Former Treasury Secretary Larry Summers got fired from his last job as president of Harvard. He doesn't seem to be doing much better at his current job, working as a columnist at the Financial Times. Today's column rightly notes the anger produced by growing inequality in the United States, but he misses both the dimensions of this inequality and its causes. First, the problem of inequality did not begin in the last five years as Summers implies in his column. The country has seen a sharp growth in inequality over the last quarter century, as most workers have seen almost no increase in their wages even though productivity has increased by more than 70 percent. This basic fact is extremely important, because Summers seems to think that we have a great economy, that could get messed up by stupid populist policies. To many of us, an economy that fails to produce dividends for the bulk of the population for a quarter century does not look very good. In other words, the economy was messed up by the designers of orthodox economic policies (including Mr. Summers). Certainly ill-formed populist policies could be worse, but the record of Mr. Summers and his fellow economic policy geniuses is one of failure, not great success. The second basic problem in Summers' analysis is that he doesn't even get the source of the inequality right. He attributes the problem to a redistribution from wages to profits, noting that the bulk of income gains since 2001 have gone to profits. Profits are hugely cyclical, as economists know. Profits fell sharply in the 2001 recession. They have since grown very rapidly, but they are just now coming back to their 1997 share of output, the profit peak of the last business cycle. While there was a redistribution from wages to profits in the 80s and 90s, the upward redistribution that has kept most workers from benefitting over the last decade has been entirely from workers at the middle and bottom to workers at the top. In other words, the reason that autoworkers, teachers, and dishwashers are falling behind is that doctors, lawyers, CEOs and college presidents are walking away with so much of the pie. This suggests a different range of remedies. At the top of my list is free trade -- trade policies that would make it as easy for hospitals and law firms to hire doctors and lawyers from India and China as it is for Wal-Mart to buy cheap shoes from the developing world. My full list is much longer (get a free download of the Conservative Nanny State for the full story), but we can't even get to first base on a solution until we are clear on the source of the problem.
--Dean Baker
