Why are wages flat and inequality growing?
Paul Krugman (via Brad Delong) bemoans the corruption that has become commonplace here in D.C. and sees it as an effect of growing income inequality:
Both history and modern experience tell us that highly unequal societies also tend to be highly corrupt. There's an arrow of causation that runs from diverging income trends to Jack Abramoff and the K Street project.George Reisman (via Chris Engelsma) has explanation for the flat wages:
Krugman is definitely on to something, but he's got the causation backwards. Public choice theory predicts that the rich have disproportionate lobbying clout because they have more concentrated interests. If there is a big motivation for lobbying -- namely the growing impact of federal taxes and regulations and income redistribution on all of us over the decades within which inequality has climbed -- the rich will do a disproportionate amount of that lobbying and will get an even more disproportionate benefit from it.
The last forty years or so have seen the imposition of environmental legislation and consumer product safety legislation, and numerous other government programs that serve to increase the costs of production. The great majority of people assume that the higher costs simply come out of profits and need not concern them. But the fact is that the general rate of profit in the economic system remains more or less the same, with the result that increases in costs show up as increases in prices, or as decreases in other costs, notably, wages. The real wages of the average American are stagnating in large part because the higher real wages he could have had...have instead been used to pay for the cost of environmental and safety regulations.
The result is today's K Street. The generic semi-skyscrapers of K Street -- all required by law to be shorter than the Washington Monument -- are the true capital buildings of the United States, the capitals of corruption, just a few blocks away from where I'm typing this. It's the street under which I catch the subway home. It is in those stunted skyscrapers, rather than in the symbolic domed capital you see on TV, that most of our country's laws and regulations are in fact drafted. The wealthy -- not to be confused, as Krugman does, with those who happen to have a high income in a particular year -- have a disproportionate clout on K Street. As a result, federal regulation disproportionately impacts the non-wealthy, including those who are not wealthy but are trying to earn enough income to become wealthy.
Reisman correctly explains why real wages aren't rising: productivity is barely keeping up with the unprecedented crush of government regulations and spending over the last several decades. When we add the disproportionate lobbying ability of the rich, who can thereby direct disproportionate costs of taxes and regulations increasingly towards the middle classes and poor, the great rise in government spending and regulation explains both flat wages and growing inequality. To Reisman's observations on business regulations I'd add the similarly strong and obvious but widely ignored connection between anti-growth zoning and rising housing prices. Housing now eats up historically extraordinary fractions of household income, and that is also a result of predatory government regulation. Not coincidentally, anti-growth zoning also benefits wealth (houses already built and owned) at the expense of income (people who have an income but not a house, who can increasingly not afford to buy a house near where the best income jobs are).
Of course, another explanation for the supposed flat wages is that we don't and can't really know whether they have been flat, or rising, or falling: the measurements that go into computing inflation and "real" wages may be quite subjective and inaccurate, for a variety of reasons. But that is a post for another day.