November 21, 2011

Larry Summers: Three Ways to Combat Rising Inequality

Former Obama official gets specific in Washington Post op-ed

Lawrence Summers, past president at Harvard University, Treasury secretary in the Clinton administration and economic advisor to President Barack Obama, took to the pages of The Washington Post on Monday to decry the growing gap between rich and poor. He then offered three suggestions that he claimed would help distribute income more evenly.

Lawrence Summers“There has been a strong and troubling shift in market rewards for a small minority relative to the rewards available to most citizens,” Summers (left) began, noting the recent Congressional Budget Office study found that incomes of the top 1% of the U.S. population rose 275% from 1979 to 2007, while income for the middle class grew only 40% (adjusted for inflation).

Why has the top 1% done so well relative to the rest, he asked?

The answer, he said, lies substantially in changes in technology and in globalization.

Using two iconic American companies as examples, he noted that when George Eastman revolutionized photography, “he did very well, and because he needed a large number of Americans to carry out his vision, the city of Rochester, N.Y., had a thriving middle class for two generations.”

By contrast, when Steve Jobs revolutionized personal computing, “he and Apple shareholders did very well, but those shareholders are all over the world, and a much smaller benefit flowed to middle-class American workers, both because production was outsourced and because the production of computers and software was not terribly labor-intensive.”

Those who call concerns about rising inequality misplaced or a product of class warfare are even further off base, he argued.

“The extent of the change in the income distribution is such that it is no longer true that the overall growth rate of the economy is the principal determinant of middle-class income growth—how the growth pie is distributed is at least equally important. The observation that most of the increase in inequality reflects gains for those at the very top at the expense of everyone else further belies the idea that simply strengthening the economy will reduce inequality.”

Summers then offered three “responses” to rising inequality:

First, he wrote, government must not facilitate increases in inequality by “rewarding the wealthy with special concessions. Where governments dispose of assets or allocate licenses, preference should be on the use of auctions to which all have access. Where government provides implicit or explicit insurance, premiums should be based on the market rather than in consultation with the affected industry. Government’s general posture should be standing up for capitalism rather than for well-connected capitalists.”

Second, he said there is scope for “pro-fairness, pro-growth tax reform. The moment when more great fortunes are being created and the federal deficit is growing is hardly the time for the estate tax to be eviscerated. And there is no reason tax changes in a period of sharply rising inequality should reinforce the trends in pretax incomes produced by the marketplace.”

Third, he concluded, the public sector must ensure greater equity in areas of the most fundamental importance.

“It will always be the case in a market economy that some will have mansions, art, etc. More troubling is that middle-class students’ ability to attend college has been seriously compromised by increasing tuitions and sharp cutbacks at public universities, and that, over the past generation, a gap has opened between the life expectancy of the affluent and the ordinary.”

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