Income: Too Many Degrees of Separation
The U.S. government should take steps to address the widening income gap, as the top tier of Americans gain additional wealth while those on the lower rungs stagnate or lose ground
Pro: Not Even Bush Can Deny the Disparity
Over the past three decades, the U.S. has steadily grown into a society defined by inequality in income and inequity in opportunity. A populist campaign against widening inequality helped propel Democrats to power in Washington in the last election. The nation’s chief economist, Federal Reserve Board Chairman Ben Bernanke, highlighted the troubling distribution of income and opportunity in a Feb. 6 speech. A week earlier, President Bush remarked on the trend and acknowledged it as "real," noting that inequality "has been rising for 25 years."
The traditional promise that the rising tide of a strong economy and rapid productivity growth will lift all boats isn’t proving true. Throughout much of U.S. history, citizens didn’t concern themselves if the rich got richer so long as most everyone else prospered, too. Higher productivity has served as the foundation for raising the living standard of most Americans. And for the past decade, productivity has grown robustly.
Yet waiting for the income payoff has been like waiting for Godot. For example, from 2001 to 2005, productivity rose at a strong 3.1% average annual rate while real compensation per hour expanded at a mere 1.4% pace, calculates Stephen Roach, chief economist at Morgan Stanley (MS).
These figures are disturbing on their own. Yet their social and economic effects are magnified by another trend: the rise in economic insecurity. Evidence is mounting that more and more workers are frustrated about the economy, worried about prospects for their children and themselves, and fearful that the economy is evolving in ways that make life increasingly capricious and unfair, leaving the mass of Americans behind no matter how hard they toil.
Fortunately, the policy prescriptions are finally gaining attention. Education reform, for one, is paramount. Too many schools are failing to prepare their students for a college education, the ticket to a good job in our intensely competitive economy. Equally important is creating a social safety net, as job stability has declined.
If policymakers don’t address inequality and insecurity, they risk ending up with an economy that will lose its flexibility, dynamism, and openness. Clearly the economy is malfunctioning, because the fruits of productivity aren’t being broadly shared. And that’s not the American way.—by Chris Farrell (For a fuller version of Farrell’s thoughts on this subject, please see "Inequality for All?")
Con: Forget Tampering. Higher Salaries Will Come
Schemes to right alleged wrongs over the income gap will fail to yield whatever vision of equality the perceived do-gooder aims to achieve. When government decides to veto the marketplace and shift funds from one group to another, it cannot avoid "interfering with people’s incentives to work, to invest, and to save," as S&P’s chief economist, David Wyss, puts it. It becomes an experiment in social tinkering that typically disappoints, with the best proof no farther than the decades of dismal economic growth across much of Europe.
Productivity gains account for only part of the tale. In the late 1990s, amid the tech boom, numerous respected economists bought into the idea that we were witnessing a fundamental paradigm shift in productivity fueled by an Internet-based economy. Worker productivity seemed to advance inexorably. Recent experience has shown this is not the case, that hiccups will occur along the way. Still, our economy has indeed experienced a fundamental shift because of the Web, and as we learn to exploit and fully integrate these new technologies and processes, workers will benefit.
Evidence exists that the income gap also results in some measure from corporate governance practices, specifically from hefty executive compensation packages. In recent years, payments to top executives have ballooned to 250 times the take-home income of the average employee.
In essence, a finite resource—corporate capital—is being allocated in a radical new fashion at many companies, with a growing share of that lucre awarded to the very top via the acquiescence (and folly) of complicit directors and once-meek shareholders. Nonetheless, this, too, is an arena in which government should steer clear and allow capitalism to render its remedies.
The real issue is not so much what government ought to, or can, do about compensatory gaps but how it can help give everyone equal opportunity for higher income. To this end, we should encourage a far better education than many Americans now receive.
Wyss maintains that as reading and writing once served as the prerequisites for proper participation in our democratic U.S., we now all need a post-high school education for that same role. Numerous studies have established the case incontrovertibly: the deeper one’s journey into scholarship, the greater one’s earning potential. As Fed Chairman Bernanke noted in his Feb. 6 speech, median weekly earnings differ by 75% between people with only a high school education and those with higher degrees.
We should concentrate on giving every American the same tools and opportunities to achieve income, not devising methods to transfer disadvantage toward those who have overcome the income gap.