I’m headed to a conference on the hot topic of the impact of our high levels of inequality on opportunity and growth, a compelling topic that’s deservedly getting a lot more attention these days (with the Washington Center for Equitable Growth being command central for the issue).
As I’m organizing thoughts for a presentation, allow me to run them by you:
Starting back in the mid-1980s, veterans of this debate, including yours truly, would point to graphs showing the increase in inequality, talk a bit about why we thought it was happening, link it to stagnant real wages and sticky poverty rates (meaning poverty rates that were less responsive to growth than they used to be), and call it a day. In other words, rising inequality was an outcome variable of great concern.
Eventually, people reasonably started wondering “what’s wrong with rising inequality?” That is, it wasn’t enough to point to the rising share of income accruing to the top 1 percent. In fact, some market-oriented types argued that such an increase was a) good, because by raising the relative returns to winning and the costs to losing, it would boost incentives to win, and b) it represented greater economic freedom, reduction of distortions caused by unions, minimum wages, the unleashing of the free hand, yada, yada.
The stagnant wage story got a bit lost in the mix. Also, in the latter 1990s, though inequality kept rising at the top of the scale, full employment actually boosted real earnings for middle and low-wage workers as well.
What evolved out of this debate was an interest in inequality not as an outcome variable but as an input variable. For example, questions were raised about its impact on growth, typically through the channel of its impact on opportunity.
This creates significant measurement challenges. It’s pretty straightforward to show a coherent, believable linkage between say, higher education and higher pay (though even here, causality is not easy to determine, as privileged classes often get both a lot of education and a lot of pay, such that the determinant variable is “privilege,” not education). But inequality, opportunity, and growth are all highly complex variables with many moving parts.
So far, from what I can see — and I’ll know more after the conference — highly plausible linkages have been made between inequality of outcomes and inequality of opportunity. It’s not a slam dunk, and some analysis doesn’t find the connection, but there’s actually a long literature going back decades showing how this plays out in public education. Economists tend to make something like this really complicated, and as I suggested, it is complex. But the historical fact of bad schools in disadvantaged communities should not be lost on anyone.
Tying this phenomenon — the negative correlation between high inequality of outcomes and reduced inequality of opportunity — to diminished growth has proven to be more challenging. That’s the point of this paper I did a while back on the subject. I found what I thought to be an important channel — more of a political economy one, where concentrated wealth interacts with deregulatory policies in ways that drive credit bubbles followed by destabilizing busts. But that, too,certainly remains unproven and also has a lot of moving parts.
While I think this newish research with inequality as an input is definitely interesting and important, I’m reminded of the one phrase I know about golf. When you’re on the green, and someone is being overly analytic about perfectly gauging all the dips and curves between their ball and the cup, I say to them “don’t give up the hole!” meaning don’t be so concerned about playing the contours of the green that you forget about the goal of sinking the putt.
I’m concerned that the wage stagnation story — the same one we emphasized lo these many years ago and as critical today as then, if not more so given its persistence — is getting lost in the mix. Note that there is — thankfully — a fair bit of hand-wringing about how flat real wages have been during the more than five-year-old U.S. recovery, but rarely is it tied to inequality.
Yet, stagnant wages amidst growing GDP and productivity is precisely the inequality point that economists, such as Larry Mishel and I, were emphasizing over 20 years ago. Moreover, while linkages between inequality and opportunity cut to the heart of the American dream, as Richard Reeves captures wonderfully in this essay, stagnant earnings amidst growth that is accruing largely to the top of income scale has been at the heart of middle-class economic anxiety for a very long time.
In other words, while we’re usefully contemplating the contours of all these inequality dynamics, let’s be careful not to give up the (wage) hole!