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.