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. A 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 to 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.

With the pandemic, living in a big city suddenly became less important. More technology firms are forming outside of Silicon Valley than before, in places like Salt Lake City. More financial jobs can be found outside of New York, in Charlotte or cities in Texas. Technology has made more remote work possible.

The dispersion of opportunity may have been brewing for decades. AOL co-founder Steve Case has argued that as technology becomes more pervasive, there is less need to locate in a big tech hub. The new premium won’t be on just having technical skills, but on knowing how to apply those skills to specific problems, elevating the importance of local knowledge. For example, helping farmers better use technology to sell in global markets. In this stage of the cycle, the gains of productivity and innovation are more evenly spread, to the farmer, the local tech entrepreneur, and even the person who serves them coffee.

Artificial intelligence may speed up this process. It is expected to replace some of the skilled labor that commanded a wage premium and may make knowledge, and abilities like coding, more widely available. Sometimes new technology benefits less skilled labor later in the innovation cycle.

Policy had a role in the past and will in the present when it comes to shaping inequality. But the policies the government chooses can make inequality better or worse. In the early 20th century, the Work Progress Administration program, for example, offered people guaranteed jobs but ultimately resulted in lower earnings.

Aspects of Bidenomics also risk delaying progress. High spending can be inflationary, which takes a bigger bite out of middle-class consumption and wealth compared with richer households. Industrial policy risks diverting capital and talent from the sorts of businesses springing up all over the country and into less fruitful government boondoggles.

Left to operate efficiently, the market does some of the work of bridging inequality, and it does so without sacrificing growth.

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”