Tue, Feb 06, 2007 - Page 9 News List

Inequality is on the march but more difficult than ever to gauge

By J. Bradford DeLong

How much should we worry about inequality? Answering that question requires that we first answer another question: "Compared to what?" What is the alternative against which to judge the degree of inequality that we see?

Florida is a much more materially unequal society than Cuba. But the right way to look at the situation -- if Florida and Cuba are our alternatives -- is not to say that Florida has too much inequality, but that Cuba has much too much poverty.

On the global level, it is difficult to argue that inequality is one of the world's major political-economic problems.

It is hard, at least for me, to envision alternative political arrangements or economic policies over the past fifty years that would have transferred any significant portion of the wealth of today's rich nations to today's poor nations.

I can easily envision alternatives, such as Communist victories in post-World War II elections in Italy and France that would have impoverished nations now in the rich North. I can also envision alternatives that would have enriched poor nations: Deng Xiaoping (鄧小平) becoming China's leader in 1956 rather than 1976 would have done the job there. But alternatives that would have made the South richer at the price of reducing the wealth of the North would require a wholesale revolution in human psychology.

Nor should we worry a great deal that some people are richer than others. Some people work harder, apply their intelligence more skillfully, or simply have been lucky enough to be in the right place at the right time. But I don't see what alternative political-economic arrangements could make individuals' relative wealth closely correspond to their relative moral or other merit. The problems that can be addressed are those of poverty and social insurance -- of providing a safety net -- not of inequality.

But on the level of individual societies, I believe that inequality does loom as a serious political-economic problem. In the US, the average earnings premium received by those with four-year college degrees over those with no college has gone from 30 percent to 90 percent over the past three decades, as the economy's skill requirements have outstripped the educational system's ability to meet them. Because the required skills acquired through formal education have become relatively scarcer, the education premium has risen, underpinning a more uneven distribution of income and wealth.

Ceci Rouse and Orley Ashenfelter of Princeton University report that they find no signs that those who receive little education do so because education does not pay off for them: if anything, the returns to an extra year of schooling appear greater for those who get little education than for those who get a lot. A greater effort to raise the average level of education in the US would have made the country richer and produced a more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find -- and thus worth more on the market.

Likewise, the US' corporate CEOs and their near-peers earn 10 times more today than they did a generation ago. This is not because a CEO's work effort and negotiation and management skills are 10 times more valuable nowadays, but because other corporate stakeholders have become less able to constrain top managers and financiers from capturing more of the value added.

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