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April 23, 2012 12:00 PM The Great Divergence: A Dialogue

Entry 3: It's all about wealth

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

I’m glad we seem to agree on a basic starting point - that inequality is kind of an indicator of lots of other phenomena, and that it’s worth digging into the causes and consequences, some of which may be more benign than others. I think we differ on whether Tim Noah made a convincing case that both the causes and consequences of inequality are worth worrying about. I should say that the book addresses most of your specific critique, so I hope you’d say more about why you didn’t find it persuasive, in addition to explaining why you think the causes of inequality are mostly Very Good Things.

You’re right, of course, that income isn’t the only way to measure inequality, and that measuring wealth or consumption would give a somewhat different picture. We are sort of entra Piketty-Saez, the two economists who have done so much to build a robust statistical picture of inequality. Their data is staggeringly comprehensive (because it’s based on tax data, rather than surveys), and it allows realistic international comparisons as well as historic comparisons, because it goes back to 1917. There’s nothing comparable on wealth or consumption.

I’m sympathetic to looking at wealth, because I’m particularly concerned about economic security. Wealth can be seen as a form of security. We can provide a lot of security through social insurance programs like Unemployment Insurance, or certain kinds of private insurance, but there’s no protection from all the unpredictable risks of life as solid as having $10,000 in the bank. It’s the difference between a small setback - an illness, or six months out of work — being temporary or causing a lasting loss of human potential. To me, that’s the strongest case for public policy to focus on encouraging modest wealth accumulation.

Wealth inequality is worth more attention than it gets, but I don’t agree that wealth distribution is a “better” measure of inequality. And that’s simply because wealth is overwhelmingly concentrated among older people. The median net worth of households 65 and over is $170,494, while the median household headed by someone under 35 has a net worth of $3,662. It’s natural that one accumulates wealth over the course of life, and for retirement, so these numbers on their own aren’t damning. But since the 65+ group spent some or most of their working years in the pre-1979 economy, and typically enjoyed tremendous appreciation in housing values, their wealth is in a sense a marker of the pre-Divergence distribution of income and gains. The question that can’t really be answered statistically, yet, is whether today’s 35 year olds, or even 45 year olds, will enjoy the same level of widely distributed security later in life that today’s Boomer seniors and their predecessors do. It seems unlikely, since they are starting out in a world of stagnant incomes, educational debt, and with little chance of enjoying the kinds of wealth gains that someone who invested in either a house or in the stock market in the 1970s or 1980s has accrued. That’s not to say that all seniors are rich, or promote a generational conflict - just that the majority of wealth is concentrated in a sector of the population that reflects the greater equality of opportunity in an earlier era.

The argument that distribution of consumption is a better measure has something going for it. It’s closer to the real question of quality of life, for sure. The work you cite by Will Wilkinson makes primarily a hedonic argument about consumption: Incomes may be stagnating, but people can buy more and better stuff. A median-income household today may not have more income, adjusted for inflation, than the median household in 1979, but it is nonetheless far better off. It has access to a wider variety of better food at moderate prices, its car or cars are reliable and comfortable, it has a big flat-screen TV and a smartphone. Much of the consumption of the super-rich, like the “positional goods” chronicled by Robert Frank (patio-sized barbecue grills, swank watches from companies “only the very rich even know about”) add very little real benefit other than perceived or relative status. Yet for a lot of things that matter, the consumption story is not so simple. The education necessary to secure a spot in the middle class is vastly more expensive. Health care offers more options, but takes a far greater share of total income - though much of the cost shows up on the employer side, and thus contributes to the stagnation of wages and salaries.

More importantly, if consumption inequality doesn’t match income inequality, that might be an indicator that consumption is running ahead of income for many Americans, which would mean they’re taking on greater debt. And, indeed, this is no mystery - through most of the 2000s in particular, households added debt, reducing net savings, in order to sustain their basic lifestyle. To be fair, the availability of mass credit, through mortgage insurance or broad availability of consumer credit, created the broad middle class society of the 1950s-1970s every bit as much as high wages or the clout of unionized workers. But I find the story told by Raghuram Rajan, in his book Fault Lines, to be persuasive - that we compensated for growing inequality by pushing easy credit, so that people didn’t have to take a hit to their lifestyles. The result, as we know, was astonishing instability, and a huge loss of economic potential as a result of the balance-sheet recession that followed. If the benefits of growth in the 2000s had been more broadly distributed, it seems unlikely that the financial and economic crises of the end of the decade, and continuing, would have been nearly as severe, just because the level of indebtedness would be lower.

Rajan’s is implicitly a political story as well - easy credit was the way the political process defused any potential populist backlash. The political marketplace is distorted by economic inequality as well, in ways that go beyond campaign contributions and lobbying. That’s a small part of Noah’s story, but a big part of what I’m concerned about - that economic and political inequality join a vicious, self-reinforcing circle that ultimately leads both to risk (as in Rajan’s account) and stagnation. You’ll need a lot of “Very Good Things” to make up for that.

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