University of Chicago economist John Cochrane has written one of the most unique and insightful perspectives on inequality in his blog, The Grumpy Economist. Read Why and how we care about inequality in its entirety. It is about 6 pages long.
Yes, the reported, pre-tax income and wealth of the top 1% in the U.S. and many other countries has grown. We have an interesting debate whether this is “good” or “market” inequality – Steve Jobs starts a company that invents the iphone, takes home 1/10 of 1% of the welfare (consumer surplus) the iphone created, and lives in a nice house and flies in a private jet – or “bad,” “rent-seeking” inequality, cronyism, exploiting favors from the government. Josh Rauh made a good case for “market.” It’s interesting how we even use different language. Emmanuel Saez spoke of how much income the 1% “get,” and Josh how much the 1% “earn.”
In middle incomes, as Kevin Murphy told us, the “returns to skill” have increased. This has nothing to do with top-end cronyism. As Kevin so nicely reminds us, wages go up when demand for skill goes up and supply does not. He locates the supply restriction in awful public schools, taken over by teacher’s unions. Limits on high –skill immigration also restrict supply and drive up the skill premium. There’s a problem we know how to fix. Confiscatory taxation isn’t going to help!
More “education” is one obvious “solution.” But we need to be careful here, and not too quickly join the chorus asking that our industry be further subsidized. The returns to education chosen and worked hard for are not necessarily replicated in education subsidized or forced. Free tuition for all majors draws people into art history too. Forgiving student loans for people who go to non-profits or government work, or a large increase in wealth and income taxation, remove the market signal to study computer programming rather than art history, which raises the skill premium even more. Saudi Arabia spends a lot on “education” in Madrases around the world. In a Becker memorial conference remember three rules: Supply matters, not just demand; don’t redistribute income by distorting prices; and human capital investments respond to incentives. (By the way, I’m all for art history. Just don’t pretend that the measured economic returns to education will apply.)