David Brooks Is Wrong About Inequality

David Brooks Is Wrong About Inequality

JOSH BARRO

JAN. 17, 2014, 4:24 PM 4,921 43

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 labor and capital. Over the last few decades, returns to labor 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 airplane 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 centers. 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.
The Inequality Problem

JAN. 16, 2014

David Brooks

Suddenly the whole world is talking about income inequality. But, as this debate goes on, it is beginning to look as though the thing is being misconceived. The income inequality debate is confusing matters more than clarifying them, and it is leading us off in unhelpful directions.

In the first place, to frame the issue as income inequality is to lump together different issues that are not especially related. What we call “inequality” is caused by two different constellations of problems.

At the top end, there is the growing wealth of the top 5 percent of workers. This is linked to things like perverse compensation schemes on Wall Street, assortative mating (highly educated people are more likely to marry each other and pass down their advantages to their children) and the superstar effect (in an Internet economy, a few superstars in each industry can reap global gains while the average performers cannot).

At the bottom end, there is a growing class of people stuck on the margins, generation after generation. This is caused by high dropout rates, the disappearance of low-skill jobs, breakdown in family structures and so on.

If you have a primitive zero-sum mentality then you assume growing affluence for the rich must somehow be causing the immobility of the poor, but, in reality, the two sets of problems are different, and it does no good to lump them together and call them “inequality.”

Second, it leads to ineffective policy responses. If you think the problem is “income inequality,” then the natural response is to increase incomes at the bottom, by raising the minimum wage.

But raising the minimum wage may not be an effective way to help those least well-off. Joseph J. Sabia of San Diego State University and Richard V. Burkhauser of Cornell looked at the effects of increases in the minimum wagebetween 2003 and 2007. Consistent with some other studies, they find no evidence that such raises had any effect on the poverty rates.

That’s because raises in the minimum wage are not targeted at the right people. Only 11 percent of the workers affected by such an increase come from poor households. Nearly two-thirds of such workers are the second or third earners living in households at twice the poverty line or above.

The primary problem for the poor is not that they are getting paid too little for the hours they work. It is that they are not working full time or at all. Raising the minimum wage is popular politics; it is not effective policy.

Third, the income inequality frame contributes to our tendency to simplify complex cultural, social, behavioral and economic problems into strictly economic problems.

There is a very strong correlation between single motherhood and low social mobility. There is a very strong correlation between high school dropout rates and low mobility. There is a strong correlation between the fraying of social fabric and low economic mobility. There is a strong correlation between de-industrialization and low social mobility. It is also true that many men, especially young men, are engaging in behaviors that damage their long-term earning prospects; much more than comparable women.

Low income is the outcome of these interrelated problems, but it is not the problem. To say it is the problem is to confuse cause and effect. To say it is the problem is to give yourself a pass from exploring the complex and morally fraught social and cultural roots of the problem. It is to give yourself permission to ignore the parts that are uncomfortable to talk about but that are really the inescapable core of the thing.

Fourth, the income inequality frame needlessly polarizes the debate. There is a growing consensus that government should be doing more to help increase social mobility for the less affluent. Even conservative Republicans are signing on to this. The income inequality language introduces a class conflict element to this discussion.

Democrats often see low wages as both a human capital problem and a problem caused by unequal economic power. Republicans are more likely to see them just as a human capital problem. If we’re going to pass bipartisan legislation, we’re going to have to start with the human capital piece, where there is some agreement, not the class conflict piece, where there is none.

Some on the left have always tried to introduce a more class-conscious style of politics. These efforts never pan out. America has always done better, liberals have always done better, when we are all focused on opportunity and mobility, not inequality, on individual and family aspiration, not class-consciousness.

If we’re going to mobilize a policy revolution, we should focus on the real concrete issues: bad schools, no jobs for young men, broken families, neighborhoods without mediating institutions. We should not be focusing on a secondary issue and a statistical byproduct.