This is a detailed follow-up to my long essay Moral Failure In Liberalized Market States, and particularly the introduction to that essay, in which I talked about wages versus productivity. Please read or review that text if this subject interests you.
As Yogi Berra said, "you can observe a lot by just watching." Indeed you can. For example, at the Washington Post's Wonk Blog, we see The top White House economist’s favorite graph might restore your faith in the future.
At the end of a briefing Monday on the Economic Report of the President, I asked Jason Furman, the Council of Economic Advisers chairman, what his favorite chart in the 410-page book is. He replied that his favorite new chart is this one on the trend in total factor productivity — a measure of how efficient we are, taking into account technological advancement — from 1953 to 2012.
Furman and his fellow CEA member, Jim Stock, made the case that the chart is grounds for optimism about the future of the economy.
Some have argued — notably Robert Gordon of Northwestern University — that productivity growth over the past 40 years has been sub-par and, just by carrying that trend forward, we can expect less robust economic growth in the future. (He also worries about other headwinds, like a shrinking population of working-age Americans because of the retirement of baby boomers.)
[My note: Gordon also sees economic inequality as a headwind for growth.]
Furman and Stock argued that the past decade-and-a-half has been reasonably good for productivity growth — and that means economic growth might be pretty good in coming decades despite a smaller labor force.
There still remains a big open question, however, about whether a broad share of the population will benefit from that growth.
Right, that's the big open question. Only top income earners have benefited from economic growth in the United States over the last three decades. That distressing fact is addressed on pages 189-192 of the Economic Report of the President linked-in above. By the way, that report is 415 pages long, so one of the things we can observe by watching is that 0.723% of the report was devoted to explaining income inequality in America.
Most of those three pages are devoted to a long, boring and irrelevant discussion about various bogus theories economists have come up with to explain this chart.
Those explanations center around the usual suspects—the impact of technological change and globalization on the supply and demand for skilled labor (see below). I will not waste your time by reviewing those arguments. The Council of Economic Advisors (CEA) tells us the lesson of Figure 5-3.
The lesson from Figure 5-3 is that productivity growth is important for wage growth, but that does not mean that it automatically leads to wage growth.
As regular readers of DOTE know, I do not make this shit up.
Long story short, after that long discussion of bogus theories, the CEA concludes as follows.
Autor and coauthors refine the earlier skill-biased technological change literature and argue that the changes in inequality are driven by technological change that substitutes for some tasks but not others (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2011). In particular, this new research argues that computer technologies complement non-routine cognitive tasks, which tend to be highly paid; substitute for routine tasks, which tend to be in occupations with wages in the middle of the distribution; and have little effect on manual tasks that tend to be associated with lower wages. This technological explanation for polarization has been controversial, however, and Mishel, Shierholz, and Schmitt (2013) suggest that the theory does not explain the timing of changes in polarization, and more generally that occupational employment and wage trends do not explain a large part of the trends in wages or inequality over time.
Moreover, one of the most striking changes in inequality over the past three decades—the sharp growth of incomes at the very top of the distribution—is unlikely to be related to technological changes or to a relative demand for skill (Alvaredo, Atkinson, Piketty, and Saez 2013).
If you know how to interpret income distribution data, a casual glance at this next chart makes it obvious that "the sharp growth of incomes at the very top of the distribution ... is unlikely to be related to technological changes or to a relative demand for skill."
Note that the TOP 20% includes the TOP 5%, so looking at the curves, we might conclude that virtually all the household income gains of the last 42 years (>90%) went to the TOP 5%. And other data we might cite indicates that most of those income gains went to the TOP 1%, and within that group, most of the income gains went to the TOP 0.1%. On Obama's watch, the TOP 1% captured 121% of the income gains in the first two years of the "recovery" (2009-2011). In Emmanuel Saez's 2012 update, we find that 99% of the income gains since 2009 went to the TOP 1%. Graph above from Mother Jones
The CEA report also notes that—
While [some bogus] hypothesis has remained influential, there are reasons to question the primary role of technology in causing the inequality changes that emerged in the 1980s.
For example, many other industrialized nations, such as Germany and Japan, experienced similar technology shocks in the 1980s, but saw little or no increase in wage inequality. This led some economists to expand the framework for explaining inequality to acknowledge the importance of wage-setting institutions in mediating technology shocks
Clearly, there must be something "special" going on in the United States.
I took the liberty of consulting the Alvaredo (2013) document the CEA cites, which is called The Top 1 Percent in International and Historical Perspective. Here is the abstract.
For three decades, the debate about rising income inequality in the United States has centered on the dispersion of wages and the increased premium for skilled/educated workers, attributed in varying proportions to skill-biased technological change and to globalization (for example, see Katz and Autor 1999 for a survey).
In recent years, however, there has been a growing realization that most of the action has been at the very top.
This has attracted a great deal of public attention (as witnessed by the number of visits to and press citations of our World Top Incomes Database) and has represented a challenge to the economics profession.
Stories based on the supply and demand for skills are not enough to explain the extreme top tail of the earnings distribution; nor is it enough to look only at earned incomes.
Different approaches are necessary to explain what has happened in the United States over the past century and also to explain the differing experience in other high-income countries over recent decades. We begin with the international comparison in the first section and then turn to the causes and implications of the evolution of top income shares.
If you look at the inequality chart above and read Alvaredo (2013), you are forced to acknowledge the obvious — "Stories based on the supply and demand for skills are not enough to explain the extreme top tail of the earnings distribution."
As Alvaredo (2013) notes, this failure to explain things has represented a challenge to the economics profession.
Indeed it has. How big a challenge is it?
The CEA follows-up their brief discussion of income inequality in the United States with a section called Policies to Foster Productivity Growth and to Help Ensure That Everyone Benefits from it. Sound good!
That section starts on page 193, only a very short distance from the red text highlighted above.
The first few sentences of that section go like this—
The benefits of technological progress do not accrue only to those who develop new processes and inventions; they also spill over to the population at large. For this reason, the U.S. Government has a role in supporting and enabling technological development...
But of course we have just established, and the CEA admitted one page earlier, that the benefits of technological progress do not spill over to the population at large.
The rest of the chapter talks about how the Federal Goverment can foster technological change and broaden its reach, especially with respect to patents and telecommunications (improving internet access, etc.).
You might recall my earlier discussions of how beneficiaries of the status quo employ various rationalizations to maintain ongoing socio-economic arrangements. Those beneficiaries include most (if not all) working economists, and certainly include those lucky economists serving in the White House Council of Economic Advisors. See my long essay cited at the top, and follow the links there-in.
I feel compelled to repeat something I said earlier: I do not make this shit up.
In a parallel universe, you do make this shit up - and win the coveted Lupitzer Prize for Creative Fiction.
Posted by: Oliver | 03/12/2014 at 06:11 PM