Commentary | Economic Growth

Unfettered Markets, Income Inequality and Religious Values

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[ THIS PRESENTATION WAS GIVEN BEFORE THE PEW/BROOKINGS INSTITUTION FORUM ON RELIGION AND PUBLIC LIFE ON MAY 19, 2004. ]

Unfettered markets, income inequality, and religious values

By  Lawrence Mishel

I agree with Becky Blank that asking whether we should or should not have markets is not that interesting. Frankly, Bill McGurn is aiming his criticism at a group of people who seem to believe that markets in and of themselves are bad.  This is not the position that Becky nor I take.  Markets are the predominant mechanism for allocating resources throughout the industrialized world and that is not being contested anywhere, neither by Becky nor by any significant political movement in the U.S. or elsewhere.

The key question for me is whether “unfettered markets” are the appropriate way of organizing our economy, both in terms of the values we seek to see reflected in our society and for achieving our economic goals. One’s view of “unfettered markets” shapes how one views the role of individuals, institutions, and government in the economy. Unlike the generic question of “markets” the issues around “unfettered markets” are consequential and current.  The U.S. economic policy debate is in fact dominated by the assumption that unfettered markets work best, a view that’s applied to our domestic economy and to that of other countries through international financial institutions that the U.S. controls. John Kerry’s recent statement that he is “not a redistributionist” indicates how dominant this view has become.

I wish to state at the outset that there is plenty of room for applying our values to the economy because an economy can be structured in many different ways and yet achieve the same amount of efficiency.  There is not one true formula, known only to an economics priesthood, which prescribes how an economy should work. This was a conclusion of a book that Becky edited for the National Bureau of Economic Research (NBER) a decade ago. My way of illustrating the point is to note that major European countries have a far different set of policies—a strong social insurance system, government provision of health care, higher taxes, and far less inequality. Relative to the U.S., these countries also tend to take more of their growth in the form of leisure than consumer goods.  For those enamored with unfettered markets they are doing everything wrong. Yet, these countries have seen faster productivity growth –the gain in economic efficiency –  than the U.S. for most of the last four decades.  This is mainly explainable as a process of these countries “catching up” to the U.S., which was the technological leader.  However, many of these countries have now achieved higher productivity levels than the U.S.  It appears that one can choose different degrees of inequality and maintain the same amount of economic efficiency. Of course, one could also choose, based on one’s values, to lessen inequalities even if there were a trade-off with economic efficiency.

The discussion in the book was a bit too abstract for my taste, probably because I am an empirical economist and not a theorist. Let me introduce the topic of social class and income inequality so that we can explore how religious and other values should shape our economic thinking and policies.

We live in a class society. In this respect we are no different than other societies today or in the past. For purposes of this discussion let’s just say that there are different groups differentiated by their income and power and that the positions of these groups are strongly maintained over time. It’s not that there isn’t upward and downward mobility, it is just that there’s not enough of it to make having a favorable class position seem like a temporary arrangement. In this class society there are those at the bottom and those at the top, with positions in between.

It is important to note that there has been a dramatic, and relatively unique, upward shift in income in our country over the last few decades: there has been far more growth of inequality over the last three decades than any time in the last century any far more than in any other advanced country. Moreover, we are the most unequal of any of the advanced countries.

I have prepared a few tables from some researchers at NBER that illustrate how large the income redistribution has been and the scale of inequality in America:

• The top 1% of families earned 9.3% of all income in 1980. By 2000 this income share rose to 19.6%. Correspondingly, the income share of the bottom 90% fell from 66.0% to 53.9%. There were small gains in the income shares of the remaining group—the 90th to 99th percentiles, a gain of 1.9 percentage points of income.

• From 1980 to 2000, the incomes of the upper 1% rose 179% while those of the bottom 90% rose by 8%.

• In 1970, the ratio of top executive earnings to that of the average worker was 38.6. This ratio rose to 101.1 by 1980, to 222 by 1990 and to 1,046 in 1999.

 Because of the high degree of inequality in the U.S., even though our per capita income is higher than many countries, our low-income families in the U.S. are not better off than in other countries where per capita income is lower. Last, I should note that although we think of ourselves as a very fluid, mobile society compared to European countries, we, in fact, do not have more upward mobility. Recent research indicates that the U.S. has less class mobility than previously believed and it hasn’t changed much over the last few decades.

I am not making any extreme claims here. If no one accuses me of saying that we’re living in a caste system or rigid class society I promise not to ask anyone to defend our society as a pure meritocracy. One’s class position really matters: it greatly determines your health, how long you live, where you live, your exposure to crime, your success in school, and the likely success of your children. The extent of inequality also has tremendous ramifications for the type of society we share. A task force of the American Political Science Association has concluded recently that inequality in income and resources translates into inequalities in participation and effectiveness in our democracy. As we shape the economy and the resultant income distribution we are also shaping the very nature of our democracy.

This leads me to think that economic issues are just as much “values issues” as any of the frequently discussed values issues.  Moreover, the teachings of the various faiths have much to say on economic matters, although no ten-point plan for the economy can be found. I dare say that there’s no reason to believe that unfettered markets provide us with the type of society our faiths guide us to have in terms of the lives of the poor, the treatment of workers, and the solidarity of our communities. It is left to us to help shape the economy through our individual actions, through collective activities and institutions (such as unions, religious institutions, and community groups), and through government provision of goods and services, redistributive policies, and regulations.

Table 1: Changes in income shared, 1980-2000

Table 2: Household income by income class, 1980-2000

Figure 1: The top decile income share in the United States, 1917-2000

Figure 2: The top percentile income share in the U<br />
nited States, 1913-2000

Figure 3: The top decile income share in France and in the United States

Figure 4: The top 1% income share in France and in the United States

Lawrence Mishel is president of the Economic Policy Institute in Washington, D.C.

[ POSTED TO VIEWPOINTS ON MAY 25, 2004 ]