Inequality is not just about taxes and education

Zachary Goldfarb wrote an interesting piece on President Obama’s commitment to fight rising economic inequality as president. Lots of it rings true—the president has indeed expressed concerns about rising inequality and many of his policy initiatives (particularly the coverage expansion included in health reform) will indeed do much to ensure that rising inequality no longer provides as daunting a barrier to low– and middle-income households’ living standards growth.

What’s consistently depressing in the inequality debate as waged around D.C. politics, however, is the telescoping of the debate into being all about tax rates and educational attainment.

Goldfarb repeats a piece of ossified conventional wisdom in his piece, writing, “The data show that rising inequality is largely the result of a changing economy that handsomely rewards people with better skills or credentials—a college education—and leaves people with a basic education at a disadvantage.”

This just isn’t right. Check out how wages for college graduates have fared in the past decade. 

The real action in inequality is the enormous share of overall economic growth in recent decades claimed by the very top slices of the income distribution—yes, the top 1 percent, who accounted for a larger share of average income growth between 1979 and 2007 than the entire bottom 90 percent of U.S. households (a bottom 90 percent that includes most college graduates).

And what has driven this concentration at the very top? It’s less about education and more about raw economic power and how policy has tilted to shove more of it to the top. For example, as of 2007, about more than half of the income earned by the top 1 percent could be accounted for by corporate executives and jobs in the financial sector. These are, to put it lightly, sectors of the economy where competition has limited reach for putting a brake on pay; in the jargon of economists, they’re sectors with substantial “rent-seeking.”

Yet despite the clear importance of economic power and income concentration at the very top driving trends in overall inequality in recent decades, little has been done to change policy to address this—and this has not really changed during the Obama administration. One could imagine using policy levers to go directly after these rents at the very top—through changing corporate governance law to make markets in managerial labor actually competitive rather than collusive, or by instituting a tax on financial transactions to crowd out socially unproductive trading that makes the entire sector more expensive and allows it to claim excessive amounts of overall income growth. Yet measures like these are certainly not on the table.

Further, as tax and inequality expert Emmanuel Saez noted in Goldfarb’s piece, the changes under discussion in American politics at the moment are marginal compared with changes that would actually materially affect trends in inequality or compared with historical tax shares faced by the very richest.

It is obviously better to have a presidential administration that thinks rising inequality is a problem, especially compared to one that either made it worse through their own policy choices or one that thinks that the real problem was the moochers in the bottom half of the income distribution. But the scale of the inequality problem remains under-appreciated and policies aimed at fixing it remain severely underpowered. For what a real inequality-reducing politics would demand, see the overview chapter from the latest edition of The State of Working America.


  • foosion

    Some major contributors to inequality
    - trade and immigration policy which puts lower paid workers in competition with foreigners (e.g., outsourcing) lowering their pay, while insulating higher paid workers (e.g., doctors) from competition, raising their pay
    - intellectual property laws which raise prices of a wide range of items, such as drugs and movies, for the benefit of the few
    - too big to fail and other subsidies for the finance sector
    - anti-union efforts