Income Inequality

Washington Post business columnist Steven Pearlstein was online Wednesday, Feb. 7 at 11 a.m. ET to discuss how the income equality debate is changing.

Read the column: The Grand Bargainer (Post, Feb. 7 ).

The transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here.

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Angleton, Tex.: Comment: I have always argued that percentage raises/ss benefits only serve to widen the gap between the the high and low incomes.

Steven Pearlstein: Indeed they do, which is why a lot of good companies (like the Washington Post)often do a combination of a fixed dollar raise for everyone, plus a smaller percentage when they do annual across the board raises.

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Arlington, Va.: In considering how to deal with the real problem of increasing income inequality, is redistribution of wealth really the best way to tackle the problem?

Steven Pearlstein: People too easily jump to this solution, and too easily dismiss it. I think redistribution has its place in the toolbox. You can do it through a progressive tax code, particularly if you have refundable tax credits like the EITC. And you can do it through government programs like housing vouchers and food stamps and Medicaid. Up to a point, both are good. But beyond a point, you start to impact incentives to investment, innovation, etc, as Bernanke argued yesterday. Figuring out where this point is is an art, not science, and it involves political and value and social choices, not just economic ones. These decisions also happen in a cultural and historical context, so that the ideal point for us Americans may be different than the ideal point for the French.

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Madison, Wisc.: Thanks for your article and for taking questions. I too was pleasantly suprised by the Fed Chairman's remarks. The big question is, will they get any support among the Bush Administration? I forsee Mr. Bernanke getting a nice headpat from Republicans before he is politely ignored. He is clearly not speaking the party line.

washingtonpost.com: Ben Bernanke's Remarks from Feb. 6

Steven Pearlstein: I've been around here long enough to know that these sorts of things are important, because they set up the political environment that make negotiation and compromise possible. These kindso of things don't happen until the public begins to expect some progress, and the outlines of the deal have been sketched by people with wide respect-- otherwise the parties remain in their partisan and ideological bunkers, dug in, hoping if they just hold out longer, they can win. So I put this in the category of the recent coming together of the Roundtable, the SEIU and the AARP over health care.

The key thing that has happened here is that the Republican leadership of the House has been crushed (and, to an extent, in the Senate). They were the real stumbling blocks to getting things done, even for the White House. Now compromise and bipartisanship are at least possible.

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Laurel, Md.:

If I earn $X, in most respects it doesn't matter if my neighbor has $(X+Y), assuming the economy can keep producing enough to keep the overall economy from becoming inflated. But there is one very important respect where it does matter -- housing. As Will Rogers pointed out, no one is making more land.

I think there is a very important political dimension to this. Looking at the 2004 Presidential electoral map, it's clearly blue on the coasts and Great Lakes shores and red in the middle. Where's there's plenty of land to build more housing, income inequality doesn't matter as much; explaining the "blue stater's conundrum" about why the poorest states in the country voted for Bush -- it's not as bad to be poor in Kentucky as it is in New Jersey.

Steven Pearlstein: You know, that's a very perceptive point. In the midwest, its not a zero sum game, but on the land-constrained coasts it is. But my guess is that the degree of inequality is also not as great in the heartland (except in the case of easterners buying up all the ranches in Montana and land around Aspen). And that has to do with different norms of behavior, a higher premium that is put on a sense of community. The roots of this probably go back to the heavy Germanic and Nordic roots in the Midwest, the union-manufacturing and agricultural bases for the economy. My guess is that there is less class mobility but more equality in the heartland.

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Severna Park, Md.: Hi Mr. Pearlstein - thanks for another great column, yours is one of the best at the Post. Much has been said about income inequality, etc., but I like to look at it in real-life terms. Some professions, like teaching and public safety (in fact, most public service professions), by their nature offer only lower-level salaries. A teacher may be the best at what they do, but will rarely make much more than 70K after many years on the job. But, because so many people are making so much more money, their demand for housing, etc. drives up the cost of everything, leading to the teacher struggling to get ahead. This is why I disagree with those that discount the income gap as being caused by people without the skills necessary in a "global economy". All of these arguments seem to me as just excuses for allowing business owners (and others) to become rich without contributing to society. Yesterday's article in the Post about the landscape company owner who employs immigrants instead of blacks is a case in point. What struck me about the article is that the owner is a millionaire and pays his top guy $20/hour. No wonder there is a gap.

Steven Pearlstein: Not sure the owner was a millionaire. But even if he were, it is hard for him to remain in business and remain competitive if he offers guaranteed paid that is much above the prevailing market wage. His customers won't be willilng to pay more so he can pay his workers more (although it is true that if you pay more, you get the better workers and that may allow you to charge more). What a millionaire owner could do is offer profit sharing, which wouldn't make the firm uncompetitive.

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Burke, Va.: So Steve, how is the "grand bargain" to be funded? Me thinks taxpayers. If that is true, what are the ramifications? If the goal is the equitable distribution of income, seems that the grand bargain would be nothing more than using the tax system as a Robin Hood approach to leveling the playing field. Once again the feds look to solve, as you stated, a hopelessly complicated issue with a couple of quick fixes which will get them votes but won't fix much.

Steven Pearlstein: Well, some higher taxes, well designed, is probably part of the bargain. Maybe restoring the top marginal tax rate, above $200,000, to 37 or 39 percent would be a place to start. But some of it could also be funded by requiring every company, or every individual, to buy catastrophic health insurance, as some states are doing. That will cause some people to spend more money than they are now, but its not taxpayer money exactly. Wage insurance could be part of a wholesale reform of the unemployment compensation programs in the states, which might involve higher insurance fees, or maybe not. Making pensions more portable might not cost money. More money for early childhood education nd community colleges -- yes, that probably will require taxpayer money, but over the long term, it will pay for itself, most studies have showed.

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Alexandria, Va.: For my two cents, the Grand Bargain should insure against catastrophe. You should get health insurance if you're between jobs. If you're not working, you will be poor. Our society is crazy to suggest seniors should maintain their lifestyle when they retire. Education needs to be rethought to make it more high tech, with less math (geometry, trigonometry) that you'll never use. Toss out all that no child left behind testing. It serves no purpose.

Steven Pearlstein: Okay.

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Detroit, Mich.: I find the most disturbing aspect of the ever increasing disparity of income between those of higher incomes and those of lower incomes, to be the increasing difficulty of those in the latter group to better their lot. College tuition, health care costs, etc. which increase beyond inflation rates have made it harder for people who do not have adequate financial resources to give their children the hope of a better future. Conservatives like to think anyone can make it in the U.S., as long as they work hard. I don't think they understand the reality of today for many of our country's citizens.

Steven Pearlstein: That get's to Bernanke's point, that equality of opportunity needs to mean more than just elimination of class and race discrimination barriers. It also means getting kids ready, really ready, to enter and compete in the workforce. It means having some social safety net under you so you feel a bit more comfortable leaving your job and starting a business. Those sorts of things. And if we had that, then we could get back to saying that America offers equality of opportunity, not equality of outcomes.

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New York, N.Y.: Steve,

I appreciate your columns for their sensibility and balanced approach. It appears inevitable that the "rich" will continue to get "richer," and that we should instead focus on preventing people from falling through the cracks. As a society, how do you feel we should determine and set appropriate tax rates and benefits to assist those in need without being confiscatory?

Thanks.

Steven Pearlstein: Well, that's the trick, isn't it. I know that 50 percent tax rates are too high. And 30 percent are too low, when you are talking about the richest Americans -- tooo low becuase we need the money to fund the safety net, and that's where the money is. Conservatives make these ridiculous arguments that if you raise rates for anyone, anytime, you throw the economy back into recession. Its just a big lie.

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Maryland: The government already redistributes quite enough of my wealth each year, thank you very much. I am a 6 figure single income, no kid household and I put a nice chunk of change into the public coffers every year.

Steven Pearlstein: Well, the question you have to ask yourself is whether you'll be better off with an open, deregulated economy in which you pay slightly higher taxes, or a more closed, regulated economy in which your tax rate is the same or lower. Because that is the real choice you face. That's a political judgment I'm making there, not an economic one. But the gig is up on very low taxes, very low regulation, totally free market and free trade. Americans have decided that's gone to far, and they want a better balance.

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Oxford, Ohio: Bernanke's speech was a great overview of the issues. I thought the policy recommendations were rather cautious and vague. Of course his job is monetary policy, not tax, education or trade policy. How far could Bernanke go in the discussion over inequality before he is seen as overstepping his bounds?

Steven Pearlstein: Well, he was pretty tame in his policy presciptions, explaining that those are political questions that the central banker would best stay away from. In fact, he's a pretty conservative guy and the safety net he'd construct would have a lot bigger holes than the one I would construct. But he is to be commended for framing the issue correctly, and dismissing some of the incorrect analyses of the left and right.

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Maryland:"The Goldman Sachs partner with an MBA is pulling away from the MBA who is an assistant comptroller of a mid-sized insurance company . . ."

Not surprising. Nor is it wrong. The GS MBA typcially works enough hours each week to equate to 2 jobs. Not saying the insurance Co., MBA doesn't work hard, but I don't think the jobs equate. And if the jobs aren't equal, why should the compensation be equal?

My college roommate studied hard, works hard, and still makes less than $30,000 with a masters degree (in sociology). I studied hard, I work hard, and make 6 figures (consulting). We each made choices. She does work she finds fulfilling and accepts that there is an economic downside. I would rather have been an English major, but I also didn't want to sacrifice a lifestyle I wanted to have, so I found a job track that pays well and lets me dabble in the writing on the side.

Similar efforts, differnt areas, different choices, different reasons, different payoffs. Why is this wrong?

Steven Pearlstein: Its not wrong at all. The point I was making was merely an analytical one -- namely, that levels of education doesn't explain the inequality surge, and giving everyone a college degree won't fix the problem.

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You missed one point: Wealth acts much like gravity at a certain point. Beyond an "event horizon" level of accrued wealth, you pretty much manipulate the system to insure you get more wealth. Individual merit and ability means nothing as to how well you do.

See: Paris Hilton, various Kennedys, various Bushes, etc...

So this isn't just about "making opportunity available". The existing accrued disproportionate wealth means the positions which allow one to "get in the club" are to an ever increasing extent reserved for the kids of those already in the club. In an earlier era this was known as Aristocracy, but nowadays we like to disguise it with pseudo-economic double speak (if Adam Smith was around today, pundits would call him a "Socialist").

Steven Pearlstein: Look, there is no denying your point that people who start out wealthy and well connnected do better, on average, than people with the same talent and drive who start out without those. But to level the playing field perfectly, you'd have to redistribute income and regulate things in such a way that you'd greatly reduce the incentives and big prizes Bernanke spoke of that keep the U.S. economy so entrepreneurial and dynamic and innovative. So its a tradeoff. And I'd say we probably are closer to the right tradeoff than any economy in the world. While our class mobility isn't as great as we sometimes assume, it is at least as good as anywhere else, and probably better.

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16th and M, D.C.: Are you familiar with the book "The Winner-Take-All Society"? IMHO this work has the trenchant socioeconomic analysis of our time, namely that "winners" in any segment collect all the spoils and there is no room for second or third. The textbook example is Microsoft, a company that uses being no. 1 to... keep being no. 1 and not much else.

I haven't been to an MBA class, but from what I hear, kids are taught that if you can't be number one in a product class or industry, get out. The market leader isn't engaging in monopolistic behavior, but it doesn't need to -- its competition bows out voluntarily.

Shouldn't we be worried about the negative implications for consumer choice, price-fixing, etc., on top of the income inequality issue?

Steven Pearlstein: I wrote a series of articles based on that concept when the book first came out more than a decade ago. So yes I'm very familiar with the book and the concept. And it is a very important part of the inequality story, that doesn't necessarily suggest too many good policy "fixes." One, however, would be better antitrust enforcement against cartels like Wall Street's investment banks and the professional sports leagues.

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Boynton Beach, Fla.: Do you forsee growing strength in labor unions as a counterbalance to CEO pay? Is there any other way to stem the runaway greed?

Steven Pearlstein: Yes, although maybe not labor unions as we've had in the past.

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Washington, D.C.: From Chad Evans at the Council on Competitiveness

Excellent point re. difficulty in measuring the true inequality gaps in the U.S. This is another example of the difficulty we have measuring prosperity and competitiveness in the 21st Century - game has changed radically. To your point re. overall inewquality, as well as inequality between Goldman Sachs MBA versus mid-size company MBA, we would draw your attention to an interesting data point in our new Competitiveness Index - The absolute level of income has risen for all income groups over the last decade, so even those who stayed in the same income group saw their incomes rise on average over the decade. Another point, from 1988-1998 (most recent data available), 47 percent of those in the lowest income group moved up to a higher group, with 4 percent actually reaching the top income group.

I share your concern about measurment, but is the situation really "hopeless?"

Thanks,

Chad Evans

Steven Pearlstein: No its not hopeless. But it is not ideal either. And the best evidence I've seen is that income mobility, in the lst decade, has shown signs of declining. This is hard to measure, as you point out, but there are some longitudinal studies that follow the same people over long periods that show some decline in upward mobility. And this probably has to do with what a previous writer talked about, the advantage that kids from richer homes have in terms of education, health and nutrition, and having the family connections to start out on a higher rung of the ladder.

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Dayton, Ohio: Hi Steven - in re one of the recent posts about income equality in the heartland. I was born and bred here, lived for 15 years in DC, and relocated back 3 years ago.

One of the key differences I see in mobility and inequality here is the distinction in higher education. On the coasts, education is not just a key to higher ability but also about connections. The Midwest is much less subject to the old-boys network, and much more focused on just pure competence.

Steven Pearlstein: Precisely. Greater emphasis on state universities, less on elite private schools.

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Fairfax, Va.: Hi, Dr. Pearlstein:

I think that people spend too much time worrying about income inequality.

Far better good could be done by focusing more of our attention on "productive inequality" rather than income inequality.

Income inequality is a result, and it's productive inequality that mostly explains that result.

Steven Pearlstein: You assume, falsely, that higher productivity drives higher income. Take the case of the Goldman Sachs partner. If you assume that his higher pay reflects higher productivity -- which is exactly what official productivity statistics do -- then of course you can say pay reflects productivity. But maybe his higher pay reflects rents earned because the investment banking industry is a cartel. In that case, higher productivity does not equate with higher pay. Or take baseball. Is the pitcher who makes $20 million really five times better thant he one that makes $4 million. Not really. But because baseball is a cartel and can charge outrageous amounts for broadcast rights and box seats, with no competition, you get these kind of skewed results.

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Moneta, Va.: You aren't an economist, are you. "Well designed taxes?" Have you forgotten the two loops of "Choose" in "Free to Choose?" Economics and politics. Is there anything efficient in politics?

Steven Pearlstein: I'm not an economist.

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Princeton, N.J.: Steve, the studies I have seen indicate that financial mobility is very low in the US. Your chnaces of earning more than your father are zilch. Please don't quote Cato Institute to me.

Steven Pearlstein: No, they are not zilch. I'm quoting work done at Syracuse.

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Rolla, Mo.: Income inequality seems to have crept up on this country without much notice, which makes it easy for the Administration to tout what a great economy we have had, with low unemployment and a strong stock market. But take a typical example out here with a manufacturing plant (Briggs & Stratton) laying off workers who make $20/hour or so with health benefits. Those workers may actually find work at the local Wal-Mart or other service job at $10/hour with little health benefits. Unemployment in the area stays the same, but the impact is felt on local spending, the local hospital, etc. And, there are more of these people in the country than there are those benefitting from the market.

Steven Pearlstein: Well, the data shows that you are wrong in your last statement: the benefits from a more efficient and competitive globalized economy outweigh the costs. Unfortunately, we don't do enough in this country to recycle some of the benefits from the winners (consumers and workers who benefit from globalization, new technology, winner-take-all) to the losers.

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Moneta, Va.: Why does someone's high income offend liberal progressive socialists? Income "redistribution" seems just another weapon in class warfare. In effect, it punishes the successful. I hate to use this phrase, but the income spread "is what it is." Not many workers set their own salary. Could tax changes and the way income is declared be likely causes? And, so what? Are we jealous? Going to have the Gov't limit maximum as well as minimum wage? Now there's an idea Lenin could love.

Steven Pearlstein: Nobody is suggesting setting maximum wage, so your very clever comment is, in fact, off the point. The fact is that if you raise the top marginal rate from 35 percent to 39 percent, you won't significantly change the incentive of talented, driven people to do the things that will make them very rich, but you will have $100 million to make sure everyone has health insurance. And if you make people feel more secure economically by making health care universal, you will help to prevent the democratic political process from putting up barriers to trade, which particularly is favoring rich people. So this is why you need a better balance -- because the economy exists in a political context.

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D.C.: RE: Teacher making 70K

Making 70K by a teacher isn't bad if they're only working 2/3 of the year. If they worked a full year, they'd be making $105,000.

Steven Pearlstein: Not sure they can make the same money int he summer, but the basic point is a valid one.

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Princeton, N.J.: Sorry to wite so much. Re Chad Evans - Of course some people in the lowest income group rise out of it simply because they get older. A 10 year old is certainly in a low income group.

Steven Pearlstein: Yes, in these studies, you have to factor out the natural tendency of people to make more as they get older.

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Definition of "Rich": Steve,

Do you define someone who is rich at the $200K + annual income level? Everything is relative, of course, but $200K in Wash. DC or other high cost areas isn't the same as making that much in other locations. Seems that 'rich' should be defined in some more reflective way.

Steven Pearlstein: Ideally, yes. Practically, not so easy.

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Baltimore, Md.: As a tax-hating high-income conservative, I really wouldn't mind more wealth being distributed to the lower classes to ease economic security and help people who need it most.

What I really can't stand are all the welfare-type payments I'm forced to make to middle class and wealthier people.

Why can't we finance this "grand bargain's" payment system to poor people by getting rid of redistributions like Social Security to the upper middle class?

Steven Pearlstein: Here, here to that.

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New York, N.Y.: Wouldn't abolishing the estate tax severely aggrevate growing income inequalities? It doesn't quite seem right to consider abolishing the tax (which very few multi-million estates pay) at the same time so many people really can't make ends meet. Any thoughts on where this issue is going?

Steven Pearlstein: If you allow people to pass along a reasonable amount of their winnings, then I agree -- and so do most Democrats, who are willing to exempt the first $4 million from the inheritance tax. Beyond that, I agree, taxing estates is a very justifiable social and economic policy designed to provide "equality of opportunity."

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Washington, D.C.: Good article and many thoughtful comments. Before going to far on the land value versus blue red state it is well to consider that majority red or blue states are often so by relatively slim margins and often social not economic issues are the decisive issues. Consider Ohio generally conservative on social issues but in last election populist on economic issues. Furthermore Coastal areas have had high property appreciation whether in red or blue states. There is probably some interesting regression analysis here.

Steven Pearlstein: Good point. Thanks.

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Madison, Wisc.: I'm concerned less about how much others with similar education and background make relative to me than I am about job security. Anyone who works for a Fortune 500 company is effectively a temporary worker. The fear of being downsized to serve the whim of rapacious shareholders keeps people like me from taking any risks or participating in any innovations that may result in my eventual irrelevancy. The Grand Bargain can't fix this; we need a new business ethic that is the opposite of Ayn Rand's Objectivism. Do politicians see this as well?

Steven Pearlstein: No, they don't see this because its probably a good idea that workers don't have job security. That's because their companies don't have "customer security." You can't have the one without the other.

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D.C.: Why would the "millionaire" landscaper offer profit sharing if he doesn't have to? There is an abundance of a supply of workers. People are paid what the market bears, and if people are in fact overpaid, then they market will adjust to that and that person won't be employed for much longer.

As the businessowner, he deserves to reap whatever he does because he in fact has assumed the risk to build the business.

Steven Pearlstein: We'd have a better society, and I would argue a better economy, if there were more profit sharing with workers. Would I suggest making this legally mandatory? Probably not. But I would like it to be the norm of behavior, and if employers who did so were well recognized as better employers than those who didn't. The evidence is that these companies provide better value.

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Moneta, Va.: And the government should be responsible for getting kids ready, really ready to compete in the workforce? Puhleeeeze. Are government schools a success story, by anyone's measure? And the solution? Why, "renorm" the baseline (which means change the SAT and the way it is scored, so that falling results are less embarrassing to the US "education" industry).

Steven Pearlstein: You don't believe in public education. Most Americans do, after more than a hundred years of experience. Do they need to be reformed. You bet. But you don't throw out the baby with the bath water.

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Taxes: Well, it's nice to see the comfortable D.C. yuppies hop in and complain.

Perhaps you might want to explain to them that relatively basic, and long established economics dictates that yes, some taxes should go up. For example, in a case where you liberalize trade, a simple Hecksher-Olin Factors Analysis dictates that capital taxes should go up in the capital intensive country (and the US is _the_ most capital intensive country on the globe).

What do we do? Lower them by half. Dumb, dumb, dumb on a fundamental economic level.

Want to fund this stuff? Follow the H-O rules and return cap gains to par with income.

Steven Pearlstein: I agree, although more as a matter of good tax policy than anything else. All income should be treated the same.

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D.C.: When people brag about their salaries, why don't they also include the number of hours worked? Investment Bankers and lawyers easily make over six figures, but what are their average hours worked per week? This is especially the case where lawyers have a minimum quota for billable hours.

Steven Pearlstein: Dont feel too bad for the law partners and investment bankers. Yes, they work hard. But if they wanted to work less and earn less, they could set things up that way. Obviously, they think the benefits outweigh the costs.

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Steven Pearlstein: That's all the time we have for today, folks. Good discussion. See some of you next week, I hope.

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