There is something very, very fishy in Alan Blinder’s well-regarded reflections on “Our Dickensian Economy.”
First, there is something fishy about the title: in light of the importance of consumer surplus, not captured in national accounts, and the undeniable advances in material prosperity we’ve seen in recent years, is it really fair to say that “America may now be the greatest place on earth to be rich but an awful place to be poor”? For this statement to have any meaning, we need a context for comparison. I would argue that France is at least as good a place to be rich as the United States, if not a better one. France’s cultural amenities are peerless, and its city centers offer tremendous consumption opportunities for those with a great deal of disposable income. Because the less-affluent tend to live in the suburbs, France’s city centers are also playgrounds for the rich, the near-rich, and affluent tourists. There are other countries — Switzerland and Singapore, and there are others — that also come to mind. And let’s not forget countries in which the rich are able to hire armies of servants due to the low cost of labor. Less-skilled U.S. workers may well have experienced wage stagnation, if not compensation stagnation, but they command a much higher wage than workers in Costa Rica, Chile, Antigua, and a number of other reasonably well-governed societies in the developing world where the rich are welcome. In that sense, these countries are also great places to be rich, though of course the rich are a heterogeneous group. Some rich people might enjoy living in more egalitarian societies, for example.
As for whether or not the United States is an awful place to be poor, note that Blinder made his first clause relative and the second one absolute — had Blinder claimed that the U.S. was the worst place in the world to be poor, we would have rightly laughed in his face. Had he even claimed that it was the worst place in the OECD to be poor, we would have also laughed in his face. Had we claimed that it was the worst place to be poor among the five countries that rank highest according to the United Nations Human Development Index, he’d have a somewhat more solid case. That’s very different. Regardless, is it “awful” to be poor in the United States? Much depends on who we’re talking about. For upwardly-mobile migrants from the developing world, I’m guessing the answer is no: it’s better to be poor in the United States than in Haiti. For children born into households living in neighborhoods scarred by multi-generational poverty, I’m guessing the answer is yes. Yet I have to assume the same is true throughout the OECD and indeed throughout the world. So Alan Blinder’s most arresting sentence is useless and highly misleading. Not a good place to start.
Most of Blinder’s essay is boilerplate, but this part is interesting:
When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that’s right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?
Does that seem fair? Well, I’d want to know more before I could answer that question. One thing I’d like to know is whether the increase in productivity in the nonfarm business sector can be attributed to all firms. My guess is that a relatively small number of firms, and a relatively small number of employees within those firms, have driven the productivity increases. The evidence I’ve seen suggests that the increasing use of pay-for-performance has been an important driver of productivity gains. We’ve also seen an increase in work effort for upper-tail workers. And I have to assume that capital deepening plays at least some role in increasing productivity. If capital deepening plays some role, one assumes that the owners of capital will expect some return on their investment.
So here are the tell-tale signs that I’d look for: have some very productive workers seen their compensation increase by a lot? Have the owners of capital seen strong returns over this period? Are there workers who’ve seen compensation gains despite modest increases in productivity, e.g., in sectors defined by Baumol’s disease? All of this complicates Blinder’s neat picture.
I’m not saying that Alan Blinder’s heart isn’t in the right place. But he’s advancing arguments that thoughtful readers should subject to critical scrutiny. He does make at least one good point:
We often hear that the top 1% of income-tax payers pay about 40% of all the income taxes. Sounds like Robin Hood is on the job. But that’s just income taxes. Did you know that the payroll tax (the people’s tax) now brings in about 96% as much revenue as the personal income tax (the rich man’s tax)? As recently as 2000, it brought in just 65% as much. Yes, taxpaying has been radically democratized. Yet the drumbeat from the right continues: We must remove the oppressive yoke of taxation from the backs of the haves, and put it on the backs of the . . . Well, they usually don’t finish the sentence. But someone must pay the bills.
Indeed! Though we should keep in mind that the payroll tax is at least notionally tied to Social Security and Medicare. I have a suggestion: how about we put the oppressive yoke of taxation on the backs of owners of expensive homes in places like Princeton, New Jersey by eliminating or at least phasing out the mortgage interest deduction and the state and local tax deduction? Let’s start there! Doing so would raise a great deal of revenue. Next, let’s eliminate the tax exclusion for employer-provided health insurance and replace it with a refundable tax credit, a proposal Barack Obama’s presidential campaign attacked ferociously in 2008. I’m very happy to finish the sentence, and there are many on the right who feel the same way. I do hope Professor Blinder joins us in this crusade.