Thomas Piketty's book Capital in the 21st Century is generating a lot of buzz because it presents a seemingly coherent explanation of income disparity in our country, as well as a proposed solution -- a complex tax scheme unlikely to be enacted. On May 14, the Wall Street Journal published a stinging rebuttal of Piketty's thesis by Martin Feldstein, the Harvard economist and former chairman of the Council of Economic Advisors, who challenged virtually all of Piketty's basic assumptions.
Feldstein insists the income gap is not nearly as extreme as Piketty contends. He sees the problem not as one of income disparity but rather too little income for people at the bottom of the heap. Feldstein contends the only viable solution to that is better educational opportunities for the poor and stronger economic growth.
I agree with Feldstein's argument but his solution is not easy to accomplish. Education is always cited as a solution to the income gap, but while education is vital the fact is we have poured hundreds of billions into education in recent years to little effect. We now have millions of unemployed liberal arts grads on the streets. As for economic growth, I know of no one who is against it but it remains an elusive goal.
This debate inevitably evokes more criticism of the compensation meted out to corporate brass which by any sensible measure is out of control. But while this issue generates criticism and indignation, I do not believe it speaks directly to the core issue of income disparity. If we imposed sensible limits on executive compensation, it would lead to slightly higher dividends for investors, but do nothing for the working poor.
Likewise, the clamor for a higher minimum wage strikes me as almost irrelevant. It would benefit a few and harm many more by reducing entry level jobs for people with marginal qualifications and putting an untenable burden on many small businesses.
In my book, Making It In America, I proposed an idea called gain-sharing, which is similar to profit sharing but based more on a company's growth than on profits at any particular time. The workers of a company know that if the company does well, they share in its progress. That encourages them to greater effort and puts more money in their pockets.
For gain-sharing to have an impact, it would have to be required by law or at a minimum rewarded by the tax code. And it should be applied to all enterprises, profit and nonprofit, great and small. The way to get more citizens to a higher level of income is to get them better plugged into the engines of growth. It should be an easier sell to business because it is in fact tied to growth. If business turns down, the company is not locked into a higher compensation structure.
Of course, what we really need to heal the income rift is more jobs which will put upward pressure on compensation. So what we really need, as Feldstein says, is more robust economic growth. But how do we accomplish that? In Shakespeare's words, "Ay, there's the rub."
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. You may quote from this with attribution. Let me know if you would like to speak with Jerry. May 2014