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.