Conscious policy changes, not the
uncontrollable progression of technology, are to blame for income
redistribution. Photograph: Kimberly White/Reuters
The people who have been the winners in the massive upward
redistribution of income over the last three decades have a happy story
that they like to tell themselves and the rest of us: technology did it.
The reason why this is a happy story is that technology develops to a
large extent beyond our control.
None of us can decide exactly
what direction innovations in computers, automation, or medicine will
take. Scientists and engineers in these areas follow their leads and
innovate where they can. If the outcome of these innovations is an
economy that is more unequal, that may be unfortunate, but you can't get
mad at the technology. This is why the beneficiaries of growing
inequality are always happy to tell us that the problem is technology.
is another story that can be told. In this story the upward
redistribution of income was a conscious policy by those in power. This
story points to a number of different policies that had the effect of
redistributing income upward. For example, exposing manufacturing
workers to direct competition with low-paid workers in the developing
world, while protecting highly educated professionals (e.g. doctors and
lawyers), would be expected to lower the wages of both manufacturing
workers and the large number of workers who will compete for jobs with
displaced manufacturing workers.
Central banks that target low inflation even at the cost of higher unemployment will also increase inequality. When a central bank like the Fed
raises interest rates to slow the economy and reduce inflationary
pressures it is factory workers and retail clerks who lose their jobs,
not doctors and lawyers. Even an economist can figure out that this will
depress the wages of the former to benefit the latter.
And when a
government adopts a one-sided approach to enforcing labor laws, so that
courts intervene to benefit management and weakens unions, it will
reduce workers' bargaining power. This will mean lower pay for ordinary
workers and higher corporate profits and pay for those at the top.
and other policy changes over the last three decades can explain the
massive upward redistribution that we have seen over this period. In
this story there is no happy coincidence about the upward redistribution
of income. It was done by human hands with the fingerprints of the one
But people involved in policy debates often
have difficulty seeing these fingerprints. That is the context in which
we have to understand the report that the OECD released
on inequality at the end of last year. While this volume contained much
interesting data and useful analysis, the main villain in its
inequality story was technology.
This led to the happy conclusion
that those calling the shots were not responsible. As decent caring
human beings they had ideas about how to redress the harm that
technology had caused, but this was only because they were good people.
There was no sense of undoing the damage brought about by deliberate
On closer examination it turns out that the OECD technology story is wrong. An analysis by my colleague at the Center for Economic and Policy Research,
David Rosnick, found that they appeared to have made a mistake in their
analysis substituting a coefficient on a cyclical technology variable
for the coefficient of the trend technology variable. Essentially, their
results (and ours) found that spending on technology may influence
inequality over the course of a business cycle, but that the increase in
spending on technology over the last three decades had no impact on
inequality over this period.
The OECD analysis did find that lower
unionization rates and weaker labor protections contributed to
inequality, although this rise was offset by the impact of an
increasingly educated workforce. On net, their analysis explained none
of the rise in inequality they identified.
Our analysis found that
the growth of the financial sector could explain much of the rise of
inequality over this period. The rise in the financial sector share of
compensation was strongly associated with a rise in inequality. This is
not surprising. The huge paychecks of the Wall Street crew have to come
from somewhere and our analysis indicates that it came from those below
the 90th percentile in the income distribution. The growth of the
financial sector is in turn a story of too big to fail insurance and
having the government look the other way in the face of financial sector
corruption, as we see most recently with the LIBOR scandal.
short, the OECD struck out in trying to produce a volume that supported
the benign technology caused inequality story. When done correctly their
analysis does not support this conclusion. Our modification of their
analysis fingers the financial industry as a major villain in the
If we are serious about reducing inequality, reining in the financial sector must be a big part of the plan. And, a tax on financial speculation would be a great place to start.