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Why income inequality matters

See Part One of this series.

So we’ve established that there’s growing income inequality in the United States. The second question is: Does it matter?

This isn’t a question that’s well-answered in Paul Krugman’s “The Conscience of a Liberal.” He does a good job demonstrating that the inequality is growing, and he makes a reasonable case for why that’s happening—something that we’ll examine more closely in the next installment of this week’s series. And he talks a lot about pre-New Deal America (the Gilded Age, a time of extreme income inequality) being a time where the people on the low-end of the scale faced crushing poverty.

But Krugman doesn’t really make the case that the current growth of inequality is bad, so much as he takes it as a given. And while he laments the 1950s as a time when the middle class shared broadly in American prosperity, he seems more interested in seeing the country’s richest men and women get their comeuppance. He has, perhaps, not-bad reasons for that, but I’m not so much interested in keeping the elites reined in as in ensuring that the rest of Americans can fairly expect to provide for their families.

Can they or can’t they?

Relative to the rest of the world, they can. Here’s a chart that was posted last week in the New York Times’ Economix blog:

What’s notable about this chart is two things. First: America’s inequality is growing rapidly, but it’s still not quite as startling as the inequality in some emerging nations. (Although it is still massive, really massive, compared to other developed nations.) And relative to those emerging countries, America’s poorest workers are still doing quite well. Says the Times’ Catherine Rampell: “Yes, that’s right: America’s poorest are, as a group, about as rich as India’s richest. Kind of blows your mind, right?” The cost of living is higher here, of course, but it does suggest that poorer workers here have a better shot at clothing and feeding their families than people in much of the rest of the world. Not to suggest that it’s easy or fun.

(Compared to other developed nations, though, the poorest 10 percent is actually … poor, with a median income below the median income of the poorest 10 percent for that group of countries. Our richest 10 percent, however, blow away the richest decile of every other nation.)

If we grant that low-income American worker aren’t quite so impovershed by worldwide standards, though, there’s still reasons, I think, to be concerned about widening income inequality. Here’s a few.

* FAIRNESS:  Krugman writes: “The value of the output an average worker produces in an hour, even after you adjust for inflation, has risen almost 50 percent since 1973. Yet the growing concentration of income in the hands of a small minority has proceeded so rapidly that we’re not sure whether the typical American has gained anything from rising productivity.” I’ll risk sounding Marxist with this statement, I suppose, but it seems to me that workers who create more wealth ought to share in some of that as a reward for their increased productivity. They don’t.  There are reasons the market allocates more value to executives than to mere workers, and a disparity will never go away. But a system that provides no additional weath to people creating it risks a backlash.

* ECONOMIC AND SOCIETAL STABILITY: There’s an argument to be made that “the widening chasm between rich and poor” is partly responsible for the unrest in Egypt, and that only makes sense. We’ve seen it time and again throughout the history of the world: When the rich claim all the spoils and everybody else is left behind, everybody else often end up running out of patience. It’s a reason that Marxism had an appeal in the first place, and it’s part of the reason that America encouraged the creation of welfare states in Western Europe in the aftermath of World War II: Better to have a hybrid state of capitalism and social democracy than to let the Stalinists sweep in and take over everything. Now, of course, conservatives disdain the very system that was created as a bulwark against Communism by suggesting it’s akin to Communism. (Sigh.)

But there’s an example closer to home of the problems that can result from widening inequality: The financial collapse that nearly destroyed the American economy in 2008. The argument—which I find convincing—is that Americans had been conditioned to expect economic progress, so when their incomes started stagnating during the Reagan Era, they began to put more and more of their purchases on credit. This was particularly true in the housing market, where substantial savings disappeared as a mortgage requirement. People went heavily into unsustainable debt to buy their homes, and the country’s elites—in their bid for “financial innovation”—created ever more complex financial instruments to enable the system. Eventually, the bubble popped in a way that threatened the very foundations of the economy.* We’re all paying for that, still.

* One can blame workers for trying too hard to keep up with the Joneses, I suppose, but that’s what people do. In any case, we were all told that it was safe.

That’s bad on its own, but it also brings us back to the “fairness” point. While workers saw their houses disappear under a tidal wave of foreclosures, bankers who enabled the system were bailed out. Lots of them are still getting bonuses. Poorer Americans bear the risks, richer Americans reap the rewards.  

* DEMOCRACY: If the resentment caused by that disparity wasn’t enough to destabilize the American system, the disparity would still be a threat to democracy. Why? Because money is power, and the ability of the elites to leverage ever-greater sums of money to prod government into doing their bidding threatens the whole notion of citizenship in which every adult American has the ability to shape, to some extent, the actions of their government. There’s a real danger we’re becoming a plutocracy, a government by and for the rich. Last year’s Citizens United ruling by the Supreme Court has loosened whatever restraints were in place that kept the rich from overpowering the rest of us. It’s why we argue about the influence of George Soros and the Koch brothers. Even Alan Greenspan is concerned.

“Ever since America’s founding, our idea of ourselves has been that of a nation without sharp class distinctions—not a leveled society of perfect equality, but one in which the gap between the economic elite and the typical citizen isn’t an unbridgeable chasm,” Krugman writes. “High inequality, which has turned us into a nation with a much-weakened middle class, has a corrosive effect on social relations and politics, one that has become ever more apparent as American has moved deeper into a new Gilded Age.”

All this might be best left alone, I suppose, if any American could transcend their class by sharp thinking and hard work. But increasingly it’s the case that rich Americans stay rich and poor Americans stay poor. Krugman: “Mobility is highest in the Scandanavian countries, and most results suggest that mobility is lower in the United States than it is in France, Canada, and maybe even Britain. Not only don’t Americans have equal opportunity, opportunity is less equal here than elsewhere in the West.”

So here’s my conclusion: Income inequality in America matters. It is already have pernicious effects on our economy and political system. We haven’t been treated to Egypt-style instability, but we shouldn’t pretend it’s not possible here either. If current trends continue, in fact, we may face real problem as a society.

What is behind those trends? That’s the next installment.


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