Although, on the whole, I believe that most members of the top 1% provide useful services to society, I share the concern of “occupiers” and Tea Party members about many of the bailouts. The rich bankers and others who took large risks should have taken much larger haircuts. I have also supported from the beginning of the recession higher capital requirements for banks, especially for the large “too big to fail banks” that will be bailed out if they get into financial difficulties.It helps to have high schools that behave like high schools, and colleges that behave like colleges, but one component of rising income inequality surely is more employers of high-end skills chasing fewer holders of those skills (at least until labor-augmenting technical change permits less-skilled people to do some of those jobs.)
Nevertheless, the overall earnings inequality has far greater relevance for the vast majority of occupiers and Tea Party supporters than do the earnings of men and women at the very top of the financial sector. The most effective way for the US to reduce overall inequality that will help the largest number of young persons is by finding ways to bring American high school and college graduation rates up to the levels achieved by the other nations, such as South Korea and some European nations, that have replace the US as worldwide leaders in education achievements.
But where an idea gains traction, a leader, charismatic or not, might emerge. Here's Judge Posner.
Railing against income inequality, job loss, and banking abuses is thus understandable, but it doesn’t do any good. The “Occupiers” are anarchic and disruptive, and the solid middle of American society, which rejects the Tea Party because of its goofy ideas, is likely to reject the Occupy movement because of its style, while broadly sympathetic to its antipathies. But if the movement attracts charismatic leaders amidst a stagnant or worsening economy, it may become a force in American politics.We'll see how that plays out. But, Professors Becker and Murphy argue, messing around with the tax code (a border fence wasn't a hot topic in 2011, and much of the illegal immigration is by way of people overstaying their visas) is less effective than, well, ideas that might be familiar to regular readers here.
Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavorable development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applicable to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.Yes. Supply curves slope upward, long-run supply elasticities exceed short-run supply elasticities, and induced innovation can expand employment opportunities for people with smaller portfolios of human capital. Provided those portfolios include discipline and persistence.
We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to investments in education and other human capital. Yet this conclusion should not produce complacency, for the response so far to these higher returns has been disturbingly limited. For example, why haven’t more high school graduates gone on to a college education when the benefits are so apparent? Why don’t more of those who go to college finish a four-year degree? (Only about half do so.) And why has the proportion of American youth who drop out of high school, especially African-American and Hispanic males, remained fairly constant?Thus, it may seem simpler to tinker with the tax code. But it's not.
The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—particularly individuals from broken households. Cognitive skills tend to get developed at very early ages while, as our colleague James Heckman has shown, noncognitive skills—such as study habits, getting to appointments on time, and attitudes toward work—get fixed at later, although still relatively young, ages. Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital.
For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same individuals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.Yes, provided the common culture reinforces the life-management skills of the middle class, and the schools don't dumb down and call it inclusion.
A more sensible policy is to try to take greater advantage of the opportunities afforded by the higher returns to human capital and encourage more human capital investment. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by discouraging investments in its most productive and precious form of capital—human capital.