A Conservative View on Income Inequality

link here to article

Kenneth Rogoff states that income inequality is the single greatest threat to stability in almost every country in the world. He argues in this article that market forces will correct the problem.

His first point is that the distribution of skills is at the root of income inequality. Highly skilled labor earns higher wages than lower skilled labor. One consequence is that the cost of skilled labor provides an incentive for capital substitution. Many skill intensive occupations will be affected by the use of new technologies. This will even affect professions like law and medicine.

His next point is that education will be more evenly distributed because low cost technology will be provide the skills needed for higher paying jobs. That will level the playing field so that more people will compete for the high paying jobs. That will also cause the wage premium for skills to fall.

He acknowledges that progressive taxation and other non-market interventions have been useful in reducing inequality but that the past should not be used as a prologue to the future. The market will eventually reduce income inequality.

Rogoff raises some interesting points but I don't like the idea of waiting for a future in which technology and market forces will reduce inequality. Especially, if as he indicates, it is the greatest source of instability. I also have a problem with his assumption that income inequality is a function of the distribution of skills. For example, one of the leading sources of inequality is the rapid increase in the compensation of corporate executives. They earn many times more than executives in similar jobs 30 years ago. I do not believe that this is because they are more skillful than their historical peers. Moreover, US executives earn many times more than their counterparts in Europe and elsewhere in the world. Is this another example of American Exceptionalism? The highest paid executives in the world are in the financial services industry. Does the financial crisis that they produced suggest that their compensation is skill based?