Beware of Economists Defending Inequality

Once again, conservative economists are carrying the water for the evermore privileged economic elite. In a variety of venues, including The New York Times and here, they've tried to reassure us that rising economic inequality is "beneficial and desirable" because it encourages young people to go to college

This argument takes the conventional wisdom that economic inequality results from gaps in education and skills-and drives it over the cliff.

For years, economists have conflated the growth of economic inequality with increasing returns to education -- the fact that college-educated workers made increasingly more than workers whose education stopped at high school. Now, economists are arguing that this wage advantage creates an important "market signal," sending a message to high-school grads to go on to college.

The argument has three shortcomings. First, the wage growth of college grads is no longer outpacing that of less-educated workers. Second, even when it did, it wasn't the main factor driving up inequality. Third, they're wrong about the market signal: people don't need the incentive of a much higher college wage advantage as motivation to seek a higher education.

Over the 1980s, the college wage advantage grew by 14 percent, a large gain indeed. But that growth rate slowed in the 1990s, and in the 2000's it hasn't gone up at all. Apparently, these economists are so devoted to their old story that they won't let new facts intrude upon it.

Second, some of what drove the college wage up is stuff that has little to do with education. Since many more non-college workers earn the minimum wage, for example, when it falls, as it did sharply over the 1980s, their wages go down. This shows up as a higher relative wage for college workers. Economists start crowing about "increased returns to skill" when it's really just low-wage workers getting shafted.

Third, people don't need a rising wage premium to convince them to go to college. Other countries with much less inequality have college graduation rates at least as high as ours, and our largest spurt in college attendance occurred in the 1970s, having nothing to do with relative wages (it was the baby boomers entering their college years and draft deferrals).

Most importantly, we are now experiencing levels of income inequality unmatched since the late 1920s. These recent trends have little to do with education, because it's not a matter of those at the top getting ahead relative to those at the middle or low end. It's those at the tippy top doing much better than everybody else, including lots of other highly skilled workers.

This phenomenon just made the front page of the New York Times, in an article documenting "the growing concentration of wealth and income among a select group at the pinnacle of success, leaving many others with similar talents and experience well behind."

Take a look, for example, at what happened to the incomes of the very rich households in the top one percent of the income scale (average income in 2005: $1.1 mil) and the "only pretty rich" households just below them (those between the 90th and 99th percent: avg. income: $151K). Clearly, we're comparing the haves to the have-mores here, a largely college-educated clientele, so any difference between them is not explained by a conventional skills story.

Between 2001 and 2005, the average income of the "pretty rich" group grew a measly 3% after inflation, while that of top 1% was up 23%. Accordingly, the income gaps between these two groups rose as well, with the top 1% having 6.5 times the income as the 90-99% group in 2005, up from 6.2 times in 2001 and way above the 3.7 multiple at the end of the 1970s.

Given the flat trend in the college wage advantage, along with the income surge at the highest peaks of the income scale, we are now embarked upon an inequality trend that has less to do with education and a lot more to do with initial wealth and power. In an economy with weak unions, low minimum wages, aggressive outsourcing and offshoring that affects both blue and white collar workers, even a college education can prove to be weak insulation.

What's particularly galling is that the higher "returns to education" argument is being used as a cover to justify extending the Bush tax cuts for the wealthy. Prominent economist Gary Becker explicitly argues against progressive tax changes-he's against allowing the high-end Bush tax cuts to expire as planned-based on his view that income inequality reflects a greater value of skills (having a college degree).

So, while the wealthiest among us are already receiving the lion's share of pretax income growth, now we're getting lectures on why they need continued tax breaks as well. In other words, the skills argument is being used as cover to justify the unjustifiable.

Moreover, those who would deny, or worse, applaud these trends, predictably resist doing anything about them. Some members of Congress are waking up to the depth of our inequality problem, and taking action to address them, including higher minimum wages, trade agreements that emphasize labor rights, policies to re-build union power, and a return to more progressive taxation.

The denizens of the penthouse have felt these rumblings and set loose their packs of economists. We should be ready for them. We all appreciate the importance and value of education, but the lack of education didn't get us into this inequality mess, and while a more highly educated workforce is a worthy goal, it won't get us out of it.