INEQUALITY, UNEMPLOYMENT AND ANTI-POVERTY POLICY
James K. Galbraith*

Professor of Economics
University of Texas at Austin

Professor Galbraith concluded the Vincentian Chair of Social Justice Moral Dimensions of Poverty Conference in a plenary session on "Common Vision for the Common Good: Rethinking Poverty in the Millennium." The following is a summary of Professor Galbraith's lecture, which addressed the relationship between inequality in the structure of pay and incomes, unemployment and other measures of economic performance and policies that combat poverty. While hopeful that our nation can reduce child poverty in the next twenty years by as much as we have already reduced poverty among the elderly, he cautions us that at the same time we must address inequality in the larger distribution of income and wealth.

Introduction

What a pleasure to be here at this splendid conference, to offer a few thoughts with the due humility of an economist on the subject of the moral dimensions of poverty. When I say "due humility," I do not mean that I will necessarily be humble, but rather, that on this subject the economics profession of which I am a member has a fair amount to be humble about. For while economics was once a branch of moral philosophy, much of what is most celebrated in today's economics is without moral foundation. While I think, and shall argue, that good economics can say something both useful and morally constructive about poverty, the job will not be well done if it starts from the economic presumption that unfiltered markets produce everywhere and always the best outcomes. Pareto optimality is bunk, and so is the fundamental theorem of welfare economics.

THE STRUCTURE OF SOCIETY AND ECONOMIC OUTCOMES

Let's therefore set aside entirely this intellectual conceit, according to which prior moral characteristics are said to determine economic outcomes. Let us set aside the latter day Social Darwinism that serves to legitimate a "washing of hands" and a walking away from the problem. Instead, when we speak of the moral dimensions of poverty, what we mean is the moral obligation imposed on all of us by the persistence of poverty in our midst.

There are, at least, two main ways of approaching this interpretation of the theme.

One is the work of charity, service, community organizations, and social activism. This reflects the obligation of those who are not poor to help those who are, both directly and through public institutions and policies. This is most important as all of you know, but it will not be my principal theme today.

A second moral dimension of our approach to poverty, however, also exists. This lies in recognition that the extent of poverty is an economic and social outcome. Therefore we have an obligation also to consider the structure of society and the economic outcomes it provides.

INEQUALITY AND POVERTY

The relationship between economic inequality and poverty is direct. The more unequal the structure of pay and incomes, the more people will be poor, both in absolute and relative terms. But there is also an indirect relationship, of at least equal importance. Increasing economic inequality also increases the numbers of the comparatively rich and the share of the most rich in total wealth and total income. Now there is nothing per se immoral about the rich. But the fact is that great inequalities of wealth and income do have social consequences. They increase the social distances separating the poor from the middle, with demoralizing effect on the poor. They increase the social distance of the middle from the wealthy, demoralizing the middle. Additionally, they isolate the wealthy from the social problems and social institutions on which society as a whole relies. The private pension, the private school, the gated community and its private security force are all aspects of this isolation. Naturally, having provided what are ordinarily public services for themselves, those who are in that position find it natural to resent paying taxes to support public services that they will not themselves make use of. Hence, we have the cap on the social security payroll tax, the low rate on capital gains, and the constant clamor to cut top rates on the income tax, all of which support social services. Meanwhile that burden falls on the already demoralized middle, which must support an enlarged population of the poor without the fiscal assistance of the rich. It is a formula for social disruption and for fission. It brings me to my central point: a society cannot tackle poverty without also taking care not to become too unequal in its larger distribution of income and wealth. Much as we would like to isolate the phenomenon distribution of wealthy from the phenomenon of poverty, this fundamental economic reality will defeat us every time.

CAUSES OF INEQUALITY

The next question is therefore: what causes rising inequality? I should think the answers are fairly obvious to many of you. Ronald Reagan, and before him, Richard Nixon, caused inequality to rise. But the economics profession has a much more complex and less helpful view. To be sure, some economists, my friends and allies in most matters, have usefully pointed to the decline of unions, the low minimum wage, changing pay norms and more aggressive corporate tactics against labor. But this is at best only part of the story.

Most of the economics profession concerned with this issue has been locked in a death struggle between two factions. The one faction blames globalization and immigration, for raising the supply of unskilled labor. This is of course an economic force, and if our problems really did come from this question there would not be much more to say. But while immigration and trade clearly do play a role, no study has persuasively shown that role to be very large.

As a result, most of the economics profession has settled on "technology," and specifically "information technology" as the source of rising inequality. The argument is that computers put a premium on skills, which the market then rewards. The implication of this argument is that changing the supply of skills will bring inequality back down. But this popular explanation, which also raises inequality onto a plane of cosmic forces, also will not wash. For the most part computers do not enhance skill, they are skill saving. The major changes in pay differentials have occurred not in the most computerized sectors, but in some of the least computerized. Finally, this explanation is not sufficient because the major rise in inequality in any event occurred before the widespread diffusion of computers.

If these cosmic explanations won't do, what then? My work supports the idea that the major sources of rising and falling economic inequality are, in fact, well within our social control. They include:

In fact, as these conditions and programs have improved, inequality in pay has comedown. These are indeed social phenomena and they are subject to moral control.

AN AGENDA TO ELIMINATE POVERTY

THE ROAD AHEAD

I would not be discouraged. We have in the past 30 years greatly reduced poverty among the old. We have seen in the past five years that full employment is possible without inflation. We have enacted an increasing Earned Income Tax Credit and higher minimum wages. If we can keep that up—and that means fighting to preserve and protect what we have already achieved—then we should have no doubt that over twenty years we could reduce child poverty in this country by as much as we have already reduced poverty among the old.

That, it seems to me, would be a moral accomplishment of which we could be proud.


*James K. Galbraith is a Professor at the Lyndon B. Johnson School of Public Affairs University of Texas at Austin where he teaches Economics. He is a Senior Scholar with the Jerome Levy Economics Institute and Director of the University of Texas Inequality Project. Galbraith's newest book is Created Unequal: The Crisis in American Pay (1998). Dr. Galbraith holds degrees from Harvard and Yale (Ph.D. Economics, 1981). He served on the staff of the United States' Congress eventually as Executive Director of the Joint Economics Committee. He is the author of textbooks, numerous scholarly articles in journals and op-ed pieces in major newspapers, as well as a commentator on National Public Radio.

 

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