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A CRB discussion of Economic Inequality

By: William Voegeli
December 12, 2012

In the Summer 2012 issue of the Claremont Review of Books, senior editor William Voegeli reviewed The Great Divergence: America's Growing Inequality Crisis And What We Can Do About It by Timothy Noah, a senior editor of the New Republic. Noah's replies and Voegeli's responses on American democracy and economic inequality constitute this installment of "Upon Further Review."


Noah: Thanks for your review of my book, The Great Divergence: America's Growing Inequality Crisis And What We Can Do About It. It's crisply written, thoughtful, and witty. It's also unfavorable, of course, and wrong. But you did me the great favor of paying the book close attention, grasping its subtler points to a degree that some favorable reviews (the book received mostly favorable reviews) did not. How refreshing to answer a reviewer on the basis of honest disagreement rather than error or bad faith. The sentence, "The obligation to consider differing viewpoints can't hide Noah's irritation at their existence" was alone worth the $6.95 cover price. I winced (because it's true), then laughed out loud.

Our chief disagreement is about whether income inequality matters. I think it does; you think it does not, and that the book never presents a compelling justification for itself. Rather than litigate what the book says or doesn't say-I don't want to sound like one of those people who complain about bad reviews in the New York Times Book Review ("I did too point out that Krakatoa was west, not east of Java, right there on page 137, damn you!")-let's start afresh.

It's important to begin by pointing out that "Why does economic inequality matter?" is not a question that many people asked 100 years ago, or even 50 years ago. It wasn't asked 100 years ago because the U.S. was closer than it's ever been before or since to being violently overthrown by radicals. The ruling class assumed it had to be mindful of inequality in order to keep the government out of the hands of anarchists, socialists, and other troublemakers. The question wasn't asked 50 years ago because the U.S. was competing for hearts and minds with the Soviet Union and our leaders understood that too much economic inequality would hurt the American argument (which we ultimately won). Today there's no chance the government will be overthrown by radicals, and Communism is, for all practical purposes, dead. Consequently, the question must be addressed on the merits.

I think there are two reasons to worry about income inequality. An economic reason is that in a capitalist economy you need to incentivize people. Conservatives have little trouble grasping that principle with regard to rich "job creators," but it seems to elude them when we're talking about ordinary workers. Growth in median income has been pitiful since 1979 compared to what it was in the postwar era, and also compared to what it was after 1979 for the affluent (especially the top 1%). For the past dozen years, there's been no growth in median income at all, even as productivity has been rising briskly. Why should an ordinary worker care whether his company thrives-indeed, whether the country thrives-if he won't get a piece of the action? His only reason to care is fear of losing his job. The lack of proper incentives for middle-income workers endangers the economy. Indeed, it may already have weakened it.

There's also a sociological reason. Historically, societies that are dramatically unequal-where the middle class disappears-have seldom thrived as democracies. "No bourgeois, no democracy," Barrington Moore famously wrote, and I think he was right. Why should this be so? Because we're social creatures. Yes, it's great that everybody's living standard rises over time. I'm very happy that I, a mere commoner, have access to antibiotics that were previously unavailable to King Henry VIII. But vast disparities in wealth and income create dangerous social gulfs. Charles Murray does a pretty good job illustrating that in his recent book, Coming Apart, when he documents how the affluent and the white working class have become strangers. Murray stubbornly insists that the cultural divergence and mutual estrangement has nothing to do with economics; instead, he blames it on the permissive 1960s. But of course it has everything to do with the economic gulf that's opened up between these two groups.

There are other items in your review I take issue with, but this should get us started.


Voegeli: I'm glad you think my review treated The Great Divergence fairly. I'll try to maintain that standard in this exchange of opinions, and appreciate your willingness to help our readers think through the issues at stake.

I believe our chief disagreement is not about whether economic inequality matters, but about how and how much it matters. That is, if given the choice between citizenship in two countries that were very similar in terms of freedom, prosperity, and civilizational attainments, but had markedly different degrees of economic inequality, I would prefer the more equal one. One of my favorite passages in Divergence has the British journalist Henry Fairlie celebrating the informality of an America where everyone, from a kid on a tricycle to a bishop or U.S. president, greets a stranger with the same jaunty and direct, "Hi."

You and Fairlie are correct that sustaining a democracy requires the respect ungrudgingly offered and confidently expected by countrymen who believe their common, equal citizenship trumps differences of rank, wealth, ability, and attainment. I don't take Divergence to be arguing that social equality is simply and solely a function of economic inequality, so that any reduction of income differentials will necessarily bind us together more closely. But your rejection of the null hypothesis that economic inequality has no bearing on social equality is persuasive. The questions, then, concern: 1) economic equality's importance, vis-à-vis such other factors as family cohesion, civic beliefs, and the strength of social mediating structures like churches and bowling leagues, in sustaining social equality; and 2) the justice and prudence of public policies that promote economic equality, for the sake of social equality, by enhancing the government's powers to regulate the processes or redistribute the results when consenting adults buy and sell goods and services. It's not much of a spoiler alert to forecast that you'll think economic equality is more important to social equality than I do, and that vigorous government interventions for the sake of promoting economic equality are less ominous.

If that's a fair account of our topic, then let me take this swing at your first pitch: We are indeed social creatures. An entailment of that sociality can be that "vast disparities in wealth and income create dangerous social gulfs." But it's not the only one. Another is the desire to treat and be treated by other people in accordance with procedurally fair, neutral rules. We don't want to find out after the game, whether we've lost or won, that the umpire was using a compressed strike zone when the team he admired was at bat, and a spacious one when the team he disapproved stepped up to the plate. Further, social creatures-especially don't-tread-on-me American ones-are likely to fear that empowering government to rearrange economic outcomes to better conform to distributive standards, which are always as hazy as they are lofty and urgent, compromises not only fairness but freedom.

Finally, as social creatures we employ a framework for assessing our own circumstances and prospects that does not emphasize how penicillin has made our lives better than Henry VIII's. That doesn't mean we live completely in the moment, however. Economists and sociologists analyzing America's income statistics during the long economic boom after World War II may have been right to call it the Great Compression, but I don't think many Americans at the time regarded it that way. Rather, they liked the direction their lives were headed because people who had grown up on isolated farms or in crowded city apartments, relying on streetcars and laundries, were raising their children in single-family suburban houses, with the family automobile parked in the carport and a washer and dryer in the basement. I see little evidence from the scholarly literature or popular culture of the boom years that approval of historically low ratios between CEO's compensation packages and median incomes, as opposed to tangible improvements in the quality of life, figured prominently in popular confidence about the future. As John Kenneth Galbraith wrote in The Affluent Society, "the facts are inescapable. It is the increase in output in recent decades, not the redistribution of income, which has brought the great material increase in the well-being of the average person."

I close by remarking on your wistfulness about the absence of internal radicals or external Communists who might prod us to equalize incomes. It is in keeping with your hopes, now certainly flagging, that Occupy Wall Street would catalyze a politically irresistible redistributive movement. In your book's final sentence-"The worst thing we could do to the Great Divergence is get used to it"-you are trying to say something to the Americans indifferent to that great crusade. But perhaps they, in their reluctance to enlist, are trying to say something to you about their abiding desire for economic vigor and absolute mobility, and their abiding fears about the power and decency of redistributive government.


Noah: I'm glad to hear that you think income inequality matters, and that it has some bearing on social inequality. (I wish I could persuade my friend Mickey Kaus on that point. He argued in his 1992 book, The End of Equality, that it doesn't. Some of its premises have taken a beating from recent economic and political science research, but it remains a stimulating read.)

Like you, I am a great fan of family cohesion, civic beliefs, churches, bowling leagues, etc., and I'm willing to believe that most if not all of these community-building factors, in addition to being good things in themselves, contribute to social equality. Certainly the mere fact of having a sibling provides valuable instruction from an early age that the world does not revolve around yourself.

Our difference is that you like it when government focuses on procedures, but not when government focuses on outcomes. I think government needs to be attentive to both. Your comment about the importance of "procedurally fair, neutral rules" was answered more than a century ago by Anatole France: The poor "must bow before the majestic equality of the law, which forbids both rich and poor from sleeping under bridges, begging in the streets, and stealing bread." One size doesn't fit all.

In theory, yes, there is a point at which government redistribution becomes so intrusive, and so undermines individual success, that freedom and fairness are compromised. In practice, this has actually happened in many societies. But it's difficult for redistribution to get out of hand in a free and democratic society, and in our free and democratic society we've never come close. If we had, you and I would know about lots of entrepreneurs who fled the U.S. because they couldn't tolerate its wealth-killing economic repression.

Or, alternatively, you'd be able to demonstrate to me that in the past the U.S. economy has stagnated during periods when the government has more actively redistributed income. In fact, the opposite is closer to the truth. From 1945 to 1973 the U.S. government pursued a much more redistributive economic policy than it does today, and incomes became more equal, not less. Yet during those postwar years we experienced much greater economic prosperity than we enjoy today. During that period, you're right, Americans didn't celebrate the virtues of growing income equality (not consciously, anyway); they celebrated the virtues of prosperity. But I believe that the fact that prosperity was widely shared motivated workers to help make our economy grow. If you worked hard and played by the rules, as we Democrats like to say, you stood a good chance of acquiring your own home, sending your kids to college, and securing yourself a decent retirement. (Provided you weren't black, Latino, gay, or a woman; but those aren't economic categories, and they're part of a different story.) Today, that's a lot less true, and a lot of Americans are wondering what the hell happened.

In your review, you take me to task for refusing to say what an ideal income distribution would be. But the fact is we can never know what the ideal anything is in a dynamic capitalist economy. What's the ideal inflation rate? The ideal unemployment rate? It's ever-changing according to circumstance. But I think you'd agree that unemployment is too high right now, and that inflation is pretty low. The troubling trend is not that inequality exists-inequality always exists, and we always need some of it to sustain a thriving economy. You have to reward effort and skill, and effort and skill are not evenly distributed throughout the population. But when income inequality rises to near-unprecedented levels I think that's worth worrying about. More important, when we experience a 33-year trend toward ever-growing income inequality that shows no signs of ending, we need to recognize that something is out of balance.


Voegeli: Let's consider the postwar boom. It is, in the first place, at least debatable whether turning the domestic policy dials just so explains it very well. World War II devastated much of the rest of the world but left America physically undamaged, with almost no civilian casualties and relatively few military ones. In its aftermath, as historian James Patterson wrote, "[W]ith 7 percent of the world's population in the late 1940s, America possessed 42 percent of the world's income and accounted for half of the world's manufacturing output. American workers produced 57 percent of the planet's steel, 43 percent of electricity, 62 percent of oil, 80 percent of automobiles."

These extraordinary economic advantages were enduring, but not eternal, and America has spent four decades competing in a global economy it once dominated. Little wonder that a policy agenda to recreate the global economic configuration of 1945-73, or replicate its agreeable consequences, is proving so elusive. Little wonder, as well, that labor unions were strong then and weak now. Unions do well representing the employees of enterprises whose customers have nowhere else to go. That is, the United Auto Workers had leverage against the Big Three because the Big Three had leverage against car buyers with few other options, since the path of least resistance for management was to give the unions what they wanted and pass along the higher costs to their customers. (To this day, according to the Bureau of Labor Statistics, the most heavily unionized part of the private economy is the utility industry, where 25.7% of workers belong to unions, compared to 7.6% of all workers in the private sector.) More people are nostalgic for employees to have Great Compression leverage against employers than for corporations to have mid-century leverage against consumers. There's no obvious and maybe no possible way to have the one without the other, however.

Even if, or to the extent, that government policies caused the postwar boom, it's not clear that the policies were what you say they were or had the consequences you say they had. Did the United States really pursue "a much more redistributive economic policy than it does today" during the Great Compression? Redistribution consists of taking from some and giving to others. But that era's tax system, the chief taking instrument, had a lot of Potemkin progressivity: high rates in the top brackets wrapped around a maze of deductions and exemptions. The conviction that there had to be a better way culminated in the Tax Reform Act of 1986, which reduced the top tax rate to 28% and curtailed deductions and exemptions. Among the politicians crucial to its bipartisan enactment were such reactionaries as Bill Bradley and Richard Gephardt.

As for the giving part of the Great Compression's redistributive policies, it was only at the very end that such Great Society programs as Medicare and Medicaid came into existence, and they didn't start running at full speed for several years. In 1959, the midpoint of the 1945-73 golden age, federal government outlays equaled 18.8% of GDP, compared to 24.1% in 2011. But more than half of federal spending in 1959, 10% of GDP, was on national defense, even though we were between the shooting wars of Korea and Vietnam. We are in a shooting war now, but defense spending was only 4.7% of GDP in 2011. By contrast, in 2011 the federal government spent 16.1% of GDP on "Human Resources": Social Security and other income transfer programs; Medicare and other health programs; and education, training, social services, and veterans programs. In 1959 Human Resources outlays equaled 5.1% of GDP. The government's capacity to conduct off-the-books redistribution through regulatory agencies was also constrained during most of the Great Compression because there were fewer such agencies. The Environmental Protection Agency, Consumer Product Safety Commission, and Occupational Safety and Health Administration, to name three, all came into existence during the final months of the Great Compression.

Brink Lindsey says that those on the Left and Right are both nostalgic for the 1950s. "The only difference is that liberals want to work there, while conservatives want to go home there." It's seems, as well, that liberals want to tax and organize there while conservatives want to spend and regulate the way we did back then. Given the complicated ways that a long list of public policies and economic realities contributed to the Great Compression, you'll agree, I'm sure, that it simply won't do for either of us to cherry-pick a few of our favorites and declare them to be the keys to recreating what Americans like best about those days.

Pending irrefutable evidence that this and only this X caused that Y, I suggest a package deal: Let's bring back the entiremid-century policy regime, not just the bits of it either one of us likes best. We'll have the Eisenhower-era tax rates, but also the tax loopholes. I won't insist that we double defense spending-the Cold War is over-but federal domestic spending will have to shrink dramatically. The Great Society programs were part of the landscape during the final 8 years of the Great Compression, so we'll keep but constrain them. Human Resources spending, adjusted for inflation, amounted to 31.4% of federal spending from fiscal years 1946 through 1973, as opposed to 67% in 2011. There's no need to quibble over loose change; let's just cut federal Human Resources spending in half, from $2.4 to $1.2 trillion, nearly enough to wipe out 2011's $1.3 trillion deficit. Privatization, aggressive means testing, and voucherization will all be indispensible to making the 50% reduction work. On labor unions, I'll propose that we go back to the private-sector unionization rates that prevailed during the Great Compression, while reinstating the laws that prevented government workers from joining unions or striking, which were in effect during most of it.

It won't be easy, especially because of the tax and unionization rate parts, but I think I can persuade the Claremont Review of Books editors to endorse this package deal. Can you enlist your New Republic colleagues for a joint editorial?


Noah: Sorry for the delay in responding. Income inequality suddenly veered into the news with Mother Jones's release of a secretly-videotaped harangue by Mitt Romney, at a $50,000-a-plate fundraiser last May in Boca Raton, decrying the fact that 47% of Americans (46.4% actually, but who's counting) don't pay income tax. Most of them don't pay income tax because they don't have enough money, but Romney wasn't saying it was awful that they don't have enough money. He was saying it was awful that they don't pay income tax even though they don't have money. In retaliation against this leak, a 1998 audiotape found its way onto the internet in which Barack Obama said, "I actually believe in redistribution, at least at a certain level, to make sure that everybody's got a shot." An unexceptional opinion even if he were to utter it from the Oval Office. Anyway, my day job is writing for the New Republic, and I ended up blogging about all this quite a bit.

You suggest that the booming, egalitarian economy of the post-World War II era cannot be compared to our own because it left our economic competitors (principally Western Europe) flat on their backs. American mothers guilted their kids into eating their vegetables by saying, "Children are starving in Europe." But they didn't starve for very long. By the early 1950s even West Germany's economy was once again thrumming, thanks in large part to the Marshall Plan.

What changed wasn't the presence of global competition, but its quantity. Starting in the 1970s the industrialized world expanded to include Japan, Korea, China, Mexico, and the former Soviet satellites, among others. And yes, that made life a lot more difficult for American industry and American workers. But global economic pressures, by definition, are felt around the world. Globalization has led to a run-up in income inequality in many other (though not all) advanced industrialized democracies. But the distressing reality that my book tries to account for is that the level and acceleration of income inequality has been greater here in the U.S. than anywhere else.

When I say that the postwar U.S. economy was more redistributive than today's I mean several things. First, effective taxes on the rich were indeed higher back then. According to a recent report by the White House Council of Economic Advisers (see Fig. 5-8), if the tax code of 1960 were still in place-rates, deductions, exemptions, everything-then after-tax income for the top 0.1% (today, anyone earning more than about $2 million) would be more than one-quarter lower. Also, unions were more powerful (and enjoyed much more support from government). Also, monetary policy was, prior to the Great Inflation of the 1970s, more focused on reducing unemployment and less focused on maintaining a "strong dollar." Also the minimum wage got raised more often. Also, educational opportunity was expanding more rapidly, as reflected in growing high school graduation rates.

You're right that the Great Society created more entitlement programs in our present era compared to the postwar golden age, but the program that most directly took money from the affluent and gave it to the poor-Aid To Families With Dependent Children-dated all the way back to 1935 (and expired in 1996). Since 1979, federal benefit programs have grown less progressive, according to the Congressional Budget Office. (A good conservative talking point, incidentally, and one that could guide us toward wise policymaking as we trim back entitlement spending to restore the federal budget to solvency.) CEO pay was much lower during the postwar era, partly because corporations figured if they got too greedy they'd be punished by the government (as JFK, for instance, punished U.S. Steel when it jacked up prices after he'd persuaded the steelworkers union to moderate their wage demands). So was compensation in the (then-sleepy) financial sector, which was still tightly regulated. The federal government is bigger today than it was then, and more of its resources go to social programs (mainly to pay for health care and retirement). But that doesn't make it more redistributive.

Of course I don't want to return to the 1950s-era economic policies in their entirety. We need the expanded regulatory state to keep the air and water clean. (In the great scheme of things, running these agencies isn't very expensive.) We need Medicare and Medicaid because medical science has figured out how to give us longer and more productive lives, and somebody's got to pay for that. And we need a lot more spending on Social Security because we have a lot more old people than we used to, thanks to the Baby Boom. Which itself, ironically, was the most enduring product of the postwar economic prosperity.

I sure as hell would like to have the newspaper, magazine, and publishing businesses back, though. Think you could arrange that?


Voegeli: Tim, we appear to have demonstrated the adage, which I've seen attributed to both Swift and Santayana, that it's impossible to argue someone out of a position that no one ever argued him into. That is, neither of us seems to have come up with any contention that has made the other reconsider his position on economic inequality-positions, I'm guessing, that can be traced to dispositions we each formed shortly after we started reading and thinking about politics. I don't believe the exercise has been a futile one, though. As you stated at the outset, honest, good-faith debates about important public questions are, regrettably, the exception rather than the rule. I hope our readers have found the exchanges instructive.

We're playing this game at Claremont Stadium, so I'll take the final at-bat for the home team. Let me come at our subject from a different angle by introducing the issue of affirmative action. We've been debating the justice and feasibility of public policies designed to lessen income inequality, but affirmative action raises similar questions about how to respond to group disparities within a diverse population. You've stated elsewhere that you're "not ready to ditch race-based affirmative action," and regret the prospect that "the Supreme Court will likely soon disallow it." Jeffrey Toobin agrees: "it would not be surprising if the Court sent affirmative action to its doom."

Toobin argues that there's an important dog-that-didn't-bark reason for affirmative action's political vulnerability: "No figure in public life, including President Obama, has made a full-throated defense of the practice in years." As best as Google and I can figure out, you and he are among the throng of affirmative action supporters who have declined to put forward that comprehensive argument. That so many people would say so little about a question they consider so important is noteworthy.

Part of the explanation for this anomaly, I submit, is that affirmative action supporters find past instances of candid advocacy on its behalf more awkward than inspiring. In 1985 two Democratic appointees to the U.S. Civil Rights Commission took their Republican colleagues to task for misunderstanding the laws the Commission existed to enforce: "Civil rights laws were not passed to give civil rights protections to all Americans, as a majority of this Commission seems to believe. Instead, they were passed out of a recognition that some Americans already had protection because they belonged to a favored group; and others, including blacks, Hispanics, and women of all races, did not because they belonged to disfavored groups." This argument really is the essence of the case for affirmative action. But that's a problem, since it is Orwellian to assert that legislation making it unlawful to discriminate against any person because of "race, color, religion, sex, or national origin" did not mean any any, just some any.

Indeed, affirmative action meant that laws prohibiting discrimination based on race would be enforced by requiringdiscrimination based on race. One bad practice that emerged from this bad theory was "race-norming." For many years the U.S. Department of Labor quietly mandated that the scores on skills tests be reported according to how participants had scored relative to others in the same racial or ethnic group, but not in absolute terms relative to all test takers. "Thus a black, a Hispanic and a white achieving the same raw score of 300...were given the race-normed scores of 83, 67 and 45, respectively," according to Terry Eastland. Once such facts became widely known, "race-norming could not survive."

Oh, the places you'll go! The liberal project has a demonstrated facility for turning noble intentions into bizarre initiatives. (See: busing, court-ordered.) Civil rights advocates passionately defended the benignity of their intentions, as when theNew York Times dismissed overwrought concerns the 1964 Civil Rights Act might require discriminating against whites in order to achieve racial balance by insisting, "The bill does not require employers or unions to drop any standard for hiring or promotion or membership-except the discriminatory standard of race or religion."

Conservatives' happy recollections of such forthright dealings inform our reading of your assurance that "it's difficult for [income] redistribution to get out of hand in a free and democratic society." Well, maybe it's not that difficult. In a world without race-normed employment tests, or where liberal heroes like Thurgood Marshall and William Brennan had not favored achieving racial balance in schools by busing students across entire metropolitan areas, conservatives would place higher confidence in liberals' sense of limits and proportion. If the same crowd proposes to pursue income equality with the same zeal it pursued racial equality, however, you'll forgive us for wanting to get the terms in writing before we enlist in the crusade.

This is why my review criticized The Great Divergence for being so hazy-and, perhaps, so cagey-about the standard of distributive justice by which it declares our current distribution of income outrageous. Your response in our debate has been the same as your response in the book to former Secretary of the Treasury Nicholas Brady: since it's impossible to "state precisely what the proper distribution of income ought to be," it's unreasonable for conservative skeptics to demand any clarity from liberal egalitarians. I'll reiterate: our supposed demand for a precise standard is a straw man you're using to avoid the question altogether. I don't buy that the complete absence of any standard to judge income inequality is no different, or worse, than the lack of a formula for the right amount of inflation and unemployment. There has been quite a bit of academic work on the latter topics, attempting to define "full employment" in light of the ordinary, voluntary shuffling of people in the labor market, or the ideal inflation rate consistent with price stability and economic growth.

The right amount of economic inequality is, by contrast, a philosophical rather than a technical question. Divergencementions, but neither endorses nor rejects, the "difference principle" in A Theory of Justice (1971) by John Rawls, according to which economic and social inequalities are acceptable if, but only to the extent, that they conduce to "the advantage of the least favored." If you would proclaim yourself a Rawlsian you would be taking a bold, politically controversial position, but also a coherent one. Unless and until you do so, your stance on the distinction between tolerable and intolerable economic inequality is the same as Justice Potter Stewart's on pornography: he couldn't define it but, "I know it when I see it." You can understand, I'm sure, why ACLU-types were reluctant to constrain the freedom of expression on the basis of Stewart's gut feelings. It's the same reason CRB-types are reluctant to constrain the freedom of contract on the basis of yours.