Lawrence Summers

Inequality is about more than money

Lawrence Summers
Jun 9, 2014 06:00 UTC

Graduates from Columbia University's School of Business hold a sign as they cheer during university's commencement ceremony in New York

With Thomas Piketty’s book, Capital in the 21st Century, rising to number 1 on best-seller lists, inequality has become central to the public debate over economic policy. Piketty, and much of this discussion, focuses on the sharp increases in the share of income and wealth going to the top 1 percent, .1 percent and .01 percent of the population.

This is indeed a critical issue. Whatever the resolution of particular numerical arguments, it is almost certain that the share of income going to the top 1 percent of the population has risen by 10 percentage points over the last generation, and that the share of the bottom 90 percent has fallen by a comparable amount. The only groups that have seen faster income growth than the top 1 percent are the top .1 percent and top .01 percent.

Applications are seen at a rally held by supporters of the Affordable Care Act in Jackson, MississippiThis discussion helps push policy in constructive directions. Taxes can be reformed to eliminate loopholes and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a clear case for policy measures to reduce profits from such rent- seeking activities, as a number of economists, notably Dean Baker and the late Mancur Olsen, have emphasized.

Unless one regards envy as a virtue, the key reason for concern about inequality is that lower- and middle-income workers have too little — not that the rich have too much. So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. On any reasonable reading of the evidence starting where the United States is today, more could be done to increase tax progressivity without doing any noticeable damage to the prospects for economic growth.

It is important to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life: health and the ability to provide opportunity for children.

Focus on equality of opportunity, not outcomes

Lawrence Summers
Jul 15, 2012 21:52 UTC

Even if the process of economic recovery proves protracted, the American economy will eventually recover, and cyclical issues will cease to dominate the economic conversation. It is likely that issues relating to inequality will move to the forefront. There is no question that income is distributed substantially more unequally than it was a generation ago – with those at the very top gaining share as even the upper middle class loses ground in relative terms. Those with less skill, especially men who in an earlier era would have worked with their hands, are losing ground, not just in relative but in absolute terms.

These issues frame an important part of the economic debate in this election year. Progressives argue that widening inequality jeopardizes the legitimacy of our political and economic system. They contend that at a time when the market is generating more inequality, we should not be shifting tax burdens from those with the highest incomes to the middle class, as has taken place over the last dozen years. And while they recognize that Steve Jobs earned his billions providing great value to consumers and making a substantial contribution to the American and global economies, they also point out that the social value associated with the activities giving rise to many other fortunes, especially in the financial sector, is less apparent.

Conservatives argue that in a world where everything is increasingly mobile, high tax rates run more risk of driving businesses and jobs overseas than they once did. They point out the central role of entrepreneurship in advancing economic growth and note that since most new ventures fail, the returns of success have to be very large if entrepreneurship is going to flourish. They take umbrage at the suggestion implicit in some political rhetoric on inequality that there is something wrong with success on a grand scale. And they worry that policy measures taken to directly combat inequality will have perverse side effects.