Both Social and Market Thinkers Need to Rethink Their Big Picture

Thomas Jefferson never intended “All men are created equal” to describe the actual condition of the United States that he was bringing to birth. Equality was an ideal, in 1776 as now. But for more than 20 years, we have been moving away from the ideal, and that fact is at the root of many of our current social problems. It is also a fact that is widely misunderstood, in different ways by different parts of the political spectrum.

On the one hand, growing inequality has been caused primarily by economic forces, not perverse government policy. On the other hand, if the growing inequality is to be reversed, that must be done by appropriate government policy working to guide natural economic forces.

Since 1973, family incomes in the United States have been becoming more unequal. According to “The Economic Report of the President for 1995,” the lowest four-fifths of families have seen their shares of income reduced. Only the top fifth has gone up, accounting for a bit more than 40% of total family income 22 years ago to more than 45% today. The top twentieth of families has gone from about 15% of income to nearly 20% of the total.

This much of the problem is common and agreed knowledge, but consensus begins to break down beyond that. What might be called “social thinkers” and “market thinkers” (often misleadingly called the liberal left and the conservative right) differ over analysis and policy prescription. Each side has a piece of the full picture, and one crucial piece has been left out by both.

Social thinkers add to their view of family-income inequality that while labor productivity has gone up by almost 25% since 1973, wages have gone down by nearly 15%. True but misleading. Hourly wages have dropped by that amount, but fringe benefits have gone up by 50% and compensation paid to employees--a category that includes salaries as well as hourly wages--has increased, though not as much as productivity.

One thing that has not happened, however, is profits gobbling up the productivity gains. Payments to employees have increased their share of national income, relative to payments to ownership in general and corporate profits in particular.

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Increasing inequality is thus mostly among earners paid for their labor. Its central causes are the shift among jobs toward salaried occupations and the increases of salaries for those occupations, which require more education and skills than those paying hourly wages.

The remedy for this is clear: more and better education and training. That is also agreed upon, except for one minor political difference: Social thinkers want an active government role in these fields. Market thinkers are unwilling to pay for it with taxes. Instead, market thinkers look at increasing inequality and say: “It’s a pity, but markets work, and if that’s what the labor market is doing, workers must simply adjust.”

Market factors do provide the major reason for growing inequality, but the market thinkers’ complete dependence on that explanation runs into a number of difficulties.

First, throughout the economic history of the United States, markets have worked with the aid of the federal government--starting with the Northwest Ordinance of 1785, going through land grants to railroads and others, and for many recent decades including assistance to education and training.

Second, when top management fixes its own salaries, it seems a bit specious to contend that this is the working of the free market. No estimates have been made of the degree to which inflation of executive pay has contributed to the statistics of inequality--probably very little, but it nonetheless looms very large in the perception of inequality.

And third, the systematic wiping out of labor unionism throughout the 1980s has made a difference that has little to do with markets.

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Thus, social thinkers underestimate the power of markets, market thinkers overestimate it and both misinterpret the data.

In addition, both sides ignore a key point. Neither inequality-inducing structural change nor the need for a richer skill mix is new to the United States. Such shifts have occurred continually through our history, very much so after World War II. After that war, however, a crucial part of the government policy that successfully coped with the structural changes was the conscious promotion of a high-employment economy.

In such an economy, new jobs were available for those losing obsolete jobs; downsizing was matched by upgrowing. If appropriately trained people were not available for the new jobs, then business cooperated with government in educating and training them because business needed trained people in order to maximize its own profits. That was particularly true in the 1960s, when fears of the structural changes caused by the “automation revolution” matched those of today.

As a result of these policies, a high unemployment rate in the years from the end of World War II through the 1960s was in the 5% range, a low one in the 4% range or even below. Because of the oil shocks, the 1970s were a lost decade economically. Then in the 1980s, the economy returned to a new and more pessimistic regimen: The old 5% high unemployment rate had become the low. The new high had risen above 7%, up to 8%.

That has been the case ever since: Business has felt little pressure to hire and corporate downsizing has become a permanent way of life. Unemployment beginning at early middle age has become either permanent or resulted in drastically reduced incomes. Entry-level jobs for those out of school have frequently become permanent “careers” rather than first steps.

A primary reason for the increased unemployment “norm” has been the failure of the government to try to decrease it--a failure based on 1970s oil-shock “stagflation,” on 1980s Reaganomics, on much exaggerated inflation fears, and on 1990s hysteria about a deficit which is in fact low relative to GDP.

In the meantime, increasing inequality and its accompanying insecurity are intensifying deep social problems--of race, class, crime and confused militant reaction to all the above. Needed to reverse this are education and training programs to assist structural change; self-restraint or public restraint on self-determined executive compensation; removal of the obstacles to unionism thrown up in the 1980s, and, underlying it all, an expansionary government economic policy that takes priority even over deficit bashing.

None of which seems even to be coming up in the current depressing political campaign.