There’s an interesting back and forth going on between Paul K and Ezra K (or K x (P + E) if you want to use the distributive function, as you should given that this is an inequality discussion).
The President recently averred that inequality is the defining challenge of our time. Ez argues that perhaps growth and unemployment better represent that challenge. Paul offers four strong reasons why, no, inequality is a fine candidate for that role (of course, no one’s done more to promote demand-side growth policies than Paul, so he’s clearly not discounting that side of the argument).
Well, here’s a unifying theory: demand-side policies that that significantly lower unemployment will also reduce inequality. It’s right there in figures 2.5-2.7 of my new book with Dean Baker on getting back to full employment.
A major factor driving inequality, particularly earnings’ gaps, is the diminished bargaining power of middle and low-wage workers. In an economy like ours, with little (not-enough, IMHO) pressure from collective bargaining, low minimum wages, and a large low-wage sector relative to other advanced economies, very tight job markets are about the only friend working families have.
Just look at the first two pictures here. Over the period when labor markets were tight 2/3’s of the time, incomes grew together. Over the period when labor markets were tight 1/3 of the time, they grew apart.
Yes, yes–I’ll be the first to admit that there are a ton more moving parts–the absence of full employment is but part of the explanation for the sharp growth in inequality since the latter 1970s–but the more rigorous analysis in Baker/Bernstein finds this connection as well.
So we don’t have to choose whether to fight weak demand or high inequality. Fight the former and you’ll help reduce the latter.
And yes, it’s a bit of a strange discussion given that the political system is fighting neither, though that’s not entirely true. Sub-nationally, there’s stuff going on here, including infrastructure investment and minimum wage increases.
Finally, since I’m saying here that stronger demand can reduce inequality, am I not contradicting my recent work cited by both K’s which argues that linkages going the other way–high inequality leads to slower growth–are hard to find? Nope. First, clearly growth alone is insufficient to reduce inequality. The economy’s been growing most of this time that inequality’s been increasing. You need full employment, which btw, brings you back to Larry Summers’ concerns that were central to Ezra’s argument.
Second, my point here is that full employment enforces a more equitable distribution of growth. That’s not saying anything about the impact of inequality on growth itself, though the theory I develop in my CAP paper does introduce what I think are potentially important feedback loops between inequality, debt bubbles, and recession, with a generous sprinkling of money-in-politics to close the loop.