In the past week, triggered by Abiola Lapite's column "Inequality of Wealth is a Force for Good" [Oct. 22], a steaming debate has taken place in the op-ed pages of The Dartmouth concerning the enlarging U.S. income distribution. So far, the pages have been overwhelmed by opinions favoring government intervention to correct this disturbing trend.
It is good to know that there are compassionate humans, but are the writers right in proposing that the government ought to combat inequality through further redistribution of wealth? The answer is an emphatic "NO!" Although they have consistently criticized pro-growth, "laissez faire" policy as detrimental to the poor, there is little, if any, evidence supporting their contention.
To illustrate the various lapses in their arguments, which have mostly consisted of careless uses of statistics and intuitive statements that lack intellectual rigor, one needs only to show that even the most sophisticated form of their arguments is deficient. Since that argument would be the one that places blame for growing income inequality on globalization and technological change that "laissez faire" policy supposedly fuels, understanding why even this argument is highly problematic would show how tenuous the position is of those favoring government intervention to counteract income inequality.
Many implicitly use the Stolper-Samuelson theorem to argue that trade has hurt unskilled American laborers. The central idea is that skilled laborers of the American economy -- which is endowed with more skilled, than unskilled, laborers relative to developing countries -- would experience rising wages in trading with developing countries, while the unskilled ones are hurt by decreasing wages. Indeed, this theoretical picture, at a glance, resembles the American labor market conditions in the last couple of decades. After all, they say, how can a Joe Smith in an American textile factory that pays him eight dollars per hour NOT lose his job, when a Li Hong Zhang in China competes for the same job, but while demanding a significantly less wage?
The major problem with this line of reasoning is that the theorem also predicts that the unskilled in the developing countries would gain from trade, while their skilled workers would lose from it, thereby equalizing these countries' income. This prediction is obviously contradicted by the widening income distribution seen in countries including Chile, Colombia, and Mexico, since they liberalized trade in recent years.
In addition, on theoretical grounds, it is not even appropriate to use the Stolper-Samuelson theorem, which assumes the constancy of the product mix of the economies in question. A number of developing countries, particularly the successful ones growing at extraordinary rates, have drastically changed their GDP composition over the years. Consequently, a static equilibrium model like that of Stolper and Samuelson is inapplicable for the analysis of income inequality in the context of trade with developing nations.
Information technology, which has exploded since its infant stage in the 80s, is also widely accepted as a contributor to the enlarging income gap. But this argument, as well, is marred with problems -- for example, in its interpretation of the education premium in the 80s. The proponents of this argument attribute this premium, which has been stretching the top end of the socioeconomic hierarchy further up, to technological change that has made the educated laborers more valuable than ever. However, these individuals fail to see the trend can also be accounted for by the drop in the return to college education in the 70s, which discouraged Americans from receiving college education into the following decade. In other words, the culprit could be the supply shortage of skilled laborers, relative to their demand.
Another critical point to note is that we are still in the midst of a great technological leap, and any conclusion about the effects of this development is premature. Historically, most technological innovations needed at least 20 to 25 years for their impacts to be felt. In a more extreme case, Watt's steam engine needed a-century-long refinement before it replaced traditional power generators. Thus, we must wait before we can undertake any sensible assessment of the latest technological breakthrough. In light of another historical truth that many past technological trends displaced the skilled, and not the unskilled -- as the early-nineteenth-century mechanization of spinning illustrates -- one should not hastily conclude about the "evil" nature of technology.
As long as we have only a mediocre grasp of the causes behind the widening of income inequality, we should avoid any "social spending," which people like Lee Istrail '99 ["Redistribute the Wealth," Oct. 24, The Dartmouth] and Scott Brown ["The Growing Economic Class Divide," Oct. 20, The Dartmouth] readily endorse, because such a measure is bound to be misguided. In fact, America's inability to deal with Medicare and Social Security crises shows that any redistribution is likely to result in more preposterous entitlements to the middle class, which shamelessly, without exception, robs the poor and rich. What we do know, on the other hand, is that the years between the Civil War and World War I, during which the U.S. maintained a "pro-growth" policy much more rigorously than today, saw stable or declining levels of income inequality. Therefore, I only hope that the proponents of wealth redistribution will refrain from shouting their flawed economic agenda to the impressionable masses.
Of course, I also know that would be wishful thinking.
