What’s missing from the conversation on income inequality?

Income inequality is a hot topic these days here in the US, and for good reason: over the past generation or so, real gains in income for those at the bottom and middle of the spectrum have been practically nil, while those at the top (especially the very top) have risen rapidly. As a consequence, income inequality by some measures is at its highest levels since the 1920s.

cbo-inequality-after-tax-income

If income inequality has been rising for so long, why is it only recently getting so much attention? I think the main reason for the recent attention was the housing bust and financial crisis in 2008 (duh), which provided a shocking contrast between widespread home foreclosures and mass layoffs on the one hand, and generous bank bailouts on the other. But since then, we’ve had plenty of other things to keep our attention on the subject. I’m thinking the Occupy Wall Street/99% movement; the 2012 Presidential election, which forced a national dialogue on the subject; and the near-celebrity status of economist Emmanuel Saez, whose recent book has attracted huge media attention.

Within that debate, economists continue to fuss over a longstanding question: Sure, inequality is rising, but what does that mean for economic growth? Do societies in which the rich take a bigger and bigger slice find it more difficult to grow the whole pie over time?

The Washington Center for Equitable Growth has a new paper summarizing the research, both old and new, on exactly this topic. It’s a good read even if you’re not into economics, especially the overview section, which gives some nice context for this question. Among the report’s conclusions are:

Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth.

It’s always important to differentiate between positive and normative questions in economics, and this subject is no exception. The former asks something about how the world is; the latter, how the world should be. Economists like to focus most of their time on positive issues: Does inequality constrain growth? That is an important question, and researchers and organizations which focus purely on answering it objectively and honestly are doing very important work. Nonetheless, what seems to be missing from today’s debate about inequality is a second, more normative question: If the economy continues to grow while remaining very unequal (or becoming more unequal), is that ok?

For two reasons, I’d say the answer is No (surprise!). The first reason has to do with economic theory. The second has to do with the very purpose of our lives as human beings.

Why might economic theory suggest that an increasingly unequal society which continues to grow is not ok? One of the basic assumptions of economics is something called “diminishing marginal utility”, which simply means that as you consume more and more or something — let’s say, potato chips — you get less and less additional satisfaction from said thing. This assumption makes sense — even a slob like me feels more and more gross as I near the bottom of the potato chip bag — and is needed for models of economic theory to pump out clean mathematical results.

Now, this assumption is based on a super-simple model with just two types of goods — let’s say, potato chips and apples — that tells us that an individual is best off when he or she consumes a combination of chips and apples, rather just one or the other. The question is, then, is diminishing marginal utility a real thing when it comes to money? Does one’s welfare increase less and less as one gets more of everything?

Economic theory doesn’t weigh in on this specifically, but economists try different ways to prove that each extra dollar adds less and less happiness. In my opinion, this seems kind of obvious, a truth that deserves acceptance a priori. To argue that rich people derive equal happiness as poor people from the same sum of money is mind boggling to me. I mean, Manny Ramirez, the baseball icon who made $20 million per year as an outfielder for the Boston Red Sox, was well known for letting uncashed game checks pile up in his locker. Meanwhile, I found $5 in my pocket when I put on my dress pants this morning and nearly cried.

Anyway, if we do assume that we get less and less benefit from every extra dollar as we get richer, why not try and send some of that money to the people who’d benefit most, specifically the poor and middle class?

This is a basic argument in favor of income redistribution: give more money to the people who get the most out of it in terms of their actual wellbeing. In that sense, income redistribution can be efficient in terms of maximizing the overall welfare of society, and might still be a good idea on this basis even if it constrains economic growth (which apparently it does not do in any case).

So what’s missing from the debate about inequality, then? It’s that, putting aside concerns about growth, efficiency, etc., the true measure of our worth as individuals and together as a human race is our level of commitment to taking care of the less fortunate. This is a universal spiritual truth articulated by every world religion, and best known to us Westerners in the context of Christ’s famous Sermon on the Mount, which begins:

Blessed are the poor in spirit, for theirs is the kingdom of heaven.

Baha’is, as you would imagine, hear this same message in their own Holy Writings, for instance here:

O ye rich ones on earth! The poor in your midst are My trust; guard ye My trust, and be not intent only on your own ease.

And, of course, probably my favorite passage from the Baha’i writings (which I’ve quoted many times on this blog), which reads:

Tell the rich of the midnight sighing of the poor, lest heedlessness lead them into the path of destruction, and deprive them of the Tree of Wealth.

In other words, religion teaches us that not only is the very purpose of our lives here on earth to serve others, but that serving the poor in particular is especially merit worthy. It’s great that the recent economic research suggests that a more equal society and a rapidly growing economy can coexist. But even if they clashed, I’m not sure it would matter from a moral perspective. Efficient or not, showing deference to the poor is always the right policy. That truth is self evident, and needs no fancy arguments.

 

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One thought on “What’s missing from the conversation on income inequality?

  1. I’m fascinated by some of the recent research about the rich – the poor have been studied ad nauseam and there is relatively little research on the behavior and attitudes of the wealthy – curious to me given North America’s obsession with becoming rich. Being wealthy it seems does not tend to improve one’s character or even one’s happiness we’re finding…

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