Thomas Piketty’s analysis of inequality through the ages kicked off an important debate about the causes of and solutions to the problem of the increased concentration of wealth and income. Central to Piketty’s economic mechanics is his assumption that, barring some cataclysm, wealth will increasingly accumulate to those at the top of scale as long as its rate of return (the rate at which wealth holdings appreciate) exceeds the economy’s growth rate. From this diagnosis, his prescription is redistribution through the tax code. This certainly falls out of his model: once you accept the inevitability of narrowly held wealth accumulation, the only solution is to tax and redistribute.
Note, however, that this is not a onetime solution; it implies consistently ratcheting up the redistributive function to offset relentless accumulation. Moreover, in most political systems I can envision, there’s a fatal flaw here: the increasingly wealthy and powerful won’t stand for it, a criticism Piketty himself of course recognizes (he’s not naïve).
So how should we think about this problem? In fact, some of Piketty’s critics point out that there are actually a variety of ways to alter the distribution of market outcomes, aka the primary distribution of income (in contrast to the secondary distribution after taxes and transfers). These ideas range from more union power to better balance that of capital, higher minimum wages, patent reform, restraints on the financial sector, charging polluters and financial bubble blowers for the negative externalities they generate, direct job creation to tighten the labor market and enforce a more equitable distribution of growth, and more.
But from where I sit in the nation’s benighted capital, the chance that any of these will see the legislative light of day anytime soon is far too low. Not zero, maybe. The President himself, for example, has taken steps to raise the minimum pay of workers on federal contracts and enforce better environmental standards. But neither he nor his successors can make much of a dent in the forces skewing the primary distribution in the face of well-organized and highly effective political opposition.
Much of this opposition can be traced to capital itself, as wealth accumulators have the resources to control political outcomes (recent political science research quantifies their disproportionate influence). And, of course, given the drift of campaign finance in recent years, concentrated wealth has ever more inroads into the political process.
All of this raises a fundamental question that curiously seems to be unasked: why is capital so powerful?
One reason is that labor power is so diminished, what with private sector unions at seven percent of the workforce (public sector unions, historically less vulnerable to outside pressure, are at 35 percent but under attack). But that just begs the question: why isn’t labor more powerful, with “labor” in this context referring to not only unions but to the much larger group that depends on paychecks for their economic well-being.
I don’t know the answer to these questions, but my experience as a policy wonk and economist in government has led me to believe that economics, as currently practiced, is part of the problem. Not the discipline itself, which historically has been flexible enough to offer wide ranging and useful tools for analyzing and solving economic problems. I’m talking instead about the way it interacts with wealth and power today to support capital and hamstring labor.
For example, it’s widely argued that government actions that set wages or regulate commerce create “inefficiencies.” Regulate an industry and capital will flee; raise the national wage floor and employers will leave the market (or, in Piketty’s world, handily substitute machines for workers). Increase a marginal tax rate and workers will supply less labor; investors, less capital. Form a union and the unionized firm will face competitive disadvantages that will put it out of business. Provide a safety net benefit to someone and they’ll work less. Tax a polluter and you’ll crash GDP. Tax a financial “innovator” and credit markets will dry up.
Conversely, cut back on a tax rate, a safety net program, the minimum wage, the unionization rate, financial oversight, and growth, jobs, and liquidity will flourish.
I’ve been arguing against these positions for decades, backed by considerable empirical evidence showing that moderate changes to tax rates, minimum wages, union density, the safety net, regulatory oversight and so on trigger nothing like the disasters their opponents claim and can yield important benefits (which is not to say there are no “negative impacts” at all). Yet the bar to win the anti-interventionist argument is set remarkably low. You don’t need evidence; you can just cite “basic economics.”
One symptom of this mindset is the elevation of GDP above all else. I found it striking that during one round of the recent Obamacare debate, opponents got long mileage from a CBO report showing that some recipients of subsidized health coverage could now choose to work less, clearly a good thing for them. But this unlocking of job lock was widely pilloried for reducing potential GDP. When the CBO projected that a minimum wage increase would raise wages of 24.5 million and cost the jobs of 0.5 million, guess which number won the debate?
Armed with these distorted arguments, capital is not just insulated against labor. It is in a position to steer every economic policy debate its way. As Suresh Naidu writes in a wonderful essay on many of these same points, “In a thoroughly marketized world, the wealthy can purchase educational reform, ….,think-tanks, legislative language…”
Surely part of solving the inequality problem will require reducing the outsized political power of those with the most resources (and to be clear, I’m arguing that their usual dominance is highly amplified and uniquely unopposed in our current politics). If I’m right about the role of economics today in supporting capital and opposing labor, then part of winning that fight requires a new economics that encompasses a much broader scope of human and societal well-being, that more readily sees market failures, more accurately gauges and fairly judges reactions to policy changes, and places a much heavier weight on shared prosperity, and not solely through redistribution, but through market outcomes.
As another Thomas—Pynchon—said: “If they can get you asking the wrong questions, they don’t have to worry about answers.” Progressives have all kinds of ideas to shape a more equitable primary distribution. But those ideas will never get much oxygen if we remain voluntary trapped in the cramped debate of a short-sighted economics.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. Bernstein was previously the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. This post was originally published on his blog, On the Economy.