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Untangling the Knotty Problem of Inequality

May 30, 2012 3 minute Read by John Prestbo

A recent newspaper article and a new book have brought an old trend back to my attention. The trend is growing income inequality, which has direct implications for our ability to accelerate U.S. economic growth. The article appeared on The Wall Street Journal’s front page this week under the headline: “Flat U.S. Wages Help Fuel Rebound in Manufacturing.” It presents data showing that the much-rejoiced revival in U.S. manufacturing activity is based to a significant degree on lower wages for manufacturing workers — wages that often aren’t keeping up with inflation. “With unemployment still high and global competition intense, employers have the upper hand in asking unions to relax work rules and restrain, or reduce, wages and benefits,” the article says. The new book is “The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It” by Timothy Noah, senior editor of The New Republic. I have a habit of blogging about books I haven’t read yet, and this is no exception (though I have downloaded it to my iPad). However, a front-page appraisal in The New York Times Book Review caught my eye. In it, Benjamin Friedman, economics professor at Harvard, says Noah “gives us as fair and comprehensive a summary as we are likely to get of what economists have learned about our growing inequality.” There is no mistaking that income inequality is a knotty problem, as the Journal article demonstrates. On the one hand, lower wages are bringing some manufacturing jobs back to the United States, thereby shrinking the unemployment rolls. On the other hand, those wages sometimes aren’t enough for families dependent on them to make ends meet. Under these circumstances, 4% annual GDP growth probably isn’t achievable and certainly isn’t sustainable. As I read through the book I’ll share some of the author’s reportage along with my own thoughts about applying the economic research to a growth strategy that unites us rather than divides us.


Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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