The Increase In Inequality Is Necessarily Caused By Policy

Jim Tankersley has a post purporting to document a big economic fight happening in the Democratic party. In it, he rehearses the (by now) hackneyed "divide" between those who blame the rise of inequality on institutions and those who blame it on secular economic/technological change:

The difference there is crucial, for policy and for messaging. One side believes what's gone wrong for the middle class is that wealthy and powerful players have rewritten the tax code, trade deals, labor law and other policies in order to advantage themselves, at the expense of workers. Middle-class stagnation, in this view, is a choice that can be corrected by shifting power back to workers, at the bargaining table and elsewhere.

The other side, the Third Way side, believes that the stagnation is a natural consequence of a globalizing economy, which has disproportionately benefited people with high skills and people who own stock, businesses and other forms of capital. That's the story Kodak is meant to represent. Its demise wasn't imposed by someone else's policy choice, it was a failure of the company to adapt. To boost the middle-class, by that logic, workers need to be given the means to adapt.

In my opinion, this difference is entirely meaningless for policy and everything else for that matter.
 
Identifying Causes Doesn't Identify Solutions
 
The first problem with this discussion is that it often proceeds (and does here) as if identifying the "cause" (whatever that means) of a change in income dynamics also identifies the solution to it. But this obviously isn't true.
 
Even supposing that the Third Way side is correct and that income stagnation at the bottom and middle is a "natural [ugh] consequence of a globalizing economy," that would not actually tell us anything about how to change the income dynamics back. There is no necessary relationship between what set something down a new path and what will set it back. This is especially true in the history of economic development.
 

For instance, industrial technological shocks caused people to move off the farms and into the cities. In so doing, these shocks "caused" a whole host of new economic security problems (owing to the peculiarities of urbanized wage labor) that were already solved in one form or another in the agrarian communities that relied primarily on decommodified farm labor. Under Third Way's analysis, you would, I guess, respond to these problems by giving workers the means to personally adapt to the new terrain. But the actual way we solved these new industrial problems—e.g. income collapses owing to unemployment, incapacitation due to sickness or old age—was through the widespread adoption of modern social insurance institutions.

Always Institutions

The second problem in this discussion is that it is confused about how to think about the relationship of economic shocks and distributive institutions. 

Secular economic changes (think technology shocks, for instance) do not, by themselves, determine how future income will be distributed. Future income will be distributed according to future economic institutions. If a secular economic change would, under your existing economic institutions, cause inequality to go up, you have two choices: 1) keep your existing economic institutions and allow inequality to go up, or 2) adapt your economic institutions to keep inequality where it is. The decision you make between (1) or (2) is what decides how the secular economic change will affect the distribution of national income. It is thus always decisions about institutions that cause inequality to go up.

If you wanted to make the argument that institutions aren't to blame for rising inequality, as Third Way does, then your actual argument should be that it would have been (and continues to be) impossible to put together a set of distributive institutions that would keep inequality (and stagnation) down. That is, you'd need to argue that option (2) was simply not available given the nature of the specific economic shocks.

But, in the context of the US, this would be a nonsensical thing to say. We have a ton of room to install institutions that would distribute the national income more evenly than it is currently distributed. In fact, we don't even have to innovate on this front because other countries have already done it. We just have to steal their ideas. There is little question that adopting much more egalitarian distributive institutions, e.g. raising taxes and providing generous social benefits, would have been sufficient for heading off inequality rises (or, at minimum, keeping the rises very low). And this is true even if Third Way's theory about what drove income dynamics is correct. Thus, it's clear that our institutional decisions are ultimately the real cause of the rise in inequality.

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