The Unknown Candidate: Brooksian Myths on Income Inequality

Wednesday, September 06, 2006

Brooksian Myths on Income Inequality

(Click graph for larger view.)

According to David Brooks in today's Times op ed, "government policy is not driving inequality and wage stagnation." Further, according to the select statistics he quotes, American workers are doing fine, thank you.

First, Davey's statistics are, as usual, suspect. Second, I question in what country David Brooks resides. The problem with his narrative is that it doesn't fit reality.

Then again, these days nothing much coming from the mainstream media does.

According to the Drum Major Institute for Public Policy:

"At the close of 2005, the administration of President George W. Bush was trumpeting a strong national economy. Productivity was growing. Consumer spending was healthy. Corporate profits were rising. But the public remained skeptical: as one indication, a Gallup poll near the end of the year revealed that three out of five Americans viewed the economy as only fair or poor, and a majority saw economic conditions as getting worse.

The American people aren’t so easily fooled. The policy of official optimism did nothing to obscure the increasingly harsh economic climate in which ordinary Americans found it harder than ever to hold onto a middle class standard of living with a well-paying job, health insurance, the chance to own or keep a home, the opportunity to provide a good education to their children and the security of looking forward to a dignified retirement.

Congress played no small part in driving the American Dream further out of reach for ordinary citizens in 2005. Congress at the Midterm: Their 2005 Middle-Class Record takes a closer look at the decisions made by Congress, from creating new obstacles for families overcome with debt to declare bankruptcy to a disastrous budget that aimed to pay for tax cuts benefiting the rich with dramatic cuts to student loans and health programs for the poor. After examining each bill in detail, Congress at the Midterm assigns a grade to each member of Congress based on his or her support for the middle class.

The record is clear: Members of Congress failed the middle class in 2005. A quick look at the report card shows that a vast majority of senators and representatives earned a grade of C or less. An average performance is simply not good enough. In a time when the middle class is increasingly squeezed, middle class Americans deserve better.

From health care to economic justice to Social Security, Congress missed dozens of opportunities to improve conditions for the middle class and did so much to squeeze it even more.

[...]

In Conclusion: In 2005, Congress disdained the concerns of middle-class Americans and opted instead to favor the already wealthy and powerful in vote after vote. This is a surefire recipe for a shrinking middle class and the wrong direction for the vast majority of Americans striving to attain or hold onto a middle-class standard of living. But the nation will not change course unless citizens have the information they need to hold their elected representatives accountable."

According to Think Progress:

4.3 million: Number of Americans who have fallen into poverty since President Bush took office

$5.15: Federal minimum wage

26%: How much the inflation-adjusted value of the minimum wage has eroded since 1979

0: Number of times minimum wage has increased since 1997

7: Number of times Congress has increased its own pay since 1997

$0: How much more a year people earning minimum wage earn today compared to 1997

$28,500: How much more a year members of Congress make today compared to 1997

$10,700: Amount a person making minimum wage will earn in a year

$5,000: Amount below the poverty level working 40 hours a week, 52 weeks a year at minimum wage will leave a family of three

7,300,000: Number of workers who would benefit from an increase in the minimum wage

72%: Percentage of adult workers who would benefit from an increase in the minimum wage

1,800,000: Number of parents with kids under the age of 18 who would benefit from an increase in the minimum wage

11 million: Number of jobs added to the economy in the four years after the last minimum wage hike

$8.70: Amount minimum wage would have to be today to have the same purchasing power it had in 1968

2.5 years: Amount of health care for two children which could be bought by raising the minimum wage from $5.15 to $7.25

86%: Percentage of Americans who support raising the federal minimum wage

And, now -- 'The World According to Davey':

The Populist Myths on Income Inequality
By David Brooks
The New York Times

There are two schools of thought on income inequality. Members of the first school — populist politicians and a few economists — say the key issue is economic power.

The haves exercise more power over the have-nots. As a result, corporate profits soar, while wages stagnate. Money-drenched politicians push through shareholder-friendly trade deals that outsource American jobs while job insecurity skyrockets. C.E.O.’s get absurd salaries while the 99 percent of earners enjoy few benefits from productivity gains. Unions are weakened while manufacturing wages tumble and the middle class suffers.

In short, populists argue, the market is broken. The rules are rigged. The reigning ideology in Washington must be upended. Unions must be revived. Globalization needs to be reorganized.

The problem with this narrative is that it doesn’t really fit the facts. First, workers over all are not getting a smaller slice of the pie. Wages and benefits have made up roughly the same share of G.D.P. for 50 years. Second, offshore outsourcing is not decimating employment. According to the Bureau of Labor Statistics, outsourcing is responsible for 1.9 percent of layoffs, and the efficiencies it produces create more jobs at better wages than the ones destroyed.

Third, jobs are not more insecure. Workers are just as likely to hold a job for 20 years as they were in 1969. Fourth, workers are not stuck in dead-end jobs. Social mobility is roughly where it was a generation ago.

Fifth, declining unionization has not been the driving force behind inequality. David Card of the University of California, Berkeley, has estimated that de-unionization explains between 10 and 20 percent of the rise in inequality, and that effect was probably strongest decades ago. These days the working class is not falling behind the middle or upper-middle class. Instead, the big rise in inequality is within the office parks, among people who were never unionized. Middle managers are falling behind top executives.

The populists, who usually live in university towns, paint a portrait of unrelieved misery that badly distorts reality. It’s true that middle-class wages are lagging, but as Stephen Rose points out in The American Prospect, over the past 25 years the share of working-age adults in households making over $100,000 has risen by 13 percent while the share of households making less than $75,000 has dropped by 14 percent — after adjusting for inflation. The median household income of people in their prime working years (25-59) is $63,000. More than half of Americans have no credit card debt, and half of those who do owe less than $2,200.

Workers continue to see their wages rise as they age. The typical male worker with some college but no degree has seen his income rise from $34,000 in 2000 to about $40,000 today.

Members of the second and much more persuasive school of thought on inequality say the key issue is skills. Lawrence Katz, formerly of the Clinton administration, now of Harvard, puts it this way: Across many nations, the market increasingly rewards people with high social and customer-service skills.

A contractor who can work with customers, design kitchens and organize jobs may earn five times as much as one of his workers who has identical cabinetry skills. An office worker who is creative, charismatic and really good in fast-changing interactive settings now gets paid much more than a disciplined middle manager who excels at routine tasks.

Katz describes a polarized economy. Wages are rising in the bottom quartile for workers who provide personal services. The middle is lagging. The real rewards are going to the top 10 percent, especially to those relative few who have the skills to transform organizations from the top.

In other words, the market isn’t broken; the meritocracy is working almost too well. It’s rewarding people based on individual talents. Higher education pays off because it provides technical knowledge and because it screens out people who are not organized, self-motivated and socially adept. But even among people with identical education levels, inequality is widening as the economy favors certain abilities.

In short, government policy is not driving inequality and wage stagnation. But government hasn’t done much to effectively address the problem either, even though per-capita education spending has more than quadrupled since 1950. What’s needed is not a populist revolt, which would make everything worse, but a second generation of human capital policies, designed for people as they actually are, to help them get the intangible skills the economy rewards.

What would a set of second-generation human capital policies look like? I’ll come back to that in a few days.

Photo credit: David Brooks. (The New York Times)
Graphic: The New York Times