New York Times - April 4, 1999
Is the U.S. Income Gap Really a Big Problem?
By SYLVIA NASAR
In economics, the facts alone don't usually tell the whole story. Consider inequality, the trendy subject of dozens of books in the last few years. The facts are uncontroversial: By any hard measure -- wages, income, wealth -- the gap between rich and poor in America has been widening for decades. And while there are indications that the gap may have stopped growing in the mid-1990s, the disparities between Americans of different means are wider today than at any time since the end of World War II.
Sounds like a big problem, right? The conventional wisdom says so. Oddly, though, none of the authors who spend hundreds of pages and thousands of statistics documenting the phenomenon devote even a few paragraphs to rigorously demonstrating that greater income disparities -- as opposed to, say, the persistence of an entrenched underclass -- is a serious problem for the nation. They simply assume that it is.
So when two distinguished empirical economists take the trouble to challenge what has become an article of faith, it's intriguing -- particularly because neither is a right-wing ideologue baldly denying the facts, nor a hoary elitist insisting that inequality is necessary for innovation, saving or support of "high" culture. The main question they must tackle is how to decide whether rising inequality is good, bad or indifferent.
One approach, taken by Martin Feldstein, president of the National Bureau of Economic Research, is to ask whether the sources of increasing inequality meet a widely accepted ethical criterion first proposed by the Italian economist Vilfredo Pareto. It is the economic equivalent of the Hippocratic standard in medicine: Any change is good if it makes someone better off without making anyone else worse off.
Feldstein examines some of the changes that have created an explosion of riches at the very apex of America's income distribution. The most important, economists agree, is the market's increased tendency to heap most of its rewards on those with lots of education and sophisticated skills.
In addition, opportunities for entrepreneurs have burgeoned wildly; as recently as 1980, 60 percent of the Forbes 400 had inherited the bulk of their wealth; by 1997 the old money had dropped to just 20 percent.
Then there's the well-publicized phenomenon of the 70-hour work week for investment bankers, lawyers, management consultants and other top professionals, a contrast to the past when those who worked the longest were those with the lowest wages. And, finally, there's the extraordinary bull market in securities, mostly owned by the haves.
All these changes, Feldstein says, are in themselves positive, and tend to benefit some individuals without making others any worse off. By the Pareto criterion, that's a change for the better.
Finis Welch, a labor economist at Texas A&M University who gave this year's prestigious Ely Lecture at the American Economics Association annual meeting, takes a different approach, focusing on inequality's consequences rather than its causes. Welch argues that rising inequality has had important positive effects along with at least one negative.
He points out that, while the market's uneven rewards for skills have caused the wage gap between high-paid and low-paid individuals in general to widen dramatically, they have also sharply narrowed the far more disturbing wage gaps between blacks and whites and between women and men.
Under these circumstances, it is hard to believe that most Americans would prefer the more homogenous income distribution of the late 1940s, when racism and sexism severely limited occupational choice and pay.
Growing inequality could have devastating effects if it convinced those at the bottom that efforts to move up are doomed to failure. But largely the opposite has happened. Young Americans are finishing high school and going on to college in record numbers, an obvious plus.
Still, one clear response to increased wage inequality that Welch identifies is unambiguously troublesome. Low-skill, low-education men react to their falling earnings potential by giving up on work and relying instead on welfare and other social programs for income, an option that did not exist before the mid-1960s. Policy-makers are more conscious of the pitfalls and are more inclined than ever before to tie benefits to work. That, together with the tightest labor market in memory and a recent surge in pay among the less skilled, may be drawing some drop-outs back into the work force.
"Everybody was just wringing their hands" about income inequality, Welch said, "but I just kept thinking that people have more of a sense of control over their destinies than when I was a kid."
Welch, who overcame a devastating accident that left him a paraplegic at 18, seems in step with the mood of most ordinary Americans, who seem to feel that, whatever has happened to the income distribution, opportunities abound -- and not just for the rich.