The Big Lie About Inequality

Photograph by Nathaniel St. Clair

We all know about Donald Trump’s “Big Lie” that he won the 2020 election. This is of course laughable, there is nothing in the real world to support Trump’s fantasies of massive voter fraud.

However, there is arguably an even bigger lie that enjoys near-universal acceptance in intellectual circles. It is the claim the huge rise in inequality over the last half century was due to market forces.

The usually insightful Peter Coy plays along with this Big Lie in his New York Times column today. Coy lays out the argument of a new NBER paper, by Ilyana Kuziemko, Nicolas Longuet Marx, and Suresh Naidu, that the Democrats have been hurt politically because they adopted a strategy, beginning in the seventies, of compensating losers from market outcomes.

The model of this story is that removing protectionist barriers in a movement towards free trade invariably creates winners and losers. According to standard theory, the winners are supposed to get more than the losers lose, so in principle we can tax the winners and pay the losers and make everyone better off.

The paper argues that this strategy is a political loser because people don’t want to see themselves as beneficiaries of government handouts. It’s also the case that there were never any serious proposals to tax the winners within an order of magnitude of what would be needed to compensate the losers.

However, the more important point, ignored by Coy, is that how we chose to move to “free trade” was itself a political choice. We could have moved to free trade by radically reducing the barriers that prevent doctors and dentists trained in India and other developing countries (or even rich countries) from practicing medicine in the United States. This could have still involved meeting U.S. standards, but medical students could train and test in other countries rather than the United States.

If we had gone this route, our doctors and dentists would likely be paid more in line with what they get in other rich countries, (e.g. around $150,000 a year rather than $350,000 a year) saving us close to $200 billion a year in health care expenses ($1,600 a family). We could have aggressively applied the quest for free trade to all highly paid professions, making highly paid professionals losers and blue-collar workers winners.

The same story applies to patent and copyright monopolies. We have made these government-granted monopolies longer and stronger in the last half-century. Our elites have turned language and logic on its head and called these protections “free-trade.” They redistribute massive amounts of income upward, more than $400 billion a year ($3,200 per family) in the case of prescription drugs alone. Democrats have been fully complicit in making these protections longer and stronger, having supported the Bayh-Dole Act (approved under Carter) and a variety of other measures that meant greater protection both domestically and internationally.

In short, the issue is not just that the Democrats have supported a regime where the winners are supposed to compensate the losers from a “free market.” They have supported structuring the free market in ways that make the working-class losers.  (Yes, this is my book, Rigged [it’s free.])

This means the working class has very good reasons for not liking the modern Democratic Party, even if the Republicans are no better on this score. But, they won’t let you make these points in the New York Times, it hits too close to home.

This first appeared on Dean Baker’s Beat the Press blog.  

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.