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Home Publications Blogs Beat the Press Inequality: Don't Blame the Market

Inequality: Don't Blame the Market

Sunday, 03 August 2014 07:58

Zachary Goldfarb has an interesting analysis of trends in before and after-tax income inequality in the Obama years. However he is mistaken in attributing the rise in before-tax inequality to the market rather than deliberate policy choices.

For example, the big banks still exist today because the government had a policy of saving them from the market. They would have managed to put themselves into bankruptcy in 2008 without huge amounts of below market loans and implicit and explicit guarantees from the government. In the wake of this history, the income and wealth of most of the financial sector can hardly be viewed as a market outcome. (The financial sector also profits by being exempted from taxes that apply to other industries.)

Globalization has increased inequality because of the way the government structured trade. It has designed trade agreements to put downward pressure on the wages of manufacturing workers by putting them in direct competition with their much lower paid counterparts in the developing world. It could have designed trade agreements to make it as easy as possible for people in the developing world to train to our standards as doctors, lawyers, and other professionals and then to compete freely in the U.S. market with native-born professionals. This pattern of trade would have yielded enormous benefits to the economy by reducing the cost of health care and other services, while reducing inequality. The fact that we did not go this way was a policy decision, not a market outcome.

In the same vein, the fact that many products, most notably prescription drugs, sell for high prices is due to government granted patent monopolies. The Hepatitis C drug, Sovaldi, which is being sold by Gilead Sciences for $84,000 for a 3-month treatment, would sell for less than $1,000 in the absence of a patent monopoly. The difference is overwhelmingly a transfer from everyone else to the wealthy. Patent monopolies transfer hundreds of billions of dollars a year to patent holders, who are overwhelming high-income households.

Finally, by running a high unemployment policy the government is transferring money from low and moderate income people to the higher income people. We could bring the unemployment rate down to 5.0 percent or possibly 4.0 percent with larger government deficits or a lower valued dollar, which would reduce the size of the trade deficit. The lower rate of unemployment would not only give millions more people jobs, it would also give workers in the bottom half of the wage distribution the bargaining power necessary to raise their wages. These workers would then have more money, while high income households would have to pay more for help.

In short, there are a whole list of easily identifiable policies that have fostered the large upward redistribution we have seen in the last three decades. It is not just the market.

Comments (7)Add Comment
What Would a Free Market Look Like if It Was Really Free?
written by Last Mover, August 03, 2014 10:51

If the (unfettered, unregulated) free market was to blame for the current state of inequality, imagine the necessary conditions:

Competition would have to exist and drive resources to their highest valued use as price is driven to economic cost.

There would have to be near perfect information for the efficient market hypothesis to function.

No underutilized unemployed resources.

No negative or positive externalities.

No natural or network monopolies.

No long term monopoly profit as economic rent.

No barriers to entry.

No market manipulation.

Low transaction cost.

Consistently ranked ordinal utility functions with no interdependence.

Even if these and other conditions were met to justify the current state of inequality, what would that mean? It would mean that capitalism itself has failed miserably even under the best of conditions.

How else to explain America getting frog marched down the road to serfdom by a tiny group of economic predator makers at the very top who literally run the country with their obscene income and wealth under free markets at their best?
What Free Market?
written by Ellis, August 03, 2014 11:41
Don't blame the free market????

When has the "market" ever been "free"? When has business ever not depended on government to help them fleece the population, plunder resources, and wage war to impose their rule?

Never! "Free market"? I got a bridge to sell ya.
written by Juan Valdez, August 03, 2014 2:35
Dean - you consistently talk about bad trade agreements that lowers salaries for American workers, but then you quickly throw in, as if a panacea, constructing trade agreements to bring in more high paid professionals as some sort of fix to the problem. The impact being the high paid professionals will lower salaries because of more competition.

Why not keep the focus on the original part of your argument, where bad trade agreements are forcing down wages? Americans need growing salaries to be prosperous. Here you provide no possible recommendations, just a solution on lowering salaries to high paid professionals.

We have a great deal of experience with lowered salaries as a result of globalized trade and it is not pretty. Does lowering salaries for high paid professionals actually produce better outcomes? Any studies? Again, our experience has been bad.
The fallacy of reification
written by Victor Green, August 03, 2014 4:15
Notice that the author makes an invalid distinction by using the phrase the phrase ". . . the market rather than deliberate policy choices." Here, s/he commits the logical fallacy of reification, because implicitly, but mistakenly, the author assumes that 'the market" is something other than one of many "deliberate policy choices" a society can make. The author of this essay is comparing the real world to an imaginary ideal market economy -- and s/he seems to assume his ideal "free market" would generate a fair distribution of income and property. This free market is an ideal many have referred to but one that no one has spelled out, though many have tried. Proponents of the free market seem to assume hat an ideal "free market" would generate a fair distribution of income and property. However, inevitably, free markets have to grapple with the issue of private property rights, and this is where they fail to be just, or even economically stable.


Reification (fallacy) - Wikipedia, the free encyclopedia

Reification (also known as concretism, or the fallacy of misplaced concreteness) is a fallacy of ambiguity, when an abstraction (abstract belief or hypothetical construct) is treated as if it were a concrete, real event, or physical entity.[1][2] In other words, it is the error of...

I notice his use of the phrase "the market rather than deliberate policy choices." He implicitly assumes that 'the market" has some type of existence that makes it something other than one of many "policy choices" our democracy can make.

He is quite right that our government policies favor the rich and are unfair, especially in the financial sector, but invoking an imaginary entity named "the market" will not help anything. He needs to name the "deliberate policy choices he wants to see us make to improve the real world, not just wish we lived in his imaginary world
Economics - Reified?
written by Dan, August 04, 2014 12:31
Victor - Isn't reification (50 cent word of the day!) what underpins all economic findings? Ever seen a supply or demand? Your point is provocative, but makes me wonder if all economic arguments are logical fallacies.
Unregulated markets concentrate wealth and crash. That's factual history.
written by Brian, August 04, 2014 12:34
Excess concentration of wealth is a flaw in the whole free market concept. Automation and tech had only made this worse. Progressive taxation on the rich to pay for free education, healthcare and modest room and board for all who need it is the solution that works. As many EU countries show like Sweden, Denmark.

Nobody gets so rich on a desert island or in a failed state, these rich folks would not have lasted a minute without societies, gov's protection, without the money system, the laws, the protection from robbers and criminals, yet they act like the made it all on their own: that's human nature.

Taxing the rich to take care of the rest of us, is not socialism, not Communism, but our Founders Locke liberal social contract.

Rule by the 1% i totalitarian, oligarchy, often fascist, and is the goal of traditional, and current Burke Conservatism.
Professionals have been the beneficiaries of upward redistribution
written by Dean, August 05, 2014 4:14

much of the one percent consists of doctors, lawyers, and other highly paid professionals. Their income is a cost that gets passed on to the rest of us, meaning it lower our pay. The rich understand this when they use trade to beat down the wages of ordinary workers, the market dynamics work the same way when you lower the pay of high end workers

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.