|
With Economic Inequality for All*
A COALITION REPRINT:
September, 1998
by James K. Galbraith,Professor,
LBJ School of Public Affairs, University of Texas/Austin,
author of Created Unequal: the Crisis in American Pay,
and member of the Advisory Board, National Jobs for All Coalition
Since 1970 the pay gap between good and bad jobs in America
has grown. It is now so wide that it threatens, as it did in the
Great Depression, the social stability of the country. It has
come to undermine our sense of ourselves as a nation of equals.
Economic inequality, in this way, challenges the essential unifying
myth of American national life.
The most visible sign of this challenge emerges not in the marketplace
or on the factory floor, not in civil society or ordinary life,
but in politics. It surfaces in bitter discussions of budgets,
welfare and entitlement programs. A high degree of inequality
causes the comfortable to disavow the needy. It increases the
psychological distance separating these groups, making it easier
to imagine that defects of character or differences of culture,
rather than an unpleasant turn in the larger schemes of economic
history, lie behind the separation.
High inequality has in this way caused our dreadful political
condition. It has caused the bitter and unending struggle over
the transfer state, the ugly battles over welfare, affirmative
action, healthcare, Social Security and the even more ugly preoccupation
in some circles with the alleged relationship between race, intelligence
and earnings. The “end of welfare as we know it,”
to take just one example, became possible only as rising inequality
insured that those who ended welfare did not know it, that they
were detached from the life experiences of those on the receiving
end. The present attack on Social Security, custom-designed to
increased poverty among the old, likewise became possible because
those who would gain cannot imagine trading places with those
who would lose.
But what caused the rise in inequality? According to popular perception,
a high level of inequality is a kind of black rain, a curse of
obscure origin with no known remedy, a matter of mystery covered
by words like downsizing, deregulation or globalization. Some
believe capitalism has simply become more savage, that there is
a new brutality of markets. Many speak of a paradox in which the
social evil of rising inequality accompanies rising average incomes
and general prosperity for the country as a whole, a single cloud
in a silver sky.
There is a darker possibility, favored in social scientific circles.
Does higher inequality perhaps serve a deeper purpose, one that
is to be expected and accepted? Is the splitting apart of America
perhaps the inevitable consequence of technological progress and
the spread of free markets, a byproduct of change and modernity?
Is it the cost we must pay for the efficiencies of worldwide production
and trade? Is it the price of comparatively low unemployment?
Is it a side effect, disagreeable perhaps but a necessary aspect
of our development toward a better future?
The idea that inequality serves a deeper purpose emerges from
the economics profession, which has produced a kind of instant
wisdom on the subject--a set of views usually presented as orthodox
but in fact established with great haste and in considerable disorder
in recent years. To a predominant faction within the economics
profession, the “why” of the increase in inequality
has been answered by a single, all-encompassing phrase: skill-biased
technological change. And many go further, linking this change
specifically to the advent of the computer. Massive investment
in computers has, in this view, led to a transformation of the
workplace. Since only so many well-trained, computer-literate
workers are available at the outset, market forces require that
they be paid increasing amounts. The is called an “increasing
return to skill.”
The strictest believers in the free market infer from this that
inequality is not a problem; the market’s dictate should
be respected, even celebrated. A rising computer-skilled wage
sends a signal to the labor market, where it is received by everyone
from college students to middle managers in late middle age. They
decode the message and head back to school. Soon computer courses
will be overflowing, the labor markets will be flooded with newly
numerate job applicants and the premium associated with computer
skills will disappear.
To this there is a respectable--but ineffectual--liberal dissent.
It argues that there is a social benefit in accelerating the creation
of new skills, or in making access to retraining more equal. Policy
can prepare the work force to meet the challenges still to come.
Hence there is a case, on the center-left, for subsidies to education
and for training programs. Affirmative action for women and minorities
is also justified, for such measures help redistribute the privileged
positions in the distribution of skills.
Yet either way, the notion that equalizing skills will equalize
incomes rests on a confusion about the relationship between the
two. The confusion is between equity in access to lottery tickets
and equity in the value of the prizes. It is one thing for a program
to support new changes for people to compete on the educational
and career ladders. It is something different to promise that
the ladder itself will become shorter and wider. It is bold and
ingenious to imagine that we can return to the middle-class solidarity
of three decades ago entirely by diffusing knowledge through the
population and by allowing free labor markets to work.
It is also nonsense. Twenty years into the computer revolution,
and nearly thirty years since the start of rising inequality,
many millions have acquired the skills appropriate to the age.
Word-processing, accounting and calculating on spreadsheets, e-mail
and the Internet, computer graphics and publication, computer-aided
design: None of this is, any longer, esoteric. But the readjustment
of incomes to a wider and more equitable distribution of skill
levels hasn’t happened. Indeed, as far as one can measure
skills by educational attainment, the reverse has occurred and
continues to occur. Educational differentials have narrowed, with
policy help. Yet wage differentials widened sharply in the seventies
and eighties; a charitable interpretation of the available data
is that through the mid-nineties differentials remained roughly
stable at very high levels. This bitter irony is especially poignant
for black Americans, who have narrowed the educational gap separating
them from whites only to slip farther behind in average earnings.
A review of the evidence suggests something entirely different
and, perhaps, surprising. Rising wage inequality is neither inevitable
nor mysterious nor necessary nor the dark side of a good thing,
but was brought on, mainly, by bad economic performance. Its principal
causes lie in the hard blows of recession, unemployment and slow
economic growth, combined with the effects of inflation and with
political resistance to raising the real value of the minimum
wage. These are blows that leave scars, which do not disappear
quickly even when the economy recovers. They can be healed, and
have in American history been healed, only by sustained periods
of full employment alongside controlled inflation and a determined
drive toward social justice. We last saw such a movement in this
country in the sixties, and before that only during World War
II.
What caused bad economic performance? Economic policy, and very
specifically monetary policy, changed. Beginning in 1970, the
government abandoned the goal of full employment and instead turned
its attention to a fight against inflation. For this purpose,
only one instrument was deemed suitable: high interest rates brought
into being by the Federal Reserve. There followed a repeated sequence
of recessions, each justified at the time as the unfortunate consequence
of external shocks and events beyond national control. The high
unemployment that these recessions produced generated the rise
in inequality. For this the federal Reserve, under its reputable
chairmen Arthur Burns, Paul Volcker and Alan Greenspan, stands
primarily (though not solely) responsible.
Rising wage inequality is also linked to economic globalization.
United States trade has been expanding since the late sixties,
and the effects on wages, now thoroughly debated in a large literature,
are significant--but they do not dominate the movement of wages.
It would be absurd to pretend that imports from low-wage countries
have no effect on US wages; but it is equally wrong to argue,
as we sometimes hear from both left and right, that the Mexican
and Chinese tails wag the dog of the US wage structure.
Moreover, while globalization may be irreversible, its consequences
for economic and social inequality can largely be traced to the
period during the early eighties when the dollar was hugely overvalued
and much of our industry was swamped by imports. Because of this
peculiar, harsh, unnecessary and policy-created pattern--again,
something for which the Federal Reserve bears substantial responsibility--globalized
trade pulled our manufacturing wage structure in two directions
at once. It gradually layered the United States between the rich
counties and the poor, and this country has tended to become the
leading industrial economy of both the First and the Third Worlds.
Given that policy caused the crisis, it follows that things could
have been different if policy had followed a different course.
And our situation can be changed now. We know it can be changed,
because policies are available that have reduced inequality in
the past, both in the United States and in other countries, Indeed,
policies now in place have slowed the increased in wage inequality.
The task we face today is not so much to invent such policies
but to recognize them and to push them forward further and faster
than we have so far dared to do.
From 1945 through 1970, the government maintained a wide range
of protections for low-wage workers so that a broadly equal pattern
of social progress was sustained despite rapid technological change.
These protections were held in place by a stable macroeconomic
policy that avoided sharp or prolonged disruptions to growth,
and in particular by a monetary policy that was subordinated to
this objective. In those years the government as a whole was committed
to the pursuit of full employment, price stability and high rates
of economic growth.
In the years following 1970, technological change continued, but
the protections were withdrawn, and at the same time macroeconomic
policy became much more unstable. The federal government shifted
its support from the economy in general to specific leading sectors
of the economy--in fact to the firms and industries most devoted
to technological change.
Meanwhile, our central bankers, driving under the influence of
monetarists, decided that they should assume sole responsibility
for the defeat of inflation above all other economic goals. But
they were wrong if they supposed that this macroeconomic decision
would not have distributional effects.
The wage structure cracked and crumbled under the assault of policies
that stabilized the price level at the expense of comparatively
low-income Americans--as happened in the recessions of 1970, 1974,
1982 and, most recently, of 1991. These policies were led and
implemented by the Federal Reserve, though with the acquiescence
of the rest of the government, which chose the politically easy
path of assigning responsibility for fighting inflation to the
central bank. Wage equality and the middle-class character of
American society fell victim, in short, to the war on inflation.
Progressives have responded to the inequality crisis, but in a
way that does not effectively engage its origins in macroeconomic
policy. The principal answer offered by the small cohort of true
progressives who have survived in our political life is to engage
in a stalwart defense of progressive taxation and generous public
assistance programs includingSocial Security. This defense is
legitimate and vital. And in the preservation of the income tax
and the Social Security system--so far--it has been not without
of share of successes. Tax reform in 1986 and 1993 also demonstrated
that the theme of fairness in the tax structure is a powerful
political force; liberals need not flinch from progressive taxation
for political reasons.
But in the long run the battle cannot be won by reacting to inequality
with ever-increasing transfers. For as a society grows increasingly
unequal, the political economy of compensatory transfers becomes
oppressive. Claustrophobia set in. In the squeeze between entitlements,
public interest payments and private spending, public services
are degraded, downgraded and debased; they become symbols of the
shabby, amenities to avoid. The social bargain exempting the rich
from their share of the burden--for instance through caps on income
subject to Social Security payroll taxes and reduced tax rates
of capital gains--comes to grate on the middle class as much as
the burden itself.
An economy of tax slaves and debt peons is an economy of frightened
and frustrated people. Without public solutions to the problems
of life on the treadmill, and without the political parties, platforms
and organizations to put them into effect, it is not surprising
that people become open to the appeal of every man for himself.
Ultimately, the power of this appeal will become irresistible.
It is already nearly so: Witness the allergy on all sides of our
politics to expanding welfare and to public investment; witness
the accelerating and dangerously bipartisan assault on Social
Security.
It follows that if we wish to restore patterns of wage equality
befitting a society that is truly middle class, we need two things:
a return to policies of sustained full employment, and an entirely
different approach, when necessary, to inflation. For this, low
and stable interest rates are essential. Direct actions to raise
substandard wages, through higher minimum wages and more effective
labor organization, are necessary. A return to a national presence
in wage-setting, with a more equitable structure as the explicit
goal of public policy, would be even better. Additional steps--including
renewed investment in urban and public amenities, jobs programs
and universal healthcare--should be on the agenda.
These measures work. Indeed, as unemployment has fallen during
this expansion, there is already some evidence of improvement
on the inequality front. The question now is how to sustain recent
progress long enough for even more substantial improvements to
occur. If we can get a national program of sustained full employment,
if we can stabilize or isolate the Asian crisis, and if we can
bring some balance to an expansion that has so far relied far
too heavily of private household debt this can be done.
The steps required may be radical by the tame standards of what
now passes for politics in America and of the defensive agendas
on taxation and welfare that have been even the true progressive’s
lot for several decades--but they are not unprecedented. In any
event, the important point is not whether an action is radical
but whether it is needed.
In the end, the challenge for political progressives is to reclaim
the prize of sustained full employment and to recapture the policy-making
institutions that control the supply of unemployment, the supply
of instability and the supply of inequality in the structure of
pay. In the end, the crisis of the transfer state has to be met
on the terrain of the wage structure, or it will not be met at
all.
*Reprinted, with permission, from the Nation, Sep 7-14,
1998.
The Coalition's reprint series includes articles
of interest to our supporters. Reprints do not necessarily reflect
the views of the Coalition in every detail.
|
