Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Tuesday, August 22, 2006

Government Policy and Income Inequality Yet Again Again

Paul Krugman emails:

I think it's really important to realize that we have only a modest amount of direct evidence that technological change is driving increased income inequality. That is, while there have been a few studies showing some connection between increased use of IT and changes in the wage structure, very little of the conventional wisdom that technology is the culprit is based on those studies.   So why is technology given the credit? Basically because it's the residual category - and as Bob Solow said about the role of technology in growth, the residual is the measure of our ignorance. We estimate the effects of the stuff whose effects we know how to measure - taxes and globalization, mainly - and then attribute the rest to technology.   The point is that it's all too possible that we're attributing to technology rising inequality that may be largely due to hard-to-quantify political and institutional change.   There are several reasons to think that politics plays a big role. One is the broad correlation between the political climate and trends in inequality, which I pointed out in the Times. (By the way, Larry Bartels in Princeton's politics department shows that there's a strong correlation between party control of the White House and inequality trends even in the short run; see It's kind of a mysterious result, but worth pursuing.)   Another piece of evidence is the wide difference in inequality trends between the US and to a lesser extent the UK, on one side, and everyone else.   Yet another piece of evidence, which I think is very suggestive, is the discontinuous nature of the Great Compression. If you go back to the original Goldin and Margo paper,, they found that there was a drastic reduction in wage inequality over the course of just 5 or 6 years in the 40s, which then stuck for another 30 years. In the paper, they struggle to reconcile this with a supply-and-demand framework, but it sure looks like a change in norms which had sustained effects on market outcomes.   So what are the mechanisms? Unions are probably top of the list; I believe that there's a qualitative difference between wage bargaining in an economy with 11 percent of workers unionized, which is what we had in the early 30s, and one with 35 percent unionization, which is what emerged from World War II. That's discontinuous change, partly driven by a change in political regime. And the process went in reverse under Reagan.   An overall climate of public scrutiny may matter too, especially at the top of the scale.   And don't forget that some taxes affect the pre-personal-tax distribution of income. Taxes on corporate profits went from a minor inconvenience before FDR, to a major source of revenue under Eisenhower, and back again.   The bottom line is that the view that rising inequality reflect forces beyond the reach of politicians may sound sensible, but it's actually a supposition based on very little evidence, and there's a lot of evidence on the other side.


  • At 9:55 AM, Blogger VinylVenus said…

    Brad (something about the immediace and intimacy of webblogs allows me to address you so informally...)

    Thank you for your musings on the effect of organized labor and its virtual invisibility in economic equations. I just had one of those "duh!" moments while reading this.

    Because I have been reading you regularly (something I wouldn't bother doing if I didn't find your views aligning with mine), I gently ask this: Is it possible that, in the academic field of Economics, there has been a failure to examine Labor's complexities? I mean, has it been understudied because it has been allowed to remain a simple factor of one man plus one hour equals one productivity unit? Have the effects of education and training, health (including nutrition and adequate medical coverage) and morale (psychologically and the psychosocial benefits of unionization) been largely ignored? If this is true, might it be because academics view Labor as a large proletarian mass, a faceless group of "worker bees"?

    Brad, I do most sincerely ask that gently. I've become addicted to your take on Economics. And it doesn't hurt me to have your informed views. I entered the field of political candidacy this year by running for the US House of Representatives. I lost in the Primary, placing a poor second in a three-way race. I am not disheartened; I have targeted my weaknesses in several areas (most particularly in raising money) and have formulated plans to address them.

    I was raised in a blue-collar, union household during the 50s and 60s. I know first hand what a difference collective bargaining can make. As the oldest of six children, I realize that my father would have fed us, no matter how small his income was; but better wages through unionization meant that each of us were able to enjoy just a little bit more. It meant I was able to have a new prom dress, instead of a hand-me-down; my brothers participated in scouting and sports, without the worry of sports fees beyond a budget. To be fair, we each had to contribute something through our own labors. Labor bargaining provided us with adequate nutrition and good medical coverage.

    I mention all that to illustrate my point about the complexity of Labor. The simple formula I mentioned above should be: one laborer (able to maximize performance through better options) plus one hour equals one enhanced production unit. (Forgive my simplicity--I'm slowly learning to speak the language of Economics, never having read it in the original.)

    The massive assault on Labor, beginning with Reagan and PATCO in 1981, has rendered workers powerless, and Labor unions impotent.

    We must reverse this immediately, before it's too late. If we don't, we'll have to wait for things to get so bad, a bloody revolt will occur. From that, a worse leader than Bush will arise from the chaos. (History and human nature shows this to be predictable.)

    I am for strong Labor. Only then will the scales be balanced. After all, why should corporatists be allowed all the advantages gained by Labor's perspiration?



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