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The Market and Inequality

Paul Krugman joined a debate on the morality of markets, arguing that the United States has not met the fundamental condition of equality of opportunity that libertarian conservatives agree is necessary for fairness. While this is true (only in looney tune land does a kid growing up in Anacostia have the same opportunity as a kid growing up in Chevy Chase), this argument wrongly cedes the main point to the right.

It is ridiculous to argue that the inequality in the U.S. is simply the result of free markets. Markets are structured by governments, and the rich have used their control of the government to structure the market in ways to make themselves richer.

The mechanisms for upward redistribution can be seen everywhere. Most recently the government bailouts of too big to fail banks meant that the top executives of Citigroup, Goldman, and the rest could continue to draw paychecks in the tens of millions of dollars. The implicit government guarantee enjoyed by these institutions amounts to a subsidy of tens of billions each year that is divided among their higher paid employees and their shareholders.

Patent and copyright monopolies are another way in which the government redistributes income upward. The income from these government granted monopolies flows overwhelmingly to people in the top 10 percent of the income distribution. These interventions in the market serve a purpose, but there are other ways to support research and creative activity that are more efficient and lead to less inequality.

The pattern of trade pursued by the United States over the last three decades, in which less educated workers are placed in competition with low-paid workers in the developing world, while the most highly educated workers are largely protected, also increases inequality. This effect is increased as a result of the over-valued dollar.

Federal Reserve Board policy that explicitly sacrifices employment in order to insure against inflation also has the effect of redistributing income upward. When the Fed raises interest rates to keep the unemployment rate from falling too low it is factory workers and store clerks who lose their jobs, not doctors and lawyers. Of course, the main beneficiaries of lower inflation are bondholders who would see their wealth eroded by higher inflation.

Governments also write the rules of corporate governance. In the United States these rules allow top executives to pilfer their companies. The top executives of Toyota, Hyundai, KLM and other huge foreign corporations all get well paid. But their compensation is likely to be measured in the low millions, not the tens or even hundreds of millions pocketed by CEOs in the United States. The difference is that the laws of corporate governance apply more of a check on the behavior of top management in other countries.

The role of government in determining market outcomes is easy to see for those who bother to look. It is understandable that conservatives, who want to like to see more income flowing to the top, would argue that inequality was just the result of the natural workings of the market. It far more difficult to see why progressives would ever accept such nonsense.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by TPM Café.

 

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Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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