Friday, May 16, 2014

The Two Inequalities

In the wake of Piketty, “inequality” is in.  But it comes marinated in confusion.

The problem is that there are two inequalities with relatively little in common.  The one we had been arguing about for several decades is wage inequality.  Most pay has stagnated in the US, while a few occupations, like finance, have seen stupendous rewards.  Within the professions, a few superstars are making oodles while the rest are left to envy.  There has been a big debate: is it about “human capital”?  Winner-take-all?  Deunionization, deregulation and political derepresentation?

But a second inequality has appeared on the scene: the growing share of income going to capital rather than labor.  This is Piketty's issue, the topic of his book.

There is actually little overlap between them.  Inequality I is about the division of labor income, inequality II the falling share of labor income overall.  Inequality I is about the 99% versus the 1%; inequality II is about the 1% of the 1% (the top .0001) versus everyone else.

Solutions to Inequality I don’t touch inequality II.  You can crank the minimum wage to $15, make college education free, and issue every worker a union card, and, if Piketty is right, the proto-dynastic ruling class of capital will continue to cement its domination.  This is why P himself, despairing of any other approach, calls for a global wealth tax.  (This of course is crazy, as is my earlier call for a stochastic jubilee, which could be designed to largely converge on a tax.)

The reason I'm writing this is that the current discussion mixes up these two inequalities, with the result that #2 is ignored.  The first inequality is the one we think we understand, so we try to squeeze Piketty into it.  But he doesn't fit.


Dan Kervick said...

But a second inequality has appeared on the scene: the growing share of income going to capital rather than labor. This is Piketty's issue, the topic of his book.

Piketty is interested in both kinds of inequality. The core of the book is Part Three, which is called "The Structure of Inequality" and consists of chapters 7 through 12. Among other things, it deals with both inequality of capital income and inequality of labor income, and with the correlations between the two.

Sandwichman said...

Yes, what Dan Kervick said. Piketty very clearly differentiates the two kinds and analyzes each and the relationship between them.

Peter Dorman said...

I plead guilty! My error, for which I will spare you the explanation.

That said, I still think it's true that Piketty's primary contribution is to foreground the problem of extreme concentration at the top, and that much of the discussion adroitly avoids it. Investments in early childhood education are great, but how will they counter plutocracy?