Why Should We Care About Rising Inequality?

by Andrew McAfee on March 6, 2013

I’ve been asked this question by a few people recently, none of them hardhearted let-them-eat-cakers. If I’m hearing them right, they’re asking two simple yet profound questions:

Why should we care if those at the top have a lot (and more all the time), as long as those at the bottom have enough?

And because of the productivity gains, innovation, and progress you talk about, isn’t it getting easier and easier over time to have enough, even if you’re at the bottom of the income/wealth distribution?

These questions deserve a thoughtful answer. So here’s mine, presented very briefly and with links to work I’ve relied on. I don’t pretend to be an expert on issues of income and wealth distribution and their consequences, but in the course of my work on technological progress and its implications (discussed often in this blog and summarized in Race Against the Machine, which I wrote with Erik Brynjolfsson) I’ve read a bunch on the subject and talked with a lot of folk who know it well. Here’s what I’ve learned: We should care a great deal about high and rising inequality for three sets of reasons: economic, political and social.

Economic Reasons

Some very important things are still expensive, and getting more so over time. Here’s a graph produced by economist Jared Bernstein (full presentation here) showing that housing, education, and health care — three biggies — have increased in price far more than middle class family income over the past 20+ years.

It’s true that some things, especially digital ones, have gotten much cheaper and much better over time. If the world’s richest people in 1960 were transported to a middle class house today, they’d be struck dumb by the flat-screen TV, smartphones, and laptops. They’d also be flabbergasted by a trip to the supermarket, drugstore, or hospital. I don’t mean to downplay this progress at all. But the house itself is getting more expensive, and the trip to the hospital is getting further out of reach for many because health care status is so closely tied to employment status in America.

 

Many people at the bottom have little or no economic cushion to see them through an unexpected expense (like a car or house repair) or short period of unemployment. Annamaria Lusardi, Daniel J. Schneider, and Peter Tufano asked people about “their capacity to come up with $2,000 in 30 days.” I find their results shocking.

Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans… [In other words, we] find that nearly half of Americans are financially fragile… [A] sizable fraction of seemingly “middle class” Americans… judge themselves to be financially fragile.

In short, it does not look like those at the bottom have enough.

Societal Reasons

Inequality is eroding the American dream of equal opportunity and social mobility. As my MIT colleague David Autor puts it

If the U.S. has a civic religion, it is our belief that society should be meritocratic — everyone should have a fair chance at success based on their smarts and their hard work. As the inequality of household resources becomes more skewed, the likelihood that kids starting at the bottom get a decent shot at the top gets more remote… if you walk the campuses of most top colleges in the U.S., you will discover that the vast majority are from upper income households. You don’t have to take a moral stance on inequality per se to be deeply worried that this may ultimately inhibit the American ideals that bind us together. Inequality within reason is a good thing; it creates incentives so that people work hard to reap rewards. But if more inequality today reduces the equality of opportunity for the next generation by skewing the playing field and disequalizing opportunities faced by kids from low v. high income households, that’s a tradeoff that many people would not want to make.

We Americans pride ourselves on having greater social mobility than sclerotic, ossified Europeans, but recent research shows that that pride is badly misplaced. As The Economist summarizes

Back in its Horatio Alger days, America was more fluid than Europe. Now it is not. Using one-generation measures of social mobility—how much a father’s relative income influences that of his adult son—America does half as well as Nordic countries, and about the same as Britain and Italy, Europe’s least-mobile places.

 

People at the bottom are living different and less healthy lives than those at the top. I don’t share Charles Murray‘s politics, but respect how he digs deep into the data. He’s summarized sharply diverging trends at the top and bottom of the American middle class in his book Coming Apart. In my recent TED talk (video up soon, I hope) I showed some of his results, using the stereotypical workers ‘Ted’ at the top and ‘Bill’ at the bottom. Here are the relevant slides

I should point out that there’s an active debate about the causes of this divergence. Murray and others think that it stems from an erosion in values among the Bills of the country. Another school of thought (the one in which I place myself) holds that the erosion of work opportunities for Bill is the prime driver. We’ll hopefully get clarity on this critical question with more time and study.

Political Reasons

Countries with lots of inequality tend to develop unhealthy political systems, and eventually to fail. In my view, the best and most authoritative book on this subject is Why Nations Fail by Daron Acemoglu and James Robinson. They write

But the real reason to worry about [economic inequality] is not the unfairness of it all… The problem is that economic inequality often comes bundled with inequality of opportunity and political inequality…

Prosperity depends on innovation, and we waste our innovative potential if we do not provide a level playing field for all: we don’t know where the next Microsoft, Google, or Facebook will come from, and if the person who will make this happen goes to a failing school and cannot get into a good university, the chances that it will become a reality are much diminished…

The real danger to our prosperity lies in political inequality. The U.S. generated so much innovation and economic growth for the last 200 years because, by and large, it rewarded innovation and investment. This did not happen in a vacuum; it was supported by a particular set of political arrangements — inclusive political institutions — which prevented an elite or another narrow group from monopolizing political power and using it for their own benefit and at the expense of society. When politics gets thus hijacked, inequality of opportunity follows, for the hijackers will use their power to gain special treatment for their businesses and tilt the playing field in their favor and against their competitors. The best, and in fact the only, bulwark against this is political equality to ensure that those whose rights and interests will be trampled on have a say and can prevent it.

So here is the concern: economic inequality will lead to greater political inequality, and those who are further empowered politically will use this to gain a greater economic advantage by stacking the cards in their favor and increasing economic inequality yet further — a quintessential vicious circle. And we may be in the midst of it.

Anyone still not worried? If so, I’d love to hear why.

p.s. I realize that many of my sources have a center-left political orientation. In particular, I got a lot from this column by Thomas Edsall (who has interviewed and quoted me) and the Joseph Stiglitz-moderated New York Times series “The Great Divide.” If anyone would like to point out good counterarguments from the right (or anywhere else) I’d be eager to read them.

  • http://www.facebook.com/brian.e.pomeroy Pomeroy Brian

    Not me. I have little to add but being an abrasive
    personality I can add one horrible thought. It has been a long time since I
    have read an article that has not left me wanting more information or made me
    angry. It seems the media and the politicians do not care about anything or
    anybody except kissing the rich guys ass.

    What makes me sad is the poor people will turn on each other
    instead of putting the blame where it belongs. It is starting with the idiot
    middle class going to work every day and paying taxes and commenting when ever
    I talk about such matters, “There is nothing I can do.”

    Well, there is something you can do. If everyone told the
    government they were taking the week off and not paying anything, say 72 hours
    just to circulate their emergency supplies, the rich guys would sell their
    stocks and the economy would crash. But they will not. They will turn on each
    other like wild animals when things do go wrong; and things will go wrong.

    Brian Elwin Pomeroy

  • http://www.compliancebuilding.com Doug Cornelius

    My concern is less about the existence of inequality, than the ability to move up in wealth. Based on hard work and education, can someone move from poverty move up to the level of middle class and can someone from the middle class move up to the level of wealthy? Hard work and education need to be rewarded.

    Certainly, many of those in the “wealthy” category were not in that category 20 years ago. Through hard work, education, and some luck they managed to accumulate “wealth” to move up. That has been the American standard of meritocracy. I’ve seen the video showing the skew of wealth distribution. But it does little to say how the membership of the wealthy has changed over time.

    I don’t have an issue with the wealthy being able to give some advantage to their children. Again, that has been part of the American dream, wanting your kids to be better off than you. But eventually they need to stand on their own merit where they can get beaten by a poor kid who is smarter and has worked harder.

    I believe the funding of our public schools is eroding and higher education has become too expensive. So, we are losing ground on the education side. The benefits of hard work are being attacked by automation. (I think someone recently wrote a book about that subject.) I worry about rising inequality, if it becomes harder and harder for people to overcome the inequality.

  • djd1981

    “Why should we care if those at the top have a lot (and more all the time), as long as those at the bottom have enough?”

    Maybe when that starts to be the case, we can ask this question.

  • http://www.lowpan.com Jon Smirl

    Inheritance bothers me more than inequality. How about this? $10M per person can be passed out tax free. Three years after death the government gets 100% so use those three years to donate what’s left to charities. This will do far more over the long run to introduce mobility into the top 1% than changing the income tax rate.

  • cashgap

    Familiar with the concept of unintended consequences? Do you suppose that the productive will just let you take everything over $10M? Can you think of ten strategies that could be used to prevent this confiscation? I can in just a few minutes.

    I get that some covet what others have accomplished, and resent that some have parents who contemplated three generations while others have parents that didn’t think past Saturday night. That doesn’t mean that seizing the fruits of a lifetime of accomplishment will succeed.

  • cashgap

    Exactly, those at the bottom will NEVER say enough is enough if anything is left at the top. How much will they want to redistribute? “Just a little more…” :)

  • http://www.lowpan.com Jon Smirl

    The productive are dead. You can give $10M each to as many people as you want. Give everything else to charity. At that point you’d owe nothing in inheritance taxes. I want to stop multi-generational dynasties centered around large inherited fortunes.

    I have contact with a group of worthless trust fund babies living off from wealth that was generated in the 1700’s. They haven’t done anything except throw parties for the last hundred years. Every one of them is a member of the top 1% and their kids will be more of the same.

  • cashgap

    Oh, I get redistributionist theory. The mountains will be laid low, the valleys will be made high, etc. If we tear down enough at the top, surely those in the lower leisure class will advance. Gimme gimme some, no fair that you ended up with more just because your parents weren’t takers like mine.

    The hilarious irony is that someone less accomplished, whether a good-intentioned idealist like yourself or some worthless bureaucrat, is absolutely CERTAIN they can make a better decision about one person’s body of accomplishment than the very accomplished person.

    They amassed the fortune by making superior decisions. Should their fortune be allocated by someone with superior decision making ability, or someone with demonstrably inferior decision making ability in the financial sense?

    You resent and envy the tiny group of trust fund babies and are willing to trash private property rights to “show them!” and perhaps get some of what you covet. Would the world be a better place if we allow your dreams to be accomplished at gunpoint, or if you went off to make your own fortune? You’d be amazed at what you can accomplish if you decide to accomplish it and stop focusing on “Get even with ‘em”ism.

  • http://www.lowpan.com Jon Smirl

    The creator of the fortune has full control over how it is allocated. Make a list of people getting $10M and charities for the remainder and put it in your will. Government gets nothing.

    What I don’t want to see is the creation of massive pools of wealth where the descendants get income streams forever with no ability to touch the capital. Give them each their $10M. Most of them will lose it, some of them will turn it into another billion.

    My theory is zero cap gains while alive. Let highly skilled people create all the wealth they can. But then break the fortune up at death. Each person has to start anew. $10M should be plenty of seed capital. It is up to each recipient whether they squander it or invest it.

  • http://www.lowpan.com Jon Smirl

    BTW, I don’t envy the trust fund babies. I’ve made my own pile of cash and don’t need theirs. What I don’t want to see is people growing up knowing that they are going to get $100K+/yr guaranteed. It ruins their incentives in life and leads to a lot of self-destructive behavior.

  • ShowTime!

    “break the fortune up at death” is a terrific way to get the most brilliant and productive people to stop being brilliant and productive earlier in life. I would argue that for the majority of earners, the goal of lifetime earnings is less about the ability to amass and distribute wealth during their own lifetime and more about ensuring that future generations (at least the next generation) have at least a financial cushion and at best financial freedom.

  • ShowTime!

    Thanks for posting this article. I think more Americans should understand this view and when articulated in this way, most will be hard pressed to disagree that rising inequality = bad. Where everyone will continuously disagree is how best to reverse the trend and close the gap. Little has been written on this topic and the fundamental partisan argument has to do with redistribution of existing value (i.e., to take from the rich and give to the poor or not?). It could not be more clear that taking cash (via taxes) from the well-to-do and providing to the underprivileged (via social programs, tax breaks, etc.) will have minimal impact on closing the inequality gap… why? There are so many dimensions to poverty which have everything to do with learned behavior and inherited situations and absolutely NOTHING to do with access to capital. But for some reason, government continues to pursue redistribution of wealth as a solution. I will always be against increasing taxes on the rich as long as government continues to pursue this pedestrian approach to closing the inequality gap. I will gladly give a portion of my income to help close the gap when we’ve taken the time to determine how best to put this money to work to increase opportunity for the underprivileged.

  • cashgap

    “What I don’t want to see is”… why does this matter? It can easily be countered with “What I do want to see is”. I say let the productive make the decision. You want to make it for them. Generally, when someone wants to make a decision for someone else, that tells us most of what we need to know about their motives and decision making ability! Hate, jealousy, envy, greed. Your statements boil down to something more. If you could JUST get your hands on that CASH you could allocate it so much more efficiently but those stupid ACHIEVERS are doing what they want with it! Grrr, there outta be a law… :)

    And you can tell yourself it’s a high motivation, as you say… you merely want to pick their pockets to help them avoid self-destructive behavior! So much better than saying “I want to steal that”, better to say “I want to help that person by taking away the burden of their wealth”.

    There’s only one face of socialism, you’re presenting it. You know better than I how to run my life, and if I won’t consent to you running it for me, by golly, a bunch of you will gang up and enforce your views with the force of law.

    Very petty, very sad, and NEVER something we hear from the accomplished. Do some introspection… why do you want to strip the wealth from those particular trust fund babies so badly? Redistributing it to the idle, the poor decision makers, the underachievers. We know it will be truly squandered there, and will end up back in the hands of the achievers. Is it worth it, just to punish those you’ve singled out for whatever crimes you’ve imagined?

    Why not live your life as a shining example of how it should be done, rather than “correcting” the imagined errors of their parents?

  • http://www.lowpan.com Jon Smirl

    Inherited royalty running the country is a good idea too. Wouldn’t want a gang of peasants revolting and taking away the power that rightly belongs to the progeny of the King. After all, the King knows what is best.

  • john milton

    That is so awesome, cashgap! When the resources of a planet are completely commanded by the wealthy elite and they never say enough is enough–THAT is okay! As long as they get to pillage the planet and have the best of everything! That is NOT AN ISSUE! The problem is average people demanding a decent life–no!no!no!–that is a problem! Your logic is awesome!

  • john milton

    I am FED UP with these brilliant and productive people! When some new medical technology is invented, I cannot afford it and should never avail its benefits. When some spectacular technology comes to the market that those with more access use to impress their shallow friends, it is out of my reach! When people are going to live a thousand years due to advances in bioengineering, I know I SHAN’T be one of them for the technology is out of my budget! I might as well be reading science fiction, for all these benefits of technology made by brilliant people shall never reach me and are no better than the fiction described by writers fifty years ago.

    When people go to vacations, I can’t because I work on Christmas Day, too! After doing three jobs a week for low income, I know the rich will retire early, while I shall toil for scraps even after I am past 75. And perhaps for THAT reason alone the rich will provide me some healthcare(as much care that can slip from their greedy, arrogant, contemptuous selves) just so they can watch me toil and suffer when I am seventy!

    You know what?–I have had ENOUGH OF THIS BLOODY BRILLIANCE! Take your brilliance and put it up yours! I don’t need either your BRILLIANCE or your HARDWORK. I will work with technology that is fifty years old so I can have more than the fucking jobs the BRILLIANT are offering me–a decent fucking life! The life of a human being, not one of dogs, chicken, or cattle!I don’t need to toil more than ten hours a day in boring, exhausting jobs just so that I can turn 80 and die working in some miserable diner of a stroke!

    And capitalism is the worst system ever devised. When democracy became too much to control, the rich devised a system to create a modern version of feudalism that had the goal of keeping the newly liberated peasants in a new system but at the same level they were in during actual feudalism. And while they told the peasants to revolt against the kings they titled themselves the saviours of mankind while all they really were doing was diverting humans from one form of slavery to the other. So read my lips: I don’t care if your brilliant fucking greedy sociopaths don’t have enough incentive to do anything. I say don’t do anything! Better still disappear into the ass of some mythical Ayn Rand mountain like Glenn Beck hopes to do and do whatever you like! I and the rest of us average folk will be okay. We’ll manage our own affairs. And I should have the opportunity to do something more meaningful than I should have had the malice of the brilliant been allowed to run riot!!! Thank you! Goodbye, BRILLIANT PEOPLE! NOW please LEAVE US ALONE! WE the 99% are NOT YOUR SLAVES!

  • http://twitter.com/Rolo_Tamasi Rolo Tamasi

    I’m concerned about the Economic Reasons presentation and fear it may be easily misinterpreted.

    If the deflator used to evaluate the 20% real terms income growth figure is appropriate then people are better able (20%) to afford the totality of things they consume. Some things have increased by more than average but they remain more affordable than they were because they are significantly more than offset by those that have increased less.

    The income bars are stated to be in real terms but the expenditure bars are not stated to be on the same basis. If the bars are not all deflated using the same deflator it is a misleading comparison.

    Maybe a more significant question is how does median income real growth inform us about inequality at all?

  • Jennifer Locke

    Many assume the poor don’t work hard, but they do. Retail, fast food, landscaping,
    housecleaning, etc. are all physically very taxing. Their hard work is not rewarded, and indeed they often have to work more than one to make ends meet.

    So I agree with you that proper education is the key to getting one job that
    pays enough and gives the worker time at home with the kids at the end of the
    day. And public education needs more funding, clearly. But even the wealthiest
    school isn’t going to help the children who have insufficient nutrition,
    supervision, homework help and advice to help them succeed in school and
    advance onto higher paying jobs. We need to BEGIN by paying all workers a living wage that enables them to provide a richer environment for their children at home, then hopefully break that cycle of poverty.

    But given our newfound lack of mobility in this country, I’d say luck is more than
    a little piece of the puzzle.

  • http://www.compliancebuilding.com Doug Cornelius

    Nobody is claiming that the poor don’t work hard. The viral video talks about inequality, but provides little information about how the composition of the wealth classes have changed over time. The American meritocracy ideal is that hard work and education should improve a person’s chances to gain wealth. Whether that it is up from poverty or up from the middle.

    It’s easy to show the current spread in wealth. It’s much more difficult to track the changing composition of the different levels of wealth, including during the course of a person’s career.

    It’s a bit old now, but the NY Times has a good collection of graphs showing mobility. http://www.nytimes.com/packages/html/national/20050515_CLASS_GRAPHIC/index_03.html

    There is lots of wealth mobility, but we can do better. It’s surprising to to see that the US does not outperform our peer countries in wealth mobility.

  • Anonymous

    You say “Very petty, very sad, and NEVER something we hear from the accomplished.”
    I respond by saying that of course you do not hear them saying these things, they are too busy buying legislators and making certain the field is tilted in their favor. Why should they waste time talking about it.

  • http://twitter.com/VirginiaHolbert Ginny Holbert

    There is also just a basic economic argument that gross inequality is bad for growth. One hundred people with $100,000 will buy more cars and iphones and manicures–and generate more economic activity–than 1 person with $10 million. However, even between liberal economists there is some disagreement over this. http://krugman.blogs.nytimes.com/2013/01/20/inequality-and-recovery/

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  • Deborah S

    In regards to the diverging trajectories of Ted and Bill, you note that:

    ” I should point out that there’s an active debate about the causes of this divergence. Murray and others think that it stems from an erosion in values among the Bills of the country. Another school of thought (the one in which I place myself) holds that the erosion of work opportunities for Bill is the prime driver. We’ll hopefully get clarity on this critical question with more time and study.”

    I believe these reasons are both valid and related –but I suggest that the erosion of work opportunities *precedes* erosion of values. The right kinds of jobs don’t just affect purchasing power (i.e. positively affecting the economic narrative) but they also enhance self-esteem, create meaningful social engagement, and develop human creativity (positively affecting the societal narrative). On the other hand, extended un/underemployment and the absence of opportunities to work gainfully leaves people feeling irrelevant and alienated. It’s not hard to understand how they come to feel resentful of (and rejecting of the values of) a societal order that makes them feel like Mister Cellophane, invisible and inconsequential. Rifkin (1996, p216) puts it more eloquently than I:

    [Those who have lost their work to technology] “sense that the world is passing them by, and feel increasingly powerless to intervene on their own behalf, to demand their rightful inclusion in the new high-tech global order. They are the outcasts of the global village.., a mass of humanity whose fortunes and destiny increasingly tend toward social upheaval and
    rebellion against a system that has made them all but invisible.” (p. 216)

    Indeed, I believe that a preceding comment by John Milton manifests exactly what this logic would suggest – frustration, resentment and a desire to disassociate from a societal order that values some contributions excessively at the expense and exclusion of others. It’s not a healthy place for a country to be…

  • Anonymous

    Sadly, this article is not at all persuasive from the point of view of the one-percenters. Why should they care? Political stability? Pshaw… Latin America is less politically stable, and that’s the model the American plutocracy would like to follow. Who needs political stability when you can have tall walls and armed guards? If the riff-raff breaks into your compound, you always have the helicopter.

  • http://www.facebook.com/VicDesotelle Vic Desotelle

    This is a crisis of meaning, not of conditions … A few points for discussion: At the core of our decline lie assumptions and interpretations about money, economy, and equality that are no longer valid. Prosperity is ‘not’ dependent upon innovation, and again, this is an issue of meaning. The phrase ‘economic inequality’ is a blend of two misunderstood meanings, as economic influence and monetary influence are two very different things. I look forward to the day when we are open a the crisis of meaning and meaning’ful’ness. Only then can we begin to shape a key, that opens a door, to a society that provides well-being for all of its people.

  • BFWB

    Every conservative in America claims the poor don’t work hard. Most of them do so privately, the rest publicly. Some conflate race with that. And if you’re surprised by these economic figures, try taking a look at per-capita incarceration rates, and racial representation in same. It should scare the socks off you.

  • http://www.facebook.com/ViableWay Mary McGuirk

    do you have any clue about how much a CEO spends for his or her personal gratification and enjoyment in a year that is not available to the rank and file employee…benefits that are untaxed. Just by way of explanation, Ann Romney deducted $77,000 for her HORSE expenses, but parents only get $3500 or so, plus some credits for education or day care costs.

  • http://www.facebook.com/mirza.duratovic Mirza Duratovic

    If every person has to start anew then everyone will be equal at the start. The whole point of a amassing wealth is to gain differential advantage over other people. Why would anyone do anything apart from sustenance?

  • http://www.omarbuyshouses.com/ we buy houses cash

    We buy houses. You have probably
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    these people and how can they constantly be able to buy houses? Where do they
    get the money? What do they do with the houses? Let’s take a look.

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