Tuesday, December 22, 2015

My Answer to the Question: 90% of the wealth goes to top 1%. Is that good for the country?

Over on Quora, someone wanted to know whether high levels of inequality are good for the country. Here's my answer:
A High Level of Economic Inequality is  Economically Inefficient
If we were talking about a microeconomic market where there was extreme market concentration, such that one company either represented 90% of the supply or 90% of the demand, we would have no problem saying that this was a near-monopoly situation (in the case of supply) or near-monopsony (for demand), and that this was undesirable. A monopoly causes high prices in the market, a smaller market overall, and a social deadweight loss from all of the lost transactions that would have benefitted both buyers and sellers. These are all symptoms of a market disease or an economic dysfunction.
Extreme disparity in income and wealth is an economic dysfunction that produces poor results for the economy as a whole. It results in labor resources that are underpaid and underemployed, oversaving by the 1%, underinvestment in public assets, and anemic growth. Growth is anemic for several reasons: 1) the average consumer is too budget constrained to reach optimal choices and not sufficiently incentivized to work any harder, and 2) the consumers who are part of the wealth-holding class become increasingly harried due to the increasing slope of the wealth curve. In other words, if you are poor, you can't afford the necessities of a good life, and also can't improve your life by working more or more effectively, you aren't an efficient participant in the economy, so the economy will tend to shrink or stagnate. If you are rich, you will look to your next door neighbor, who is twice as rich as you, and you will feel poor; you will then look at your other neighbor, who fell on hard times and who is now half as rich as they once were. Looking at these two things, you will spend more and more of your time worrying about what will befall you tomorrow. Instead of being an efficient participant in the economy, you will either begin making unwise gambles to try to catch up to your successful neighbor, or become very thrifty and risk averse to avoid the fate of your unsuccessful neighbor. You will, like the budget-constrained worker, be an inefficient part of the economy, and both you and society will suffer a loss for it. The economy, lacking the driving force of both rich and poor, will stagnate or shrink.
A High Level of Economic Inequality is Unethical and Undesirable
The arguments in favor of gross economic inequality fall into three groups: 1) utilitarian arguments that arrangements leading to inequality produces positive results relative to any other arrangement, 2) arguments that some abstract good, such as economic freedom, are so valuable as to outweigh the negatives, and 3) arguments from market theodicy.
With regard to argument (1), there is evidence that some degree of inequality is healthy, because it offers incentives to compete economically, to be financially prudent and to work hard. While society might value everyone equally, and therefore try to offer a fair and level playing field, it doesn't value equality to the exclusion of any other abstract good, and the cost of creating and enforcing complete equality is as impractical and undesirable as creating and enforcing complete inequality (where one person controls all assets, and everyone else is a serf or slave). For these reasons, mixed market economies are favored on the grounds of openness, fairness, freedom, growth, happiness and flexibility, among other abstract values. We tolerate mild inequality of outcomes because the millionaire's success helps make the beggar's life better, and because stamping out mild inequality would be very, very costly relative to the benefit.
To justify gross inequality in this framework, we would have to believe that the social value of an additional dollar's worth of happiness is greater for the millionaire than for the beggar. The more you have, the happier you are to have more, and the happier we should be to give it to you. If this is true for wealth, then wealth is the only known material good for which it is true. This is nonsense.
With regard to argument (2), if we are unwilling to grant equality uncontested priority over all the other abstract goods, then we should also be skeptical that freedom can be an uncontested, singular value. Maximizing economic freedom at all costs leads to unconscionable results, just as does maximizing economic equality.
Instead, societies have a plurality of values, a plurality of abstract goods in tension with one another, and just like physical goods, it's necessary to balance them and arrive at the best possible basket of goods under changing conditions.
As for argument (3), that the market is somehow a perfect moral judge, this is equally foolish. As Mark Twain observed, if God seeks to punish us with thunderbolts in this life, then His aim must be very poor indeed, given the distribution of lightning strikes. The market is a wonderful tool and a servant, but a terrible master. Its thunderbolts (good and bad) are no better distributed than the lightning.
In conclusion: No, it's not healthy for the economy or the country to have extreme inequality.

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