Wall Street Journal
By: Alan S. Blinder
June 22, 2014
The attention that's been showered on Thomas Piketty's best-selling tome, "Capital in the 21st Century," has been something to behold. Pikettymania has raised public awareness of inequality in the U.S. as no one has managed to do since the 1960s. Predictably, Mr. Piketty, a professor at the Paris School of Economics, is being lionized by the left and vilified by the right.
His central claims are that inequality is both too high already and destined to rise further. (Think France in the Belle Epoque.) Both claims are debatable, of course. The first is a value judgment on which the left and the right will never agree. The second is a forecast, for which Mr. Piketty makes good arguments. But it's a forecast nonetheless.
In thinking about his two claims, notice, first, that the abstract notion of inequality being "too high" can mean either that the rich are too rich or that the poor are too poor (or both). Mr. Piketty emphasizes the former. Second, you can focus on income inequality, where we have far more data, or on wealth inequality, where we have less. Mr. Piketty's signal scholarly achievement is to make a quantum leap in our supply of data on wealth, which is his focus.
That's all wonderful. But if there is to be a national debate on what to do about inequality in the United States, I'd like to see the focus put elsewhere: namely, worrying more about the bottom than the top, and focusing on income inequality rather than on wealth inequality. The two are related, of course: The portion of wealth inequality that is not derived from inheritance is largely a consequence of huge income disparities.
Related, but different. As Mr. Piketty poignantly observes, even in rich countries the lower 50% of the population owns little wealth other than their homes (if they own them) and their pension rights (if they have any). So focusing on wealth disparities, or even on the income derived from wealth (interest, dividends, capital gains) can't tell you much about what's happening in the middle of the income distribution, not to mention at the bottom. For people in the middle, earnings are virtually the whole story. Down closer to the bottom, it's about earnings and government transfer payments.
Several problems have afflicted America's workers since the late 1970s.
First, the share of labor income in total income has fallen. Using net (of taxes and depreciation) domestic income as the measure, and treating the income of self-proprietors as coming half from labor and half from capital, Commerce Department data show that labor's share dropped to about 73% in 2012 from about 77% in 1979. Capital's share rose correspondingly.
Second, and closely related, wages have stagnated relative to productivity. In theory, real hourly compensation (in dollars of constant purchasing power, including fringe benefits) should track labor productivity (real output per hour). And from 1947 to 1980, it pretty much did. But Labor Department data for the nonfarm business sector show that real compensation has grown at only half the rate of productivity improvement since 1980--1% per annum versus 2%. Over a period of 33 years, that opened up a yawning 40% gap.
Third, and perhaps most important, the distribution of wages has spread out drastically. According to compilations by the Economic Policy Institute, the median real wage--that is, the real wage earned exactly in the middle of the wage distribution--rose by a mere 5% over the years 1979-2012. The implied annual rate of increase is close enough to zero that you can taste it. By contrast, the wage at the 95th percentile rose a healthy 39% over those same 33 years. And the rewards for work grew vastly faster in the top 1%--that's the top 1% in wage earnings, not in total incomes--where the increase was 154% over this period. Let's remember that the top 1% now comprises roughly 1.35 million workers. So we are not only talking about CEOs, movie stars and hedge-fund operators here--though their earnings have shot off the charts.
At the bottom, things have been truly dismal. At the 20th percentile of the wage distribution, real wages were essentially flat over the 33 years; at the 10th percentile, they fell 6%. And this is for people who have jobs. Most of the poor do not.
In 1979, 11.7% of Americans lived below the official poverty line. By 2012, that percentage rose to 15%, even though real GDP was 72% higher. Only about a third of these unfortunate people worked in 2012, and fewer than 10% worked full time, year-round. As a result, much more of their income comes from government transfer payments than from earnings. Meanwhile, the safety net that provides this support has been under ferocious political attack for decades.
The bottom lines are three. First, a significantly smaller share of the nation's income now goes to labor than was true 30-35 years ago. Second, labor's shrinking share has grown drastically more unequal. Third, the U.S. does less to support its poor than, say, Western European nations do. These are facts. Their policy implications have been and remain controversial.
Concentrating on, say, the growing gap between the upper 1% and the lower 99% leads Mr. Piketty to advocate such redistributive policies as higher top income-tax rates, stiffer inheritance taxes and a progressive tax on wealth.
But if you dote instead on plight of the lower 15%-20%, or even on the lack of progress of the lower 50%, you are led to think about policies like giving poor children preschool education, bolstering Medicaid, raising the minimum wage, expanding the Earned Income Tax Credit, and defending anti-poverty programs like food stamps.
These two policy agendas are not inconsistent, but they are certainly very different. The first tries to level from the top; the second tries to level from the bottom. Between the two, I'd like to think that most Americans join me in favoring the second. But I'm worried. Does Pikettymania prove me wrong?