Institute for New Economic Thinking Lance Taylor describes his thinking on the great divide. Worth a look:
President Trump, in his inaugural address and elsewhere, rightly says that over the decades since 1980 American household distributions of income and wealth became strikingly unequal. But if recent budget and legislative proposals from Trump and the House of Representatives come into effect, today’s distributional mess would become visibly worse.
First, I will sketch how the mess happened, then I will propose some ideas about how it might be cleaned up. I will show that even with lucky institutional changes and good policy, it would take several more decades to undo the “American carnage” that the president described.
“What, then, can be done to strengthen the case for markets?
“There’s one thing that’s crucial – equality of power. For free markets to have public acceptance, the worst-off must have bargaining power. Without this, “free” markets merely become a device for exploitation.
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“Philippe Aghion and colleagues have shown that there’s a negative correlation across countries between unions density and minimum wage laws. Countries with strong unions have less stringent minimum wage laws – because greater bargaining power reduces the need for such laws. Remember that the UK adopted minimum wages in the 1990s, when unions had been emasculated. In the 60s and 70s, when unions were strong, the market raised wages.
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“The inference here is, for me, obvious. If you are serious about wanting free markets you must put in place the conditions which are necessary for them – namely, greater bargaining power for tenants, customers and workers.”
While I do not disagree with his general conclusion, his model is, by his own admission, highly suspect. Three of his four model assumptions are “counter-factual” by his own admission. The fourth (the first in his list), to ignore the “Medium-term business cycle oscillations,” while acceptable, is the very thing that causes turnover in the top 1%.
While I do like the focus on disposable income, rather than total income, there is a huge missing component, which is unrealized capital gains. (The capital gains mentioned in the article are realized gains.) They do, at least, make a passing mention this in Footnote 2. But those unrealized capital gains drive the wealth divide. If we look at my own “income,” what shows up in my taxes is only one half to two thirds of what I actually bring in as income, depending on whether you want to include benefits. Uncounted is the increase in the value of my house and my retirement accounts.
With those counted, the income gap would be even starker than portrayed here, since lower-income people are much less likely to own their own home or to have retirement accounts.
So is there are solution? I’m not sure. Frankly, I’m not even sure we’ve sufficiently defined the problem we want to solve.