Inequality and Solidarity

I welcome David Grusky’s provocative reflection on the way forward for those who, like myself, support the Occupy Wall Street movement and wish to advance its goals.

As an economist I can attest that his main point echoes arguments that have been made in the scholarly literature on labor markets and inequality for many years now. There is not much new in the observation that rent-seeking is a problem—one that can both exacerbate economic inequality and undermine economic efficiency. Neither is it a revelation to be told, contrary to simple-minded narratives about the impact of redistributive taxation, that equity and efficiency needn’t conflict when labor markets are imperfect or incomplete.

However, I find much of the detail in Grusky’s argument to be unpersuasive or just plain wrong.

The wage premium for college graduates over those with a high school education is not due mainly to non-competitive behavior by elite colleges artificially limiting their enrollments. Nor is it mainly due to the shortage of highly skilled workers that comes about because of abysmal public schooling for the poor. Neither is excessive executive compensation—as unseemly and infuriating as it can be—an important source of economic inequality at the top of the income distribution. (There are too many high-earning lawyers, doctors, athletes, financial analysts, entertainers, entrepreneurs, small-business owners, scientists, and engineers for this to be so).

Inequality is a product of our impoverished ideas about autonomy, community, and solidarity—not our economy.

In Grusky’s rush to adopt a language of “market failure” so as to criticize unequal market outcomes, he gives short shrift to the larger structural forces that are at play here, over which no one has much control: forces such as globalization, technological change, social segregation, and middle class–oriented interest group politics. What economists call skill-biased technological change is not a market failure—it’s a fact of life. Likewise, the impact of competition from low-paid offshore labor is an effect that won’t yield to marginal policy change or the obvious “progressive” (i.e., trade-restricting) legislation.

At the same time, I believe there are places where Grusky simply does not take the logic of his argument far enough. Thus he laments disparities in educational opportunity, but he does not advocate tearing down the barriers suburban, middle-class communities have erected around high-quality primary and secondary public schools, even as poor kids languish in big-city districts a stone’s throw away. Nor does he embrace the implication of James Fishkin’s argument that conventional education policy can’t equalize the life chances of all youngsters. Doing so requires neutralizing the advantages that accrue to children of accomplished parents because so much development and socialization take place at home.

It doesn’t make much sense to think about rents and market failures when inequality is mainly a product of our impoverished ideas about autonomy, community, and solidarity. The failures here are political, not economic, and they are likely to be remedied only by a politics of cross-class and cross-race solidarity—the kind of politics about which I heard far too little at the Occupy Wall Street rallies I attended.

Finally, Grusky’s evident contempt for mainstream economic analysis leads him into error and incoherence. He thinks the Harvards and Stanfords of the world are artificially limiting enrollment. There would be more competition for the best jobs, he thinks–and hence, lower wages in those jobs and thus less inequality–if only they’d open themselves to more applicants. But, he fails to reckon that becoming less selective would, in and of itself, make degrees granted by institutions such as these less valuable in the marketplace. If it were so easy to produce elite graduates by expanding the number of seats in elite colleges, why would large state university systems such as California, North Carolina, and Michigan create a two-tiered structure, with highly selective flagship universities alongside more modest and far less selective institutions? Grusky complains about the non-competitive nature of U.S. labor markets yet avoids the widely accepted fact that the U.S. labor market is far more fluid than the comparable markets of continental Europe. He talks about “institutional reform” as if invoking these words were enough to induce the desired change, without recognizing that market failure and governmental failure are but two sides of the same coin. Sometimes the regulatory remedies for market failure are worse than the diseases they are designed to counteract.

Grusky’s piece is an invitation to a much-needed debate about inequality in America—a debate that must, I agree, move beyond the issue of tax rates for millionaires and billionaires. It is my hope, however, that as this debate unfolds it will be more comprehensive and more economically literate than the argument on offer in this opening salvo.