Today’s Budget Bites post is authored by Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities. Jared will give the luncheon keynote at the CBP’s March 15 conference. Advance registration ends next Tuesday, so register now.
I’m leaving the beltway for a few days next week for a Cali swing that takes me to one the nation’s great state-based fiscal and economic policy shops: the California Budget Project. The good folks there asked me to highlight a few bars of the chin music I plan to play when I speak at the group’s annual conference: On the Edge: Consequences of a Widening Economic Divide.
That’s a good place to start, so I’ll start there. I plan to talk about the status of the economic divide, with particular attention to where things stand in the most recent data, both nationally and for California. Income inequality actually declined in the Great Recession, as the financial bust meant large capital losses for some high-income families. (And if you follow the inequality data, you know that capital incomes are a major factor in play here.)
This led some commentators to claim that the economy solved the problem of rising inequality. Well, beside the fact that a cataclysmic recession is an awfully blunt tool for reducing inequality, we’d seen this pattern before. The same cyclical dynamics occurred in the dot.com bust back in 2001. A lot of wealthy households took a hit when the equity bubble burst, but the structural factors fueling the divide were still very much in place. And once the cyclical problem was over, the structural factors reasserted themselves—big time—and growth once again became a spectator sport for middle- and low-income households.
So, I’ll start by laying out the facts of the case, and showing that the benefits of the growth that’s occurred so far in the current recovery are also in the process of making an end run around the working class.
But, with respect to the title of the conference, I am planning to go well beyond discussing consequences. Because I don’t know about you, but I’m tired of just describing problems. I want to solve them.
So I plan to lay out a model I’ve been working on for the past few months, kind of my theory of (almost) everything. It’s very simple really, but I think it rings true. I also believe that if we don’t carefully and correctly diagnose the problem, we risk flubbing the prescription. So I’m going to spend a few minutes next week unpacking this model:
In a normal economy, growth occurs and it reaches those who help create it—not necessarily in equal measures—there’s always unequal outcomes in a capitalist economy, and that’s fine. At least it’s fine if there are equal opportunities. Because then, families can take their share of that growth and invest in their kids, who might have a chance to climb up the economic ladder. In other words, growth leads to incomes for middle- and low-income families, which leads to opportunities, which creates the potential for upward mobility.
That’s how it’s supposed to work.
But then I inject inequality into the model. Now, growth is diverted from large swaths of families, and as their incomes stagnate or worse, opportunities fade and mobility is diminished. Worse, the concentration of income feeds into a concentration of political power, and this power organizes itself against measures that could help offset rising inequality, like higher minimum wages, union organizing, safety nets, and so on. Instead, that political power moves to cement its privileged position and deepen the channels that are diverting growth from the majority to the minority, implying the rise of policies like supply-side, trickle down tax cuts, deregulation of financial markets, and no-holds-barred campaign finance. The result is a very vicious cycle.
My talk will explore the evolution of this model, look at the economic and policy developments it would predict, and ask if, in fact, that’s what the data show. I don’t want to give away the punchline, but…yeah…that’s pretty much what the data show.
But what do we do about all this?
Ah, now for that, you’ll have to show up for the talk.
See you there!