Breaking the Bank: Why Income Inequality Matters

piggybankThis week the Mother Jones website ran an article entitled "It's the inequality, Stupid" that used graphs and charts based on government data to illustrate the growing inequality between the wealthiest Americans (roughly the top 1%) and the rest of us. Perhaps most telling is their graphic illustration which contrasts the likelihood that the average American will be a millionaire (1 in 22) with the likelihood that a member of congress will be a millionaire (nearly 1 in 2). In fact, the median net worth for congressional members is roughly seven-and-a-half times the median income of the average American.

How can our congressional members represent average Americans, when on practice they look nothing like them (and that's without tackling the gender issue)?

Similarly, last fall the writer Timothy Noah of Slate ran a ten part series on inequality in America that includes this uniquely startling line:

But according to the Central Intelligence Agency (whose patriotism I hesitate to question), income distribution in the United States is more unequal than in Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Argentina, and Ecuador. Income inequality is actually declining in Latin America even as it continues to increase in the United States.

The numbers are pretty grim. A 2007 MIT working paper titled "Inequality and Institutions in 20th Century America" shows that from 1980 to 2005 of the total increase in American's income - 80 percent of that went to the top one percent. In fact according to CNN 10% of Americans control half of the nations worth, while the top 0.1% control 10% of the nation’s wealth.

And yet, despite the focus on the growing economic rift between the wealthiest Americans and the majority of Americans, there isn’t as much attention paid to why we should care. Why does income inequality matter to sustainable development?

First, some income inequality isn’t inherently bad - it’s the driving mechanism of our society. If doctors, for example, didn’t earn more than say real estate brokers (who require less education), there would be less of an incentive for doctors to take on the years of schooling (and debt) that it requires to be a doctor. What’s problematic, then, is the scale of the inequality. Large income inequalities:

Breed corruption - especially in democracies where wealth and political power are often more easily exchange. Furthermore, as the wealthy get richer and increase political influence they can support policies that make themselves wealthier at the expense of others (ahem, doesn’t that seem to be the case with much of the legislation currently on the block right now?).

Limits social mobility. In fact despite our Horatio Alger mythos of people pulling themselves up from the bootstraps, the United States is the least socially mobile country in the industrialized world. And when people do move between the classes, that direction is generally down - not up. The class you are born into, or the one below it, is the one in which you are most likely going to live and die.

Breeds resentment. Studies have shown, for example, that when inequality increases because the people at the top are getting more money, even under conditions where the economy is expanding, those at the bottom don’t experience enough increase (if any) in their incomes to compensate for the fact that their share of the economy is decreasing. People want a fair system and a system in which there are large inequalities doesn’t feel fair. Trying to convince people that it is fair is pointless, first, because in most cases where there are large income inequalities it’s a result of policies that allow such to exist (for example giving large corporations massive tax breaks and not extending those same breaks to small businesses). In other words, large inequalities are often the result of an ‘unfair’ system. What’s more problematic, is that in these circumstances,  sometimes the people erupt with violence to fix it: see Latin America. Large income inequalities are anathema to social stability.

One could argue that large economic inequalities was worth it if it provided economic or social benefits. Except that it doesn't. Large economic inequalities:

Hurt growth. Although there are problems with the economic paradigm of perpetual economic growth, if you’re behind the idea that growth is good, then economic inequality is bad for growth. In fact, argues Professor Stephen Klasen in a 2008 piece in the Review of Political Economy, economies with large income inequalities are less economically efficient. As the Slate article points out, countries such as Germany who have managed to grow their economies during the last economic expansion without also expanding their income inequalities are the nations that are faring best in the recovery.

It may be nice for the individual to be mega rich - but it’s hurting the rest of us.

Photo Credit: Angela Chan