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The Mysteries of Inequality Are Only Mysterious to Elites

The government openly acts to ensure that wages don’t rise.

Developing explanations for the growth in inequality over the last three decades has been a huge growth industry in economics and policy circles. Many economists have made their careers with a novel explanation of how the natural development of technology and the market has concentrated income and wealth in the top 1 percent. It’s even better if you can show that inequality hasn’t risen. While the explanations that blame inequality on technology can get complicated, there were three items in the last week that painted the picture very clearly for the rest of us.

First, we got new data from the Federal Reserve Board and the Census Bureau, both of which showed that typical families are still seeing very little benefit from the recovery to date. The Fed released the 2013 Survey of Consumer Finance which showed median family wealth was still below the 2010 level in spite of the run-up in the stock market.

The Census Bureau released its annual data on income, poverty, and health insurance coverage. While there was some good news on the latter two, median income remained flat. The story in both the Fed and Census analysis remains the same; those at the top continue to get the bulk of the benefits from economic growth.

The other two items tell us why this is not a surprise. First, we had a meeting of the Federal Reserve Board in which they discussed when they should start raising interest rates. There was a bit of good news for the nation’s workers as Janet Yellen, the Fed chair, continued to hold sway with her policy of maintaining the Fed’s zero interest rate policy.

However the bad news is that many members of the Fed’s Open Market Committee (FOMC) already are pushing for the Fed to pull the trigger and start raising interest rates. Furthermore, others have indicated that they are prepared to join the trigger happy group as soon as there is any evidence of wage growth. Yellen as chair has the most important voice, but if she loses the support of the rest of the FOMC, interest rates will rise.

There should be no doubt what that means. The purpose of the Fed’s raising interest rates is to slow the economy to keep people from getting jobs. By keeping the unemployment rate up, the FOMC will be reducing workers’ bargaining power and keeping them from getting pay increases. This disproportionately hurts those at the bottom of the income distribution, but puts downward pressure on the wages of most workers.

In other words, we have the central bank of the United States acting deliberately to keep workers from getting pay increases. They justify their actions over concerns about inflation, but we need not take these seriously. Who knows what they believe, but the real world risk of a dangerous inflationary spiral ranks alongside the risk of attacks by Martians. It ain’t going to happen and they should know this.

Of course high unemployment is not the only policy that has kept wages down over the last three decades. Trade policy has also been designed for this purpose. Our manufacturing workers have to compete with low paid workers in the developing world; our doctors are protected from this competition. The downward pressure on the wages of ordinary workers is worsened by our high dollar policy which puts domestic workers at an even greater disadvantage.

Government policy has also made it almost impossible for workers to organize unions. And of course we have let the minimum wage fall way behind the cost of living and even further behind productivity.

The other item in the news last week was the anniversary of the collapse of Lehman and the beginning of the bailout. This is the other essential part of the picture. While the government is prepared to act to keep wages from rising, when the Wall Street banks effectively put themselves into bankruptcy, the government was very quick to come to the rescue. Both the Fed and the Treasury Department made it their central mission to keep the Wall Streeters alive. As former Treasury Secretary Timothy Geithner said repeatedly in his autobiography, there would be no more Lehmans.

So that’s the basic story in the simplest possible terms. The government openly acts to ensure that wages don’t rise and also to protect Wall Street high flyers who managed to sink their banks with their bad bets. Maybe an economist will win a Nobel prize for figuring out why inequality is increasing.

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