Inequality as Policy

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There is little dispute that most wealthy countries have seen a large upward redistribution of income over the last four decades. The United States stands out in this respect with the share of before-tax income going to the richest one percent more than doubling over the last four decades from roughly 10 percent in the late 1970s to more than 20 percent in the last decade.


Although there is little dispute about this basic story, the causes are hotly debated. The predominant view in policy circles in the United States is that this upward redistribution was the result of the economy's natural course of development. In particular they would like the public to believe that globalization and technology reduced the demand for less-educated workers, leading their wages to fall.


This may be an unfortunate development for these workers and their families (who comprise the bulk of the population in the United States), but no one wants to stop progress. In fact, the growth of inequality was hardly a natural process, it was the result of deliberate policies designed to redistribute income upward.


Starting with the globalization story, it is true that there are hundreds of millions of people in the developing world who are prepared to work in manufacturing jobs at much lower wages than manufacturing workers in the United States and other rich countries. However there are also tens of millions of smart and ambitious people in the developing world who would be happy to train to U.S. standards (including learning English) and work as doctors, lawyers, and other highly paid professionals in the United States.


In the same way that exposure to competition form low paid manufacturing workers in the developing world put downward pressure on the wages of the manufacturing workers in the United States, exposure to competition from professionals in the developing world would put downward pressure on the wages of professionals in the United States. The reason that U.S. professionals don't face this sort of competition is because they had the political power to prevent it.


Our trade deals were explicitly designed to make it as easy as possible for U.S. manufacturing companies to outsource jobs to developing countries and ship the output back to the United States. But little was done to reduce the protectionist barriers that benefit our most highly paid professionals. It is still the case that foreign trained doctors cannot practice in the United States unless they complete a U.S. residency program. Does anyone really believe that a person can't be a competent doctor unless they complete a U.S. residency program?


As a result of this protectionism, doctors in the United States earn on average more than $250,000 a year, more than twice as much as their counterparts in other wealthy countries. This difference in pay costs the country roughly $100 billion in higher medical bills, but none of the self-proclaimed "free traders" ever talks about reducing the protectionism that benefits doctors.


There is a similar story with technology. People don't directly get rich from technology. They get rich from patents, copyrights, and other types of property claims that allow them to charge large amounts of money for technology. The impact of this protectionism is enormous.


The Hepatitis C drug Sovaldi has a list price in the United States of $84,000. A high quality generic version sells in India for $200 for a course of treatment. The United States will pay more than $430 billion this year for prescription drugs that would sell for 10-20 percent of this amount in a free market.


Here too the hand of policy is quite clear. Patent and copyright protections have been made longer and stronger over the last four decades. It was not technology that increased the income of those who "own" the technology, it was politicians.


There are other ways in which policy has been designed to redistribute income upward. There was a conscious decision to let the financial sector run wild leading to the sort of abuses we saw during the housing bubble years. This was not a story of free market deregulation. After all, the sector still gets the protection of the Federal Reserve Board and Treasury when it gets into trouble. It is simply a case of the financial industry getting insurance without having to pay for it.


And we have an incredibly corrupt corporate governance structure in which corporate directors are effectively paid off to look the other way as the CEOs and other top management rip off shareholders. There is probably not a single corporation that gives it directors a direct incentive to limit CEO pay in order to increase the profits available to shareholders.


As a result, it is common for CEOs of major corporations to earn salaries than run into the tens of millions annually. The top assistants are not far behind. And the corporate salary structure affects wages elsewhere. Many presidents of universities, hospitals, and even charities now earn more than $1 million a year.


In these and other cases the cause of rising inequality was conscious policy. The market was deliberately structured in ways that sent more income to those at the top of the ladder and left less money for everyone else. It's understandable that those at the top would want everyone to think their prosperity is just the result of the natural workings of the market, but it's not true.


- Dean Baker is Co-Director of the Center for Economic and Policy Research (CEPR) in Washington, D.C. He is the author of Getting Back to Full Employment: A Better Bargain for Working People [] among other books [].


Published in The Hankyoreh [], November 7, 2016
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