The Question of US Income Inequality and Forces of Change

Introduction
The Question of US Income Inequality and Forces of Change

Note: that’s a helluva loaded title, isn’t it? This paper was designed as an exercise to solve a complex issue in about a thousand words, so the facts of structural inequality (among other things) are left out.

Thesis

The issue of income inequality is one that — by admission of any credible economist, policy-maker, or researcher — has “no easy answer,” as mentioned by Ian Morris. This paper will cover the necessary history of US income inequality, assess recent economic theories including Piketty’s theory of capital, and finally suggest tangible policy measures to improve the issue.

History

Placing the issue of historically structural and racial inequality aside, as is outside the context of this paper, the relevant history of inequality in the US begins after WWII and is split in two phases. In the first phase between about 1940 and 1970, known as the great compression, inequality fell. Incomes rose for the bottom 90 percent of the income distribution, primarily due to the postwar boom supporting high demand for workers with low and moderate skills. At the same time, income for the top 1% remained mostly stagnant due to very high marginal tax rates. Thomas Piketty and Emmanuel Saez argued in 2003 that the “sharp compression of high wages can fairly easily be explained by the wage controls of the war economy.” In the last 35 years, according to data from the World Wealth and Income Database (disclaimer: also contributed to by Saez and Piketty, among over 40 other economists), the reverse has occurred, wherein income rose for the top 1%, and top marginal tax rates fell sharply. At the same time, a combination of global competition, automation, and declining union membership, among other factors, led to stagnant wages for most workers. In theory, it should be possible for incomes to rise for everyone at the same time — for the gains of economic growth to be broadly distributed year after year, but that’s just never happened in the US. Supporting this, data from Columbia Professor Xavier Sala-i-Martin demonstrates that the income gap has grown over that 35-year span, forming the camel-shaped distribution that Hans Rosling always says the world is actually moving away from.

Critique of Capital

In the most important macroeconomic discourse of the century, Thomas Piketty illuminates a global history of inequality and derives a grand unified theory of capital and inequality: r>g; wealth grows faster than economic output. Other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it. Since there are no natural forces pushing against the steady concentration of wealth, so only a burst of rapid growth or government intervention can keep economies from returning to plutocracy. Some primary criticisms of this theory are that (1) Piketty fails to account for how wealth is created and how it decays, (2) not differentiating different kinds of capital and social utility, (3) too much focus on capital instead of consumption, (4) an overestimation of how high the returns on wealth are likely to be in the future, and (5) that the growing share of national income deriving from capital income has not been distributed equally across all sectors. In fact, focusing on income data alone are probably not the best measure of overall inequality, and consumption data describes a better situation. However, I take the opinion of Bill Gates and think most of us can agree on three things: (1) high levels of inequality are a problem—messing up economic incentives and undercutting the ideal that all people are created equal, (2) capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked, and (3) governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

Even if we don’t have a perfect picture today, we certainly know enough about the challenges that we can take action.

Bill Gates

Action

Though the debate has a lot of polarising partisan heat, here’s what we can and should do at a policy level: (1) support human capital, (2) tax the rich, and (3) modernise the safety net. In general, many economists and policy advisors already agree on these broad objectives. To support human capital, we need to start with education; universal pre-K programs with progressive subsidies supporting lower incomes. Childcare, early education, apprenticeship programs, and national service opportunities should be expanded. We can help low-income youth and adults access opportunities by funding initiatives like the Workforce Innovation and Opportunity Act. We can support educational funding — whether school, vocational training, or otherwise — by spending less on prisons. Finally, we can invest in families by raising the minimum wage to $12/hr by 2020, paying more for leave, and enacting immigration reform to form a pathway to citizenship for undocumented families. We can tax the rich by closing loopholes, making state tax systems less regressive by adopting state-earned income tax credits, and by using the same tax code to restrain top 1% incomes. We can modernise the safety net by not simply maintaining EITC, CTC, SNAP, and Medicaid, but also by building pathways out of dependability on those programs. We can also update Unemployment Insurance to reflect the changing nature of work and refocus these programs on reemployment and child well-being. There is no progress without supporting the family unit.

I also hold the contention that the policy impact of the past 35 years on income inequality can only be reversed with an entrepreneurial state. Professor Mariana Mazzucato argues that the private sector only finds the courage to invest in innovation after an entrepreneurial state has made the high-risk investments. The private and public sector need to work together to fund innovation and entrepreneurship, on both a national and local level. At the local level, we need to counter microcosmic cases of damaging gentrification and support high-risk individuals with innovation funds, crowdfunding, crowdgranting, and microloans. At the national level, we can foster the long-run economic growth Piketty desires by funding rapid innovation in macrocosmic industries. Elon Musk and Bill Gates echo the need for a more involved public sector entrepreneurship. That’s precisely how we saw the aforementioned great compression post-WWII. Without a war driver of economic growth, we need a public policy driver. Most job new job creation is in new and emerging industries, and there is no doubt about that.

To solve inequality and achieve Piketty’s ideal r=g in the long-run, we must undeniably support human capital, responsibly tax the rich, effectively modernise the safety net, and unconditionally support micro and macrocosmic entrepreneurship.


In a Moment