Is inequality turning around on its own?
A Biden administration official recently described the philosophy of Bidenomics as caring less about the growth rate of the economy than about growth being widely shared. The need for more muscular intervention, at the expense of growth, comes from the assumption that explosive inequality is inevitable in an unchecked market economy. That may not be true. Depending on the cause, wealth disparities can self-correct. Efforts to interfere with this process may simply prolong extreme inequality.
Some inequality will always be present in a market economy, but excessive imbalances come in waves. New technology benefits the entrepreneurs best able, or lucky enough, to capitalize on it and do so in a big way first. Those who benefit become very rich. People whose jobs were based on the old technology benefit much less or become poorer. But the extremity does not last. Eventually, the technology is diffused throughout the economy. It is imitated and improved upon by others and the economic benefits are more widely shared. This is also true of globalization. Globalization increases the gains of entrepreneurship as access to new markets makes some people wealthy. But eventually, people in foreign markets build on the innovation and take some of the profits for themselves.
The last period of extreme inequality and concentrated market power was during the Gilded Age. Government intervention, world wars, the Depression, and empowering labor equalized the economy. But the market also played a role. The new innovations of the time eventually spread, enabling more people to participate in the growth that ensued, improving their quality of life. Things like electricity and telephones, and cheaper, more efficient ways to make steel created opportunities for more workers with different skills. There is reason to believe that the market will play an even bigger role in equalizing the technology-driven economy of today.
Early evidence suggests the tide is already turning. A notable trend to emerge since the pandemic is more educated and ambitious people moving to smaller cities across the country. This could be the start of an important economic shift. One reason inequality exploded in recent years is that there were huge rewards for skilled labor working for companies best able to capitalize on new technology or offer services to those innovative companies. It was important for workers and firms to be close to the center of talent, to good programmers, or people with financial expertise, which created synergies and valuable networks.
The firms that paid big tended to be in places like New York, San Francisco, or Boston. But the high cost of living in these cities shut many out from the benefits of the tech economy, contributing to inequality.
