Tuesday, March 16, 2021

Why Is Economic Inequality Bad For Society?

 ANAND [GIRIDHARADAS]: Should billionaires exist?

DJAFFAR [SCHALCHI]: In a well-regulated, well-managed, and thriving economy without monopolies, they wouldn’t. Wealth is like manure: spread it, and it makes everything grow; pile it up, and it stinks.


The first problem with gross economic inequality is that it is unjust. Whether you are trying to create a society that offers the greatest good to the greatest number (Utilitarianism), or designing a society such that you would choose to live in it as a member without knowing what your role in that society would be (Rawls), or even just a free society in which we have mutual benefit and self-interest rightly understood (Locke, Mill, et al), we have no reason to favor me over you simply because I have greater wealth, or because of who my parents happen to be, or any other random thing. As it should be with society, so it should be with the markets, which are structures within society.

Now, we might have reasons not to make everyone exactly equal. For example, economic growth tends to be greater when there are incentives for doing economically productive things. The enforcement or transaction costs might be very high. The benefits of corruptly evading these rules of equality would also grow very large.

What’s interesting is that these same costs show up at the other end of the economic distribution scale. If we have an incremental $1000 to incentivize someone to work harder to generate economic goods, we should not send it to a billionaire (who will not notice it), but to someone at the lower end of the income distribution (for whom it will make an enormous difference). If there are a few wealthy oligarchs and a lot of starving serfs, the oligarchs are going to have to hire a lot of guards and police to protect their estates. The Panama Papers showed trillions of wealth funneled through offshore shell corporations to avoid taxes.

The second problem with extreme inequality is that it is inefficient. For the reasons outlined above, it results in worse overall outcomes and in slower growth. In addition, the ability to claim all or even most of the gains to productivity can only result when there is unequal market power. As Schalchi says in the quote above, “ Wealth is like manure: spread it, and it makes everything grow; pile it up, and it stinks.” To have billionaires and paupers in the same society, you must have monopolies/oligopolies/cartels controlling large sectors of the economy, rather than having many small firms that perform slightly better or worse than one another, as in perfect competition or monopolistic competition (variegated production). Monopolies are inherently inefficient, creating deadweight loss by underproducing and overcharging relative to competitive companies. Many monopolies are also monopsonies, underpaying and underbuying labor and other inputs. All of this is just classic free market economics.

Third, the “trickle down” justification for giving tax cuts to the rich and corporations has failed. The LSE study linked below and summarized in the CBS article shows that across the OECD countries, tax cuts for the wealthy have produced zero benefit.

Beginning in 1974 and accelerating in 1980, the relationship between productivity and median household income broke down, coincident with the advent of large tax cuts for the wealthy and the decline of labor power. All of the gains gravitated to the top of the income distribution.

Lower taxes did not produce the boost to growth rates that was promised, or any additional growth at all for most people. The benefit was eaten up by the shareholding class — that’s me, not you.

Looking at the Rand study linked below, you can find out what your income would be, if the United States were only as unequal in 2018 as it was in 1974:

Would you have been better off? Almost certainly. Calculate how much our gross wealth inequality costs your family in particular every year, by looking at that counterfactual column and subtracting your income for 2018.

Would you be better off going forward if we took steps to reverse the concentration of wealth at the very top, by making government policies lift up the average and below? Almost certainly.

So, what’s your argument in favor of the current system and against a more equitable one again?