Politics & Policy

What to Do about ‘Inequality’

Federal Reserve chairman Janet Yellen (Alex Wong/Getty Images)

What the issue has to do with her duties as Fed chairman is not obvious, but Janet Yellen has joined the nation’s self-appointed Committee for Panicking about Economic Inequality, and begins by offering a slightly more rigorous repetition of the familiar errors.

Yellen makes the usual claim in the usual wrong way: “After adjusting for inflation, the average income of the top 5 percent of households grew by 38 percent from 1989 to 2013.” The normal way of reading this is that the households that were in the top 5 percent in 1989 saw their incomes grow by an average of 38 percent by 2013. But that is not the case, because the top 5 percent of households in 2013 were different households than they were in 1989. Cross-sectional data say nothing about what happened to the actual income of actual households over the period of time in question.

This is an important difference, because the income-inequality narrative reliably short-changes the question of income variability. As the Fed’s own data show, the picture is somewhat different when tracking actual families year to year. For example, of those families that were in the bottom fifth by income in 2007, more than 30 percent had moved to a higher income group just two years later; at the other end of the earnings spectrum, one in four of the families that were in the top income group in 2007 were in a lower income group in 2009. Likewise, the 0.01 percent super-rich that so horrify Paul Krugman find it very difficult to hold onto that position: Of those who were standing on that particular economic summit in 1996, the vast majority — 75 percent — were in a lower income group less than a decade later. There are many reasons for volatility at both ends of the income spectrum. Some people are scraping by on very low-paying jobs for years — until they finish law school. At the highest levels, income is mostly derived not from a regular salary but from things such as the sale of a business, investment profits, or one-time income events such as writing a best-selling book or signing a professional-sports contract. The big payday of 1996 probably will never come again for Allen Iverson or Joe Klein.  

As Yellen notes, if the share of total income accruing to the highest earners increases over time, then the share of the rest must decrease — by definition. But as a definition that is, if not quite trivial, then largely beside the point. If families in the bottom half saw their incomes growing by 10 percent a year in real terms while those at the top were growing by 50 percent or 500 percent, we would have greater inequality — and families in the bottom half would be much, much better off than they are today, when many of them would be lucky to see 10 percent income growth over a whole decade. What matters most is what is happening to the incomes of real families, not the “distribution of national income,” since there is no such thing as “national income” and since income is not “distributed” by anybody.

The economy is not performing as well as it should be for the poor and for many of those in the middle — about that, Yellen is correct. But “inequality” per se is not the problem, and the nature of the problem must be understood before the problem can be addressed. By some estimates, men’s real cash wages have been flat, or have declined, since the 1970s; household incomes have risen since that time mainly because of the entry of more women into the workforce and increases in non-cash compensation. For unskilled workers, conditions are indeed dire. That is a consequence of the integration of global markets and supply chains, which puts pressure on the wages of both skilled and unskilled workers in non-location-specific positions. That same integration of markets means that the rewards of entrepreneurial success and in-demand skills have grown, too. This is a critical contributor both to growing worldwide prosperity and to growing intranational income inequality, one of the reasons why countries as different at the United States, Sweden, and India are all experiencing higher levels of income polarization.

Yellen echoes the concerns of many conservatives on the fundamentals of this issue. Life is not going to get any easier for unskilled workers, and the only remedy is to have fewer of them by increasing educational opportunities. When she complains that college costs too much, she calls to mind Texas governor Rick Perry — except that Governor Perry is in fact trying to do something about it. When Yellen worries that children in poor communities do not have access to first-rate schools, she calls to mind many conservative school reformers — except that they are trying to do something about that, too. Their efforts have been blocked by the gentleman who appointed Yellen to her current office, and stymied by his party in Congress and throughout the states. Those are two of the four “building blocks of opportunity” that Yellen describes; the other two are business ownership and inheritances, both of which our inequality-battling Democrats propose to raise taxes on.

The Right has spent about 40 years working to liberate resources available for the education of young children through vouchers and other school-choice measures, and in recent years have paid a great deal of attention to attempting to put a brake on the ridiculous inflation of college expenses. But it’s tough to get a handle on costs when you’re paying Professor Krugman a couple hundred grand a year to not teach a course on inequality and helping Professor Warren pay the mortgage on her million-dollar mansion. Imitating Democrats of yore, those same people stand in the schoolhouse door when it comes to getting poor and largely minority children out of terrible schools. Start a business? “You didn’t build that!” insists President Obama. George W. Bush thought it might be wise to help people save real money for their own retirements — money that could have been left to their children, helping to build intergenerational wealth, something that is crucially lacking in the permanent underclass. Democrats compared him to Adolf Hitler.

Conservatives would love to help Janet Yellen out on her four building blocks of opportunity, and appreciate her acknowledgment that much of what ails low-income Americans — the schools she criticizes if only implicitly, the frequent absence of “stable family structure,” as she puts it — are not strictly speaking economic in origin. It is not as though we can quantitatively ease our way back into a culture of marriage, work, and personal responsibility. We can make the tax code more generous to families and the regulatory regime less hostile to entrepreneurship, but the economic tools will take us only so far — and will take us in the wrong direction if we mistake income inequality for the real problem.


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