“Technology Causes Inequality” Refuted
I’m getting to this a little late due to extensive travel (in South Africa now), but David Cay Johnston has a nice writeup of a recent paper on inequality based on the World Top Incomes Database. The paper, by Facundo Alvaredo et al., is important because it largely refutes the idea that technological change is the big reason for diverging incomes between skilled and unskilled workers. As Johnston writes:
That [sharply different levels of increased inequality] is significant because it means that new technologies and the ability of top talent to work on a global scale cannot explain the diverging fortunes of the top 1 percent and those below, since the Japanese have access to the same technologies and global markets as Americans. The answer must lie elsewhere. The authors point to government policy.
As the paper shows, the income share of the top 1% in the U.S. declined from a high of around 24% just before the Great Depression to a low of about 9% in the late 1970s. Since then, it has soared all the way back to about 23% just before the Great Recession, but falling back to 20% in 2010. Other English-speaking countries have had similar “U shaped” patterns, as the authors describe them (i.e., reaching Great Depression levels again), but the share of the 1% is much less in other countries. For example, in Australia, even though the 1% share is close to what it was in the 1920s, it is still only 10% of total income, compared to 20% in the U.S. This difference is part of the reason that median wealth is so much higher in Australia.
The paper gives examples of other countries where the 1% share is permanently below its 1920s level, such as Germany, Japan, France, and Sweden. In all four cases, that share is only about 10%. As Johnston emphasizes, these countries are all essentially equal to the U.S. technologically (remember back in the 1980s when so many people thought Japan was poised to eclipse the U.S. in technology?), so their substantially lower levels of inequality stand in direct contradiction to frequent economists’ claims that technology is the problem (Richard Freeman has a balanced analysis).
It is also important to point out, as Johnston does, that lower tax rates on the 1% have an impact on this. One suggestion the paper makes is that lower tax rates give CEOs and other top managers more incentive to bargain for higher income, so the effect even shows up in pre-tax income. Obviously, lower tax rates make post-tax income even more unequally distributed.
The US has 35% of the world’s billionaires. The second most billionaires per 10 million people ranks it #2 behind Hong Kong. The US has 13.2 per 10M versus 6.4 for Germany. It is not technology at play here. Of the Forbes 400 richest Americans only 11% are in technology. The question is why are there so many more billionaires in the US or Hong King than say Germany? I don’t think its tax rates either, because a lot of this wealth is equity. Now I know I am looking at wealth, and not income. But there are parallels. Could it be equity income through stock option – which are highly leveraged?
i hate to say this here, but the income inequality has nothing to do with “high skills” or “talent.” Except of course for baseball players and rock stars.
We pay some “skills” more than others because we have a moral conviction that some skills are “worth” more than others. And another moral faith that “low skill” people are worth less.
But the time and life of ordinary people (low skill) is worth just as much , or more, than that of “high skill” in the same way water is worth more than gold. We pay less for it because there is more of it, and we can get away with paying less because we can always find someone who will do it for less… because they are starving.
It’s a matter of political power, culture, psychology, even “economic” power which is another way of saying the same thing.
Having tried both, I am not altogether sure the “skills and talent” needed to be a college professor, say, is that much greater than that needed to be a farm hand.
or certainly any more useful.
i keep trying to make this point because as long as we are hammering at “inequality” and proposing to fix it with “taxes” we are playing into the hands of the criminals who are profiting from their control of the government.
enforcing laws against theft would be more useful than taxing the high earnings of thieves.
and frankly, what i see of the academic left, they fully embrace the idea of inequality of persons, and their idea of “raise taxes” starts at the guy who is making more than they are.
And I would add Coberly, raising taxes and implementing austerity through sequesters will increase inequality. Lastly, just because you raise taxes does not man it is automatically redistributed to anyone else.
If you want to fix inequality raise the min wage, and increase/direct government expenditures toward the lower income groups.
There are lots of good policies to reduce inequality, but as Coberly points out, as long as government is dominated by people opposed to such policies, they’re not going to happen. Several recent books on the middle class argue that politics has to start with overturning Citizens United and corporate personhood. Jeff Faux’s “The Servant Economy” is a good example of this, presenting a depressing but frighteningly plausible view of what will happen if we don’t fix things.
In order for the toadies in DC to do the right thing, including passing legislation that is bullet proof against the Citizens United crowd, there will have to be enough people energized enough to get out in the streets. That’s what it has always taken. But with the bulk of the American public anesthetized by various entertainments, or being kept busy working two and three jobs just to make the rent, it’s doubtful many will find the time or inclination to educate themselves on what’s really going on, and what they need to do to change it.
sure -can- help cause it, but then systems are not monocausal so I’ll add the shift from fewer to greater proportion/ no.. of unproductive workers who- on avg.- are paid less.
=======Sandi Campbell,
Sure enough — but think of combinations of ‘in the street’ and hacking — well beyond the old ‘foco’ method[s] but, to xtent, incorporating those.
[corrected typo]
I’ll add the shift from fewer to greater proportion of the no.. of unproductive workers who- on avg.- are paid less.