The Boston Review‘s latest issue devotes its “new democracy forum” to the problem of inequality, and, more to the point, what to do about it. I should point out, however, that one of the respondents to the principal essay denies that inequality is a problem. As one might guess, she sits on the right of the political spectrum, in her case as a policy analyst with the Reason Foundation, a conservative think tank (if that’s not an oxymoron).
The Rest of Us, of course, know about inequality and that the U.S. is near the top in that category, and among industrial democracies, number one. In these pages I have written about what I call “the Great Divergence.” Beginning in the mid-70s those at the top of the income scale saw their wealth skyrocket while everyone else’s either stagnated or even declined—in real dollars. (Source for below chart is Emmanuel Saez, UC Berkeley)
The initial essay is written by David Grusky, a sociology professor at Stanford. He suggests that taxes should be increased on the wealthy, but that the main focus should be on reducing “rents,” both educational and corporate. There are supply “bottlenecks” for college education—too few slots for present demand. If more of us had bachelor’s degrees, more of us could achieve higher incomes while lowering excessive incomes of the rich.
But why has this college premium endured, indeed, expanded? To understand the puzzle, let’s imagine that we live in a perfectly competitive economy. In that economy, information about the high returns of a college education would gradually diffuse, workers in pursuit of those returns would invest in college, and the resulting influx of college-educated workers would drive down the premium. The high returns generated by a shortage of educated labor would therefore disappear.
As for corporations, Grusky here is concerned about rising CEO pay.
Why are CEOs paid so well? Under current pay-setting practices, an opportunity for rent arises because board members, often sitting at the behest of the CEO, effectively set the CEO’s pay. (Although shareholders of publicly owned companies can, in theory, vote against management-sponsored compensation proposals, they rarely do.) If board members are rational, they will favor ample compensation packages because their own interests, such as remaining on the board, are served by keeping the CEO happy. It’s rather like asking a professor’s students to decide on her pay in advance of receiving their grades.
I’ll get straight to the conservative naysayer. Shikha Dalmia argues, “Grusky’s claims about rising income inequality are seriously overblown.” She believes that it’s wrong to use household incomes when measuring inequality. Rather, incomes go to individuals. From this she suggests that individual inequality has declined but that household inequality has written. Why? Because, for example, rich people marry other rich people, combing their salaries to boost household wealth. Moreover, she concludes, inequality is a “red herring,” distracting us from the more significant problem of education cartels. In this she agrees with Grusky.
Where Dalmia gets it wrong, spectacularly so, is in her assertions that, one, America’s poor aren’t all that poor, and, two, poverty is only “a stage of life, not a way of life. There is no permanent underclass here.” According to researcher Richard Wilkinson, relative poverty is bad for our health. Even Adam Smith recognized the importance of having a “linen” shirt to wear in public, and he suggested that a man have enough income to buy at least one, and linen was expensive at the time he wrote the Wealth of Nations. (It may still be expensive, but I don’t have a linen shirt, so I wouldn’t know.)
As for social mobility, she has her facts wrong. While she concurs with Grusky on the education rent proposition, she ignores research on the reproduction of privilege, according to Thomas Edsall writing for the New York Times. He writes:
Instead of serving as a springboard to social mobility as it did for the first decades after World War II, college education today is reinforcing class stratification, with a huge majority of the 24 percent of Americans aged 25 to 29 currently holding a bachelor’s degree coming from families with earnings above the median income.
As for alleged social mobility and the fiction of an underclass, Dalmia again ignores the evidence. Poor Americans tend to stay poor, as rich Americans tend to stay wealthy.
Rick Perlstein (author of Nixonland) takes exception to Grusky’s emphasis on achieving a college degree. He writes:
Meet, gentle readers, Nate Grant, a high school honors student from New Jersey who graduated recently from Ithaca College with $90,000 in student debt. Profiled in The Los Angeles Times last October in an article covering Occupiers worried about “whether their diplomas may be worth less than their cardboard signs,” Grant did what society—and his working-class father—told him to do: attend the best private college he could get into. Now he can’t find a job, is living with his parents, and is thinking about joining the military. Strikingly, he expresses jealousy toward his older brother, an uncolleged UPS driver: “He is married and debt free except for his mortgage, and here I am with $90,000 [in debt] and a piece of paper. . . . I guess I’m proud of my degree. I just don’t see where it gets me.”
Imagine that. After obtaining a college degree he’s now envying his brother, who drives a UPS truck. Nate Grant did what Pres. Obama wanted. He received his diploma. But at what cost?
Mike Konczal concurs with me (and John Kenneth Galbraith).
An alternative view is that strong unions increase the freedom of workers, and that upgrading them would do more to temper corporate abuses than would limiting CEO salary. The inequality between workers and CEOs—the 99 percent and the 1 percent—is about who has power and freedom, and who exercises control over democracy and markets.
Both Ruy Texeira and Emmanuel Saez (and his co-contributors) argue that Grusky gives insufficient effect to raising taxes on the rich. It’s the latter’s comment that provides some interesting insight.
We’ve long heard the argument that taxing the rich (or anyone else I suppose) deters productivity. Why should I put in more effort or invest more capital if the government is going to take more of my income? You’re reducing my incentive to work. For the most part, that’s not so.
We found that in a purely supply-side model, the revenue-maximizing top tax rate would be 57 percent. This implies that the United States still has some leeway to increase taxes on the rich, but that the upper limit has already been reached in many European countries.
The current marginal tax rate is only 35 percent. The tax on capital gains, the source of most income by the very wealthy (e.g., Mitt Romney), is taxed at the ridiculously low rate of 15 percent. Saez, Pitketty, and Stefanie Stantcheva believe that the marginal tax rate could be as high as 57 percent without reducing the incentive to work.
Texeira wants higher taxes on the rich. Period. Moreover, he says, there’s strong public support for doing so. He writes:
Start with taxing the rich. While it is not adequate on its own—the widening gap between rich and poor, as Grusky points out, has been driven by the rise in pre-tax inequality—it is certainly part of the solution. It would not only make a dent in post-tax inequality but would also raise vitally needed revenue. Especially in today’s political-economic climate, we need that revenue even to think about investing in programs that might lessen pre-tax inequality.
I won’t go into what the other commenters said. You can read their words if you want by clicking on the initial link above. I’ll just offer a few observations.
One from the Cato Institute pushes for private charter schools. He thinks the government shouldn’t have a monopoly on educating children, despite little if any evidence that charter schools work better than their public counterparts. Besides, spending money on private institutions siphons dollars away from public schools, creating a vicious circle. In the end, only the very poor would be taught by public educators.
Economist Glenn Loury writes:
It doesn’t make much sense to think about rents and market failures when inequality is mainly a product of our impoverished ideas about autonomy, community, and solidarity. The failures here are political, not economic, and they are likely to be remedied only by a politics of cross-class and cross-race solidarity—the kind of politics about which I heard far too little at the Occupy Wall Street rallies I attended.