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Inequality and Stagnation

By Matthew Yglesias  

"Inequality and Stagnation"

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I think it’s excellent that Bernie Sanders used his quasi-filibuster to try to bring more public attention to the issue of income inequality in the United States. Still, I think there are some important questions about this that remain largely unanswered in the progressive community. Most importantly, how does the explosion in income for the very tip-top of the income distribution related to the stagnation of wages at the median?

One answer would be that it relates very closely. That gains in the top 1 and top 0.1 percent (and so on) have come at the expense of the median. But I think it’s equally plausible that this is wrong and the co-occurrence of explosive top-end inequality and median wage stagnation is basically a coincidence. Perhaps the top 1 and top 0.1 percent have gotten rich not at the expense of the average worker, but at the expense of the other college-educated professionals in the top 10-20 percent. Meanwhile, as a separate phenomenon middle class wages have stagnated simply because real GDP growth in the past 30 years has been disappointing.

If you look at what’s happened in recent years, it’s easy to see how banking policy has helped lead to the growth of very big banks at the expense of medium-sized ones. And it’s easy to see how this might help very rich executives of very big banks get rich at the expense of modestly prosperous executives at mid-sized banks. And it’s also easy to see how low aggregate demand has led to sky-high unemployment which prevents the broad mass of less-skilled workers from bargaining for raises. But these are pretty clearly separate phenomena. De-concentrating the banking sector might be good economic policy for the long-run, but it has nothing in particular to do with short-term labor market conditions. Conversely, adequate fiscal and monetary stimulus would turn the labor market situation around and help middle class wage earners, but that wouldn’t change the fact that Jamie Dimon is a much richer and more important banker than was any bank executive in 1965.

Of course that’s a story about 2007-2010 and not the whole 30 year view. But it’s an example of how these issues can come untangled. Alternatively, if you look at the 1995-2000 period it was the only time since the end of the Great Inflation that we had a really tight labor market in the United States. It’s also the only time that we had substantial middle class wage growth. But that wasn’t a period when the trend toward accumulation of super-fortunes among the super-elite was halted.

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