David Brooks Is Wrong About Inequality

David brooksThe New York TimesDavid Brooks

David Brooks has a column about inequality today and it’s wrong. But it’s wrong in a way that helps explain why conservatives have no idea how to talk about inequality.

Brooks offers two theories of what sort of problem inequality might be: That people at the top are accruing too much money, and that people at the bottom are getting left behind. Like most conservatives, he wants to focus on the second problem. Regarding the first, he attacks the “primitive zero-sum mentality” that holds “growing affluence for the rich must somehow be causing the immobility of the poor.”

The thing is, while growing affluence for the rich isn’t causing low and moderate incomes to stagnate, they are to a large extent results of the same forces. There is a zero-sum tradeoff between the two, so a zero-sum mentality (primitive or otherwise) is called for.

Productive economic activity produces returns to both labour and capital. Over the last few decades, returns to labour have fallen relative to returns to capital. This has promoted sharp rises in wealth at the top and stagnating wage income for most of the public.

Because of the declining marginal utility of money, a more unequal distribution of the returns to economic growth is undesirable, all else being equal. The question is, is all else equal? Have there been economic changes in the last four decades that make greater returns to capital necessary for innovation and growth? Or is the shift in returns just an artifact of policy choices on taxes, trade, inflation, and intellectual property that we can reverse without sinking the economy?

I think the answer is probably some of each. But “some of each” means there are a lot of policy choices that can and should be made to reduce inequality in a zero-sum manner.

For example, Brooks notes “the superstar effect”: “in an Internet economy, a few superstars in each industry can reap global gains while the average performers cannot.” But this isn’t just a fact of life; it’s in large part a reflection of intellectual property policy choices. The existence of much larger global markets greatly raises the return to producing a beloved product, whether that’s a piece of software or a hit song.

Governments could react to this by weakening protections for IP, since IP protections are supposed to be just strong enough to encourage the generation of good ideas. This would be a desirable and more or less zero-sum policy to combat inequality. Instead, industry lobbies have been pushing for strengthening of IP, which will tend to concentrate wealth in the hands of superstars, at the expense of everybody else (stronger IP means higher prices, and therefore lower real incomes.)

The growth of returns to capital relative to wages is also driven in part by the fact that we have not had policies that consistently promote full employment. More aggressive monetary and fiscal policies to keep unemployment low, or direct government hiring of the unemployed, would push firms to pay workers more and hold inequality down. These policies would grow the economy overall (at least the macro policies would; direct hiring would depend on execution) but they would also reduce corporate profits as a share of the economy, meaning again that the rise in mass incomes would lead to a reduction in wealth at the top.

Policies that promote unionization would also tend to push wages upward, at least in industries with weak competition, such as the public sector, large-scale construction, or aeroplane manufacturing. And of course, taxes and transfers can reduce inequality.

All these policies have economic impacts beyond their distributional changes which should be considered. But adjusting them in an effort to reduce inequality isn’t just an exercise in jealousy; it’s an exercise in making the economy work for everybody.

There are other desirable policies that could raise the incomes of the poor by improving or better using human capital. For example, we could improve transit links between low-income neighborhoods and job centres. Brooks is right to want to explore such policy avenues. But the availability of such policies doesn’t mean we can just wave away the zero-sum problems of, and solutions to, inequality.

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