Commentary & Opinion
3:37 pm
Fri May 4, 2012

Michael Meeropol: The Extent of the Recent Growth in Inequality

On April 17, the front page of the New York Times had an article about two economists.   No, it was not about Ben Bernanke and Alan Greenspan who are very well known.

Instead, the two economists are academics – academics who are not household names.

These two economists, Thomas Piketty and Emanuel Saez, have done path-breaking research to document the incredible increase in inequality that has occurred in the US since about 1980. 

Saez (currently a Professor at the University of California at Berkeley) was awarded the John Bates Clark Medal and a MacArthur Fellowship while Piketty won Le Monde’s prize as the best young [French] economist.

Listeners to my commentaries have heard about their findings before.

[For the most recent version of Saez and Piketty’s research see http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf

The Times article can be accessed at http://www.nytimes.com/2012/04/17/business/for-economists-saez-and-piketty-the-buffett-rule-is-just-a-start.html?_r=1&pagewanted=all]

The information is quite stark.

Since 1980, the top 1% of income receivers have seen their share of the nation’s income rise from a mere 10% to over 20% -- reaching its zenith right before the financial crisis of 2008.   As listeners to my commentaries already know, this was the same level of inequality that had peaked just before the Great Depression.

Since the financial crisis hit in 2008, the share of the top 1% has fallen slightly, but Saez and Piketty discovered something shockingly significant when they investigated increases in income since the alleged end of the recession.  

(I say “alleged” because thought the National Bureau of Economic Research business cycle dating committee declared the recession over in 2009, very few people in the US have felt like prosperity has returned)  

They discovered that over 90% of that increased income went to the top 1%.

That’s right.  In the year 2010, the first full year of alleged recovery from the recession, the top 1% of income receivers got over 90% of all the income gain.   Their share of total income is starting to climb again – the last number available in the chart in the Times article shows them at 19.8% of all income.

The article in the Times focuses on tax policy and certainly it is true that tax policy has favored the rich and the super-rich over the rest of us since the time of Ronald Reagan.  However, I want to argue that in fact the long run growth in inequality actually has a variety of causes – and in fact, it cannot be fixed merely by changing the tax code, however laudable that goal is on its own merits.

So what are the other elements that have increased inequality?

Without attempting to give a ranking of importance, the would mention –

1.       The inability of the minimum wage to keep pace with inflation.

2.       The decline in labor unions’ ability to win wage increases.

3.       The increased competition that blue collar workers get from lower wage workers overseas as a result of trade agreements

4.       Deregulation of finance which has led to extraordinary profits in the financial sector

5.       Almost invisible protectionism – protecting the incomes of pharmaceutical companies, doctors, lawyers, academics and other high earning sectors of the economy.

Let me explain this last point.  Protectionism is defined as an effort to shield domestic producers from foreign competition.  Usually we think of this as occurring when the government artificially raises taxes on, say, steel imports.  However, much more pernicious is the protectionism that occurs because the federal government grants a monopoly to patented drugs and forbids American pharmacies to, for example, import cheaper Canadian drugs.   According to the research of economist Dean Baker,

 “… patents on prescription drugs typically raise the price of protected products by 300 to 400 percent, or more, above the marginal cost.   In some cases, patent protected drugs sell for hundreds or thousands of times as much as the competitive market price.”

http://p2pfoundation.net/Dean_Baker_on_the_Inefficiencies_of_the_Current_Drug_Patents_Regime

Similarly, doctors are protected from foreign competition by requiring that foreign trained doctors go through a stringent licensing procedure.  These procedures are not designed to make sure these doctors are qualified as they have to pass the same tests that American citizens have to pass.  These procedures instead of designed specifically to make it more difficult for foreign doctors to work in the United States. 

 For details check out Chapter 1 in The Conservative Nanny State, a free e-book by the same Dean Baker, http://deanbaker.net/images/stories/documents/cnswebbook.pdf.  The chapter is entitled “Doctors and Dishwashers” and it documents how American doctors are protected from foreign competition – a protectionism that adds dramatically to health care costs in the United States. 

Or consider the difficulties universities have in hiring faculty (even those with American Ph D’s) who are not US citizens or permanent residents.   As a former Department Chair tasked with justifying the hiring of a foreign national to the US Labor Department, I know the hoops that schools have to jump through.

Do not be misled by the fact that there are Indian doctors in some hospitals or Chinese faculty at some universities.   Neither of these facts prove there is no protectionism.   They just prove the barriers can be scaled by some.

Most people don’t think of the examples I have described as protectionism, but they artificially raise the cost of both medical care and college education.

I will now briefly consider the other points raised above.

Take the minimum wage issue.  The minimum wage reached its zenith in purchasing power in 1968.  It would have to be $9.91 today to purchase as much at the $1.60 minimum wage purchased in 1968.

The decline in the percentage of the labor force represented by labor unions, especially in the private sector has led to a significant lag in the growth of wages.  The median income of men (in real terms) reached $35,000 in 1973 and did not reach that level again until 1998.  Since 2004 that income has fallen to $32,000.   The situation is worse if we just consider year round full time workers.

http://www.census.gov/hhes/www/income/data/historical/people/

According to the OECD (Organization for Economic Cooperation and Development) the United States has the highest percentage of the labor force in low wage work among all advanced industrialized countries.

http://rwer.wordpress.com/2012/04/24/united-states-of-low-wages/

These wage trends are exacerbated by recent trade agreements which, while extending patent protection to pharmaceutical companies and doing NOTHING to increase competition among highly paid professionals, increased the ability of low wage producers overseas to compete with higher wage producers in the United States.   (Chapter 1 in that e-book gives some details about the role of this form of competition in holding down wage growth.)

Here’s an interesting quote from Nobel Prize winning economist Joseph Stiglitz on this subject --

Most Americans today are worse off than they were fifteen years ago. A full-time worker in the US is worse off today than he or she was 44 years ago. That is astounding – half a century of stagnation. ….”  This was from an interview conducted by THE EUROPEAN.  See http://rwer.wordpress.com/2012/04/30/stiglitz-a-full-time-worker-in-the-us-is-worse-off-today-than-he-or-she-was-44-years-ago/

When it comes to the deregulation of finance, there are a number of excellent sources.   Check out Joseph Stiglitz’s FREEFALL, John McChesney and Fred Magdoff”s THE ABC’S OF THE ECONOMIC CRISIS, and/or Arthur MacEwen and John Miller’s ECONOMIC COLLAPSE, ECONOMIC CHANGE.   There is no question that the deregulation of finance helped fuel the incredible increase in incomes for the top 1%, one-tenth of 1% and even the top one-hundredth of 1% of the population.  In turn, these growing incomes led not to high levels of productive investment but the search for more and more arcane and risky financial investments – which ultimately led to the housing bubble and the crisis of 2008.

 Inequality is a scourge – but tax policy alone will not solve it. 

 

Michael Meeropol recently retired as Professor of Economics at Western New England College in Springfield, Massachusetts. He is the author of Surrender, How the Clinton Administration Completed the Reagan Revolution.

 

The views expressed by commentators are solely those of the authors, and do not reflect the views of this station or its management.

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