How America chose inequality: The message the nation needs to hear tonight

Inequality was no accident, and the president's new focus on "opportunity" is a mistake, a leading economist says

Topics: Barack Obama, Inequality, mobility, opportunity, Poverty, John Schmitt, CEPR, Bill Gates, Taxes, Unions, Immigration, Labor, Trade, , ,

How America <em>chose</em> inequality: The message the nation needs to hear tonight Donald Trump, Mitt Romney, Lloyd Blankfein (Credit: lev radin via Shutterstock/Reuters/Steve Marcus/Jim Young/Salon)

Following prior pieces suggesting “income inequality” would be the centerpiece of tonight’s State of the Union, multiple outlets are reporting that’s not quite the case.  “Income inequality is out,” wrote the Associated Press, “‘ladders of opportunity’ is in.”

That’s a shame, contends economist John Schmitt, and it’s bad for policymaking as well as politics. Schmitt, a senior economist at the progressive Center for Economic and Policy Research, spoke with Salon about the problem with emphasizing economic mobility, the limits of attacking inequality through education, and what Obama should say – but won’t – tonight. A condensed version of our conversation follows.

A “senior administration official” told the Wall Street Journal that, in the Journal’s words, “income inequality would be addressed” in the speech, “but would be just one piece of the broader challenge to increase opportunities.” What is at stake in this question of whether the challenge is economic mobility, or the question is inequality?

Obviously, both are very important and they’re highly interrelated …

An important issue whenever people talk about opportunity and mobility is to keep in mind that if we’re talking about … starting to change it today, we’re talking about having an impact on mobility or opportunity, and ultimately on inequality, that is for most purposes possibly decades away. So you know, I think the time frame that we see results is going to be a lot different depending on whether we focus on trying to address inequality in the present or trying to address economic opportunity and economic mobility for basically young people today when they’re 40 and 60, not 20 …

If your strategy is to get people to go to college, finish college and get college-educated jobs, you’re basically leaving that group of workers that are, say, 25 and older, that are unlikely to go back to college and finish – I mean, some will and some do, but not in large numbers – you know, you’re leaving them out to dry. And you’re basically saying we’re going to solve inequality by slowly increasing the share of the workforce that has a college degree … It’s a very, very slow way to address the economic inequality question. It will work to a certain degree, but it takes a very long time. And … the thing that economists don’t say is: … How is it that making more people have a college degree is going to reduce inequality? Well, one important reason is that it’s going to lower the wages of recent college graduates, and bring them back down, because there’s going to be an increase in supply …



We have a pressing economic inequality problem right now. And we know how to address that. It’s just that making the politics happen is what the obstacle is. It’s a shame that there’s a shift away from directly the issue of inequality, to … questions like mobility and opportunity. Because I think those are much harder to pin down, they’re a much longer time frame, and they take us away from the direct kinds of issues that have an immediate impact.

In the State of the Union last year, the president said, “to grow our middle class, our citizens have to have access to the education and training that today’s jobs require.” This is something you hear a lot, from Democrats and from Republicans. How much of an answer is that to the mobility problem, or the inequality problem?

The focus on training, on education, on skills — those are things that are extremely helpful, and they’re very useful in the medium- and long-term … But that’s not the problem that we have right now.

The problem that we have right now is not that there are tons [of jobs] out there going vacant because we don’t have the workforce that can fill those jobs. We have the exact opposite problem. We have something on the order of three unemployed people for every vacancy that’s available. And we have a situation where even highly skilled workers are having trouble finding work … We have recent college graduates working for free as interns, and struggling to find a job that’s not something that they could’ve done with just a high school degree …

The [supposed] skills shortage problem … If there’s not enough workers who have particular skills, then employers start to bid, to get the workers that do have those skills. They steal them away from their competitors, and they bid the wages up. That’s not happening anywhere in the economy right now. So it makes me deeply skeptical that the problems that we face are related to skills. And it makes me deeply skeptical that we’re going to solve those problems in the short-term by increasing training and education – as much as I might favor doing those things.

Your “Where Have All the Good Jobs Gone” research – what does that suggest about the limits of education and productivity as ways for workers broadly to make it into the “middle class,” so to speak, or as solutions to these problems?

Workers today are a lot older than they were in the 1960s or the 1970s, and they are enormously better-educated than they were in the 1960s or 1970s. The fact that most workers are doing barely better, and some workers are doing worse than their counterparts from 40 or 50 years ago … suggest that the problem is that the way the economy converts people’s skills, people’s experience, people’s education and their training, into good jobs is what has deteriorated over this period. Not people’s underlying skills, or work experience, or education.

And I think it points to something completely different — and I think it’s absent from a lot of the discussion as [to] the reasons why we have economic inequality, and the reasons why we have these continuous problems with mobility and opportunity. And that has to do with bargaining power of workers. And you know, that I think is a piece that’s unfortunately missing from the president’s discussion of economic inequality, and it’s absent from his discussion of mobility and opportunity.

The way the economy has been restructured over the last three or four decades has removed the bargaining power of workers at the middle and the bottom. And it’s done that in a very systematic way.

The president’s rightly focused on the question of the minimum wage because I think it’s kind of a core example of where we’ve used public policy in a way to reduce the bargaining power of workers at the bottom. Because we’ve just allowed the minimum wage to fall far below its historic value, no matter how you measure it. … It’s definitely below where it was four or five decades ago, even though we’re much richer than we used to be. That’s a conscious or semi-conscious decision that we’ve made …

That’s just one example. Another is this big decline in unionization in the private sector that we’ve seen over the last four or five decades … We have a labor law that is completely unresponsive to workers’ desires to form a union in the private sector … That undermines the power very much of workers, in particular in the middle of the wage distribution …

We pretty regularly keep the unemployment rate too high, much higher than even economists, who are pretty conservative about these things, think is the level of full employment. And that goes directly to workers’ bargaining power … If you have a job and the unemployment rate is 10 percent, you are much less likely to go to your employer and ask for a pay increase, or improvement in benefits, or a better schedule, than if the unemployment rate is 4 percent …

We have this kind of systematic setup where the minimum wage is down, unions are down, the unemployment rate is too high.

It doesn’t stop there … Immigrant workers have almost no rights under our labor law … Because their position is so weak, it undermines the power of low-wage workers who were born here and have — barely — more rights … It creates a perfect set of circumstances for low-wage employers, because they can play immigrant workers against U.S.-born workers, in an environment where neither of them has very many rights. So businesses don’t have a big incentive to try and fix that situation …

We’ve had trade deals such as [the proposed Trans-Pacific Partnership], which we’re discussing right now, which are basically organized to increase the power, economic power of corporations, and to undermine the power of their workers and consumers.

You know, we privatized state and local government functions at quite an alarming rate … The main advantage that the private sector has over the public sector is not that they’re more efficient at organizing school buses. It’s that they pay their workers less and they don’t give them benefits …

That discussion of bargaining power, and the politics and the policies around it, is firstly what’s going to be missing from the State of the Union address. And broadly from the discussion of economic inequality. From, you know, even the Democratic Party, for the most part.

Alan Kreuger’s Gatsby curve [tying inequality to mobility] – what do you make of that contention, and how should that inform these debates about income inequality and mobility?

To me, the most important single conclusion to draw from the Gatsby curve is just that the United States has both very high levels of economic inequality, and very low levels of mobility. The rest of the debate and discussion around the curve is whether or not one causes the other — and then there’s a separate question of whether or not the level of mobility has been falling relative to the past …

One of the arguments I think that you sometimes hear is that … it doesn’t matter if economic inequality increases, because we have lots of economic mobility in the United States. And I think that what the data that Alan Krueger and many others have shown is that the United States actually has low levels of economic mobility relative to almost every other country that looks like us in terms of standard of living.

And so you can’t take a lot of comfort from the prospects of economic mobility … even if it’s the case that economic mobility is exactly the same as it was 20 or 30 years ago, that’s small comfort for somebody born into the economy today. Because the penalty for not moving up is, we know, substantially higher than it used to be … the 20th and the 50th percentile have, you know, basically both fallen relative to the top … If we had a big increase in economic inequality, at least to stay where we were, we would need to have a big increase in mobility — which we certainly have not had.

But my own view is, you know, the mobility question is important, and opportunity is important — but it’s also the case that we want to make sure that workers at the 10th percentile … or a low-income family at the 20th percentile, that those folks move with the growth in the overall economy. And that is something that simply has not happened over the last four decades or so …

People’s resources, particularly when kids are young, are going to make a big difference to where their kids end up. And if we focus on inequality in the short term, we are going to have an impact on mobility in the medium and the long term. And that’s what we see in the examples of other countries: The other countries that tend to have more mobility than we do have … a lot more equality, and more resources available to children in particular.

In England, the attitude of “New Labor” was once characterized [in 1998] by [Blair cabinet member] Peter Mendelson saying he was “intensely relaxed about people getting filthy rich, as long as they pay their taxes.” What do you make of that worldview … that it doesn’t hurt people at the bottom to have extremes at the top, as long as you then tax the money?

Even since he made those comments … I think there’s been a much better consciousness of the broader social costs of inequality. It’s very divisive. It creates a lot of political problems. It’s not just, you know, some sideshow. I mean, it’s a real core issue about fairness, and how people understand and identify with their society …

The other truth is that we don’t actually tax the money away. One of the big problems that we have is that we don’t have tax rates that actually … take back a significant chunk of what people at the very top make … Hedge fund managers pay a tax rate of 15 percent … No low-wage worker in the United States probably pays less than that, when you add in all the different taxes they have to pay …

There’s a big cost to the way we have things organized, because there’s a lot of oneupmanship in the CEO world, and there’s a lot of competition to get paid a little bit more … If we had taxes that made it less important to make the extra million dollars, because you knew you were going to get 90 percent of it taxed away, people might focus on other things, and do other stuff …

A lot of very, very highly paid people get “[economic] rents” — they get [paid] money they don’t need to [be paid] in order to [be willing to] do their jobs. So from a societal point of view, we’re paying the top 1 percent enormously more money than we need to in order to get them to do whatever job it is that they do, whatever socially valuable function that they think that they have …

I’m pretty sure that Bill Gates would have probably done everything that he did for, I’m just going to say, $50 million … Maybe I’m terribly, terribly wrong, and he would have only done what he did for $5 billion. But the point is that as a society, we’ve given him $50 billion, essentially. We’ve arranged a market system that has awarded him with $50 billion or more …

From a societal point of view, that’s an enormous waste. Because we could have gotten all the good products and services from all of the work that consumers value from Microsoft, by giving Bill Gates $45 billion less than we did. We would have all sorts of resources to invest in all sorts of other things, and we didn’t do that. So it’s a real case of inefficiency.

What would be the dream State of the Union speech on these issues?

One that recognizes the political constraints that are operating on the president and on progressive forces … but would spell out an alternative story to why we’re in the mess we’re in, and an alternative set of solutions …

Instead of focusing on how kind of abstract forces of technology, and you know, abstract forces of globalization are dragging down the American workforce, and creating all sorts of inequality, it would focus instead on how, you know, very clear politics, and very clear policy decisions are undermining the bargaining power of workers at the middle and the bottom.

And that is the cause of economic inequality. And that the solutions involve restructuring the economy in ways that give power to workers at the middle and the bottom …

It tells us a different story about why we’re in the circumstances we’re in, and gives us a set of recipes that are focused on the present, and on dealing with economic inequality in the present, as a way toward improving economic mobility and economic opportunity. Rather than offering us, you know, the opportunity to change things 15 or 20 years down the line if all goes well.

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