This month, Berkeley economics professor Emmanuel Saez put out an update to his estimates of income inequality, and the headline figure has everybody outraged: 95% of income gains since 2009 have accrued to the top 1%.
This is indeed outrageous, but not quite for the reason that most people think.
What the 95% statistic obscures is that the last three years’ recovery haven’t been very good for anybody, including the rich. They’ve been terrible for the bottom 99%, whose incomes are barely rising at all: just 0.1% per year in real terms. But top 1% incomes are also growing more slowly than they did in the last two economic expansions. That’s because the same slack labour market that holds down wages also deprives businesses of the customer base they need to invest and grow.
Austerity has been a negative sum game. It’s not enriching the rich at the expense of the masses. The masses are losing and nobody is winning.
The solution to this problem isn’t a policy that’s directly aimed at reducing inequality. What we need are policies that will lead to a tighter labour market and job creation. I wrote about a few of those earlier this week. If the labour market tightens, wages will rise, and we will return to the long-run trend on income inequality, with “only” about 58% of income gains accruing to the top 1% instead of 95%.
That long-run trend is also a problem calling for a policy response, though it’s less obvious what that response should be. There are a variety of forces driving up pre-tax income inequality, some of which governments can’t or shouldn’t stop. Technological advances that reduce returns to labour are also enhancing quality of life. Globalization puts downward pressure on some low- and middle-skill workers’ wages in the U.S., but it’s also lifting billions of people in foreign countries out of poverty.
One obvious answer is that fiscal policy should be more progressive, and we’ve already been moving in this direction: President Obama’s key domestic policy accomplishments are substantially increasing tax rates on high incomes and capital gains, and using those tax increases to finance an expanded health care entitlement for low- and middle-income earners. Progressive fiscal policy can go farther, but it can only go so far, because higher marginal tax rates reduce GDP growth overall even as they make post-tax incomes more equal.
The bigger question is whether the government can make pre-tax incomes more equal. I’m open to but sceptical of approaches that focus on increasing unionization and raising workers’ bargaining power. That’s because the economy is very different than it was in the 1950s, when manufacturers with high profits and protected markets were collecting big rents that workers could claim through collective bargaining. Now, low-wage workers tend to work for low-margin businesses like retailers. Collective bargaining can’t move profits from sectors like financial services, pharmaceuticals, and tech to low-wage workers who are employed in other industries.
Policies that aim to de-financialize the economy, from tighter bank regulation to transaction taxes to higher bank capital requirements, might reduce inequality by shifting profits into sectors with a broader range of worker skill levels. And weaker protections for intellectual property might reduce returns to owners of patents and increase real incomes for everybody else. But we won’t know exactly how these policies impact income inequality until we try them.
While the left doesn’t really know what to do about this problem, the right just doesn’t talk about it at all. Conservatives fret that things like higher tax rates and higher minimum wages and higher union density would slow GDP growth. That’s probably true in the long run. But what’s the point of GDP growth if it doesn’t translate into broadly shared gains in income and living standards? If the right wants a better, more-GDP-friendly approach to raising middle incomes, it needs to advance one. Otherwise, the liberal agenda for the middle class will be the only game in town.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.