Danny ChaiI’ve said this about 10 times now, but at some point I really do plan to write a long entry about why I’m not a libertarian. But anyway, this Freakonomics guest post about income inequality is very enlightening.
In short, it claims that there are real, significant consequences of income inequality, and they exist regardless of absolute income levels. Among them: higher homicide rates and obesity (and thus, mortality rates). When the inequality is extreme, it is even correlated with lower economic growth rates.
As the post mentions, the economic libertarian argues that this inequality is unimportant, because in absolute terms, the poor are better off than they were 100 years ago. But it is important. Aside from the reasons mentioned, it seems to me that times of extreme inequality in history have preceded societal upheaval. Marx saw this effect and predicted a widespread proletariat revolution. He was wrong (somewhat) in forecasting a huge adoption of socialism. But he was right that inequality eventually leads to chaos.
On a smaller scale, I won’t get into details but there are compelling arguments (e.g. here) that the extreme income inequality that existed in the 1920s was a direct influence on the Great Depression. It’s actually interesting when you read about it; the economy basically became completely depending on upper class spending. When certain speculative investments by that class went bad, there was nothing to replace it. To me, it’s another argument against trickle down economics, which doesn’t even work.
This other interview in Freakonomics with, of all people, a primate expert is also fascinating, and it touches on the dangers of class separation as well. A snippet:
We did a study in which capuchin monkeys received either a grape or a piece of cucumber for a simple task.
If both monkeys got the same reward, there never was a problem. Grapes are by far preferred (as real primates, like us, they go for sugar content), but even if both received cucumber, they’d perform the task many times in a row.
However, if they received different rewards, the one who got the short end of the stick would begin to waver in its responses, and very soon start a rebellion by either refusing to perform the task or refusing to eat the cucumber.
This is an “irrational” response in the sense that if profit-maximizing is what life (and economics) is about, one should always take what one can get. Monkeys will always accept and eat a piece of cucumber whenever we give it to them, but apparently not when their partner is getting a better deal. In humans, this reaction is known as “inequity aversion.”
I actually don’t think the response is irrational at all, but related to the fact that in a cooperative system, one needs to watch what kind of investment one makes and what one gets in return. If your partners always ends up getting a greater share, this means that you’re being taken advantage of. So, the rational thing to do is withhold cooperation until the reward division improves.
This holds an important message for American society which is becoming less fair by the day.
The Gini-index (which measures income inequality) keeps rising and is now more in line with that of third-world countries than of other industrialized nations. If monkeys already have trouble accepting income inequality, you can imagine what it does to us. It creates great tensions within a society, and we know that tensions affect psychological and physical well-being. Some attribute the dismal health statistics of Americans (now #42 in the world’s longevity ranking) to the social frictions of an unfair society (see Richard Wilkinson, 2005: The Impact of Inequality).
As has been reported all over the place, economic inequality in the U.S. is now at the highest level it’s been since those aforementioned 1920s. From the Economist:
Figures collated by Emmanuel Saez, an economist at Berkeley, make the point starkly. In the 1990s, the incomes of the richest 1% of taxpayers went up 10% a year in real terms (see chart), while those of the other 99% grew at an average annual rate of 2.4%. Between 2002 and 2006 the richest 1% saw 11% annual real income growth: everyone else got less than 1%. Three-quarters of the gains from the Bush expansion went to 1% of taxpayers, who now receive a larger share of overall income than at any time since the 1920s.
Also, in the 2007 income, poverty, and health insurance figures, it shows that the current economic boom started in 2000 and peaked in 2007. And yet, median income in 2007 was lower than it was in 2000. Additionally, the poverty rate and percentage of Americans without health insurance was higher in 2007 and 2000.
Bush has complained that he doesn’t get enough credit for the economy, which has grown at a decent clip on his watch. Phil Gramm argued that we aren’t in a recession and that we are just a nation of whiners. They both miss the point. Bush doesn’t get credit, and people complain for the same reason: the vast majority of the gains in the past few years have gone to the very top, and the economic issues confronting people today inordinately affect those at the bottom.
The cause of inequality today is arguable (and worth arguing about). But since bad things happen to all of society when things are too unequal, it seems to me that it is in everyone’s self-interest, including the rich, to address this. There are many danger signs, and honestly, it makes me worry about the stability of American society.