The Argument Over Inequality

Every April, the Congressional Budget Office releases its latest income and tax estimates. And every April, the Center for Budget and Policy Priorities plugs the numbers into its spreadsheet and announces that once again the top 1 percent of households had a larger share of the nation's after-tax income, and the middle and bottom fifths of households had smaller shares, than in any year since 1979, the first year the CBO data cover. It’s become such a rote event that few even take notice.

The numbers are always three years behind, which means this year, we received 2006 data. And sure enough, 2006 is now the most unequal year on record. The number to remember is 5,800 percent. That's how much the incomes of the bottom 20 percent would have increased since 1979 if they had been given the same $863,000 pay increase as the average member of the top 1 percent.

That didn't happen, of course. Instead, the number was 11 percent, or $1,600. That was the raise given to the bottom quintile during the past 30 years. Altogether, it could almost buy you a Macbook Air. Almost.

The argument over inequality is, in general, an argument between two camps: One group -- call them the Galtists -- believes that the top percentile is making so much money because they are immensely skilled and tremendously productive. Bill Gates might have an obscene amount of money, they argue, but he gave the world Microsoft Vista (sorry, bad example). We live in a world in which great achievements ensure great rewards, and so much as possible, we don't want to muck with that feedback structure.

The Galtists tend to end up in long arguments with their opposites: the Rawlsian liberals who believe life is luck, and so too with the bulk of achievement. Impressive as a corporate titan may appear, his success is truly testament to a thousand variables far outside his control. Good genes and attentive parents and a smart peer group and a legacy admission to Yale and perfect timing and much else. We live in a world, in other words, where great luck ensures great rewards, and it is the job of public policy to smooth out the jagged edges of fate.

Into this debate step Gar Alperovitz and Lew Daly, whose recently published book Unjust Deserts proposes a new way of looking at great wealth. It is not the primary product of luck, they say, nor is it the child of skill. Rather, it is society that allows individuals to achieve great things and earn such magnificent rewards.

Consider, they say, the phenomenon of "simultaneous invention." The great success stories of capitalism are the inventors and the innovators -- the men who dreamed up the telephone and hammered out the contours of evolutionary theory. Indeed, their names come easily to our lips even today: Alexander Graham Bell. Charles Darwin.

Less well known are the names that could have been on our lips. On Feb. 14, 1876, Elisha Gray entered the U.S. Patent Office. Like Bell, he meant to patent a device for "transmitting vocal sounds telegraphically." Unlike Bell, the device in his patent actually worked. But Gray was a few hours too late. Bell's representative had come earlier in the morning to assert Bell's claim. In the log books, Bell is the fifth applicant that day and Gray is the 39th. And so it is Bell's name we remember. Meanwhile, Antonio Meucci, an Italian stage technician, had applied for a "caveat" -- a placeholder patent -- five years before either Gray or Bell. But lacking the $10 necessary to pay the patent office, his claim lapsed.

Or take Alfred Russel Wallace, a traveling biologist and naturalist whose work in the Amazon Basin convinced him of evolutionary theory. In 1858, he sent his friend Charles Darwin a draft paper outlining his observations. The ideas so closely echoed the claims in Darwin's unfinished manuscript that Darwin rushed his work to publication.

That is often the dull reality of progress: It follows a comma rather than a paragraph break. A field of research achieves a critical mass of ideas and underlying concepts and the next step becomes clear to a number of exerts. A mixture of timing, PR savvy, and aggressive legal representation decides the name that gets etched into the history books. But the credit, properly distributed, should really accrue to the collective knowledge and expertise of society.

Economists have codified this insight in something called "Solow's residual." The term is named for the Nobel Prize-winning economist Robert Solow, who calculated that 88 percent of output growth between 1909 and 1947 could not be explained by changes in land, capital, or labor. Rather, it was technical change -- which is to say, advances in knowledge and technique and capability -- that powered growth. As the Nobel laureate George Akerlof observed, "Our marginal products are not ours alone." Rather, they "are due almost entirely to the cumulative process of learning that has taken us from stone age poverty to twenty-first century affluence."

The story of history, however, is often told through the achievements of individuals. And to some degree, there is value in that. Society is a collection of individuals. If there were no rewards for innovation, we might find spontaneous invention giving way to its opposite. But we are far from that world. Instead, we have set up a system that lavishly rewards individuals and impoverishes society. Where the richest percentile see their incomes grow by $863,000 and the poorest 20 percent see gains of $1,600. And given what we know about innovation, it's not clear that that's a wise -- or fair -- distribution.