America's 30-Year Productivity Puzzle

The most important point that Ezra Klein makes in this good piece on income equality is his distinction between income inequality and median income stagnation. The very rich are getting very, very rich and the poor are not getting much richer, at all. But it's not clear that the first fact has much to do with the second, more important, phenomenon.

The enormous wealth of the enormously wealthy might be a source of vague jealousy for us mere mortals, but it does not strike me as a problem easily solved by government choices, if it can be solved, at all. As Tyler Cowen explained in his great article "The Inequality That Matters," we can see the accumulation of massive wealth at the top of the pyramid across many industries, and there's a decent explanation: Global markets. Famous authors are richer today than in Victorian England because their books sell in scores of countries around the world rather than the dusty shelves of Victorian England, alone. He puts it nicely:

When it comes to professional athletes and celebrities, there isn't much of a mystery as to what has happened. Tiger Woods earns much more, even adjusting for inflation, than Arnold Palmer ever did. J.K. Rowling, the first billionaire author, earns much more than did Charles Dickens. These high incomes come, on balance, from the greater reach of modern communications and marketing. Kids all over the world read about Harry Potter. There is more purchasing power to spend on children's books and, indeed, on culture and celebrities more generally. For high-earning celebrities, hardly anyone finds these earnings so morally objectionable as to suggest that they be politically actionable.

Quite right. But a handful of international celebrities don't explain national income inequality. So where are the other thousands of uber-rich making their money? In finance, Cowen writes, where we witnessing something truly perverse*:

"Going short on volatility" strategy increases income inequality. In normal years the financial sector is flush with cash and high earnings. In implosion years a lot of the losses are borne by other sectors of society. In other words, financial crisis begets income inequality.

This analysis may well be spot on. But it doesn't explain why in the 30 years between the recessions of the 1980s and the Great Recession of 2008, the middle class hit a wall. I've seen no good evidence that income inequality feeds financial crises or that financial crises are responsible for the 30-year drought of the median income worker. And that is the real crisis here: Not that the pyramid is getting taller, but that it is becoming hollow.

The story that matters is the story about the middle. But what is that story? asks Ezra:

Tim Noah did a yeoman's job trying to answer that question in this series. One thing he didn't address is that, unlike the rise in inequality, median income stagnation has not been unique to the United States. Canada has suffered from it, for instance. That makes me skeptical of overly U.S.-centric explanations. One question that's never been answered to my satisfaction is why the link between productivity and income growth broke:


Where is the productivity going? I've heard a few explanations.

One said the gains from productivity went to producing cheaper products rather than returning higher wages to workers. Another said the gains went to rising pre-tax health care premiums. Another said the gains went to the top, as executives with stock compensation focused more on earnings reports to excite investors than hiring, which is an expensive drag on profits in the short term. Another said the gains came from machines that replaced middle class workers. Manufacturing's share of the labor force has fallen from 25 to 10 percent in the last three decades thanks to the metallic arms of and fingers of smart robots. The technology revolution is good for the American economy writ large, but what middle-income, union-heavy industry stands ready to catch the workers who fall from manufacturing?

For more on income inequality, its causes, and potential solutions....

-- This is how income inequality in the U.S. got so bad
-- This is why we shouldn't necessarily blame it on technology or taxes
-- This is why we shouldn't blame inequality for economic disasters
-- And this is what's happening to middle-class wages (Spoiler alert: They're stuck.)


*Whether our financial system feasts on volatility to the detriment of the economy, or whether the intricate patchwork of the financial markets makes credit more efficient, more available, cheaper and safer, I don't have a strong informed opinion.