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April 24, 2012 12:05 PM The Great Divergence: A Dialogue

Entry 4: Much of the rise in income inequality is due to benign causes.

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: Brink Lindsey

To: Mark Schmitt

I’ll turn now to backing up my contention that much of the rise in income inequality is due to benign causes - and, further, that Noah fails pretty badly in facing up to this fact. Here I’ll lean fairly heavily on a Cato Institute white paper I wrote a few years back entitled “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality.” So readers can check that out for further details.

First, greater income inequality is in part due to the successes of feminism. Wider opportunities in the workplace for women, combined with “assortative mating,” have exacerbated income spreads because high-earning women tend to marry high-earning men. Noah makes this point, citing a study by Christine Schwartz that attributes 25-30 percent of the rise in earnings inequality to the greater correlation between spouses’ incomes. But Noah doesn’t really highlight how this was made possible by a Very Good Thing - the decline of the “pink collar” ghetto. Further, Noah tries to minimize the importance of this factor, saying that this alone can’t explain why the rise in inequality has been so much bigger in the U.S. than in other advanced countries. But when it comes to untangling the causes of a phenomenon as complex as changes in the overall pattern of incomes, finding one factor that explains one-quarter to one-third of what happened is a big deal.

Second, greater income inequality is due in part to an important victory over racism - in particular, the elimination of the old, racist country-of-origin immigration quotas. Immigration reform in 1965, spearheaded by a young Senator Edward Kennedy and self-consciously identified as part of the wider civil rights movement, made possible the contemporary era of mass immigration. Noah does look at whether immigration has contributed to the rise in inequality, but he dismisses its importance because the effect on native-born workers’ wages is limited in both scope and extent. True, but immigration’s big impact on inequality isn’t the effect on native workers; rather, it’s the inclusion of massive numbers of new, low-skilled, low-wage immigrant workers in the U.S. labor force. According to Robert Lerman at American University, this change in the composition of the work force accounts for some 30 percent of the rise in male earnings inequality. This is another big part of the story, and Noah misses it completely.

Third, greater income inequality reflects positive demographic shifts. As life expectancies rise, we’re getting older. And as the economy grows richer and more complex, we’re getting better educated. With an older and better educated population, income inequality naturally rises for completely unexceptionable reasons: the wages of young, uneducated workers tend to be clumped together at low levels, whereas older, more highly skilled workers have more choices and so their incomes tend to fan out over a broader range. According to Thomas Lemieux of the University of British Columbia, this factor is extremely important. Lemieux distinguishes between “between-group” inequality (income differences across different skill levels) and “residual” or “within-group” inequality (income differences among workers at a given skill level). And he concludes, remarkably, that the overwhelming bulk of residual inequality is due to these benign demographic changes. And Noah doesn’t say a word about it.

Fourth, greater income inequality is partially explained by better economic policies - specifically, the elimination of trade barriers and the old price-and-entry controls that once cartelized the energy, transportation, and communications sectors. As Barry Hirsch of Trinity University has shown, greater competition in product markets is the main cause for the decline of private-sector unions since the 1970s. When competition was suppressed, unionized firms were able to pass along their inflated costs (in the form of above-market wages and restrictive work rules) to hapless consumers; with the opening up of competition, unionized firms found themselves at a disadvantage and began shrinking. (Interestingly, Noah cites Hirsch on another point but overlooks these findings of his.) And as David Card of Berkeley has estimated, the decline of unions explains 15 to 20 percent of the increase in male income inequality. Noah tries to tell this story as a morality play in which wicked anti-labor forces conspired to throttle virtuous unions. The real story is that unions declined primarily because of economic policy changes that were supported across the ideological and partisan spectrum.

On a related point, Noah embraces a high-side estimate of the impact of imports from China and other low-wage countries on the wages of American low-skilled workers. (Meanwhile, he lowballs the impact of immigration, an inconsistency that makes me wonder about possible ideological blinkers.) Whatever the magnitude of the effect, it is due in part to the elimination of bad protectionist policies. In addition, it reflects what is surely - in terms of the number of lives affected - the greatest humanitarian and egalitarian triumph in history: the rise of China and other less developed countries. Perhaps the result has been some increase in U.S. inequality, but the other side of the ledger is a dramatic decrease in global inequality - a point Noah never mentions.

The way I see it, Noah’s whole analysis is shaped - and distorted - by his initial assumption that rising inequality is necessarily a bad thing. That leads him, I think, to portray the various contributing factors in unduly negative terms. And distorted analysis isn’t a good recipe for sound policy prescriptions.

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Comments

  • tom on April 24, 2012 1:02 PM:

    I think you need to explain why competing against people with few workplace protections and environmental protections, and making extremely low wages is 'good' economic policy.

    I realize that we're creating a middle class in China with our money, but shouldn't we at least try and level the playing field to some extent? And of course now that the Chinese are starting to make some money, production is moving into countries with even fewer worker and environmental protections.

  • civarifsciz on January 17, 2013 4:24 PM:

    It is tough to come across knowledgeable many people on this subject, but you sound like you know what you're talking about! Thanks


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