Why has inequality gone up so much?

The main reason—the outer layer of the onion, if you will—is the diminished ability of most Americans to claim as much of the economy’s growth as they once did.

I’ll explain what I mean by that in a moment, but it may sound like a different explanation than you’re used to hearing.   Typically, we hear globalization (g), technological change (t), increased returns (ir) to high levels of education or superstar talents.  All of which play a role, but all of which have existed forever.  So something else must have changed.

Some of what’s changed relates to g, t, and ir themselves. US global trade, as measured by the sum of import and export shares of GDP, increased from around 10% in the 1960s to around 30% now, and the increased competition—and large, persistent trade deficits–with low-wage countries has held down wages and jobs in “tradable sectors.”  Technology appears to have become more “labor saving” in recent years, meaning if what you do is at all repetitive, you can be replaced by a machine.  If you write the software that runs said machines, that’s better.  College attainment has significantly slowed in recent years, and that’s been a factor as well.

But these are not the main reasons for the growth in economic inequality.  These are merely time honored forces that have the potential to deliver the benefits of growth toward a narrower sliver of the income scale.  What’s changed—the reason that potential is now realized—is the absence of a countervailing force pushing back the other way.

Unions, of course, come to mind, and there’s good research showing that less unionization is associated with faster growing inequality.  Other labor market institutions matter as well, including the erosion of the minimum wage, sectoral policies (e.g., promoting manufacturing), and the inattention to labor standards such as wage and hour rules, overtime regulations, and workplace safety.  Such policies provide some countervailing force to workers beset by the pressures of globalization, technology, and whatever else is skewing economic returns.

I’ve stressed the importance of low unemployment here as well.  It’s no accident that periods of truly tight labor markets have consistently been ones where inequality’s growth was constrained.  And that makes sense: full employment labor markets give working people the bargaining clout they lack when the supply of workers much exceeds the demand.

An intimately related factor at the core of the inequality problem is the toxic combination of “rational expectations,” efficient markets hypothesis, trickle-down economics, and increased money in politics. The first two argue that anything that looks like a countervailing force—whether it’s full employment policy, a higher minimum wages, or even using policy to burst a financial bubble—distort market outcomes and must be stopped.

The latter two take that dangerously wrong theory and plug it into regressive tax policy, aggressive deregulation, and the dismantling of any countervailing force that might have pushed back on inequality in earlier times.

That’s about where things stand right now.  We’re way far away from full employment—have been for over a decade.  Unions are fighting to stay alive, especially in the public sector, with little help from national policy.  Progressive taxation, another important force in dampening inequality’s growth (see the top figure here), is under constant attack.   And while the Obama administration and a precious few in Congress fight the toxic combination of bad economic theory and its policy implications, they are too often no match for the power and reach of the deep-pocketed opposition, who continue to oppose any countervailing force, from health care and financial reform to countercyclical measures that might lower the jobless rate even just a tad.

As long as policy remains stymied in its ability to provide the majority of the workforce with some measure of force, some bargaining power, to push for their fair share of the growth they themselves are helping to create, inequality will continue grow apace.

Like they say in that movie, may the (countervailing) force be with you.