from Follow the Money

Inequality in America

April 20, 2008

Blog Post

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Unions in the American manufacturing sector used to have the bargaining power to secure a middle class wage for their members. Not any more. And no one else – apart from corporate CEOs, hedge fund managers and star athletes – seems to have all that much bargaining power either.

The chart that accompanies Justin Lahart and Kelly Evan’s report on voter angst in Pennsylvania is worth the price of the Saturday Wall Street Journal. It isn’t (yet?) available online; for some reason it isn’t part of the graphics package that accompanies the online story. It shows the enormous gulf between the income of the top 0.1% of the income distribution and the rest of the population. It also shows that family income, adjusted for inflation, has fallen by 4% for the bottom 90% of the population while rising 22.2% among the top .01% (all parts of the top one percent saw income gains greater than 5%, but the gains were biggest at the top. The graphic I liked is based on the Piketty/ Saez data, and the income calculations exclude capital gains.

UPDATE: the key graph can be found here; hat tip to an anonymous contributor.

I am not sure than Makiw’s explanation – a fall-off in educational achievement and slower growth in the supply of highly-skilled workers – is a sufficient. The top 5% of the American families are all reasonably well-educated. But even among the 5%, almost all the income gains have been concentrated at the top. A fall-off in educational achievement can perhaps explain why the real income of the top 10% of American families is rising (a bit) while the income of the bottom 90% isn’t. But it cannot explain increasingly inequality among those at the top.

It isn’t that hard to see why so many Americans think the US is on the wrong track. Most Americans didn’t benefit from the expansion of the past few years. And now the economy isn’t expanding.

It also isn’t hard to see why public support for “trade” has eroded dramatically, despite the Bush Administration’s ongoing rhetorical critique of “economic isolationism.”

The Doha round has stalled. Trade hasn’t. China’s exports increased from under $250 billion in 2000 to $1220 billion in 2008. It isn’t clear that increased trade with low-wage countries has contributed to lower wages for less-skilled workers in the US. Krugman didn’t find a strong link. But increased access to cheap goods clearly didn’t keep family income – adjusted for inflation and excluding capital gains -- from falling for 90% of American families. The impact of globalization on prices isn’t all that clear: competition for oil has pushed its price up. Cheap oil was a big part of the post-war American lifestyle. Cheap financing from the rest of the world did make it easier for Americans to make up for falling wages by borrowing against their homes. That strategy was never sustainable, and it has clearly run its course.

If the gains from trade -- for reasons that are hard to pin down -- are not broadly shared, then building support for trade requires much bigger policy changes than many, including many in those income strata that have benefited the most from the recent expansion, are prepared to contemplate. Kenneth Scheve and Matthew Slaughter have this right.

Update: Christian Broda has sent me his most recent paper (with John Romalis) arguing that real income for the poor has gone up by more than it seems because the price of the goods that rich households consume (organic milk, German luxury cars) has gone up by more than the price of the goods that poor households consume. And since Chinese made goods account for a larger share of the goods (low-quality non-durable goods) that poor households consume, imports from China are a big reason for the increase in the living standards of poorer households.

It is an interesting argument, but I am not completely persuaded.

1/ Low-income Americans consume more goods that are made in China (i.e. shop at Walmart), but they also are employed more in sectors that produce goods that compete with goods made in China (there is a paper on this that I need to dig up), or in sectors where the equilibrium wage has been held down by the contraction in the US manufacturing sector (which is at least partially related to the rise in the goods trade deficit). While China initially produced goods that didn’t overlap with much production in the US, that is changing. Auto parts and household furniture are two examples. Even computer assembly -- some companies still do final assembly in the US. This is partially captured in the study (which compares Chinese production over time) but it presumably is having a bigger impact more recently, as the volume of Chinese production and the technical sophisticated/ capital-intensity of Chinese exports have increased. My sense is that the "deepening" of Chinese production intensified in 2006 and 2007 (until 2004, Chinese imports and exports grew together, as China imported to export; after 2004 not so much).

2/ China also pushes up the price of the goods that it imports. Think oil. And increasingly think food. China doesn’t have to buy from the US to increase global prices. Much of the increase in the price of these goods has come after 2005 -- the last data point in the survey. The rise in the price of food presumably has a bigger impact on low-income Americans.

3/ China imports a lot more debt from the US than it imports goods. The biggest winners from China’s imports of debt (US exports of bonds) are likely to be wealthier US households. Falling interest rates pushed up the price of homes. Home prices are now falling, but they aren’t back to where they were in say 2001, just before China became a big buyer of US debt. That delivered a windfall to existing home owners (while creating problems for those who took on too much debt to buy homes at the peak of the boom). Chinese demand for Treasuries also made it possible to cut taxes and run up the US government’s debt without driving up interest rates (and driving down asset prices). With a reasonably progressive tax structure, that helps those at the top more than those at the bottom. Looking only at trade in goods understates China’s impact on the US, because it ignores the now very large (and one-sided) trade in financial assets.

I am not sure that China has had a huge impact on the US income distribution, one way or the other. It may be that China had a bigger impact on prices for the basket of goods that lower-income households consume than it had on wages -- directly, and indirectly, through reductions in workers bargaining power in manufacturing sectors exposed to Chinese competition -- for those households. The overall effects are complex, because they offset. I am fairly confident that China isn’t going to just produce low-quality durables for much longer.

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