Beneficial inequality and cost-increasing innovations...?

At the risk of turning Noahpinion into an econ blog...a second economics-related post in a row!

Gary Becker writes in AEI's online magazine American.com that increasing inequality may in fact be a good thing. The reason? Rising inequality reflects the greater importance of high-level skills (or "human capital" in econ-speak) which means that college-educated workers earn more compared to non-college-educated workers. Why is this good? Because higher returns to human capital are an indicator of higher productivity, says Becker.

In plain English, this means that we're coming up with a lot of technology that's hard to use - basically, computers - as opposed to hard-to-invent-but-easy-to-use stuff like tractors and assembly lines that we invented in days of yore. This means that smarter (or better-educated) people are suddenly worth more...but Joe Shmo isn't, because he can't use computers.

So do I agree that this is a good thing? Yes, the high-tech age does increase productivity - we're using the previously untapped potential of smart folks. And that is good because it grows the economy and raises living standards for everyone. But it still does create inequality. And plenty of people think that inequality is a bad thing in and of itself, because it makes society unfair, or because it makes lower-earning people angry (I happen to believe the latter). Inequality is a side effect of growth (an "externality" in econ-speak) that must be dealt with.

Interestingly, Becker agrees, and his proposed solution to the problem is the classic liberal one - improve education for the poor. If we can give poorer people more "human capital," they'll catch up somewhat with the richer people. Becker does mention a traditional conservative caveat - that lower-class families, not just schools, need shaping up - but I think that's a truth that most liberals are prepared to live with. Fix the schools, help people stabilize their family lives, and inequality goes down while growth goes up. Sure, sign me up!


On a completely different note, and while I'm on the subject of economics, I spied an interesting post on Mankiw's blog today. The topic is saving Medicare. Mankiw quotes a Wall Street Journal article that says: "[T]he way health care is produced must fundamentally be changed, replacing cost-increasing innovations with cost-reducing ones."

Excuse me? "Cost-increasing innovations"? Doesn't basic economic theory say that all innovations decrease costs? If an expensive new MRI machine gets invented, that doesn't mean I have to use it. I could just keep using whatever people used before MRIs. And since some people would start using MRIs, the number of people using the older technologies would go down, reducing demand for that older technology and therefore reducing my costs. Now maybe this isn't the way it works in real life, but that's the way things should work in a well-designed system. I'm certain that stifling innovation just to reduce medical bills is, in the long run, a bad move...