Do No Harm

April 28, 2006

INEQUALITY IN the United States has been growing for a generation. The top fifth of households enjoyed post-tax incomes worth 6.7 times those of the bottom fifth a quarter of a century ago; that multiple has since jumped to 9.8, a 46 percent increase. But this distressing trend hasn't forced the right policy response, in part because advocates of equity are often their own enemies. Some of their proposed remedies would be ineffective, wasteful or harmful to the economy.

One unproductive critique of inequality targets corporations for cutting wages and benefits. Companies must respect market forces: If they pay workers more than is necessary to keep them, they will lose out to competitors, as thousands of jobless car workers can testify. You can debate whether government should force all companies to increase pay or benefits -- by raising the minimum wage or by requiring employees to offer health insurance, as Massachusetts has just done. You can talk about fairer government enforcement of the collective bargaining rights of workers or opportunities for shareholders to control executive salaries. But to blame corporations for ripping up the social contract is to misunderstand their function. Firms began offering workers health coverage because government controls capped what they could offer in wages; now that wage controls are history, the health plans that companies provide reflect tax rules. So politics and government create the social contract; it is not managers' place to do so.

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The next sort of blunt critique calls for policies that sound good but don't work. Cracking down on immigration, for example, is no solution. Tough enforcement is expensive, harsh and doomed to be at best partially effective; moreover, the best economic studies predict that it would lift the pay of unskilled natives imperceptibly if at all. Equally, economists find no evidence that tax-privileged empowerment zones in depressed areas boost local wages, though this didn't stop President Bush from proposing a "GO Zone" (Gulf Opportunity Zone) as part of his response to Hurricane Katrina. The same applies to tax credits for employers who hire people on welfare or food stamps; in at least two-thirds of cases, firms that hire such workers don't even know they are eligible for the tax break, according to studies by Sarah Hamersma of the University of Florida. Training programs for jobless youths also have a disappointing record: They boost future earnings of participants marginally and may do so at the expense of youths who don't attend the sessions. Because they achieve so little, all these interventions set back the fight against inequality by making it seem wasteful or futile.

The most pervasive and misplaced reaction to inequality is protectionism. Trade liberalization since 1945 has delivered a vast stimulus to growth, boosting U.S. incomes by $1 trillion a year, according to an extensive survey of the evidence by the Institute for International Economics. It's true that these gains are unevenly distributed, but the skewing is subtle. Unionized labor in the heavily traded manufacturing sector has been hit hard. But the poorest and least skilled Americans actually gain from trade, because they tend to work in low-end service jobs that do not face foreign competition. As a result, trade does nothing to depress their pay, but it does ensure that the goods they buy are cheaper.

Moreover, additional trade liberalization would help the poor, because the nation's remaining trade barriers are regressive. Cheap sneakers are subject to a tariff of 48 percent, whereas expensive leather shoes face a border tax of 10 percent. Polyester underwear attracts a tariff of 16 percent, while fancy silk underwear glides into the country with a tariff of 1 percent. Edward Gresser of the Progressive Policy Institute calculates that residual trade barriers cost a low-wage working mother 2 percent of her income, four times more than the impact on a high-income family.

So protectionism would have disastrous consequences for growth and would help limited numbers of exposed workers rather than the majority of poor and middle-income families. But the pressure to close borders, bash corporations and experiment with ineffective social programs will continue until government addresses inequality in a serious way. The next installments in our series will suggest how to do this.