Monday, October 29, 2012

Paul Krugman's The Conscience of a Liberal 4: Why Income Disparity?

In my latest reading of The Conscience of a Liberal, Paul Krugman seeks the causes of the vast disparity of wealth in the United States and the stagnation of middle-class income.

Krugman does not think that these things are just a matter of supply and demand.  According to Krugman, some believe that it is.  There is one view that says that technology has rendered a number of manufacturing jobs obsolete, and, when that happens, you have a lot of people competing for the few manufacturing jobs that remain.  When there are only a few manufacturing jobs to go around, and a lot of people want them, then the wages for those jobs either stagnate or go down, since the companies don't have to make the jobs high-paying to attract people to them.    

And then there's another view that blames free trade.  As Krugman states on page 135 in summarizing this view, "We tend to export 'skill-intensive' products like aircraft, supercomputers, and Hollywood movies; we tend to import 'labor-intensive' goods like pants and toys."  The result is that the number of labor-intensive jobs in the U.S. goes down, since the U.S. is importing the labor-intensive products from overseas rather than relying on home production of them.  Meanwhile, because there is foreign demand for the U.S.'s skill-intensive products, the number of skill-intensive jobs goes up.  As Krugman notes, "U.S. trade with Third World countries reduces job opportunities for less-skilled American workers, while increasing demand for more-skilled workers", which "widens the wage gap between the less-skilled and the more-skilled, contributing to increased inequality" (page 135).  Because there is a greater demand for skill-intensive jobs and not labor-intensive jobs in the U.S., the skill-intensive jobs pay much more than the labor-intensive ones.

Krugman acknowledges that these factors contribute to disparity of wealth, but he doesn't think that they sufficiently explain why the disparity is so vast in the United States.  After all, European countries contend with technology and free trade, but income inequality is not as great there as it is in the U.S.  Krugman, therefore, looks for other explanations.

Krugman believes that the decline in unions is highly relevant to the vast income inequality in the U.S.  Krugman says that the Reagan Administration was hostile to unions, and Ronald Reagan's firing of the air-traffic controllers gave a signal for a "broad assault on unions throughout the economy" (page 131).  Unions brought high wages to workers, and they even encouraged non-union companies to offer good wages and benefits because these non-union companies had to compete with the unionized ones for good workers.  When unions declined, middle-class wages stagnated.

Meanwhile, the wages of the upper-income people ballooned.  One reason was that Ronald Reagan as President dramatically rolled back the personal income tax rate and the corporate tax rate.  As Krugman states on page 156, "Both of these measures delivered proportionately large benefits to upper-income households, which paid a much higher income tax rate to start with, and also owned most of the stocks that benefited from lower corporate taxes."  Another reason was that there was a death of outrage over "soaring incomes at the top" (page 145).  In the 1960's-1970's, Krugman narrates, companies did not pay huge salaries to their executives, for they did not want to be perceived as paying their executives a gross amount of money while giving the shaft to their workers; they also thought that such a policy would hurt the company's team-spirit.  But it got to the point where the media was glorifying high-paid executives as super-stars, with the result that companies felt that they had to pay their executives a large amount of money to look good.  And "politicians who might once have led populist denunciations of corporate fat cats sought to flatter the people who provide campaign contributions" (page 145).  Consequently, there was not as much of a disincentive in the 1980's to have a narrow gap between the pay for the executives and the pay for the workers.

Krugman's discussion put a lot of things in perspective, for me.  I'd say that there's truth in his scenario, but also the scenarios that he presents but doesn't entirely embrace.

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