Do you ever find that you agree with someone’s analysis but completely disagree with their takeaway? I think that’s how I feel anytime I read anything by Phil Gramm — an economist and former GOP lawmaker. In his book and many of his talks and articles he raises a good point: over the last 50 years, the bottom of the income distribution has benefitted from government policy that has raised its income status relative to the median. I agree that this has happened.
Indeed, I even agree with Dr. Gramm when he said at a recent talk at Harvard: “I’m not upset by inequality.” He argues that people have different attributes, abilities, energies, and goals. Of course, these points are absolutely true. As an economist myself, I know that we need some inequality to, oh I don’t know, justify getting out of bed in the morning. I wouldn’t go to work if I knew my outcomes would be the same no matter what. The fact that some inequality is necessary is obvious to anyone who thinks about it, progressive, conservative, or whatever.
But, Dr. Gramm uses these points to argue both that rising inequality is a myth and also not something to worry about. Here is where I disagree.
While it is true that the bottom is catching up to the middle, that’s because the middle has been so stagnant. And while it is also true that we might need some inequality, I would ask: do we really need this much?
The Growth in Household Inequality
The figure below shows how household income has evolved over the last 50 years. Specifically, the picture shows household income per person from 1975-2024 for the median and the 95th percentile household (using the Oxford Adjustment Scale to differentiate between children and adult consumpton and to account for shrinking household sizes). The 95th percentile has grown three times as much as the middle. And the middle is hardly benefitting from the sorts of policies Dr. Gramm argues benefit the bottom of the distribution.
Figure. Individual Income within the Median and 95th Percentile Household, 1975-2024
The truth is that inequality today is much worse than it was in the 1970s. Household income have stagnanted in the middle. I think that “why” and “what to do about it” are actually two really important questions.
Regarding the reasons for the increase in inequality, can anything be learned by examining salary trends for various lines of work? Which have an increase in compensation and which have been stagnant? My hunch is the cause is related to the increasing role of technology in the economy, and that those who have the skills are rewarded while those lacking face higher levels of competition in the labor market, depressing wages.
You are definitely right on with that observation about technology. What you see is that in the middle of the distribution there has been a lot of downward pressure on wages due to automation. These jobs were somewhat routine (the sterotype is an assembly line worker), and easily replaced by robots and other kinds of technology. The people programming those robots were at the top of the distribution, so saw their productivity increase along with their wages. The big question is whether generative AI does something similar — think translators who used to something that a computer couldn’t and now are in competition with machines.
Impact of AI is a concern for sure, both in terms of job loss and potential for harm. I’m quite worried about negative consequences of AI, both at the personal level (psychological) and systemic level (AI taking control). Is Boston College doing any work in the area of AI focusing on safety?
It is relatively simple to measure inequality by monetary earnings over time. This says little about quality of life though. How to consider the impact of improved quality or capability of products? In other words, getting more bang for the buck. For example the televisions of today that are far better and cheaper than the ones I grew up with. Same is true of most products from cars to coffee makers. If you measure quality of life by money earned you miss the impact of technological improvement. People on the low end of the earnings curve have the benefit of many of these improvements.
It’s also a good point. I do think that a lot of measures of inflation miss that sort of technological improvement. Still, if you look at ancillary measures of inequality, you also see widening gaps. The Case and Deaton work on mortality is a good example (I’ve contributed a bit here myself: https://doi.org/10.1080/10920277.2019.1676788). Basically, people who have suffered by these monetary measures also have seen worsening inequality in mortality specially due to alcoholism, suicide, drug use etc. So, I guess the question becomes if things like a better TV in the middle of the distribution matter so much for happiness, why are these things happening more often?
It is possible that alcoholism and drug use are causes and not effects of worsening monetary income. In other words, behavior of individuals leads to outcomes (monetary income, physical and mental health, etc) and not the other way around?
You say inequality is necessary, I would say inequality is an inherent attribute of existence. No two things are alike in every way, whether they be snowflakes or income level or asset ownership. Inequality by itself is neither good nor bad, it just ‘is’. However inequality in income or wealth can grow to a level that causes disruption of society. The growing popularity of socialism could be sign that inequality is reaching a level that is a threat to our society. It will be interesting to see how our leaders respond to this threat. As an economist, are you aware of societies that successfully navigated these conditions?
I think the argument that the causality goes from economics to the alcoholism, drug use, etc. is timing. The downward pressure on earnings in the middle of the income distribution predates a lot of the problems we have seen on the mortality side. But, the “deaths of despair” idea is really only a decade old at most, so I do think research is ongoing towards causality.
I do think a tendancy towards socialism (and therefore ignoring the benefits of capitalism) is a sign inequality has grown too much. Or, perhaps, that some people feel its become harder to climb the ladder. As someone who thinks that capitalism is the best system we have come up with so far to manage scare resources, this concerns me.