Thursday, December 13, 2012

Inequality and Wages

From the title of this blog, income inequality will clearly be a major topic.  In my last post before a quickie, I highlighted the growing gap between productivity and compensation.

Nobody tries to deny the existence of growing income inequality anymore.  Instead, some have tried to shrug away the consequences, arguing that income inequality is okay because there is income mobility, or that income inequality is the price of liberty.  Somehow, these arguments are losing their resonance, as it has been pointed out that the facts show that income mobility becomes more difficult as inequality increases.  And there has been no positive correlation between increasing income inequality and increasing liberty (quite the opposite).

Cries of class warfare have become less effective, as the claim has been turned around--yes, there has been class warfare, and the one percent (or 0.1 percent) have been winning.

The question then arises as to what has caused increasing income inequality, and, therefore, what can be done about it.  If you conclude that the main cause is technological change, or increasing international trade and foreign competition, then you are off the hook because those trends are not going to reverse and increasing income inequality is just going to have to be something we have to live with.

President Obama, in his excellent speech given in Osawatomie, Kansas, last December, talked about income inequality.  The new Chair of his Council of Economic Advisers, Alan Krueger, gave another speech in January, complete with slides, that focused specifically on income inequality and its adverse consequences on the U.S. economy.  That speech noted what we have talked about in this blog in several postings, that during the Clinton Administration, income tended to rise across all income groups, whereas during Republican administrations, the increase in income tended to be concentrated at the very top.  This is not a coincidence.  Republican policy, in deeds if not in words, regards income inequality as a feature, not a bug.

Obama and Krueger have made policy recommendations to address income inequality, which a Talking Points Memo posting succinctly summarized as: "Obama wants to raise taxes on high earners to Clinton-era levels, uphold the estate tax, implement health care reform to bolster low-income uninsured people, and implement Wall Street reform so as to limit excessive risk-taking in the financial sector."   

TPM is, of course, basically on Obama's side, but its posting questions whether, even if all if these policy recommendations were fully implemented, income inequality would be significantly reduced.  These policies do not really address the root  of the problem.  For example, the typical working person might feel better if his rich boss were taxed more fairly, but then that working person is still bringing home the same lousy paycheck.

May we humbly suggest a couple more policy recommendations?  Strengthen labor unions and raise the minimum wage.

Business, of course, has always been at war with unions--sometimes shooting wars.  The period of the unions' greatest strength in the United States, from World War II through the '50s and '60s, corresponded to the period of the greatest improvement in the living standards of the middle class.  Again, this is not just a coincidence.  But beginning in the '70s, unions began to lose the war, and at the same time the middle class dream began to slip away for millions of Americans.

Republicans, of course, have always opposed raising the minimum wage, and always supported weakening the unions.  Whenever it is proposed that the minimum wage be raised, they ALWAYS claim that it will result in mass layoffs.  The fact that the minimum wage has been raised many times in the past without this result never fazes them, they always raise this claim.

Giving workers wage increases in line with increases in productivity, which, as we have noted, have diverged dramatically in recent years, especially during Republican administrations, would do far more to reduce income inequality than any tax plan.

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