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"The new gilded age"

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Thursday, Nov 2, 2006

Jon Chait’s recent article in The New Republic about income inequality is definitely worth reading (or if you prefer, read Ezra Klein’s summary here). When using certain customary metrics—stock prices, overall productivity and growth—the economy seems to be doing well, but when polled, Americans don’t believe it. In the electoral season, this leads to lots of Republican pouting about how their ignorant constituents can’t recognize what a great job Bush has done with things. But the problem is that these aren’t relevant metrics of how the economy is doing for ordinary people. As Dean Baker points out, nominal record highs for the Dow isn’t necessary good news for everyone: “The stock market is supposed to represent the discounted value of future profits. If profits are expected to be higher because there is widespread optimism about more rapid growth, then this is genuinely good news, but if expected profits rise simply because investors anticipate further redistribution from wages to profits, then the vast majority of the public has little to celebrate.” Such redistribution—or rather an increasingly uneven and unprecedented spilt of the fruits of growth between labor and capital—is exactly what seems to have happened, as this study by Robert Gordon and Ian Dew Becker shows (and Chait cites). The result, as Chait explains, is this: “The fortunes of the very rich and the fortunes of everybody else have been diverging sharply. Over the last quarter century, the portion of the national income accruing to the richest 1 percent of Americans has doubled. The share going to the richest one-tenth of 1 percent has tripled, and the share going to the richest one-hundredth of 1 percent has quadrupled.” The very rich are getting much richer than everyone else, who are struggling to tread water, wage wise. Perhaps this will at last bring home class warfare to even the privileged: Writing in Fortune Matt Miller suggests that the merely rich are becoming incensed at the ultrarich rendering their positional goods relatively worthless. “There’s only so much of this a smart, vocal elite can take before the seams burst - and a bilious reaction against unmerited privilege starts oozing from every pore. Especially when it’s clear to lower uppers that many ultras are reaping the rewards of rigged systems: CEOs who preside over tumbling stock prices, hedge fund managers who barely beat the market.” And it’s afflicting white-collar workers and the management class as well. Mark Thoma, commenting on an essay by Robert Samuelson in Newsweek, notes that technology has displaced the management strata and eliminated high-paying jobs that once spread more of the gains of growth around:


The question is where these displaced workers (or those who would have replaced them in future years) end up after the transition. Will these workers be able to transform their skills and move up to higher paying occupations or at least maintain their current income, or will the displaced current and future workers mostly move down to lower skill, lower paying jobs?
Given the outcome so far, we need to devote more attention to finding policies that can help workers receive a larger share of the productivity gains as we move to an increasingly information-based, geographically fractured, low-skill abundant, highly specialized, and highly competitive global economy. I’m not sure what fancy name to give “the next capitalism” or if it really needs one, but if growing inequality continues to be one of its main features, calling it “the new gilded age” as many do already might just stick.


This job destruction also explains in part why the “skills-biased technological change” argument for increased inequality (educated people benefit more from computers) that Chait mentions (and disparages) doesn’t necessarily hold. Having a college degree no longer guarantees you a fair share of the growth pie.


So what should we do about it? Klein suggests we support unions as a Galbraithian counterveiling power to capital’s leverage. Tyler Cowen thinks stronger unions would impede the creative destruction necessary to keep an economy competitive and innovative.


I don’t have much value to add here; I just wanted to provide a quick primer on the issue on the off chance that anyone reading is interested. I tend to agree with Klein about counterveiling power but am not entirely sure union gains consistently trickle down to the rank and file. I’m also convinced by Baker’s book The Conservative Nanny State that capital protects its interests by coopting the apparatus of the state, and wresting political power away could feasibly curb the unjustified upward redistribution. What would justify upward redistribution is also a good question.

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