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Economic inequality in Red Sox Nation
The editors of the Wall Street Journal opinion page may have their doubts, but Federal Reserve chief Ben Bernanke sounds convinced that economic inequality really is on the rise. In this Feb. 6 speech, Bernanke lays out the evidence and also considers some possible explanations. Given the huge economic changes he describes--the rapid pace of technological change, the increasing rewards for skill and education--it would be shocking if inequality hadn't increased. Bernanke also discusses another important factor, the "superstar" effect. Here's Bernanke:
...some advances, such as those that have swept the communications industry, may have contributed to the rise of so-called "superstars"--a small number of the most-gifted individuals in each field who are now better able to apply their talents in what has increasingly become a global marketplace.... For example, two decades ago, the highest-paid player for the Boston Red Sox baseball team (and in the American League), Jim Rice, earned (in inflation-adjusted terms) just over $3 million. In 2004, the highest-paid player on the Red Sox (and in all of major-league baseball) was Manny Ramirez, who received $22.5 million for the season. The number of fans who can fit into Fenway Park has not increased much since Jim Rice's day. But presumably the Red Sox owners believed that Ramirez's higher salary was justified by the increases in broadcast and merchandising revenues he might generate as a result of the confluence of new distribution channels (such as Internet-based broadcasts of games) and a larger and wealthier potential global audience. The earnings potentials of superstar entertainers, investment bankers, lawyers, and various other professionals have likewise risen sharply as technological innovations and globalization have helped them leverage their talents over a wider sphere.
But the "superstar" effect may not only create bigger winners. There can also be losers, a point made by economists Robert Frank and Philip Cook in their work on "winner take all" markets. Here's an example: When I was a kid, my dad worked for a savings and loan in a small Illinois city. In those days, banks and thrifts were a 100% local business, thanks in part to strict banking regulations as well as obvious technological limits. (You had to actually walk into to your own bank to get your money.) So there were five local banks in my little town, which meant there were five bank CEOs and maybe 50 bank officers living there too. Today, all but one of those banks has been merged into a regional or national bank. Now my hometown has one bank CEO, four branch managers, and a bunch of tellers.

I don't want to sound too nostalgic about some long, lost Bedford Falls bulding and loan. On balance, the creation of a national market for banks has probably been good for the economy, and according to the FDIC the number of banking jobs has actually risen over the past several years even as the number of banks has declined. This isn't a zero sum game. But it's a fact that if your life's ambition is to become the number-one guy at a bank, this has become harder--even as the rewards for making it have become even greater. The same is true if your goal is to run a hardware store, a book shop, or a local newspaper. Increasingly, you can either be Bob Nardelli, or be the guy Bob Nardelli runs out of business.

Bernanke ends his speech on inequality be calling for greater investment in education. Can't argue with him there. But I don't see education doing much to counter the "superstar" effect. There's no shortage of skilled bankers or booksellers in America, but there will always be a shortage of room at the top.
Posted by Pat Regnier 5:16 PM 2 Comments comment | Add a Comment

I think Bernanke misses a really important point which is that as the rich grow richer, so does their political influence, which creates something of a feedback loop. Their political influence buys them favorable treatment with broadcast licenses, estate taxation, overzealous intellectual property protection, no-bid government contracts, and real estate subsidies. Thus the opportunities expand for the accumuluation of wealth that is not so much a measure of economic worth but political clout and economic deadweight loss. It's not about the baseball platers' salaries, it's about the people paying them.
Posted By honestpartisan, Brooklyn, New York : 5:48 PM  

The reason health care and everything else is expensive is because of the American way of life. People and businesses are going to charge what they can get away with - not what is reasonable. The American way is to gouge the other guy for as much as you can get. Then if there is enough of an outcry the gov't will step in and create such a beaurocracy that nobody will be able to figure out what is really going on. Then the businesses start charging the gov't and their consumers exhorbitant prices right in front of the gov't beaurocracy and the gov't won't care because the politicians are getting kickbacks. This is the American way of life - so get used to it.
Posted By keith, austin, tx : 9:36 AM  

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