IN THE QUAGMIRE

IN THE QUAGMIRE. Robert J. Samuelson's column in today's Washington Post has an intriguing title: "The Equality Quagmire." So I put my rubber boots on and waded in.As far as I can tell, Samuelson's piece is about a new working paper on the reasons for the increasing income inequality in the United States. Its authors, Frank Levy and Peter Temin, both of MIT, give this abstract for their paper:

We provide a comprehensive view of widening income inequality in the United States contrasting conditions since 1980 with those in earlier postwar years. We argue that the income distribution in each period was strongly shaped by a set of economic institutions. The early postwar years were dominated by unions, a negotiating framework set in the Treaty of Detroit, progressive taxes, and a high minimum wage - all parts of a general government effort to broadly distribute the gains from growth. More recent years have been characterized by reversals in all these dimensions in an institutional pattern known as the Washington Consensus. Other explanations for income disparities including skill-biased technical change and international trade are seen as factors operating within this broader institutional story.

The Treaty of Detroit was a series of labor agreements between the three large automobile manufacturers and the United Auto Workers which guaranteed moderate annual wage increases and job security to the workers in exchange for promises to avoid labor disruptions. Similar contracts were signed in other industries. The era of the Treaty of Detroit was also one in which social norms disapproved of very high executive compensations.The Washington Consensus is the authors' name for the fairly widespread agreement on the desirability of deregulation and privatization during the 1980s. The 1980s were also the decade when Ronald Reagan broke the back of American unions and lowered the top marginal tax rates on non-labor income. Finally, it was during the 1980s that high executive pay packages became socially acceptable. Now, there is no real quagmire in the conclusions of Levy and Temin. They argue that institutional factors and the prevailing political values have changed in ways which weaken the bargaining position of the median worker and strengthen that of the top earners and of the owners of capital. Frail unions, less progressive taxes and a government which mostly takes the side of the employers all contribute to the increasing income inequality.