Brad Setser: Inequality in America

RGE - Inequality in America: Unions in the American manufacturing sector used to have the bargaining power to secure a middle class wage for their members. Not any more. And no one else -- apart from corporate CEOs, hedge fund managers and star athletes -- seems to have all that much bargaining power either.

The chart that accompanies Justin Lahart and Kelly Evan's report on voter angst in Pennsylvania is worth the price of the Saturday Wall Street Journal.... It shows the enormous gulf between the income of the top 0.1% of the income distribution and the rest of the population. It also shows that family income, adjusted for inflation, has fallen by 4% for the bottom 90% of the population while rising 22.2% among the top .0.01%....

I am not sure than Mankiw's explanation -- a fall-off in educational achievement and slower growth in the supply of highly-skilled workers -- is sufficient. The top 5% of the American families are all reasonably well-educated. But even among the 5%, almost all the income gains have been concentrated at the top. A fall-off in educational achievement can perhaps explain why the real income of the top 10% of American families is rising (a bit) while the income of the bottom 90% isn't. But it cannot explain increasingly inequality among those at the top.

It isn't that hard to see why so many Americans think the US is on the wrong track. Most Americans didn't benefit from the expansion of the past few years. And now the economy isn't expanding....

It isn't clear that increased trade with low-wage countries has contributed to lower wages for less-skilled workers in the US.... The impact of globalization on prices isn't all that clear: competition for oil has pushed its price up.... Cheap financing from the rest of the world did make it easier for Americans to make up for falling wages by borrowing against their homes. That strategy was never sustainable, and it has clearly run its course....

I am not sure that China has had a huge impact on the US income distribution, one way or the other. It may be that China had a bigger impact on prices for the basket of goods that lower-income households consume than it had on wages -- directly, and indirectly, through reductions in workers bargaining power in manufacturing sectors exposed to Chinese competition -- for those households. The overall effects are complex, because they offset. I am fairly confident that China isn't going to just produce low-quality durables for much longer.