Inequality is economically beneficial

Big executive pay goes with increasing prosperity. "Fairness" no more works in America than it did in Russia

Excerpt:

After World War II, many executives strove to refurbish the image of Big Business, badly battered in the Depression. Managers and professionals received more than production workers, but legal and bureaucratic filters narrowed the gaps. By the 1980s this generation of business leaders had mostly retired. Companies increasingly paid what the market would bear or they could afford.

Pay gains diverged. In early postwar decades, compensation increases crudely paralleled productivity gains -- improvements in efficiency. From 1950 to 1973, productivity rose 97 percent. Over the same period, median compensation of male high school graduates aged 35-44 rose 95 percent (after inflation); for college graduates 35-44, the increase was 106 percent. Those in the top one-half of 1 percent received only a 37 percent gain. From 1980 to 2005, productivity increased 71 percent. Median compensation for high school graduates dropped 4 percent, and compensation for college graduates rose only 24 percent. For those in the top one-half of 1 percent, it jumped 89 percent.

Comparisons such as these evoke images of greedy CEOs and hedge fund managers. But the story is more complicated. On the whole, the economy that produces these growing inequalities outperforms the one that created more statistical equality. The norms and practices highlighted by Levy and Temin collapsed mainly because they no longer worked. The idea that everyone's wages should reflect inflation plus a few percentage points worsened both inflation and stability. There were four recessions between 1969 and 1981; by then, inflation was 10 percent and mortgage rates 15 percent. Productivity growth had plunged.

Greater competition -- from imports, deregulation, new technologies -- also doomed pattern wage-setting. Companies with lax pay practices lost sales and profits. Consider GM, Ford and Chrysler as Exhibit A.

Economic inequality is an intellectual quagmire, because its origins and consequences are so murky. Contrary to popular belief, for example, it has not prevented most Americans from getting ahead. Consider families with children. A study by the Congressional Budget Office finds that from 1991 to 2005 income gains averaged 35 percent for the poorest fifth of these households, 19 percent for the middle three-fifths and 53 percent for the richest fifth. But their gains have decreased slightly since 2000. Here's another twist to the discussion: Today's immigration aggravates inequality, because so many new immigrants are poor and unskilled.

In 2008, economic inequality could become a political flash point, because the income gains at the top seem so outsize and gains elsewhere are so choppy. The very uncertainty means that, even amid great prosperity, Americans feel anxious. Whether the debate becomes an empty exercise in class warfare or a genuine search for ways to reconcile economic justice and economic growth is an open question.

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