Roemer_ideological and Political Roots of American Inequality_2011

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76 Challenge/SeptemberOctober 2011

Challenge, vol. 54, no. 5, September/October 2011, pp. 7698. 2011 M.E. Sharpe, Inc. All rights reserved.

ISSN 05775132 / 2011 $9.50 + 0.00.DOI: 10.2753/05775132540505

InequalIty

Ideological and PoliticalRoots of American InequalityJohn Roemer

Can we devise a consistent and convincing caseagainst severe income inequality? It is more difcultthan one thinks. The author oers an impressiveeconomic and philosophical analysis o the caseagainst income inequality.

ToproperlyaddressThegrowinginequaliTy in the advanced democ-

racies, particularly in the United States but also increasingly

in the UK and continental Europe, I believe it is necessary to

review the main arguments or inequality and to inquire into their

legitimacy. Today, two main arguments or inequality are proposed:

rst, an ethical oneindividuals deserve to benet rom what nature

and nurture endows them withand second, an instrumental one

inequality is good or everyone. The rst argument is presented in itsmost compelling orm by the philosopher Robert Nozick, who, in his

1974 bookAnarchy, State and Utopia, advanced the idea that a person

has a right to own himsel and his powers and to benet by virtue o

any good luck that may beall him, such as the luck o being born into

John RoemeR is the Elizabeth S. and A. Varick Stout Proessor o Political Science and Econom-

ics at Yale University. This article is based on a lecture delivered at a meeting o the GINI Project,

a European multidisciplinary social science eort to study and understand the roots o economic

inequality in contemporary advanced societies.


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Ideological and Political Roots of American Inequality

Challenge/SeptemberOctober 2011 77

a rich amily or in a rich country. Any voluntary exchanges that take

place between persons are legitimate, and, in this way, it is not hard

to imagine that a highly unequal distribution o income and wealth

can be built up airly rapidly rom these unequal endowments. Nozickis the rst to admit that actual capitalist economies are not charac-

terized by historical sequences o legitimate, voluntary exchanges:

the history o all societies includes much coercion, corruption, and

thet. But Nozicks point is that one can imagine a capitalism with a

clean history, in which vastly unequal endowments o wealth are built

up entirely rom exchanges between highly talented, well-educated

people and simple, unskilled ones, and this unequal result is ethically

acceptable i one accepts the premise that one has a right to benetby virtue o ones endowmentsbiological, amilial, and socialor

so he claims.

The second major argument or inequality is the instrumental one:

that only by allowing highly talented persons to keep a large raction

o the wealth that they help to create will that creativity fourish, which

redounds to the benet o all through what is inormally called the

trickle-down process. In brie, material incentives are necessary to

engender the creativity in that small raction o humanity that has

the potential or it, and state interventions, primarily through income

taxation, which reduce those material rewards, will kill the goose that

lays the golden eggs.

A third argument or inequality, which is currently most prevalent

in the United States, is one o utility: Even i the degree o inequal-

ity that comes with laissez-aire is not socially necessary in the sense

that the incentive argument claims, attempts by the state to reduce it

will come to naught because the government is grossly incompetent,

inecient, or corrupt. Thus better to let the rich keep their wealth

and invest it protably than to hope that the state can manage it more

ruitully. Incredible as it may seem, it is now becoming increasingly

popular in certain circles o economists in the United States to say

that the productivity o government investment is zero.

These views have taken hold in the minds o many Americans, and

the consequences or the United States, and thereore or the world,


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Roemer


will be dire, I believe, i this popular ideology is not successully chal-

lenged. The United States is not Germany in 1931, but it may well be

Germany in 1921I do not wish to push the analogy too ar, because

the United States is not suering under a punitive Versailles treaty.The details are quite dierent in the two periods, but the event o

a right-wing populist movement growing in the United States to a

dangerous degree has a nontrivial probability. It is incumbent upon

us, as intellectuals, to equip ourselves to counter it.

Philosophical Responses

The philosophical response to Robert Nozicks libertarianism cameprimarily rom two political philosophers, John Rawls and Ronald

Dworkin. (My use o the word response is somewhat anachronistic,

as Rawlss major book was published three years beore Nozicks.)

Rawls maintained,1contra Nozick, that the thesis o sel-ownership was

not aptrather, that the distribution o many attributes o persons was,

in his parlance, morally arbitrary, and hence the individual did not

have a moral right to benet exclusively rom their physical posses-

sion. Rawls certainly included among such attributes ones biological

endowment and the amily and circumstances into which one was

born. Rawls attempted to construct an argument that i rational, sel-

interested beings were shielded rom the knowledge o the luck they

would sustain in the birth lottery, which assigns genes and amilies,

they would opt or a highly equal distribution o wealthindeed, or

the distribution that maximizes the wealth the poorest class o people

would have. His main argument or this thesis was wrong (knowing de-

cision theory would have helped Rawls), nevertheless, many ound the

recommendation o the maximin allocation o income and wealth

attractive, because they ound the premise o the moral arbitrariness

o the distribution o genetic and social assets attractive.

The error in Rawlss argumentthat those in an original position,

behind a veil o ignorance, would choose a highly equal distribution

o incomecame rom his assumption that the decision makers pos-

tulated to occupy this position were completely sel-interested. Sel-


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interested individuals may be willing to take some risk in the birth

lottery; they may be willing to accept some possibility o an unlucky

draw in return or the possibility o a lucky draw. So advocating a

strongly equalizing tax system may not be in their interest. Betterperhaps to gamble on being lucky and not to have to pay a large tax

to compensate the unlucky ones, in that event. This does not mean

that a strongly equalizing tax system is ethically wrong. However,

to justiy it with the kind o argument Rawls wished to construct

requires that individuals care about others at least to some degree.

Rawlss attempt to derive equality o results rom premises o ratio-

nality and sel-interest ails. Granted, such a derivation, were it to be

valid, would be compelling, but it is not valid. A stronger premise oempathy, altruism, or solidarity is required to derive equality as an

outcome in the Rawlsian ramework.2

Another aspect o Rawlss theory was unattractive to some: It ap-

parently had no place or the role o personal responsibility and

accountable choice. Virtually all o us believe, to some extent, that

individuals should be held responsible or their choiceswe may insist

that they be properly inormed, provided with adequate education

during youth, and so on, but there comes a point at which outcomes

or individuals may legitimately dier due to choice. Rawls gestured

toward recognizing this kind o legitimate inequality when he called

or equalizing primary goods rather than incomebut then he oten

said that income was the most important o the primary goods. How,

then, could he advocate equalizing bundles o primary goods and at

the same time hold people responsible or their choice o income or

leisure bundles, preerences or which might legitimately dier across

persons?

Ronald Dworkin, in 1981, published a pair o articles that addressed

this problem in a radical new way.3 He advocated what he dubbed

resource equality, as opposed to both welare equality and primary-

goods equality. In Dworkins view, people should be held responsible

or their preerences but not or their resourceswhere resources

include many o the goods that Rawls called morally arbitrary, such

as genetic endowments and the social and amilial circumstances o


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Roemer


ones childhood. This is not the place to go into detail about Dwor-

kins recommendation or redistribution. Suce it to say that it called

or compensating individuals or the bad luck o the birth lottery but

holding them responsible or many o the choices they make as adults.Thus, a degree o equality was recommended that was less than Rawl-

sian but ar more than exists in most advanced democracies today.

Perhaps the income distributions o the Nordic democracies are the

closest approximation to a Dworkinian distribution.

Economic Theory

I wish to discuss the infuence o both macro- and microeconomictheory on our views about inequality. I dismiss macroeconomic

theory, whose two pillars, rational expectations and the ecient

markets hypothesis, have both been eectively demolished by the

current nancial and economic crisis.

Rational expectations is simply a premise o mathematical conve-

nience. Suppose that agents are making decisions under uncertainty,

which is, o course, ubiquitous in the real world. Suppose, or example,

each individual is deciding how much education to undertake, under

an assumption about the probability distribution o wages associated

with each level o education he/she might complete. I one is interested

in the long-run properties o such a process, one needs to make some

assumption about the relationship between the prior distributions o

wages conditional upon educational levels that people hold and the

actual distribution o wages that occurs ater people are educated and

acquire jobs. The simplestand, indeed, ocalassumption that one

can make is that these distributions are the same: that is, people take, as

their prior, the distribution that is in act realized. This is the rational

expectations hypothesis. Although mathematically convenient as a

way o closing the model, the assumption is impossible to justiy as

empirically accurate. The reason the assumption is convenient is that

there is no simple way to complete the model without it.

The ecient markets hypothesis says that the prices in stock markets

accurately summarize all the inormation available about the expecta-


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tions o the uture values o rms. A consequence o this hypothesis is

that bubbles cannot exist in stock marketsor , i housing is eciently

priced, in housing markets.

The nancial crisis and concomitant economic crisis that we haverecently experienced are not possible under these two views. Diehard

advocates o these views argue that there was no housing bubble and

that there is currently no involuntary unemployment: Those who are

unemployed are rationally investing in the search or new jobs. Some-

what less militant advocates o these views do not reject the claim that

a crisis occurred but, rather, construct Ptolemaic arguments purport-

ing to demonstrate that nothing could have been done to prevent it

and that, in particular, any aggressive intervention by the state wouldhave then or will now only make things worse.

My own take is that the hold these views have on macroeconomists

demonstrates that economics is not yet a science. For a theory to be

a science, it must be alsiable. I do not see how any real event could

alsiy the main tenets o current macroeconomic theory i the cur-

rent crisis could not. History suggests that individuals who have long-

held views or methods do not change. We can only hope that a new

generation o macroeconomists will emerge, whose members have

the courage and intellectual power to reconstruct the theory. With

respect to our topic o inequality, it need hardly be said that resh-

water macroeconomicsthat practiced in the American Midwest near

the Great Lakeshas no particular interest in inequality. One o its

tenets is what I call the utility thesisthat any attempt by the state

to redress inequality would only make things worse.

In addition, an important transormation in microeconomic theory

has taken place over the past thirty years, and although less noted, it

may be just as important to inequality as the rational-expectations

revolution in macroeconomics. Economists have long realized that

markets perorm two unctions: They coordinateeconomic activity,

and they provide incentives or the development o skills and innova-

tions. It is not easy to give a denition that distinguishes precisely

between these two unctions, but there is no question that a concep-

tual distinction exists.


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Roemer


Let me give two examples. An important problem acing Soviet

planners was called the transportation problem. Many plants in the

country produce steel, with various xed capacities, and many loca-

tions demand steel in various quantities. Shipping steel rom anysupplier to any demander has a cost, but these costs vary. What is the

optimal plan? How much should each steel producer ship to each

market, to satisy all demands and minimize transportation costs? This

problem led the Soviet mathematician Leonid Kantorovich to invent

linear programming in the 1940s, along with Tjalling Koopmans in

the United States, or which they jointly received the Nobel Memorial

Prize in economic science.

Competitive prices can solve this problem without linear program-ming. I competitive prices or transport and prices o steel at the

various producers characterize this market, then each demander orders

steel to minimize its costs, the steel market clears, and the market

will have ound the mathematical solution to the cost-minimization

problem. This is an example o prices perorming a coordinating

unction.

Consider, now, the problem that I alluded to earlier. A young person

is deciding how much education to undertake and wishes to maximize

a utility unction in which both uture income and the nature o the

occupation are important. Prices (which is to say, expected wages)

guide him/her to make the decision. We should think o this as an

instance in which the market is perorming an incentive unctionit

is inducing the individual to make a choice on which skill to develop

based on his sel-interest, and i the market is unctioning well (com-

petitive), the aggregation o all such choices will be Pareto ecient.

Neither o these examples is pure. In the transportation problem,

equilibrium prices are realized as the result o managers o rms hav-

ing the incentive, or one reason or another, to minimize costs, and

in the education example, the market is coordinating the allocation

o workers to occupations in a way that is, under some assumptions,

Pareto ecient. And, in any example, there will be both a coordina-

tion and an incentive interpretation o the markets role. I maintain,

nevertheless, that these two roles are dierent and that each example


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illustrates dierent mixes o the coordination and incentive unctions

o the market.

In the past thirty or orty years, the economic theorists view o

the market has changed, rom being an institution that perormsprimarily a coordination unction to one that is primarily harness-

ing incentives. Indeed, the old denition o microeconomics was the

study o how to allocate scarce resources to competing needs. This is

entirely a coordination view. The elegant theorem at the pinnacle o

this view is that equilibrium prices in a competitive economy with

no externalities, no public goods, and a complete set o markets will

induce an allocation o resources that is Pareto ecient. That kind o

eciency is the markperhaps the denition osuccessul coordina-tion. The technique that provided the intellectual justication o the

coordination view was general equilibrium theory, which reached its

apex in the 1950s and 1960s.

It might surprise you to hear that the phrase principal-agent prob-

lem was only introduced into economics in 1973, in an article by

Steven Ross.4 In the principal-agent problem, coordination is not the

primary issue. Rather, a principal must design a contract to extract

optimal perormance rom an agent whose behavior he cannot per-

ectly observe. This is par excellence an incentive problem.

The technique that developed to analyze incentive problems was

game theory, more specically, parts o game theory called contract

theory and mechanism-design theory. The problems that are analyzed

typically involve small numbers o individuals, in situations where

markets do not exist, and the individuals must set prices or write con-

tracts to get the incentives right. But the idea that incentives are the

real guiding orce that markets must address extends to much larger

groups o actorseven to entire economies. Some economists have

even gone so ar as to say that prices have no coordinating unction

at all. Rather, they say we should look at all economic exchanges as

episodes o bargaining between individuals; what determines the price

o the exchange is the relative power o the two bargainersin the

sense o how scarce the commodity they are each supplying isand

prices simply ratiy these undamentals. Under this view, markets do


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Roemer


not coordinate but simply provide the venue or bargaining.

Why did this transormation o microeconomic theory occur? This

is a ascinating question, and I do not have the ull answer. A partial

answer is that economists sought to explain the economic ailure o thecentrally planned economies, which began to occur only in the 1960s

and 1970s. But the logic here is muddy. Certainly, one might conclude

that it was the lack o markets that brought about economic ailure in

those economies. But was it because, in the absence o markets, coor-

dination ailed, or because incentives were let unharnessed? Stories

o both coordination and incentive ailures are legion. Coordination

ailure is illustrated by long queues or consumer goods and rationing

o industrial inputs, and incentive ailure is illustrated in the Sovietjoke, told by workers about managers, They pretend to pay us, and we

pretend to work. In other words, one might equally well interpret the

ineciency o centrally planned economics as illustrating that planners

cannot replace the coordination unction o the market or that lack o

market competition makes it impossible to harness incentives.

What is the import o the change in emphasis o the markets role

in the problem o inequality? I believe it is to reinorce the impor-

tance o material incentivesmore radically, to justiy the view that

the very high salaries and incomes or those at the top that have come

to characterize capitalist economies in the past thirty years are neces-

sary or eciency.

To see this, I propose a simple thought experiment. Suppose that

there were an economy in which individuals cared only about the

kind o occupation in which they engaged and the amount o educa-

tion they required to qualiy or the occupation. Assume that there

is a variety o preerences in the population over occupations and

education. Wages are not important to people, as long as they suce

to purchase a certain minimum level o consumption. There is one

rm that produces a single consumption good that everyone needs,

and the rm can produce this good using many dierent possible

combinations o workers employed in the various occupations. The

rm wishes to maximize its prots, which will equal the revenues

rom selling the output to consumer-workers, minus the wage costs


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o the workers. A vector o occupational wages and a price or the

output good comprise a competitive equilibrium or this economy

i, at those wages and prices, all the occupational labor markets clear

and the demands or workers in the various occupations put orth bythe rm maximize its possible prots at those wages and prices.

The peculiar thing about this economy is that workers do not

care about wages. They make decisions about which occupation to

pursue solely by looking at the attributes o the occupations and

their educational requirements. Each worker chooses the occupation

and concomitant educational level to maximize his utility over the

available choices. Equilibrium wages are those that direct the prot-

maximizing rm to demand exactly the supplies o occupations that areon oer by the population.

I propose that in this economy, the market is oering primarily a

coordination unction. Granted, the rm has, by hypothesis, an in-

centive to maximize prots. But in some sense the main unction o

the market is to coordinate the xed occupational choices o workers

with the rms demands or workers in the various occupations. Some

workers will earn more than others at the equilibrium, because their

wages are higher. Nonetheless, by hypothesis, as long as all wages are

suciently high with respect to the price o the output, these wages

orm no part o workers decisions.

Suppose a purely redistributive income tax were imposed on work-

ers. (It might be hard to see why one might wish to do so, i workers do

not care about their consumption levels, but this is a thought experi-

ment.) Then the occupational choices o workers will be unchanged,

and the equilibrium wages and price o output will not change. All

workers will choose exactly the same occupations as beore, and the

rm will produce the same amount o output as beore, with the same

prots. All that will happen is a redistribution o the consumption

good among worker-consumers. This is a case in which redistributive

taxation has no eecton occupational and productive choices. Taxa-

tion has no eciency consequences.

Consider, now, the polar-opposite model, in which workers care

only about income and the education they must complete to qualiy


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Roemer


or dierent occupations. They do not take into consideration the

characteristics o occupations. A wage vector will still allocate workers

to dierent occupations, but this time the nature o the occupation

is unimportant or workers. The wage makes it possible or them tooptimize their trade-o between income and time-consuming edu-

cation. Here, wages are providing an important incentive unction,

and workers will choose dierent occupations only because they have

dierent degrees o antipathy toward education or to time lost rom

earning income while going to school. I we introduce an income tax,

occupational choices will change. There may be considerable real

eects on occupational structure i the tax is suciently large; the

eciency consequences o taxation are no longer costless.The punch line I am proposing is this: To the extent that the market

is primarily a device or coordination, taxation can redistribute income

without massive eciency costs. But i the market is primarily a device

or harnessing incentives, the eciency costs o redistribution may be

high. I believe that the transormation in microeconomic theory that

I have describedone that views the market primarily as harnessing

incentives, as opposed to coordinatingprovides an important intel-

lectual oundation or the inadvisability o interering with market

rewards via a redistributionist state policy.

Ideological Strategies

Mounting a serious challenge to the growing inequality that concerns

us all requires a sound intellectual oundation. The success o the

conservative tide in the United States is in large part a consequence

o the successul intellectual work engaged in by the right wing since

the mid-1970s. The right wing took theory seriously. In the 1970s, a

number o right-wing think tanks were ormed: the Cato Institute,

the Manhattan Institute, and the Heritage Foundation. The American

Enterprise Institute and the Hoover Foundation had been ounded

earlier, in 1943 and 1919, respectively. The Mont Pelerin Society had

its rst American meeting in 1958 and brought Friedrich Hayek to the

University o Chicago. (Incidentally, or ten years his salary at Chicago


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was paid by the right-wing William Volker Fund, and ater that grant

lapsed, Chicago released him.)5

Right-wing oundationsScaie, Olin, and Bradleydeliberately

undertook the strategy o creating these think tanks in the 1970sto counter what they considered the let-wing bias o academia, in

large part the consequence o the transormation o ideas o students

and intellectuals during the civil rights movement and Vietnam war.

Their unction was to create a sound conservative ideology, with the

ollowing tenets: that reedom is possible only under laissez-aire,

that governments are corrupt and inecient, and that intererence

with markets is always bad or economic welare. These ideas were

promulgated in the media, in many publications, and by providingexpert testimony to legislators. Because the television and newspaper

media are typically owned by wealthy interests, they were surely not

indierent to helping propagate these ideas. Fox News Network is only

the latest and most vulgar example o this collaboration.

While liberal and, in some cases, let-wing ideology did develop

in the social sciences in the United Stateswith the exception o eco-

nomics, where the trend has been, as I have indicated, primarily to

the rightthe let did not produce a public presence as ormidable

as that o the right. In particular, Ronald Reagan was a wonderul

spokesman or the right, and he also perormed what in hindsight

was probably the critical move in demoralizing the labor movement,

by ring more than 11,000 ederally employed air trac controllers

during their 1981 strike. Strike action in the United States decreased

markedly ater this event, and trade-union membership is now below

10 percent in the private sector. In contrast, Canadas union density,

which was the same as that in the United States in 1960, has remained

at the same level, slightly above 30 percent. Reagans action against

the air trac controllers was only part o the Republican strategy o

turning a blind eye to employer intimidation o unions or o workers

trying to organize unions, which has been instrumental. As unions

were the main, i inadequate, schools or solidarity o the American

working class, their disappearance has let workers more vulnerable

to the individualistic and anti-state, anti-tax ideology o the right.


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Roemer


To provide a sound intellectual basis or advocacy o a more equal

society, we must address three key ideas, an intellectual task o the

utmost importance. Ideas really do trickle down, even i money does

not!First,that children should not be disadvantaged by the bad luck o

being born into a poor or poorly educated amily. I believe that there

is considerable support or this idea in the advanced democraciesbut

oten the consequences o this view have not been thoroughly under-

stood by citizens or implemented in policy. Consider education, or

example. In the United States, the average amount o state (ederal,

state, municipal) unding or the education o advantaged children

is ar greater than that or disadvantaged children. A moderate liberalgoal is to equalize unding or all children. But the correct policy is

to invest more state unds in disadvantaged children to compensate

them or their amilys lack o (material and cultural) resources. I

disadvantaged children are members o a minority race or ethnicity,

it is more dicult to win over citizens to this implementation o the

requirements o equal opportunity, due to racism and anti-immigrant

sentiment. Intellectually, winning this battle means conronting Nozicks

libertarianism and, in particular, the tenet that a person has a right to

benet rom his or her good luck in the birth lottery.

A more radical view that I also hold is that we must extend the

compensation to include genetic bad luck. Ethically speaking,

there is no reason why individuals who are less mentally endowed

should have poorer material conditions than those who are better

endowed. To the extent that this occurs, it can be excused only

by the necessity o incentive payments to wage earners and the

ineasibility o redistribution. There is no ethical basis or it, or

such a basis can exist only by advocating the right to benet rom

good luck.

Second, we must understand the true division o labor in the

markets coordination and incentive roles. Intellectually, this is the

most dicult problem and probably the most politically important

one. What I here propose is a question or research, rather than an

answer. As I said earlier, the degree to which redistribution is easible


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with small eciency costs is closely related to how important mate-

rial incentives are or productive activity. Although economic theory

has shited on this question over the past generation, it is ar rom

obvious that the shit is empirically justiedby which I mean thatwe do not know whether the markets role in incentive provision is

as important as current economic theory contends.

My current view is that material incentives are important or the

great majority o workers in their role in directing educational and

occupational choices, but that they are ar less important or the high

fiers at the top o the income and wealth distribution, and indeed

or innovation. I do not mean that the high fiers and innovators do

not like their huge incomes but, rather, that these incomes are notsocially necessary, in the sense that we would lose innovation and

good corporate management without them.

Let me outline some details o my view. Many people think that

the high incomes paid to corporate management and, in particular,

to those in the nancial sector are due to monopolistic elements

back-scratching among interlocking directorates o rms made pos-

sible by shareholder apathy, or example. I do not endorse this view; I

believe it is entirely possible that the high salaries and bonuses these

people receive are competitive, in the sense that each is receiving

his expected marginal product as evaluated by the board that hires

him. Even i this is not so, and those monopolistic elements exist,

I use the competitive assumption to make my argument because it

makes the argument stronger. In other words, I claim that even i

CEO salaries are competitive, they are inecient. Their existence

is a market ailure.

The theoretical argument or the possibility that these salaries are

competitive is that, i you are the pilot o a very large ship in Arc-

tic waters, a very small change you make in the angle o the rudder

can signicantly aect the probability o the ships impact with an

iceberg. I you are the CEO o a large corporation, with $10 billion

in annual revenues, a very small dierence in the quality o your

decisions may make a 1 percent dierence in annual revenues, which

is to say a $100 million dierence. I the hiring board is convinced


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Roemer


that you are just slightly better than the next candidate, you can

probably bargain or $25 million or so o your $100 million mar-

ginal product, or maybe more. Empirically, we note that the market

or CEOs o American rms is internationalmuch less so thanthe market or management o Japanese rms or even continental

European rms. This is an indication that the U.S. market is more

competitive than these other markets. I suggest that the truth may

be that U.S. CEOs are receiving their marginal products and Euro-

pean CEOs are receiving less than their marginal products (as are, a

ortiori, Japanese CEOs), due to social custom and, perhaps, popular

opposition to obscenely high salaries in these societies.

But the payment o these high salaries is inecient because, eveni the expected marginal product o the incumbent CEO is $100 mil-

lion greater than the next best candidate, the social costs o creating

a class with such huge wealth are large. First, the institution creates a

class that has great power to infuence politics. Members o this class,

i private campaign nancing is legal, will make large contributions

to political parties to maintain their privileges. Second, as we have

seen in the nancial sector, paying such huge salaries on the basis o

expected marginal product can induce behavior that is ar too risky

rom the social viewpoint. This negative externality is not internalized

by the rm, because, inter alia, o the implicit insurance provided by

the state against ailure in the case o a bad outcome on these risky

gambles. This is why the U.S. governments allowing Lehman Broth-

ers to go bankrupt in September 2008 so scared the nancial sector,

and why the government eectively reversed itsel a ew days later by

rescuing the insurance rm AIG.

Note that this argument diers rom the one given by a nancial

mogul, who explained that his rm continued to engage in the risky

behavior that led to the crisis by saying, As long as the music plays,

we have to continue to dance. That cute explanation suggests that

the big Wall Street rms were in an inecient Nash equilibrium.

My argument, in contrast, is that they may have been in an ecient

Nash equilibriumas long as they all ailed together, they would all

be rescued. Thus, the behavior was ecient rom the viewpoints o


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the playersprivate gains on the upside o the gamble, and socializa-

tion o losses on the downside. The act that 2010 was a banner year

or the Wall Street banking houses indicates that they have done quite

well out o the crisis, thank you.My nal argument is that the most important reward or the very

high fiers is not money income, but powerpower over othersand

the respect o their peers. I these high salaries were taxed at very high

rates, I do not think we would see a signicant change in productive

behavior. (One might have to make the taxation international, to

prevent migration.) What other occupation could these high fiers

choose that would give them the same power and respect o their

peers? Will they, alternatively, be satised to retire and play gol orread poetry?

I have argued that these high incomes are inecient because o

risk-taking externalities that they induce, that they are unnecessary

or incentive provision, and that they create a class with dispropor-

tionate political power. Finally, there is the very important negative

externality o the creation o a social ethos that worships wealth.

Ordinary people lose sel-esteem and do what they can to imitate the

consumption behavior o the very wealthy.

In sum, the positive social value o the institution o extremely

high salaries that the leaders o the corporate world and, in particular,

o the nancial sector receive is a big lie. It may well be a competi-

tive outcome, but it is a market ailure that could be corrected by

regulation or legislation. In the United States, at least, there are no

visible prospects or such legislation, which I maintain is due, in no

small part, to the hold o the incentive argument or inequality on

the voting population.

I believe, in contrast, that incentive pay or the working popula-

tion in general is important. The experience o China since 1979 is an

example: I do not attribute the Chinese growth rate o over 8 percent

a year in this period entirely to the lack o coordination that existed

beore 1979 due to the absence o markets. However, I do not think

that material incentives, especially in the wealthier countries, are

as important as many economists insist. We see a very large dier-


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ence in relative material rewards to skilled labor across the advanced

democraciesat its most extreme between the Nordic countries and

the United Stateswithout concomitant eciency dierences. Ater

basic needs are met, I believe that people put substantial weight onthe nature o their work. European workers have chosen to work sub-

stantially less than American workers, which may well be a reaction

to high taxes. But I have never heard a conservative economist argue

that people should vote or low taxes, or otherwise they will choose

to spend more time on amily vacations.

Many people could increase their income by changing occupations,

but we do not, because we think our work is important or we nd

it interesting. Cuba, apparently, produces the best physician corpsin Latin America, although its doctors are not well paid. The social

provision o good education turns out to be much more important

than high physician salaries in generating a supply o capable physi-

cians. The Soviet Union had no dearth o doctors, or mathematicians,

although they were paid less than some skilled manual workers.

So although material incentives are important or ordinary work-

ers, they are probably the least important or those workers who pay

signicant taxes in market economiesnamely, those whose incomes

are high and have interesting careers. I my conjecture is correct,

there would be no major impediments to substantial redistribution,

on account o incentive problems.

Third,we must counter the view that the state is inecient. This

is a particularly American view, so it is probably not appropriate to

spend much time on it here. Let me just mention one anecdote. In

November 2010, Gregory Mankiw, a conservative Harvard economist

who worked or the Bush administration, wrote a column in the busi-

ness section o the New York Times in which he gave this argument

or keeping income taxes low. Highly paid actors might make ewer

lms i they were more highly taxed, and economists like him might

give ewer public lectures or which they are paid high ees. Thus,

there would be a social loss resulting rom higher taxation on high

fiers. Not once in the article did Mankiw mention that, with those

taxes, we could build more bridges and perhaps even high-speed rail.


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Thats because, in the conservative American view today, government

productivity is zero.

Current American Politics

Many people believed that the 2008 election o Barack Obama signaled

a sea-change in American politics, the end o the political pendulums

swing to the right. Conventional political science predicted that the

Republican Party would move toward the center. But the opposite hap-

pened: The Republican Party has moved urther rightward. At the time o

the election, two-thirds o the population supported health-care reorm,

but by the time the bill was passed more than a year later, barely hal did.The insurance companies and the Republican Party succeeded in turning

about 20 percent o the electorateagainst the reorm, relying principally

on two arguments: that government-run health care was an inringement

o reedom and that, or the average household, costs would increase

without any concomitant increase in the quality o care.

The act that most o the claims o the opponents were lies is not

the main point; rather, we must ask, why were so many susceptible to

them, and why did the Democrats, Obama in particular, not succeed

in challenging the lies more eectively?

I believe that the narrative o sel-interest, which has been so care-

ully nurtured by the right-wing think tanks, was o key importance.

The Democrats did not argue, as I believe they should have, that it

was a travesty o justice that the richest country in the world let

44 million o its residents uninsured. They did not argue that social

solidarity required this legislation. Indeed, the right-wing Fox News

commentator Glenn Beck, perhaps anticipating such an argument,

said that when you hear someone speak o social justice, thats a code

word or socialism. Many in the United States have come to believe

that unbridled sel-interest is ethically ne, in part because, via the

invisible hand, it is said to have such wonderul consequences. The

original health-care reorm bill included a public option, ederally

provided insurance that would compete with private insurance. But

this was dropped rom the bill because conservative Democrats did


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Roemer


not support it. Whether this was because they were beholden to insur-

ance companies or campaign nance or because their constituents

opposed it as creeping socialism, I am not sure. The watered-down

bill eventually passed but with not oneRepublican legislator votingor it in either the Senate or the House o Representatives.

With regard to capping salaries o the two big investment bankers,

Obama said, I know both those guys, they are very savvy business-

men. And I, like most o the American people, dont begrudge peoples

success or wealth. That is part o the ree-market system.6 My suspi-

cion is that Obama does not believe what he said; but the act that he

said it is indicative o the American ethos that he believed he must

play to. The Dodd-Frank Wall Street Reorm and Consumer ProtectionAct, regulating the nancial sector, which passed during the summer

o 2010, is an inadequate instrument, which even centrists say will not

prevent another nancial crisis. Perhaps this was the best that Obama

could do given the balance o political orces. One must recall that

he appointed Lawrence Summers, architect o banking deregulation

under Bill Clinton, as his economic guruagain, perhaps indicating

the political power o nance in the United States at present.

In 2001, President George W. Bush enacted temporary income tax

cuts, which were to expire at the end o 2010. Making these cuts tem-

porary was evidently the most he could hope to do at that time. The

Republican Party, newly empowered ater the midterm elections o

November 2010, demanded the permanent extension o these cuts.

The Obama administration initially agreed to extend them or the

bottom 98 percent o income-earning households, but to allow the

cuts to expire or households with income over $250,000 per annum.

Allowing those cuts to expire would pay or the envisioned decit

in the Social Security und three times over. But, in the nal days o

December 2010, the administration caved, under threat that i it did

not, the Republicans would reuse to extend ederal unemployment

insurance to those who had been unemployed more than ninety-nine

weeks. In other words, Obama, an apparently liberal president, believed

that he could not make the Republicans take the blame or reusing to

support the unemployed i he did not give in on the absurd right-wing


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demand to maintain reduced taxes on the wealthy; rather, i he held the

line on taxing the wealthy, popular approval would turn against him

or not supporting the unemployed. The lesson here is not mainly that

Obama is personally weak: It is, rather, what his political calculationtells us about the ideological stance o the voting population.

Franklin D. Roosevelt was a centrist governor o New York when he

was elected president in 1932. But in 1936, he said this:

For twelve years this Nation was aficted with hear-nothing, see-

nothing, do-nothing Government. The Nation looked to Government

but the Government looked away. Nine mocking years with the golden

cal and three long years o the scourge! Nine crazy years at the ticker

and three long years in the breadlines! Nine mad years o mirage andthree long years o despair! Powerul infuences strive today to restore

that kind o government with its doctrine that that Government is best

which is most indierent.7

Those same powerul orces are at work today in the United States,

but one can hardly imagine Obama speaking as FDR did. Those

powerul orces have become even more so in the past thirty years.

In the period 19772007, 57 percent o the economic growth o the

United States went to the richest 1 percent o households: in ater-tax

accounts, over 40 percent went to these households. It is this massive

increase in inequality that lies behind the right-wing movement in

American politics todayabetted by racism, which has enraged a seg-

ment o the white population with the election o a black president.

The Tea Party movement, despite its popular and mass nature, has

been nanced by big right-wing money. It is hard to say whether it

will be a fash in the pan, but its present existence is indicative o the

social ethos. That a political party that openly supports the economic

interests o the wealthiest 2 percent o the population against those

o the great majority can nevertheless garner the support o approxi-

mately hal o the electorate is the sign o a dangerous situation.

What Can We Do?

My view as well was that the Republican Party, ater its deeat in the

2008 election, would gravitate toward the center. This, ater all, is


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the logic o political competition in normal times. Evidently, these

are not normal times. The conjunction o a right-wing, anti-tax,

individualistic ethos, a hugely enriched class at the top o wealth

distribution, an economic crisis, and a black president in a countrywhere the racism rom slave times, although much reduced, still ex-

ists, has brought about an abnormal dynamic. I we continue on this

trajectory, there will be inadequate state nancing to improve the de-

teriorating American educational system and to rebuild our crumbling

inrastructure. The real incomes o the majority o households will

continue to decline, and the American social abric will become even

more rayed. The United States will compete, less and less eectively,

with China and the other developing countries that are replacing itas the manuacturing center. American xenophobia will increase, and

international tensions will rise. The world will ail to address global

warming, because the American right wing has convinced many that

the threat is a hoax. Their motive or doing so, I conjecture, is that

addressing the problem would require state intervention, which they

abhor.

Most social scientists who study inequality have ocused upon

measuring its degree and studying the micro mechanisms through

which it is produced. Micro mechanisms include a substantial variety

o processes: how tax policy contributes to the distribution o wealth,

how the intergenerational transmissions o income and wealth occur,

what role education plays or could play in modiying the distribution

o income, how neighborhoods and social networks aect behavior

and choices that have an impact on distribution.

O course, we must understand these processes. But, in a sense,

understanding them is o secondary importance with regard to the

massively important phenomenon o increasing inequality in the

advanced democracies. Democracy worksin the advanced countries,

in the sense that policies can survive only i they are approved by

the majority (or a substantial raction) o the electorate. The current

electorate might have inadequate inormation or might have absorbed

an ideology that does not serve its true interests or might subscribe

to a social ethos that prizes a kind o de jure individual reedom over


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a secure livelihood, but in the end, the electorate must acquiesce in

social policy in our advanced democracies. This is surely one great

accomplishment o the political revolutions that began in 1776 and

1789.The most important problem or the social science o inequality

today is understanding how electorates have come to acquiesce in

policies that increase inequality and reversing this acquiescence. To

an extent, revealing the logic o the micro mechanisms is one strategy

or doing so. A second strategy is the philosophical one, o arguing

that justice requires equalityin the past orty years, a lively debate

has taken place in political philosophy about exactly what kind o

and how much o that kind o equality is required.8 A third strategyis showing how the inequality-increasing policies that electorates

have agreed to have been aggressively advocated and proselytized by

the wealthy, in order to maintain their material privileges. This work

is mainly done by historians and some political scientists. A ourth

strategy is critiquing the social ethos o individualism and greed that

has grown immensely since 1980: The ethos to replace it is one o

solidarity. This strategy overlaps with the third one, as the nurtur-

ing o the individualistic ethos has been a conscious strategy o the

wealthy and perhaps its most powerul weapon. Finally, we must do

the research to challenge the view that interering with the incentives

the market provides necessarily reduces economic welare.

This list is o necessity incomplete, and I hope others will add to it.

We must become more imaginative academic entrepreneurs. We must

not be araid o being old-ashioned when we advocate a solidaristic

world view. It has become ashionable to say that the Enlightenment

is dead and that social democracy is pass. I militantly oppose these

views. The Enlightenment provided the theoretical basis or politi-

cal democracy and the importance o science. Social democracy is

the one great success o the solidaristic ethos that survived rom the

twentieth century to the twenty-rst. As the ne, recently deceased

historian Tony Judt wrote, to the extent that we orget this heritage,

ill ares the land.9

Those o us who are most concerned with inequality in academia


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Roemer

98 Ch ll /S t b O t b 2011

today ace a situation in which we must move rom describing the

phenomenon we study to guring out how to bring evidence to bear

against the ideology that sanctions it. Such an ideology has created

a monster that is capable o inficting truly disastrous consequenceson civilization. Because theory and ideas are our mtier, we have a

vital role to play.

Notes

1. In his magisterial bookA Theory o Justice (Cambridge: Harvard UniversityPress, 1971).

2. For a discussion o Rawlsian errors in constructing the veil o ignorance,

see J. Moreno-Ternero and J.E. Roemer, The Veil o Ignorance Violates Priority,Economics & Philosophy24 (2008): 23357.

3. Ronald Dworkin, What Is Equality? Part 1: Equality o Welare, Philosophy

& Public Aairs 10 (1981): 185246, and What Is Equality? Part 2: Equality o Re-

sources,Philosophy & Public Aairs 10: 283345.4. Stephen Ross, The Economic Theory o Agency: The Principals Problem,

American Economic Review 134 (1973): 13439.

5. For this tidbit, and an impressive history o right-wing think tanks in the

United States, see K. Phillips-Fein,Invisible Hands: The Making o the Conservative

Movement rom the New Deal to Reagan (New York: W.W. Norton, 2009).

6. Bloomberg, www.bloomberg.com/apps/news?pid=newsarchive&sid=aKGZkktzkAlA/.

7. Speech delivered at Madison Square Garden, October 31, 1936.

8. For a brie review o the philosophical discussion, see J. Roemer, Equality: Its

Justication, Nature, and Domain, in Oxord Handbook on Economic Inequality, ed.

W. Salverda, B. Nolan, and T. Smeeding (Oxord: Oxord University Press, 2010).

9. Tony Judt,Ill Fares the Land (New York: Penguin, 2010).

To order reprint s, call 1-800-352-2210; outside the United States, call 717-632-3535.

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