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Sunday, January 20, 2013

NY Times: Is Technological Inequality Exacerbating Income Inequality?

New York Times:  The Smartphone Have-Nots:

Earlier this month, Larry Mishel, the president of the Economic Policy Institute, stood at a lectern in a small hotel conference room in San Diego and fiddled with a computer until his PowerPoint presentation flashed on the screen. Mishel then composed himself, paid tribute to his intellectual opponent sitting in the front row and began a speech that, he hopes, will reorient the U.S. economy away from the 1 percent or the 0.1 percent and toward the rest of us.

Mishel’s session at this year’s meeting of the American Economic Association, titled “Inequality in America,” tellingly coincided with other sessions called “Extreme Wage Inequality” and “Taxes, Transfers and Inequality.” As the financial crisis wanes, economists are shifting their attention toward a more subtle, possibly more upsetting crisis in the United States: the significant increase in income inequality.

Much of what we consider the American way of life is rooted in the period of remarkably broad, shared economic growth, from around 1900 to about 1978. Back then, each generation of Americans did better than the one that preceded it. Even those who lived through the Depression made up what was lost. By the 1950s, America had entered an era that economists call the Great Compression, in which workers — through unions and Social Security, among other factors — captured a solid share of the economy’s growth.

These days, there’s a lot of disagreement about what actually happened during these years. Was it a golden age in which the U.S. government guided an economy toward fairness? Or was it a period defined by high taxes (until the early ’60s, the top marginal tax rate was 90 percent) and bureaucratic meddling? Either way, the Great Compression gave way to a Great Divergence. Since 1979, according to the nonpartisan Congressional Budget Office, the bottom 80 percent of American families had their share of the country’s income fall, while the top 20 percent had modest gains. Of course, the top 1 percent — and, more so, the top 0.1 percent — has seen income rise stratospherically. That tiny elite takes in nearly a quarter of the nation’s income and controls nearly half its wealth.

The standard explanation of this unhinging, repeated in graduate-school classrooms and in advice to politicians, is technological change. The rise of networked laptops and smartphones and their countless iterations and spawn have helped highly educated professionals create more and more value just as they have created barriers to entry and rendered irrelevant millions of less-educated workers, in places like factory production lines and typing pools. This explanation, known as skill-biased technical change, is so common that economists just call it S.B.T.C. They use it to explain why everyone from the extremely rich to the just-kind-of rich are doing so much better than everyone else.

For two decades, Mishel has been a critic of the S.B.T.C. theory, and that morning in San Diego, he argued that broad technological innovation has been taking place so steadily for so long that the rise of computers simply can’t explain the recent explosion in inequality. After all, when economists talk about technological innovation, they are thinking beyond smartphones; they’re usually considering innovations that affect production. Business innovations — like the railroads, telegraph, Henry Ford’s conveyor belt and the plastic extruders of the 1960s — have occurred for more than a century. Computers and the Internet, Mishel argued, are just new examples on the continuum and cannot explain a development like extreme inequality, which is so recent. So what happened?

The change came around 1978, Mishel said, when politicians from both parties began to think of America as a nation of consumers, not of workers. President Jimmy Carter deregulated the airline, trucking and railroad industries in order to help lower consumer prices. Congress chose to ignore organized labor’s call for laws strengthening union protections. Ever since, Mishel said, each administration and Congress have made choices — expanding trade, deregulating finance and weakening welfare — that helped the rich and hurt everyone else. Inequality didn’t just happen, Mishel argued. The government created it.

After Mishel finished his presentation, David Autor, one of the country’s most celebrated labor economists, took the stage, fumbled for his own PowerPoint presentation and then explained that there was plenty of evidence showing that technological change explained a great deal about the rise of income inequality. ...

The Organization for Economic Cooperation and Development, a sort of global club for the world’s richest nations, has carefully studied the relationship between inequality and growth. The fastest-growing industrialized economies (South Korea, Estonia and Poland) have remarkably low inequality. A few low-growth countries (notably Mexico and Turkey) have high inequality. The rest of the world is all over the place, with no obvious connection between a country’s level of inequality and its economic growth.

Yet the scattershot nature of the data does provide some guidance. Inequality has risen almost everywhere, which, Levy says, means that Autor is right that inequality is not just a result of American-government decisions. But the fact that inequality has risen unusually quickly in the United States suggests that government does have an impact. Still, economists certainly cannot tell us which policy is the right one. What do we value more: growth or fairness? That’s a value judgment. And for better or worse, it’s up to us.

(Hat Tip: Mike Talbert.)

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A fatal flaw common to all of these handwringing studies about income inequality is the failure to take into account the massive rise of the entitlement state. Looking at income without considering transfer payments is intellectually dishonest.

Yes, the rich are getting richer, but the bottom pays no taxes and receives tens of thousands of dollars a year through various entitlement programs. There are numerous theories worthy of debate that purport explain the recent changes in wealth distribution (technology and globalization to name a few), but studies and articles that ignore transfer payments are playing political games and are more suitable for Occupy rallies than serious consideration.

Posted by: Todd | Jan 20, 2013 4:06:37 PM

What simpletons. Correlation does not prove causation. The argument that the government action of deregulation is a cause of income inequality since 1978 conveniently ignores the explosive growth of government transfer payment programs since then. Socialism anybody? Free cell phones for all !
Hopefully there was more to Mishel's and Autor's analysis than reported by the NYT.

Posted by: TexEcon | Jan 21, 2013 11:11:25 AM

Transfer payments are much more generous in Canada and Western Europe than in the Untied States.

It's the transfer payments, or lack thereof, that is helping drive the unusually large increase in inequality in the United States net of transfer payments.

Posted by: Anon | Jan 21, 2013 6:46:48 PM