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Inequality on the March

J Bradford DeLong is Professor of Economics at the University of California at Berkeley and was Assistant US Treasury Secretary during the Clinton Presidency. His last piece on Webdiary was Saved by Taxes.

by J Bradford DeLong

How much should we worry about inequality? Answering that question requires that we first answer another question: "Compared to what?" What is the alternative against which to judge the degree of inequality that we see?

Florida is a much more materially unequal society than Cuba. But the right way to look at the situation – if Florida and Cuba are our alternatives – is not to say that Florida has too much inequality, but that Cuba has much too much poverty.

On the global level, it is difficult to argue that inequality is one of the world’s major political-economic problems. It is hard, at least for me, to envision alternative political arrangements or economic policies over the past fifty years that would have transferred any significant portion of the wealth of today’s rich nations to today’s poor nations.

I can easily envision alternatives, such as Communist victories in post-World War II elections in Italy and France that would have impoverished nations now in the rich North. I can also envision alternatives that would have enriched poor nations: Deng Xiaoping becoming China’s leader in 1956 rather than 1976 would have done the job there. But alternatives that would have made the South richer at the price of reducing the wealth of the North would require a wholesale revolution in human psychology.

Nor should we worry a great deal that some people are richer than others. Some people work harder, apply their intelligence more skillfully, or simply have been lucky enough to be in the right place at the right time. But I don’t see what alternative political-economic arrangements could make individuals’ relative wealth closely correspond to their relative moral or other merit. The problems that can be addressed are those of poverty and social insurance—of providing a safety net—not of inequality.

But on the level of individual societies, I believe that inequality does loom as a serious political-economic problem. In the United States, the average earnings premium received by those with four-year college degrees over those with no college has gone from 30% to 90% over the past three decades, as the economy’s skill requirements have outstripped the educational system’s ability to meet them. Because the required skills acquired through formal education have become relatively scarcer, the education premium has risen, underpinning a more uneven distribution of income and wealth.

Ceci Rouse and Orley Ashenfelter of Princeton University report that they find no signs that those who receive little education do so because education does not pay off for them: if anything, the returns to an extra year of schooling appear greater for those who get little education than for those who get a lot. A greater effort to raise the average level of education in America would have made the country richer and produced a more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find – and thus worth more on the market.

Likewise, America’s corporate CEO’s and their near-peers earn ten times more today than they did a generation ago. This is not because a CEO’s work effort and negotiation and management skills are ten times more valuable nowadays, but because other corporate stakeholders have become less able to constrain top managers and financiers from capturing more of the value-added.

Similar patterns are found elsewhere. Within each country, the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations, and has not been accompanied by any acceleration in the overall rate of economic growth. For the most part, it looks like these changes in economy and society have not resulted in more wealth, but only in an upward redistribution of wealth—a successful right-wing class war.

This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer, and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial, and justly wealthy. But only the first 5% of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise. The next 95% would create much more happiness and opportunity if it was divided evenly among US citizens or others than if they were to consume any portion of it.

An unequal society cannot help but be an unjust society. The most important item that parents in any society try to buy is a head start for their children. And the wealthier they are, the bigger the head start. Societies that promise equality of opportunity thus cannot afford to allow inequality of outcomes to become too great.

Copyright: Project Syndicate, 2007.

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