Nation, World + Society

Inequality is not the issue — growth is

UCLA’s Lee Ohanian says economic growth can lift all boats even if it exacerbates inequality

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UCLA economist Lee E. Ohanian does not regard income inequality as the critical problem of our time.

Though he acknowledges its effects on society, he sees it as a distraction from the greater public policy issues surrounding the nation’s overall economic well-being.

Not that he’s immune to the hardships of people on the lower rungs of the economic ladder. “There is no doubt that the poorest Americans struggle mightily, and that too many Americans are poor,” he has written.

He’s heard the arguments from populist economists that the American economic system is fundamentally unfair. But he has also noted that these critics have not provided any good criteria for determining economic fairness or unfairness, and has bluntly argued what some seem afraid to acknowledge outright: “There is always some inequality in any vibrant economy.”

Ohanian, a professor of economics and director of UCLA’s Ettinger Family Program in Macroeconomic Research, is interested in more fundamental issues that he believes should be the basis of the public policy debate. His focus is the vitality of the overall economy. To that end, he sees the question of “equality of opportunity,” which gives workers on every rung of the economic ladder a chance to succeed, as the bigger concern.

He’s alarmed by the 35% decline of entrepreneurship in the U.S. since the 1980s — most of that, he said, coming since 2009. When entrepreneurship drops, job creation drops, dragging economic growth with it. He looks at the slowing growth in productivity — which over the last few years is below its historical average — and sees potential problems in job creation and investments in technology.

That leads Ohanian to a very different emphasis than that of some of his counterparts. “Americans,” he wrote in 2012 in the Hoover Institution’s Policy Review, “should care about the well-being of the nation as a whole rather than whether some people earn more than others.”

As that suggests, inequality per se does not especially bother Ohanian: Indeed, he said he wouldn’t mind seeing income inequality double if it meant there was more entrepreneurship and that those on the lower rungs of the economic ladder were doubling their incomes.

Ohanian, who is also a senior fellow at the Hoover Institution at Stanford University and an adviser to the Federal Reserve Bank of Minneapolis, has continued to probe questions of growth and equality in an updated version of his 2000 paper, “Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis,” published in the journal Econometrica.

In the introduction to that research, Ohanian and his coauthors wrote that “the relative quantity of skilled labor has increased substantially [in the postwar period], and the skill premium, which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980.”

Drawing on 35 years of data, Ohanian methodically points to the causes and conditions that he argues have led us to where we are today.

Measuring inequality

One of the starting points for Ohanian’s analysis is to note that there is no agreement on the terms of the debate itself. When it comes to inequality, he said, “There is no systematic gauge or measure, and statistics differ by how it’s measured.”

Some studies, for example, look at household income, others at individual income. Some that focus on the poor include only cash income and don’t include the value of financial assistance from non-cash transfer payments — benefits supplied through Medicare, Social Security or other similar assistance programs. At the other end of the spectrum, some studies of income disparity fail to account for capital gains or retirement benefits or health insurance, all of which often benefit wealthier Americans more significantly than the poor. The variety of measures, he said, “makes it hard for the layperson to get a sense of what [income inequality] is and how it has changed” in the last 50 years.

He also contends that there is no real evidence that income inequality is a threat to the overall economy. He cites countries — Pakistan, Spain, Italy and, of course, Greece — that have more income equality than the United States but far more serious economic problems.

By turning the discussion from inequality to growth, Ohanian identifies a different set of issues that he argues should be on the public policy table: how to keep up with the changing role of technology in the world; foreign competition and the role of American workers in the global marketplace; and the failure of the U.S. education system to prepare students to be competitive with their counterparts in other countries.

Technology, he said, is the primary reason for the increasing income gap in the United States. For several decades after World War II, he said, technology was the great leveler in American society, providing good jobs for American workers. In the 20th century, American income inequality reached its low point in the 1950s, when technological change was rapid and standards of living increased dramatically.

But sometime around the late 1970s, technology’s economic impact began to change. It went from being an equalizer to a factor that became “complementary to people who were highly trained [and] highly skilled.” And, in that transition, less-skilled workers were left behind.

Ohanian cited, for example, longshoremen working in the ports of New York and New Jersey. About 50 years ago, he said, there were several thousand workers, and they handled about 20% of the cargo those ports handle today. This was basically manual labor, not highly skilled, and was practiced by a lot of brawny guys wearing knit caps. They were highly unionized and made middle-class incomes.

Now the number of longshoremen working in those ports has dropped to a few hundred and, for the most part, the workers are college-educated with high computer skills, which they use to program and operate computer-controlled cranes that move vast cargos on and off ships.

At the same time, whole industries such as the textile business have largely disappeared from the American scene because it is cheaper to do business overseas. Much of the production is now coming out of Thailand, Vietnam or Mexico, where companies can find a cheaper workforce.

And though raising the minimum wage, as the city and county of Los Angeles are in the process of doing, may seem like a good idea for helping the poor, Ohanian questions its viability as economic policy. Pointing to the once-vibrant textile industry as a case study, he argued that companies will find ways around these mandated pay raises for their less-skilled workers.

“We want all people to be worth $15 an hour, but not everyone has that value,” he said. “How long will it take McDonald’s to develop an Uber-style app that allows customers to do their own ordering?” And once it does, will McDonald’s still need to staff its counters with $15-an-hour workers?

Read the complete story in the Fall 2015 issue of UCLA Blueprint.

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