that perhaps the roll-back of institutional safeguards has not made the economy grow any faster.
These microeconomic changes were not inevitable. Labor-market institutions appear to have many national idiosyncrasies. Lindert (2004) showed that different labor-market institutions in Western Europe and America are compatible with similar rates of economic growth. Nickell (1997) demonstrated that different labor-market institutions within Western Europe are compatible with similar rates of unemployment. Saez (2004) shows that rapidly rising incomes among the very rich appear in the U.S. , England and Canada (largely in response to U.S. competition.) but do not appear in most continental European countries or Japan.
So perhaps there's hope, after all.
Posted by Matt Lewis
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