Inequality in the United States has sharply increased in the last few decades. If left unaddressed, this growing gap between the rich and the rest threatens our economic competitiveness, social peace and even democracy itself.
Over the last 40 years, the rising economic tide has not lifted all boats. Although GDP has grown significantly, it has mostly benefited the “yachts” in our increasingly “Winner Take All” economy. Between 1979 and 2005, the mean after-tax income for the top 1 percent of the U.S. population increased by 176 percent, compared to a 6 percent rise for the bottom 20 percent. Even within the top 10 percent, inequality also grew as gains were heavily concentrated amongst the very top 1 percent. At the very top, the rich have pulled away from the rest. In 2007, the top 10 percent of US earners accounted for 49.7 percent of total wages while the ratio between CEO and average worker wages grew from 42 in 1980 – to 319 in 2008. Why does this matter?
One, high inequality impedes mobility. As the rich and poor become more different, it becomes harder to change social classes. This can happen in many ways. Increasing wealth protects incompetent children. The quality differences in locally-funded public schools get even larger, giving the rich bigger advantages while the poor languish in substandard institutions. Differing ability to pay pushes up costs of higher education at the best schools. Investment in the public commons is cut in favor of spending on private facilities. The data show how much class mobility in the United States has fallen as inequality rose since the 1970s. According to the Economic Policy Institute, 36 percent of those in the second-poorest 20 percent stayed there in the 1990s, compared with 28 percent in the 1970s and 32 percent in the 1980s. Another study showed that poor children have only a one percent chance of reaching the top five percent of the income distribution. According to numerous studies, U.S. intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. This is not self-reliance. It’s our parents that count.
Two, high inequality undermines productivity by making weakening teamwork. If the rewards go disproportionately to the few, the resentments and divisions can cut productivity. According to Richard Wilkinson, higher inequality increases stresses and insecurities related to social status differences and greatly worsen status competition. This worsens the rat race and sharply increases psychological damage done to those at the bottom of the pyramid by shaming them. A workforce made of the anxious and hyper-competitive will have difficulties get people to cooperate. This weakens competitiveness since knowledge and individual contributions cannot always be isolated and codified. In the words of Thorsten Veblen: “The isolated individual is not a productive agent. . . .There can be no production without technical knowledge; hence no accumulation and no wealth to be owned, in severalty or otherwise. And there is no technical knowledge apart from an industrial community.”
Three, high inequality increases violence. A study by Eric Uslaner and Mitchell Brown showed a high correlation between social capital, the amount of trust in society and income equality. According to Wilkinson, 35 or 40 percent of people in the most unequal U.S. states feel they cannot trust other people, compared to only 10 percent in the more equal states. High inequality is corrosive since it is seen as unfair, especially combined with low mobility. This can have a deadly backlash. There are more than fifty studies showing a correlation between violence and income differences. Wilkinson shows that the most unequal parts of America and Canada have the highest crime rates. Another 2001 study by Martin Daly found that among U.S. states and Canadian Provinces there is a tenfold difference in homicide rates related to inequality. They estimated that about half of all variation in murder rates in each province or state can be accounted for by differences in inequality. International studies also point the same way. In general, countries with high inequality also have very high crime. In Brazil, Haiti, and South Africa, where inequality is some of the world’s highest, crime is fueled by a perception that the poor have no legitimate path to success. Crime is not just the victims’ problem. High crime in Latin America has been blamed for cutting incomes by 14 percent because it cuts growth, income and investment in favor of more spending on protecting people and property.
Four, high inequality destroys lives. In addition to crime, high inequality is also associated with higher drug abuse, more alcoholism, domestic violence, obesity, divorce, bad public health and other ills. In addition to being terrible for people, these problems are very costly economically. A Washington Post article illustrates what we all already pay when peoples’ lives self-destruct: “Alcohol-related costs are $128 billion a year (equal to 50¢ a drink), highway accidents cost $112 billion (or $575 a vehicle)… drug abuse is $122 billion, violent crime costs $50 billion, gunshot injuries cost $39.7 billion and tobacco costs $94.4 billion for health care costs alone.” Worsening inequality will raise all of these costs.
Finally, high inequality is dangerous for democracy because it gives the rich too much say in politics and polarizes the electorate. Without accountability to a wider group of voters, inequality can result in system unable to respond to pressing political, social, and economic problems. Instead of serving the middle, it will serve the wealthy, leading to alienation – which will either result in disengagement or violence. While anger can take the form of crime or self-destruction, it can also fuel political extremism. Whether it’s called Communism, fundamentalism, Fascism, regional chauvinism or racism, it’s all bad. Extremism and high crime can also result in a vicious circle of bad governments. For example, in some parts of Latin America these problems result in a cycle from “get tough” elite-controlled dictatorships to ineffectual democracies to populist dictatorships – and then back to elite-controlled dictatorships or weak democracies. Past failures to give people hope have rolled back democracy in Venezuela, Nicaragua and Bolivia. Significantly, democracy is healthier in more equal places such Chile, Costa Rica and Uruguay. High inequality weakens democracy because it creates a society divided between nervous people living in gated communities and the angry masses.
In modern economy where competition, technological change and international trade are increasing the speed of “creative destruction”, it’s important to mitigate increasing differences in wealth. High inequality undermines equality of opportunity and social mobility, saps competitiveness, increases violence, reduces trust, fuels self-destructive behavior and while weakening democracy. All of this makes wild capitalism’s world of “public squalor and private opulence” unsustainable – it will either force a correction to a more just system, lead to chaos or result in a defensive crackdown by the elites. This threat is why progressive, liberal and social democratic politicians have tried to reduce the market system’s sharp edges. Contrary to libertarian or conservative thinking, liberalism is not the enemy of capitalism. It is its savior.
None of this means that there cannot be too much equality. This can also create serious problems. When there is too little to be gained by working hard and investing, there is a danger that initiative will die and talent will flee. While this is not a problem in the United States now, this is an issue in parts of the European Union today. Like for many other things, there is an optimum range for inequality in the middle.
To cut excessive inequality, the government needs to support equal opportunity while reducing the influence of money on policy. The realistic hope of advancement gives people hope and helps to ensure political responsiveness by building a stable middle class. The recent expansion of health insurance in the United States was a huge step forward, but it’s not enough. Other important changes include improving public services in poor areas (especially education), increasing access to higher education and job training and raising taxes on the rich. I’ll make the case for this next week.