Economic Inequality

If inequality matters, is it rational? David Grusky writes that much of the economic inequality in our economy is irrational, the result of rules and practices that irrationally keep pay high for a small group of college graduates and CEOs.

While many argue that inequality needs to be addressed by higher taxes,  Grusky argues  that inequality has causes deeper than the system of taxation:

But the takeoff in inequality cannot be explained by tax policy alone. To the contrary, as economists Emmanuel Saez and Thomas Piketty have shown [see their response to Grusky], there has been a dramatic rise over the last 30 years in pre-tax income inequality. The share of pre-tax income flowing to the top 1 percent of households increased from less than 10 percent in 1975 to more than 20 percent now. This spectacular increase in market inequality is of course exacerbated by changes in after-market taxation. However, because the takeoff in inequality is mainly generated within the market, we should look to market institutions to understand its main causes.

Grusky shows that beyond tax raises, it might be better to focus on two other causes of inequality: unequal opportunities in education and unjustified CEO pay. Since there remains a premium paid for college education and especially for elite college educations, increasingly the educational opportunities and preparation of more people would be one way to address income inequality. And since CEO pay has skyrocketed beyond market justification through the use of toothless boards of directors and suspect compensation consultants, leading to economic rewards beyond market justification.

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-RB