Created Unequal: The Crisis in American Pay - Review

Challenge, March-April, 1999 by Thomas Palley

By JAMES GALBRAITH. New York: Free Press, 1998. 368 pp. Hardcover, $26.

Galbraith is a Scottish name, but, after two generations of magnificent prose by father and son, I am beginning to think the Galbraiths must have a touch of the Irish. Let me give you an example from the opening of the last chapter of Created Unequal: "The discipline and profession of economics has a long tradition of acquiescence in the existing social order, punctuated only rarely by rebellion. We need a rebellion now" (p. 263).

The long diatribe is unneeded. Instead, the verbal stiletto goes clinically to the heart of the matter.

The main thesis of the book is that unstable economic performance, fostered largely by misguided Federal Reserve policy, has given rise to a huge increase in inequality within the "wage structure" (p. 49). This inequality in the wage structure is the principal cause of rising general economic inequality. Moreover, not only has Federal Reserve policy contributed to wage inequality, but it has also fueled the rise in compensatory transfers and has increased interest payments from the middle class to the rich.

This is a radical thesis. Federal Reserve chairman Alan Greenspan has long said that he is concerned about the rise in inequality and regards it as an extremely negative development. Indeed, in the summer of 1998 he participated in a conference on inequality organized by the Kansas City Fed in Jackson Hole, Wyoming. However, Greenspan's response has always been: Yes, I am very concerned, but the Fed can't do anything about it. Galbraith's book lays down the gauntlet and says otherwise.

One of the features I like most about the book is its trenchant observations on the political-economy implications of rising inequality. Galbraith frames his discussion by reference to the Harvard philosopher John Rawls (p. 4). Galbraith's argument is that economic equality blurs the distinctions between persons. It makes people feel similar, so it is akin to a Rawlsian veil of ignorance over the comparative future fortunes of individuals. This induces people to make social choices with less regard to their existing social positions, which is what a just society requires. Inequality makes people feel different, so they choose by reference to who they are. In effect, it lifts the veil of ignorance, thereby encouraging unjust choices.

The political-economy implications of these broader philosophical observations are elegantly worked out in the notion of a crisis of the transfer state. We live in a transfer economy that consists of three groups: the rich, the working middle, and the poor and elderly. The working middle are squeezed by growing wage inequality, yet they are forced to fund transfers to the rich through massive interest payments on their mortgages and other debts. Side by side, they must also fund transfers to the poor and elderly through the transfer state.

Something has to give, and it does. Among the middle, transfer programs alleviating poverty become viewed as unsupportable and unpopular New explanations of poverty emerge: The poor are lazy or genetically deficient and deserve what they get. Afflicted by a wage squeeze, the middle also look on government differently. Now the thing government can do for them most immediately is to cut taxes even if it means defunding schools and publicly provided recreational services, and even if it means letting the nation's infrastructure fall apart. Side by side, the rich develop their own separate ethos. Public schools aren't good enough for them, nor are publicly provided medical services, elderly care services, and retirement income schemes. Instead, they want out. This is the real foundation of the gated-community mentality and the attack on social security.

The result of these developments is a vicious circle of decline:

The American working population is angry because it has both the rich and the elderly on its back. . . . The economic bargain in continuing to carry both looks increasingly bad for those who can least afford it. Lacking public solutions to the problems of life on the treadmill, and lacking also the political parties, platforms, and organizations to put them into effect, it is not surprising that people become open to the appeal of every man for himself, and ultimately the power of this appeal will become irresistible. (p. 16)

What, then, are the causes of rising inequality? The dominant orthodoxy is that wage inequality has risen because of technological change centered on the computer, which has increased the demand for skilled labor and reduced the demand for less-skilled labor. Galbraith demolishes this argument by showing it to be completely at odds with the evidence.

The deterioration in wage equality began well before computers were visible in the economy; and it took years of investment before computers were widely distributed. In many occupations, such as meat packing and trucking, computers play no role, yet wages have fallen. In other occupations, such as retail, computers have been applied heavily but there have been no wage gains. Is the difference between the pay of yesterday's and today's CEOs attributable to the fact that today's CEOs have lap-tops? I don't think so. Computerization is a global phenomenon, but why are U.S. CEOs paid 200 times the average factory worker's pay whereas German CEOs are paid only 30 times as much?