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Inequality Is Not a Problem That Taxes Can Fix

03/25/2013 08:26 am ET | Updated May 25, 2013

There is a debate raging of sorts in the economics community. Are we in a recession? On one side -- claiming that economic data does not suggest that we are in a recession -- is a large swath of the economics community. On the other side, feeling the slings and arrows of his colleagues derision, is Economic Cycle Research Institute founder Lakshman Achuthan. Achuthan suggests that the U.S. job growth is in decline, a stance that may be contradicted by official data but reflects the real world experience of many Americans.

Debates within the dismal science are usually quiet affairs, but this one has gone public, complete with a YouTube Hitler parody of Achuthan. But even as Achuthan has been increasingly ridiculed for his unwillingness to back off his contention that the U.S. economy is in a recession, the debate has raised a more fundamental question about the nature of economic measurement and the effectiveness of the current economic model in meeting a primary objective of producing the greatest good for the greatest number of people.

The problem of measurement is most dramatically apparent in Europe, where the return to recession was generally recognized three months ago. While recent projections suggest a deepening recession in Europe, the official data are nonetheless a stark contrast with the facts on the ground. This is particularly apparent in Spain, where projections of a 0.7 percent annualized rate of contraction would seem to dramatically understate the severity of the economic problems in a country with an official unemployment of 26 percent, where youth unemployment exceeds 50 percent, and where in the words of Citigroup chief economist Willem Buiter, the primary practical job seeking strategy for young Spaniards has become to leave their own country.

In the years since the 2008 economic collapse, by all measures, the United States has fared far better than Europe, where the inherent tensions between monetary integration and political independence have led to a dysfunctional polity, and labor market rigidity has created undermined economic adaptability. Yet since the collapse of the housing bubble five years ago the dichotomies within the post-Cold War U.S. economic model have become increasingly apparent.

At the same time as Europe has fallen back into recession, U.S. corporate profits have hit record highs as a share of GDP and this past week the Dow Jones hit a new high, each of which are supposed to be predictors of current and future economic vitality. But as in Europe, where mildly recessionary economic indicators in Spain stand in stark contrast to clear evidence of an economy in free fall, U.S. economic data seem to miss the central point. Simply stated, even if economists are correct that we are not officially in a recession, it is hard to argue against Achuthan's larger point that for a large share of the American workforce the U.S. economy is not working. If the U.S. economy is performing acceptably according to the standard metrics, perhaps the problem is in the metrics themselves.

If one looks at the performance of the U.S. economy over the past forty years, the record is not good for the average worker. Since 1973, wages and salaries have declined steadily as a share of GDP, from 54 percent to 45 percent. And the decline has been across sectors, as private wages declined from 43 percent to 37 percent and governmental wages declined from 11.4 percent to 8.5 percent.

This decline can be attributed to several factors. Technology has dramatically increased labor productivity (output per hour worked) even as labor market pressures from free trade and capital mobility have suppressed real wages that might otherwise have increased with productivity growth. Globalization has created an economy in which growing productivity and wage competition have created great benefits to to investors in the form of increasing corporate profits and equity prices, while depressing real wages as a share of GDP and real family incomes in the United States.

And, as in Europe, economic pressures on real income levels in the United States have been and will continue to be exacerbated by the accelerating intergenerational transfer of resources from the young to the old. Even as wages and salaries are declining as a share of GDP, the retirement benefits of the Greatest Generation and Boomers are growing as a share of GDP, and will be funded by debts and taxes that will diminish the incomes and standard of living of their children and grandchildren for decades to come.

If globalization and free trade have contributed to declining returns to labor in the U.S., they have contributed to the elevation of upwards of a billion people out of poverty across the globe. But even regions such as India, China and east Asia that have benefitted from globalization -- and the gutting of the American middle class -- have seen the rise of their own plutocratic classes and the societally destabilizing impact of resulting inequalities.

The solutions are not readily apparent. To those on the left, higher corporate and income taxes are the essence of a redistributive strategy to correct increasing income inequality. Yet redistributive tax strategies do little or nothing to cure the underlying problem of work force adaptability. To those on the right, deregulation remains the key to avoiding the stagnation and constriction that handcuff the youth of Europe. It is notable that post-2008 protest movements on the left and the right each pointed to the problem of political corruption at the federal level resulting in special treatment for powerful industries.

Like many debates these days, the attacks on Lakshman Achuthan is missing the larger point. If according to the rules of the dismal science we not in a recession, it is our standard of measurement that is broken. For most people, the definition of a recession is simple: a recession is a crappy economy. And by any measure, for the large proportion of the American workforce, that is what we have.

But the larger question since the 2008 financial collapse has been whether the underlying U.S. economic model is itself broken. If our economic model is working for a decreasing share of the population over time, democratic pressures will ultimately demand not just changes to the system of measurement, but to the system itself.