Inequality, Poverty, and Prosperity.

Alan Blinder assesses the economic situation in today's Wall Street Journal, and the news ain't good:

When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that's right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?

No, it doesn't, and there's a lot of similar bad news in the piece. That's why, for all the value of Tyler Cowen's recent article on inequality, which traces out some serious problems in the financial sector, I was slightly offended that he chose to use himself, a university professor with best-selling books to his credit, in comparison with Bill Gates, to demonstrate that even those with unequal incomes have access to modern improvements in living standards. Cowen, I would bet, earns several times -- if not quite a bit more than that -- the median American income of about $50,000, and many of the wealthiest, as Cowen traces, did much less than Gates to obtain their fortunes. There are very real gaps between the mass of Americans and the very wealthiest.

You can't talk away poverty with descriptions of material goods available to all without talking about what's missing from low-income lives; in some ways, this debate is a recapitulation of one between Will Wilkinson and Jon Chait in 2009, which readers will not be surprised to learn I awarded to Chait in a clean knockout. In response to Cowen, Noah Millman points out astutely that poverty is different today than it once was but no less debilitating to a society. As an addendum, I'd point out that all of this appears to be getting worse, not better, demanding even more of public attention.

My question for Cowen is, why should the relevant comparison be 1911 and not 1974? Sure, most people are better off than a hundred years ago, but why are they worse off than they were 35 years ago?

Rich Yeselson, a strategist at the Change to Win labor coalition, e-mails to answer that last query:

"What does this tell us? That the orthodox economic story that wages increase in tandem with productivity gains is a myth. It's entirely possible--indeed its been happening for over 30 years--that capital can retain a disproportionate share of productivity gains if worker's lack bargaining power. Not coincidentally, we have seen 30 years of consistent decline in private sector union density.... nobody has figured out another way for the great mass of workers--not workers with specialized skills--to receive the fair share of their labors correlated to increases in their productivity."

Certainly Cowen and others on the right won't share that analysis, but there does appear to be at least a strong correlation between labor's strength and shared prosperity. What does seem clear is that this is not a problem that can only be solved by reforming the financial sector to hold down risky profits and prevent calamity. There's also a longer-term issue with the distribution of productivity gains that will require attention if we want to fix the unsustainable trend toward inequality.

-- Tim Fernholz

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