EPI Journal

The Economy IS a Values Issue

From the EPI Journal, Winter 2005

The discussion of the 2004 presidential election is just the most recent reminder of a curiosity in American politics: “values” issues are always social issues but never economic ones. Yet how the disadvantaged among us are treated is clearly a reflection of who we are as a people. How workers are treated on the job—their safety, their working conditions, their remuneration—also speaks volumes about our values as a nation. How we care for the elderly and the disabled, our response to child poverty, and our compassion for the less fortunate are measures of our society’s values, and they are social problems that can be addressed by economic policy.

Of course, economists contend that economics is a science. “Tell me what you want to do and I will tell you the best way to do it” is the economist’s usual stance. (Or, as one economist remarked, his role is to say, “Tell me what you want and I’ll tell you why you can’t have it.”) Clearly, this framework leaves no room for values. The underlying assumption is that unfettered markets, free and unrestricted by government or private institutions such as unions, produce the best outcomes, except in a few very specific situations: externalities (such as pollution imposed on society but not reflected in producers’ costs), monopolies, and other “market failure” cases from Econ 101.Some economists, such as Martin Feldstein (leader of the premier economic research organization, the National Bureau of Economic Research) have contended that inequality is not a proper concern for economists, who should be focused only on determining how to maximize the output of goods and services.

It is important to examine whether unfettered markets are the appropriate means of organizing our economy, both in terms of the values we seek to see reflected in our society and for achieving our economic goals. One’s view of the proper role of individuals, institutions, and government in the economy is determined, in large part, by one’s assessment of the merits of unfettered markets. The U.S. economic policy debate is in fact dominated by the assumption that unfettered markets work best, a view that’s applied to our domestic economy and to that of other countries through international financial institutions that the United States controls.

Yet there is plenty of room for applying values to the economy: an economy can be structured in many different ways and still achieve the same amount of efficiency, i.e., produce the same outputs with the same inputs. This was the conclusion of a book that Rebecca Blank edited for the National Bureau of Economic Research (NBER) a decade ago. Major European countries, for example, have a set of policies that are far different from ours: a strong social insurance system, government provision of health care, higher taxes, and far less inequality. Yet these countries have seen faster productivity growth—the gain in economic efficiency—than the United States for most of the last four decades. At first, this trend was mainly a process of “catching up” to the United States, the technological leader. However, many of these countries have now surpassed the United States in productivity.

It seems impolite in America to mention this, but we live in a class society. There are various groups differentiated by their income and power, and the positions of these groups are strongly maintained over time. It’s not that there isn’t any upward and downward mobility; it’s just that there’s not enough of it to make having a favorable, or unfavorable, class position seem like a temporary arrangement.

There has been a dramatic upward shift in income over the last few decades, coupled with a growing gap between those at the very top and those at the bottom of the income scale. In fact, inequality has grown far more in the United States over the last three decades than at any time in the last century, and far more than in any other advanced country.

Using some data from NBER researchers Thomas Pikkety and Emanuel Saez, it is possible to illustrate how large both the income redistribution and the scale of inequality in America have become:

  • The top 1% of families earned 9.3% of all income in 1980. By 2000, this income share had increased to 19.6%. Correspondingly, the income share of the bottom 90% declined from 66% to 53.9%. There were small gains (1.9 percentage points) in the income shares of the remaining group, the 90th to 99th percentiles.
  • From 1980 to 2000, the incomes of the upper 1% increased 179%, while those of the bottom 90% increased by only 8%.
  • In 1970, the ratio of top executive earnings to that of the average worker was 38.6 to 1. This ratio increased to 101.1 by 1980, to 222 by 1990, and to 1,046 in 1999.

Because of this inequality, low-income families in the United States are not better off than low-income families in some countries that have lower incomes than in the United States. And even though we think of ourselves as a mobile society compared with Europe, recent research indicates that the United States has less class mobility than previously believed, and less than in European countries. It is also the case that class mobility has not increased over the last few decades.

Even if income were distributed according to merit or to the value of one’s skills, we would still need to care for society’s most disadvantaged and guarantee them a decent standard of living. Moreover, children do not start off with the same amount of resources—monetary assets, or family “social capital”—and a child’s economic outcome depends at least as much on background as on effort or character.

The social class you belong to really matters—it determines your health, how long you live, where you live, your exposure to crime, your success in school, and the likely success of your children. A task force of the American Political Science Association has recently concluded that inequality in income and resources translates into inequalities in participation and effectiveness in our democracy.

This inequality and how it is addressed in the United States is a clear example of the intersection of economics and values issues. Economic policy is just as much of a “values issue” as any of those that are more frequently discussed. Moreover, the teachings of the various faiths have much to say on economic matters. I daresay that there’s no reason to believe that “free markets” provide us with the type of society our faiths guide us to have in terms of the lives of the poor, the treatment of workers, and the solidarity of our communities.

This essay appeared in different form as “Dismal Scientists” in The American Prospect Online, May 27, 2004. The article draws on Is the Market Moral? by Rebecca Blank and William McGurn, published by the Brookings Institution and the Pew Forum on Religion and Public Life.

For additional information on the link between values and the economy, see Viewpoints on www.epinet.org to read a speech by Lawrence Mishel entitled Unfettered markets, income inequality, and religious values given at the Pew/Brookings Institution Forum on Religion and Public Life on May 19, 2004.

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