Saturday, January 16, 2016

Why Is Inequality Rising And What Can Be Done About It?

The problem of rising inequality has received a lot attention.  Even right wing populists are concerned about inequality.  They blame it on establishment politicians in the Republican Party who are not really conservative enough.  Many believe that they can elect true conservatives who will not compromise with Democrats whose progressive policies are ruining the economy. Robert Kuttner reviews a book by Tony Atkinson which offers an explanation for rising inequality and some solutions for the problem.  The good news is that many economists are reconsidering the common explanations for rising inequality and they are proposing solutions that address the real causes of rising inequality.  The bad news is that many of the solutions are constrained by a determination of what is politically possible.  Even modest solutions are unrealistic given the current state of politics.

Standard economic theory assumes a competitive labor market rewards those with the required skills in accordance with their contribution, and it penalizes those who lack the skills that are demanded by the market.  The solutions that follow from that analysis suggest that educational reforms that provide the skills demanded by the market will fix the inequality problem.  That analysis is being rejected by a growing number of economists.  Competitive forces in the labor market are not responsible for rising inequality.  Political power has shifted, and those with political power have placed their fingers on the scale to rebalance it in their favor.  The benefits from oligopoly are going to top executives, who determine their own compensation, and to shareholders and investment managers.  Government is necessarily a party to this process.  Every economy is composed of market participants and government official who set the rules.  There has been a powerful shift in the rules of the game which has altered the distribution of income. 

Kuttner does a nice job of reviewing four of the the common conservative explanations for rising inequality.  He also considers a bipartisan proposal for reducing poverty that was hosted by the Brookings Institute.  Many believe that we could solve our economic problems if conservatives and liberals could reach compromises which used to be more common in our politics.  The Brookings compromise would have no chance of passage even if we elected a Democratic president and reached a Democratic majority in the Senate.  The political center has shifted so far to the right that compromises between the center left and center right cannot address the real issues.  It took several decades to shift the center so far to the right; it will take a long time, and a lot of planning to accomplish what conservative forces were able to achieve.  Perhaps we have arrived at new beginning to the process.  Kuttner's analysis provides a good starting point.

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