Paul Krugman reviews Robert Reich

How much is monopoly power behind inequality?  Is the older explanation of skill-biased technical change [SBTC] still in the running?  Here is an excerpt from Krugman’s new NYRoB piece:

SBTC has fared very badly over the past quarter-century, to the point where it no longer deserves to be taken seriously as an account of what ails us.

The story fell apart in stages. First, over the course of the 1990s the skill gap stopped growing at the bottom of the scale: real wages of workers near the middle stopped outpacing those near the bottom, and even began to fall a bit behind. Some economists responded by revising the theory, claiming that technology was hollowing out the middle rather than displacing the bottom. But this had the feel of an epicycle added to a troubled theory—and after about 2000 the real wages of college graduates stopped rising as well. Meanwhile, incomes at the very top—the one percent, and even more so a very tiny group within the one percent—continued to soar. And this divergence evidently had little to do with education, since hedge fund managers and high school teachers have similar levels of formal training.

Something else began happening after 2000: labor in general began losing ground relative to capital. After decades of stability, the share of national income going to employee compensation began dropping fairly fast. One could try to explain this, too, with technology—maybe robots were displacing all workers, not just the less educated. But this story ran into multiple problems. For one thing, if we were experiencing a robot-driven technological revolution, why did productivity growth seem to be slowing, not accelerating? For another, if it was getting easier to replace workers with machines, we should have seen a rise in business investment as corporations raced to take advantage of the new opportunities; we didn’t, and in fact corporations have increasingly been parking their profits in banks or using them to buy back stocks.

In short, a technological account of rising inequality is looking ever less plausible, and the notion that increasing workers’ skills can reverse the trend is looking less plausible still. But in that case, what is going on?

Krugman makes many other points in the review, but overall he is sympathetic toward Reich’s view that growing income inequality has a lot to do with growing monopoly power in markets.

In my view, the “epicycles” of technology plus trade with China and the rise of finance and constrained building do explain a good deal of what is going on.  I don’t feel bad that this theory has four major variables, five if you wish to throw in education.  Besides, the implied boosts in monopoly power sufficient to rationalize the observed increases in income inequality a) are huge, as opposed to the modest changes we have observed, and b) do worse either cross-sectionally, or in the time series, than the tech/trade/finance/land hypotheses.  Contra Reich, the “if these seventeen policies were different, income distribution would be very different” claim doesn’t actually count as an explanation of how the income distribution has evolved in a world which has remained within other policy ranges.  Land values aside, the world awaits a really good paper on monopoly power and American income inequality.  So far we don’t have one, so it is a very speculative hypothesis, with the “glance over the shoulder at the data test” showing mostly negative results.


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