We know the numbers are bad. We know the fabled 1 percent have benefited from the economy over the past 30 plus years far more than has the rest of the populace. We have heard the outrage and the calls for fairness. But we have seen little or no reaction. Politics havent changed much anywhere. The revolutions in the street have not materialized, at least in the affluence developed countries.
So there has been much head-scratching, soul searching and navel contemplating about why the people so obviously
disadvantaged by this state of affairs appear so supine in the face of their increasing deprivation. Some believe this because the many have given up hope. Others posit that they fear to lose what little they have. Still others believe there is widespread acceptance that the deck is stacked against them and that they are powerless to change it.
But it may well be that no convincing argument has yet emerged as to how this affects people personally. As economists are wont to ask, where is the harm?
The answer may lie in the steady diminution of opportunity. As the following article explains, unfair systems tend to reinforce their tendencies because those who are benefiting become ever more fearful of losing their advantages. The result, over time, is that productivity declines reducing the capacity for competitive advantage in a global economy. Furthermore, those economies most likely to experience extreme inequality are also those most dependent on the impetus of consumer purchases to drive growth. As consumers' income stagnates or falls, the ability of those economies to regenerate wealth declines. In effect, structurally unequal societies within democratic systems are committing slow motion suicide.JL
Tim Harford comments in the Financial Times:
I
set out two reasons why we might care about inequality: an unfair process or a
harmful outcome. But what really should concern us is that the two reasons are
not actually distinct after all. The harmful outcome and the unfair process feed
each other.
When the world’s richest
countries were booming, few people worried overmuch that the top 1 per cent were
enjoying an ever-growing share of that prosperity. In the wake of a depression
in the US, a fiscal chasm in the UK and an existential
crisis in the eurozone – and
the shaming of the world’s bankers – worrying about inequality is no longer the
preserve of the far left.
There should be no doubt about the facts: the income share
of the top 1 per cent has roughly doubled in the US since the early 1970s, and
is now about 20 per cent. Much the same trend can be seen in Australia, Canada
and the UK – although in each case the income share of the top 1 per cent is
smaller. In France, Germany and Japan there seems to be no such trend. (The
source is the
World
Top Incomes Database, summarised in the opening paper of a superb symposium
in this summer’s Journal of Economic Perspectives.)
But should we care? There are two reasons we might: process and outcome. We
might worry that the gains of the rich are ill-gotten: the result of the old-boy
network, or fraud, or exploiting the largesse of the taxpayer. Or we might worry
that the results are noxious: misery and envy, or ill-health, or dysfunctional
democracy, or slow growth as the rich sit on their cash, or excessive debt and
thus financial instability.
Following the crisis, it might be unfashionable to suggest
that the rich actually earned their money. But knee-jerk banker-bashers should
take a look at
research by Steven Kaplan and Joshua Rauh, again in the JEP
symposium. They simply compare the fate of the top earners across different
lines of business. Worried that chief executives are filling their boots thanks
to the weak governance of publicly listed companies? So am I, but partners in
law firms are also doing very nicely, as are the bosses of privately owned
companies, as are the managers of hedge funds, as are top sports stars.
Governance arrangements in each case are different.
Perhaps, then, some broad social norm has shifted, allowing higher pay across
the board? If so, we would expect publicly scrutinised salaries to be catching
up with those who have more privacy – for instance, managers of privately held
corporations. The reverse is the case.
The uncomfortable truth is that market forces – that is, the result of freely
agreed contracts – are probably behind much of the rise in inequality.
Globalisation and technological change favour the highly skilled. In the middle
of the income distribution, a strong pair of arms, a willingness to work hard
and a bit of common sense used to provide a comfortable income. No longer.
Meanwhile at the very top, winner-take-all markets are emerging, where the best
or luckiest entrepreneurs, fund managers, authors or athletes hoover up most of
the gains. The idea that the fat cats simply stole everyone else’s cream is
emotionally powerful; it is not entirely convincing.
In a well-functioning market, people only earn high incomes if they create
enough economic value to justify those incomes. But even if we could be
convinced that this was true, we do not have to let the matter drop.
This is partly because the sums involved are immense. Between 1993 and 2011,
in the US, average incomes grew a modest 13.1 per cent in total. But the average
income of the poorest 99 per cent – that is everyone up to families making about
$370,000 a year – grew just 5.8 per cent. That gap is a measure of just how much
the top 1 per cent are making. The stakes are high.
The more unequal a society becomes, the greater the incentive for the rich to
pull up the ladder behind them.
At the very top of the scale, plutocrats can shape the
conversation by
buying
up newspapers and television channels or funding political campaigns. The
merely prosperous scramble desperately to get their children into the right
neighbourhood, nursery, school, university and internship – we know how big the
gap has grown between winners and also-rans.
Miles Corak, another contributor to the JEP debate, is an expert on
intergenerational income mobility, the question of whether rich parents have
rich children. The painful truth is that in the most unequal developed nations –
the UK and the US – the intergenerational transmission of income is stronger. In
more equal societies such as Denmark, the tendency of privilege to breed
privilege is much lower.
This is what sticks in the throat about the rise in inequality: the knowledge
that the more unequal our societies become, the more we all become prisoners of
that inequality. The well-off feel that they must strain to prevent their
children from slipping down the income ladder. The poor see the best schools,
colleges, even art clubs and ballet classes, disappearing behind a wall of fees
or unaffordable housing.
The idea of a free, market-based society is that everyone can reach his or
her potential. Somewhere, we lost our way.
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