Focusing on the Middle

FOCUSING ON THE MIDDLE….Why do liberals care about rising income inequality? There are several reasons, I think, but the main one isn’t actually related to inequality per se: what we’re really concerned about is stagnant middle class wages. We want to see consistent growth in median incomes, and that can’t happen if the rich are hoovering up the bulk of the income growth. Ezra Klein, riffing on an old Paul Krugman column, puts it this way:

The concern [is] that, through mechanisms we’re not entirely sure of, the very richest are siphoning off the economic growth before it flows through the middle and lower classes. The worry is about the distribution of growth, but the suspicion is that the distribution is being warped by the sheer level of inequality.

I’m not sure this gets the mechanism quite right, though. There are two basic ways that unequal growth can happen:

  1. The rich suck up vast amounts of income growth, and this leaves very little money for the middle class. Thus, wages for the middle class are stagnant or, at best, rising slowly.

  2. Middle class wages are kept stagnant, and this frees up vast amounts of money from economic growth. The money has to go somewhere, and it goes to the rich.

Now, obviously, it doesn’t have to be one or the other. It could be both. But I suspect there’s a lot more analytic power in #2 than in #1.

Here’s the thing. One of the arguments against the proposition that government policy has a big influence over increasing income inequality is, in Brad DeLong’s words, “that the shifts in income inequality seem to me to be too big to be associated with anything the government does or did.” And if you’re assuming #1, that’s probably correct. Government policies simply don’t seem to have a big enough direct impact on the pretax income of high earners to explain the vast shift we’ve seen over the past few decades.

What’s more, the middle class is big. If there were significant pressure to keep middle class incomes rising in line with economic growth, it would take titanic amounts of government action to swim against that tide and direct the money instead to the rich. It’s nearly impossible to see a mechanism that could allow this to happen.

But ? government policies that affect #2 seem far more plausible. For example: Appoint members to the Federal Reserve who are obsessed with inflation and act to cool down the economy at the least sign that average hourly wages are rising. Make it harder to form unions in new industries, thus reducing the bargaining power of the working class. Support free trade agreements that put downward wage pressure on low-income workers. Support tax and deregulation policies that make middle class jobs less secure.

This seems far more likely to account for most of what’s happening. If you can maintain pressure on median wages, the rest happens automatically. After all, the income from economic growth has to go somewhere, and if it’s not going to the middle class it’s going to end up going to the rich. Where else can it go?

Now, there’s certainly no reason to reduce marginal tax rates on the hyper rich in an effort to make inequality even worse than it otherwise would be. But as unjustified as this is, tax cuts aren’t the main issue. Median wages are. Focus government policy like a laser on improving the wages of the middle class, and reductions in income inequality will follow.