Washington, DC – The basic facts of inequality are beyond dispute: The top 1 per cent sucked in more than 42 per cent of the gains of US economic growth over the last three decades, with the bottom 90 per cent sharing less than 37 per cent. This means that most of the population has seen little improvement in living standards over this period in spite of the great breakthroughs in technology and increases in productivity.
This background provides the fuel of the Occupy Wall Street movement and its sympathisers around the country. However, there is a counter-story that the media continually bombards us with. This counter-story has a hero, Steve Jobs.
The counter-story is that under Jobs’ leadership, Apple has produced one breakthrough after another, revolutionising the way that we use computers, listen to music, make phone calls and live our lives. Jobs died a very wealthy man because of his success in bringing great products to the market.
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The pushers of the counter-story ask us if we would be happier if Steve Jobs had not been rich, but we didn’t have the iPod, the iPad, the iPhone and all the other products developed by Jobs and Apple over the last three decades. The moral of this counter-story is to shut up and eat your inequality.
This counter-story might provide good rhetoric, but it suffers from bad logic. The question is not whether we are better off with Steve Jobs getting very rich and all the products that Apple developed, or having Steve Jobs be poor and not having these products; the question is whether it was necessary for Jobs to get quite so rich in order to get these products.
The difference is the concept of economic rent. Rent is the additional money that Jobs collected beyond what would have been needed to get him to innovate great products. This rent was likely substantial in Jobs’ case and is probably even higher for other members of the 1 per cent.
To see the logic of this issue, let’s imagine that firefighters were paid in a somewhat different manner. Instead of paying them a fixed monthly wage, suppose that fire crews would show up at the scene of the fire and then negotiate their payment with the property owner.
In this payment system it is likely that firefighters, or at least some of them, would become very rich. Imagine that a crew showed up at the burning home of a billionaire whose family was trapped inside her house. No doubt she would be willing to give her fortune to the fire crew to save her family.
It could even be extremely lucrative to show up at the burning homes of middle-income families. After all, getting two or three hundred thousand dollars for a couple of hours work (albeit extremely dangerous work) is pretty good pay.
Of course, we don’t pay our firefighters this way for the obvious reason that it would allow them to collect enormous rents. Firefighters generally get decent salaries, but none of them are pocketing millions of dollars a year.
But if we did pay our firefighters by negotiating million-dollar deals at the scene of the fire, the counter-story told by the defenders of the 1 per cent would apply perfectly. After all, aren’t we better off having the firefighters get rich and having our families be saved than if the firefighters remained poor and our families were killed?
But that is not the question that serious economists ask. Serious economists ask whether we could get the same effort from the Steve Jobs of the world under different payment schemes. There is good reason to think this is the case for many members of the 1 per cent.
Let’s start with the situation that is most analogous to the firefighters negotiating payment on the lawn of the burning house. Suppose we paid for the research and development of prescription drugs upfront rather than by giving drug companies patent monopolies. As a result of these monopolies, drugs that would sell for $5 per prescription in a free market sell for hundreds or even thousands of dollars. The savings from this switch could potentially save us more than $200bn a year and provide us with better health care.
In some cases, huge rents are not associated with anything of obvious value. For example, when Goldman Sachs trader Fabrice Tourre (also known as “Fabulous Fab”) designed a guaranteed-to-fail collateralised debt obligation and foisted it off on unsuspecting clients, it is not clear what productive purpose was being served. If Mr Tourre was deprived of his seven- or eight-figure bonus, it doesn’t seem like the rest of us would suffer in any obvious way. Much of the financial sector has this character, which is why many economists are supportive of financial speculation taxes.
There are many other areas where it is possible to identify large rents that allow the 1 per cent to profit at the expense of the rest of us. Honest economists would be looking to design mechanisms that whittle down the size of these rents so that the bulk of the population could enjoy more of the benefits of economic growth. However, if most economists are employed by rich firefighters, then the experts will tell us that the alternative is to watch our loved ones burn to death.
Dean Baker is co-director of the Centre for Economic and Policy Research, based in Washington, DC. He is the author of several books, including Plunder & Blunder: The Rise and Fall of the Bubble Economy, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich, Get Richer and The United States Since 1980 and The End of Loser Liberalism: Making Markets Progressive.