David Brooks on income inequality

In today's New York Times, David Brooks takes on the "populist" view of income inequality. Now, Brooks' views are so valuable that the Times feels obligated to charge for the pleasure of reading him. But here's the nub of his argument:

Members of the second and much more persuasive school of thought on inequality say the key issue is skills. Lawrence Katz, formerly of the Clinton administration, now of Harvard, puts it this way: Across many nations, the market increasingly rewards people with high social and customer-service skills. A contractor who can work with customers, design kitchens and organize jobs may earn five times as much as one of his workers who has identical cabinetry skills. An office worker who is creative, charismatic and really good in fast-changing interactive settings now gets paid much more than a disciplined middle manager who excels at routine tasks. Katz describes a polarized economy. Wages are rising in the bottom quartile for workers who provide personal services. The middle is lagging. The real rewards are going to the top 10 percent, especially to those relative few who have the skills to transform organizations from the top. In other words, the market isn't broken; the meritocracy is working almost too well. It's rewarding people based on individual talents. Higher education pays off because it provides technical knowledge and because it screens out people who are not organized, self-motivated and socially adept. But even among people with identical education levels, inequality is widening as the economy favors certain abilities.In short, government policy is not driving inequality and wage stagnation. But government hasn't done much to effectively address the problem either, even though per-capita education spending has more than quadrupled since 1950. What's needed is not a populist revolt, which would make everything worse, but a second generation of human capital policies, designed for people as they actually are, to help them get the intangible skills the economy rewards.

Jared Bernstein takes Brooks to task for a number of inaccuracies. Here's my bit of piling on.

1. What does Brooks mean by "office workers" who earn more than middle managers? My administrative assistant is incredibly creative, charismatic, and good in fast-changing situations; but she's never going to earn as much as the "middle managers" at this college. [By the way, am I one of those middle managers? I think I am!] I don't care how good you are at your job, if it's a clerical job or involves flipping burgers or changing bedpans, you aren't making a whole lot of money in this economy.

2. His comment about personal service workers is sleight of hand. Personal service workers in the bottom quartile of income earners may have seen their wages rising (I haven't checked the data), but they are a small fraction of all workers in the bottom quartile. As a whole, the bottom fifth (I haven't found the data by quartile) has seen its share of GDP shrink from 4.2% in 1977 to 3.9% in 1985 to 3.7% in 1995 to 3.5% in 2001 to 3.4% in 2005. (Census Bureau has the data)

3. I think one thing that's going on with the income distribution is this. With the development of communication and computer technology and the greater reach of large corporations in the last several decades, our productive technology is increasingly characterized by scale economies (I haven't read Rosen's Economics of Superstars, AER 1981, in awhile, but I think my argument is related to his). Two examples. Microsoft dominates the "market" for operating systems because of network effects: the more people who use Windows, the more valuable it becomes for the marginal user. Tom Hanks gets paid an outrageous amount of money because the distribution of his movies has become so sophisticated. It costs next to nothing at the margin to distribute one more copy of the same movie, so he is able by dint of a slight advantage in talent over a performer that no one has ever heard of to dominate the market. This means that there are huge monopoly rents that are up for grabs across huge swaths of the American economy. In the old days when the economy was insulated to some extent from the rest of the world and workers were represented by strong unions, you might have seen workers take a big chunk of these rents. But in the present environment, the rents go to those in the strongest bargaining position, namely the executives at large corporations and institutions and the performers who always have the recourse to walk away from the next film (or music, or sports) deal. So Brooks is right that our "meritocracy" is rewarding people based on individual talents, those who are organized, self-motivated, and socially adept. But the talent that is being rewarded is the talent to extract rents, not the talent to produce a higher quality product than the competition. Rewarding that particularl talent produces no benefits for society; there is no economic argument to justify such a meritocracy, no economic basis for opposing, say, a steeply progressive tax system that would counteract some of the forces pushing us toward greater income inequality.