In light of Walldon’s important post below on wage stagnation, “A rising tide lifts only the millionaires' yachts,”
and an earlier one
on the so-called “educational premium” as responsible for growing income inequality, I will put up this little piece I was working on.
I think James K. Galbraith pretty solidly dismantled the “education premium” argument for recent growth in income inequality in his 1998 book, Created Unequal. As far as I can tell, this theory in itself, as the explanation for growing inequality, has no more empirical support than the argument that government policy is primarily responsible. In fact, I would think far less. Funny how we too often go along with how the conservative economists (almost an oxymoron, but not quite) stack the deck: they say it’s the education premium, then we say, no, it is government policy, they say prove it, we say, well, it is hard to prove, so it must be a mix of factors. Since a mix of factors means nothing to anyone who hears the argument, while education premium is clear (as well as self-satisfying to the college educated), the conservatives win the argument.
If it is the education premium, then how come income inequality virtually always increases during Republican administrations, and decreases during Democratic administrations? Could it be that Republicans always follow policies that attempt to depress wages ostensibly to favor management – it’s a false premise that bounces back against even the small businesses, I would say -- while Democrats generally try to adopt policies that improve wages to favor labor? How could income inequality – not wealth inequality, and it’s important to keep the distinction clear – be reduced in the 90s under Clinton, as it was, when surely the importance of education was growing just as rapidly as it is now?
In my mind, the so-called “growing education premium” is just that: so-called -- a smokescreen to prevent people from seeing what is right in front of them. When Democrats are in office, the emphasis is on eliminating poverty and improving wages and incomes within the lower and middle classes, and the economy flourishes as a direct result of the massive infusion of confidence that comes from such policy changes. When Republicans are in office, the economy stagnates, period. (That goes for Reagan, too, although he managed to make it look otherwise.) It’s right there in the numbers.
Now granted, using the last 60 years or so – post-war America – does not render enough comparisons of Republican vs. Democratic administrations that would meet statistical models of certainty. That’s why it is political, why ultimately we must make an educated judgment on causation because that is the best we can do. But from Truman, through Kennedy and Johnson, even most of Jimmy Carter, and certainly Bill Clinton, Democrats did Democratic things when they came into office and our economies flourished for ordinary working people. Poverty came down, so did unemployment, and so did income inequality. The economies usually worked better for the wealthy, too, since the business climate improved and stock market performance also has tended to be better under Democrats. The difference is that the middle and lower classes participated in the improvement more.
I think the bottom line is that, in a macro sense to explain and counsel government policy, classical economic theory fails badly. I believe in the social contract theory of how we, as a society, tacitly agree to divide up the rewards of economic activity. The deck inherently is stacked in favor of the wealthy, who have the resources to bend government to their concerns, unless government deliberately and consciously makes sure working people have bargaining resources, too, as has been the case beginning with Teddy Roosevelt and continuing through the Democratic presidents in the 20th century. The mainstream social contract today is a mix of Friedmanism (Milton, that is) and Galbraithism (John Kenneth). Yes, we believe in maximum marketplace freedom that allows Steve Jobs and Bill Gates to create unimagined new wealth (and allows us to open that store we always wanted to do), and we believe, in general, that corporate profits are a good thing. But in this mainstream social contract, we also believe in public education, Social Security, some way of achieving universal health insurance against being wiped out by a health crisis at the wrong time – such as after the layoff and before the next job – some level of government mandates on workplace safety and a clean environment (with the businesses affected being able to shape fairly and reasonably the rules they will have to live by), low unemployment, and continuing improvement in the lot of ordinary people, including continuing improvement in eliminating poverty. Minimum wage, enforcement of the labor laws, enforcement of workplace safety, progressive taxation and full employment as a national goal (all of which the Republicans reject) tend to do these things. They give working people better bargaining power for carving up the national wealth more fairly.
What the stagnation of wages in a time of high productivity and huge corporate profits shows is that the mainstream social contract is not being followed by the Administration in power. In my opinion, period, that is 100% of the explanation, all of it, every bit of it. It is the product of the minority who have succeeded in capturing the Republican Party, and now the government itself, who have never accepted the mainstream social contract. They have bought totally into Milton Friedmanism as an ideology, and by hiding it (tapping into resentment of the “power elite” and using phrases like “compassionate conservative”), have been able to undermine the bargaining power within the national social contract that 70 years of presidencies had created or allowed for ordinary people.
Obviously, there is an “educational premium” that contributes heavily to unequal incomes. The word “it” above does not mean inequality per se, but its growth since 1980. The mainstream American social contract today allows for a high level of wealth and income inequality (more so than in other countries, but $200 million for a CEO is well beyond the tolerance point), but what we had going through several generations in the post-war period was gradual reduction in that inequality. That most of all signaled continuing reduction in poverty and improving real wages for all workers – especially during Democratic administrations. Now we really see what pure Republican ideology does, and it’s not good. Terms like “educational premium” are used to hide that.