The Two Inequalities
by Peter Dormand
The Two Inequalities
In the wake of Piketty, “inequality” is in. But it comes marinated in confusion.
The problem is that there are two inequalities with relatively little in common. The one we had been arguing about for several decades is wage inequality. Most pay has stagnated in the US, while a few occupations, like finance, have seen stupendous rewards. Within the professions, a few superstars are making oodles while the rest are left to envy. There has been a big debate: is it about “human capital”? Winner-take-all? Deunionization, deregulation and political derepresentation?
But a second inequality has appeared on the scene: the growing share of income going to capital rather than labor. This is Piketty’s issue, the topic of his book.
There is actually little overlap between them. Inequality I is about the division of labor income, inequality II the falling share of labor income overall. Inequality I is about the 99% versus the 1%; inequality II is about the 1% of the 1% (the top .0001) versus everyone else.
Solutions to Inequality I don’t touch inequality II. You can crank the minimum wage to $15, make college education free, and issue every worker a union card, and, if Piketty is right, the proto-dynastic ruling class of capital will continue to cement its domination. This is why P himself, despairing of any other approach, calls for a global wealth tax. (This of course is crazy, as is my earlier call for a stochastic jubilee, which could be designed to largely converge on a tax.)
The reason I’m writing this is that the current discussion mixes up these two inequalities, with the result that #2 is ignored. The first inequality is the one we think we understand, so we try to squeeze Piketty into it. But he doesn’t fit.
cross posted with Econospeak
The biggest inequality is in how monetary policy is conducted. When the central bank reduces rates it creates a wealth effect (gives free wealth) to existing asset holders. Because assets are concentrated towards the wealthier the wealthy get free wealth as a matter of convention through monetary policy.
A balanced wealth effect would involve giving free wealth to all not just the rich when stimulating the economy.
Tackling #2 requires realigning finance to it’s proper position/role in an economy. That is put it back in service of the production/labor economy instead of treating fiancé as a standalone income creator.
That is move the economy back to earning money the old fashion way instead of this money from money system we have.
Though as we move to being more of a raw materials economy we are in that moving backward from being a developed economy as described in the World Bank 2005 report to that of a 2nd tier economy, one which a majority of it’s wealth is from it’s natural resources and not from it’s intangibles of justice and education.