December 24, 2013
In his speech on inequality earlier this month, President
Obama proclaimed that the government could not be a bystander in the
effort to reduce inequality, which he described as the defining moral
issue of our time. This left millions convinced that Obama would do
nothing to lessen inequality.
The problem is that President Obama
wants the public to believe that inequality is something that just
happened. It turns out that the forces of technology, globalization, and
whatever else simply made some people very rich and left others working
for low wages or out of work altogether. The president and other
like-minded people feel a moral compulsion to reverse the resulting
inequality. This story is 180 degrees at odds with the reality.
Inequality did not just happen, it was deliberately engineered through a
whole range of policies intended to redistribute income upward.
is probably the best place to start just because it is so obvious.
Trade deals like NAFTA were quite explicitly designed to place our
manufacturing workers in direct competition with the lowest paid workers
in the world. The text was written after consulting with top executives
at major companies like General Electric. Our negotiators asked these
executives what changes in Mexico's law would make it easier for them to
set up factories in Mexico. The text was written accordingly.
we saw factory workers losing their jobs to imports from Mexico and
other developing countries, this was not an accident. In economic
theory, the gains from these trade deals are the result of getting lower
priced products due to lower cost labor. The loss of jobs in the United
States and the downward pressure on the jobs that remain is a predicted
outcome of the deal.
There is nothing about the globalization
process that necessitated this result. Doctors work for much less money
in Mexico and elsewhere in the developing world than in the United
States. In fact, they work for much less money in Europe and Canada than
in the United States. If we had structured the trade deals to
facilitate the entry of qualified foreign doctors into the country it
would have placed downward pressure on the wages of doctors (many of
whom are in the top one percent of the income distribution), while
saving consumers tens of billions a year in health care costs.
other words, the government quite deliberately structured our trade to
put downward pressure on the wages of much of the labor force, while
protecting doctors and other highly paid professionals from similar
competition. Trade is just one of the many ways in which the government
has redistributed income upward over the last three decades.
subsidy for too big to fail banks, which makes the Wall Street crew
incredibly rich, is another way that the government redistributes money
to the top. Bloomberg estimated
the size of this annual subsidy for the Wall Street gang at $80 billion a year, more than the government spends on food stamps.
longer and stronger patent protection the government has given
pharmaceutical companies is another way that money goes from the rest of
us to the rich. The annual size of patent rents in the drug industry is
currently in the neighborhood of $270 billion, more than three times as
much as the government spends on food stamps.
the macroeconomic policy run by the government has also worsened
inequality. Budgets are crafted by politicians, not the gods or nature.
The decision not to run a more stimulatory policy to reduce unemployment
is every bit as much a conscious act as would be the decision to try to
bring the economy to full employment with further stimulus.
other words, Congress and the president have decided to craft budgets
that lead to tens of millions of people being unemployed or
underemployed. As Jared Bernstein and I point out in our new book
high levels of unemployment put downward pressure on workers' wages,
especially those in the bottom third of the labor force. This means we
have a federal budget that limits growth and employment in a way that
redistributes income upwards.
There is a much longer list of ways
in which the government has acted to redistribute income upwards over
the last three decades. I have a fuller discussion in my book,The End of Loser Liberalism: Making Markets Progressive
the key point is that inequality didn't just happen; it was the result
of government policy. That is why people who actually want to see
inequality reduced, and for poor and middle class to share in the
benefits from growth, are not likely to be very happy about President
Obama's speech on the topic. His comment about the government being a
bystander ignores the real source of the problem. Therefore it is not
likely that he will come up with much by way of real solutions.
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