August 03, 2014
Zachary Goldfarb has an interesting analysis of trends in before and after-tax income inequality in the Obama years. However he is mistaken in attributing the rise in before-tax inequality to the market rather than deliberate policy choices.
For example, the big banks still exist today because the government had a policy of saving them from the market. They would have managed to put themselves into bankruptcy in 2008 without huge amounts of below market loans and implicit and explicit guarantees from the government. In the wake of this history, the income and wealth of most of the financial sector can hardly be viewed as a market outcome. (The financial sector also profits by being exempted from taxes that apply to other industries.)
Globalization has increased inequality because of the way the government structured trade. It has designed trade agreements to put downward pressure on the wages of manufacturing workers by putting them in direct competition with their much lower paid counterparts in the developing world. It could have designed trade agreements to make it as easy as possible for people in the developing world to train to our standards as doctors, lawyers, and other professionals and then to compete freely in the U.S. market with native-born professionals. This pattern of trade would have yielded enormous benefits to the economy by reducing the cost of health care and other services, while reducing inequality. The fact that we did not go this way was a policy decision, not a market outcome.
In the same vein, the fact that many products, most notably prescription drugs, sell for high prices is due to government granted patent monopolies. The Hepatitis C drug, Sovaldi, which is being sold by Gilead Sciences for $84,000 for a 3-month treatment, would sell for less than $1,000 in the absence of a patent monopoly. The difference is overwhelmingly a transfer from everyone else to the wealthy. Patent monopolies transfer hundreds of billions of dollars a year to patent holders, who are overwhelming high-income households.
Finally, by running a high unemployment policy the government is transferring money from low and moderate income people to the higher income people. We could bring the unemployment rate down to 5.0 percent or possibly 4.0 percent with larger government deficits or a lower valued dollar, which would reduce the size of the trade deficit. The lower rate of unemployment would not only give millions more people jobs, it would also give workers in the bottom half of the wage distribution the bargaining power necessary to raise their wages. These workers would then have more money, while high income households would have to pay more for help.
In short, there are a whole list of easily identifiable policies that have fostered the large upward redistribution we have seen in the last three decades. It is not just the market.
Comments