Inequality And Stagnation

Tyler Cowen and Peter Thiel argue that median incomes are stagnating because we don’t have enough innovation. Along the lines of yesterday’s suggestion that maybe high inequality is driving financialization rather than the other way around let me suggest that perhaps this is backwards. Perhaps we’re not having much innovation because our median incomes aren’t growing fast enough. Consider, for example, the fact that even though “everyone” has a smartphone these days, most Americans actually don’t have a smartphone.

There are a whole bunch of other things like that. Useful fairly recent innovations that aren’t so expensive that only a tiny elite can afford them, but that most people don’t own because they’re pretty expensive. Laptops, tablets, hybrid cars. These are, I think, the kind of things more people who own if they had more money. And the issue here is that it’s not as if Robert Nardelli is going to say “I’m rich, so why not go buy eleven iPads.” If the income distribution were flatter, you’d see higher sales for all these affordable luxuries. And if sales for that kind of product were higher, there’d be more return to dreaming up new categories of product. But in a world where lots of people who love to cook nevertheless don’t own stand mixers because they’re too expensive, how much sense does it make to invent new high value kitchen gadgets? You can think about this in terms of big infrastructure projects, too. Something like the Verizon FiOS network is only being rolled out very slowly. There are a number of reasons for that, but you can leave them all constant and just imagine that the median household income were growing faster. That would increase the anticipated share of the people in any given neighborhood who you could upsell on FiOS, which would increase the expected return on investment, which would increase the pace with which the network is built out.

A lot of U.S. tax policy over the past twenty years seems to have been driven by the idea that we suffer from some kind of investment drought. It seems much more plausible to argue that we’ve been suffering from a shortfall of worthwhile investment opportunities, at least in part because we’re suffering from a purchasing power shortfall.