Inequality and the Pandemic, Part IV: Possibilities

Another in my series of extracts from my book-in-progress, Economic Consequences of the Pandemic. So far I’ve looked at luck the limited relationship between returns and social value and the fact that risk-taking is mostly done (involuntarily) by the poor, not the rich. Now I’m going to consider possibilities for reform

The biggest lesson of the pandemic, and indeed of the decade since the Global Financial Crisis is that (just about) anything is possible. The decades in which the ‘Washington Consensus’ held sway narrowed the range of thinkable policy options to the marginal differences between hard (think Newt Gingrich and Margaret Thatcher) and soft (Bill Clinton and Tony Blair) versions of neoliberalism.

Economic policies that had prevailed during the decades of widely shared prosperity in the decades after 1945 were simply ruled out as the kind of thing governments don’t do any more. This was particularly true in relation to income distribution.

Let’s start with the minimum wage. When the Federal minimum wage of $0.25 cents an hour was introduced in 1938, national income [more precisely, Gross Domestic Product] per person was $674 per year. Over the next thirty years, the minimum wage grew roughly in line with GDP, reaching its maximum purchasing in 1968. Since then, the minimum wage has failed to keep pace with inflation, let alone income per person, which reached $65000 in 2019. If the minimum wage had risen at the same rate, it would now be just under $25/hour. In fact, the Federal minimum wage is $7.25/hour. Many states have higher rates, but the average is still only $11/hour.

Minimum wages set a floor, but for most workers, what matters is the bargain they can strike with their employers. In the mid-20th century, labour’s side of this bargaining process was mostly undertaken by unions – even non-union workers benefitted from this process. Unions have vanished from most of the US private sector today, a development paralleled to a greater or lesser extent in much of the developed world.

In the neoliberal framing of the issue, the decline in unionism is the inevitable consequence of a modern flexible economy. In reality, the primary cause of declining union density is the passage of anti-union laws, beginning with the Taft-Hartley Act in 1948 (outside the US, the process began later and is less complete, but the sequence of events is generally the same). As the International Monetary Fund (long a guardian of economic orthodoxy) has observed, the weakening of unions may be responsible for as much as half the decline in the labor share of national income.

Similar points may be made about income tax rates. Work by economists such as Diamond and Saez suggests that income tax revenue would be maximized with a top marginal rate of 70 per cent. And, on almost any plausible assumptions about the relative value of additional income to the rich and the poor, the socially optimal marginal rate would be only marginally above this.

It’s true that there were plenty of loopholes (though perhaps fewer than today). Still it seems clear that a good many high income earners faced an effective marginal tax rate equal to or greater than the 70 per cent rate recommended by economists like Diamond and Saez. They may have reduced their work effort as a result, but any impact on the economy as a whole was undetectable.

High minimum wages, strong unions and progressive taxes worked well in the past. But in considering the possibilities for a post-pandemic world, we need not think in terms of turning back the clock, even if doing so would be an improvement on the disasters wrought by decades of neoliberalism. Rather, we can imagine new paths that combine the best of the past with innovations made possible by the advance of technology.

Some of these new possibilities, such as Universal Basic Income and guaranteed free access to college, have already been raised, notably in the context of the Democratic Party primary campaign. Others, such as the need to redress growing inequality between potentially home based information workers and in person service providers, are emerging from the pandemic. Much remains to be worked out but one thing is certain: a return to the pre-pandemic economy, neither possible nor desirable.

(links to come when I get some more time).

3 thoughts on “Inequality and the Pandemic, Part IV: Possibilities

  1. At the outset of paragraph four, it probably would be good to make it clear that it’s the US you are talking about. “When the US Federal minimum wage of $0.25… etc.”

    Would it be possible at some point in the book to develop an “index of neoliberalism”, as in how neoliberal a country was at the start of the COVID-19 pandemic and then compare their neoliberalism score against their COVID-19 performance? Could it be adjusted for other variables? My basic thesis is that how neoliberal a nation was (and thus less “socialist” as in terms of having social safety nets, good government health and welfare agencies etc. ) is very strongly correlated with how badly they failed to deal with COVID-19 properly as measured by medical, social and economic indicators.

    So far as I can see the most neoliberal nations have been the places where the biggest COVID-19 response failures have occurred… and they have failed by a country mile, not just a little bit. The performances of the USA and the UK, for example, have been an ongoing disaster and disgrace. Their performances still have not plumbed the nadir. The Americans and Brits are going to be scraping up their messes for a long time to come. All we may have seen so far is the end of the beginning of this crisis. Maybe you better not finish the final draft of this book too soon.

  2. Two things on my personal wish list – and I suspect that of many others.
    1. An end to the tyranny of GDP per head as THE master welfare indicator. There is no single obvious alernative, but we can hope for pluralism. Even the modest shift to NNI per head would improve things, but we have to go farther and use indicators of equality, sustainability, public capital stock and floor rights.
    2. Linked to 1 is recognition and expansion of the non-traded sector of the economy. There are deadweight costs, both in resources and in psychology, of putting a price on everything. If we can affordably make more goods and services free at the point of consumption, like a public library, why not? This is an incremental not a transformational case, but it deserves a hearing.

  3. I dislike the term neo-liberalism. It means everything and nothing and is most commonly a term of abuse thrown around with little precision. I point to both Denmark and Sweden, both of which have embraced neo-liberalism in the sense that they have extremely free labour markets, they believe that national wealth is best promoted and grown through the private sector with zero state ownership of any enterprise worth its name. They are not socialist in any vaguely sensible term of the word. However both believe that Such neo-liberalism is best supported by a strong social welfare safety net. You can have a strong and competent regulatory state, a strong welfare, and promote free markets and private enterprise.

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