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April 23, 2012 9:05 AM The Great Divergence: A Dialogue

Entry 1: The importance of sharply rising inequality.

By Mark Schmitt and Brink Lindsey

This week, the Washington Monthly is featuring a conversation about economic inequality, prompted by Timothy Noah’s new book, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It. Participants are Mark Schmitt, director of the fellows program at the Roosevelt Institute, and Brink Lindsey, senior scholar at the Kauffman Foundation.

From: Mark Schmitt

To: Brink Lindsey

Let’s start by getting two basic points abut Tim Noah’s new book, The Great Divergence, out of the way. First, let’s do the basic task of a book review - the “should you read this book?” question. A reader might assume that he’s already read Tim’s award-winning series in Slate, and the beautiful slideshow that went with it, and wonder whether he needs to read the book as well. The answer is yes - this is in no way a padded out magazine article. The series was about inequality itself; the book is more of a story - and really, in its way, a dramatic one. It’s a story of how we know what we know about inequality, and how various economists, political scientists, journalists and politicians evolved in their thinking about it. And it tells the story of the last thirty-plus years of American history through the lens of inequality. The decline of manufacturing, fall of unions, a new wave of immigration, the rise of women to equality and more in higher education, the hollowing-out of the middle of the labor market, and the breakdown of the political purpose are all strung together by inequality. Some are partial causes of the Great Divergence, and some results. In a way, the book reminds me of your own The Age of Abundance, which told a similar history, starting earlier, through the phenomenon of abundance, especially mass abundance. The age of inequality overlaps with the age of abundance, and we are still a staggeringly wealthy society in which the majority of us live better lives than our grandparents, but at some point, abundance seemed to become a less powerful summary of the era, and inequality, middle-class stress and high-end super-gains - becomes a better lens on history.

And second, this may surprise you, but I’m going to affirm right away that I don’t really care about inequality. (Should we switch sides now?) No, really - I find inequality in pure terms kind of difficult to think about. I’m a weak Rawlsian, and don’t believe absolute equality - a Gini coefficient of 0 - to be the goal of society, so I don’t know what the ideal balance is, or if there is one. But I am concerned about what leads to sharply rising inequality, and what follows from it. And that’s what the book is really about. Think of it almost like one of those medical mysteries from the New York Times Magazine, in which a patient presents with a symptom - sudden weight gain or mysterious headaches. The symptom itself may not be debilitating, but the doctor has to figure out what caused it, what else is going on, what’s likely to happen, and how to treat the patient, not just the symptom. The Great Divergence - high end gains/middle- and low-income stagnation — is a big symptom. What are the causes and consequences? How bad is it, doc?

As the book shows, some potential causes and conditions of rising inequality aren’t necessarily a disaster. If everyone’s gaining, but the very top are gaining faster because they’re technology entrepreneurs creating massive amounts of wealth and growth (a good description of a brief period at the end of the 1990s), that’s not something I’m going to be all that concerned about. If “associative mating” - what Noah describes as the tendency of educated high-earners to marry each other — is a major cause of inequality, that’s not something I’m going to lose sleep over (in my own comfortable two-income bed), because I don’t really see how public policy can or should do much about it. But if inequality represents, for example, corporate executives rigging the compensation process to take a greater share of corporate income for themselves, while pressing hard to reduce wages elsewhere in the company, or move production overseas, then that’s something to be quite concerned about - especially if it is encouraged or rewarded by public policy, which means we can do something about it. If inequality is leading to ever greater leverage by the very wealthy over the political process, taking even modest tax increases off the agenda, and thus creating a self-perpetuating economic/political inequality machine, that’s something I’m definitely, profoundly concerned about. Why? It’s not just fairness, though fairness is part of it. It’s that in addition to fully subverting democracy, it would lead to a kind of societal stagnation, a loss of creative dynamism, as the winners hoarded their gains.

And then there are the two big related symptoms that seem to accompany inequality, linked almost like obesity and diabetes: economic immobility and economic insecurity. Mobility and security are deeply engrained in the concept of “the American dream,” and in the simple slogans of politicians from time immemorial: Mobility in the idea that “you can be whatever you want,” or “every generation can do better than its parents.” Economic security in the old Clinton slogan that “If you work hard and play by the rules” you should be able to build a secure base for your family. If inequality is stripping away both mobility and security, that’s a really deep threat to the expectations and optimism of the American middle class. While sharply rising inequality of incomes, driven by gains at the top and stagnation in the middle, is an uncontested fact, whether mobility and security are decreasing as well is somewhat debated, given the many ways those phenomena can be measured and the limits of data. But Jacob Hacker’s analysis of economic insecurity, updated by his new Economic Security Index, certainly indicates a rise in the chance of a family losing a significant share of income, a change that corresponds closely to the rise in inequality. And while the data on mobility don’t definitively show that intergenerational mobility (the chance of moving out of the income class you were born into) has significantly decreased, it does make clear that we have much less of a chance of moving to a different class from the one we were born in than than, say, Canadians have, or residents of most European countries except for the one that brought us Downton Abbey.

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Comments

  • Former reader on April 24, 2012 8:47 AM:

    Trying to do the absurd and infuriating Captcha thing. You guys really need to get rid of this. It sucks.

  • SlackerInc on April 26, 2012 8:37 AM:

    How about being against great levels of inequality because it causes economic meltdowns? The two highest peaks on graphs of inequality over the past century were followed immediately by the Great Depression and "Great Recession", respectively.

    If you listen to the award-winning Planet Money report "The Giant Global Pool of Money", I think it's possible to divine why this is so.

    As I see it, capital is like water that "wants" to find its natural level (which would be if resources were more or less evenly distributed). At some point the economic system just doesn't work unless wealth is circulating (people think of wealth like it's the gold pieces Scrooge McDuck piles up in his vault, but GDP is made up of all kinds of perishable goods like fresh flowers and services like haircuts, and a rich person can only consume so many flowers and haircuts, and florists can't sit around idle owing rich people those things when they want to claim them). So when GDP goes up but wages stay flat, rich folks, although they may not consciously realise it, kind of have to let some of that wealth out of their "vaults" to circulate among the same people that naturally would have it if their wages were rising (or we could even get into the Marxian concept of surplus value for that matter).

    But the fatcats demand an IOU and a hefty premium to be paid back later, with no sense that ultimately this is unsustainable: they're going to want that money back and all the interest, of course. And then, if they get that repayment, they are going to have even more wealth that they'll want to rent out at high interest rates, and on and on...and so it becomes like a Ponzi scheme they are playing on themselves in a way, as they squeeze low income people dry.

  • Edward on May 05, 2012 4:52 PM:

    This is another book that I suspect will mainly be read by people who already agree with its premise. The sheer amount of information it contains about inequality is staggering. This is a dense read; don't take it to the beach. Perhaps most interesting is the number of typical explanations that Noah discusses and then discards as not having sufficient explanatory power.

    Edward from live tennis scores

  • Peter on June 07, 2012 9:37 AM:

    I'll say first off that I'm more a righty bend than a lefty, but if you'll forgive the cliche, "Labels are for soup cans, man." Income disparity, while not in itself wrong, at a certain rate becomes unfair and oppressive if you're "left" and destabilizing risk to prosperity if you're "right". Both sides want a similar result. The differences are how you go about it. The topic of the book isn't right or left.

    Peter from stuttering treatment

  • Skeptic on August 09, 2012 4:13 PM:

    "If everyone’s gaining, but the very top are gaining faster this is not necessarily a disaster" - totally agree with that! Those who panic about the rising inequality forget that in absolute terms everyone is still progressing - it is the matter of speed that upsets such people.

    Andrew aka Satori