The Dangers of Avarice

Inequality in the United States has sharply increased in the last few decades.  If left unaddressed, this growing gap between the rich and the rest threatens our economic competitiveness, social peace and even democracy itself.

Over the last 40 years, the rising economic tide has not lifted all boats.   Although GDP has grown significantly, it has mostly benefited the “yachts” in our increasingly “Winner Take All” economy.  Between 1979 and 2005, the mean after-tax income for the top 1 percent of the U.S. population increased by 176 percent, compared to a 6 percent rise for the bottom 20 percent.  Even within the top 10 percent, inequality also grew as gains were heavily concentrated amongst the very top 1 percent.  At the very top, the rich have pulled away from the rest.  In 2007, the top 10 percent of US earners accounted for 49.7 percent of total wages while the ratio between CEO and average worker wages grew from 42 in 1980 – to 319 in 2008.  Why does this matter?

One, high inequality impedes mobility.  As the rich and poor become more different, it becomes harder to change social classes.  This can happen in many ways.  Increasing wealth protects incompetent children.  The quality differences in locally-funded public schools get even larger, giving the rich bigger advantages while the poor languish in substandard institutions.  Differing ability to pay pushes up costs of higher education at the best schools.  Investment in the public commons is cut in favor of spending on private facilities.  The data show how much class mobility in the United States has fallen as inequality rose since the 1970s.  According to the Economic Policy Institute, 36 percent of those in the second-poorest 20 percent stayed there in the 1990s, compared with 28 percent in the 1970s and 32 percent in the 1980s.  Another study showed that poor children have only a one percent chance of reaching the top five percent of the income distribution.  According to numerous studies, U.S. intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark.  This is not self-reliance.  It’s our parents that count.

Two, high inequality undermines productivity by making weakening teamwork.  If the rewards go disproportionately to the few, the resentments and divisions can cut productivity. According to Richard Wilkinson, higher inequality increases stresses and insecurities related to social status differences and greatly worsen status competition. This worsens the rat race and sharply increases psychological damage done to those at the bottom of the pyramid by shaming them.  A workforce made of the anxious and hyper-competitive will have difficulties get people to cooperate.  This weakens competitiveness since knowledge and individual contributions cannot always be isolated and codified.  In the words of Thorsten Veblen:  “The isolated individual is not a productive agent. . . .There can be no production without technical knowledge; hence no accumulation and no wealth to be owned, in severalty or otherwise. And there is no technical knowledge apart from an industrial community.”

Three, high inequality increases violence. A study by Eric Uslaner and Mitchell Brown showed a high correlation between social capital, the amount of trust in society and income equality.  According to Wilkinson, 35 or 40 percent of people in the most unequal U.S. states feel they cannot trust other people, compared to only 10 percent in the more equal states.  High inequality is corrosive since it is seen as unfair, especially combined with low mobility.  This can have a deadly backlash.   There are more than fifty studies showing a correlation between violence and income differences.  Wilkinson shows that the most unequal parts of America and Canada have the highest crime rates.  Another 2001 study by Martin Daly found that among U.S. states and Canadian Provinces there is a tenfold difference in homicide rates related to inequality.  They estimated that about half of all variation in murder rates in each province or state can be accounted for by differences in inequality.  International studies also point the same way.  In general, countries with high inequality also have very high crime.  In Brazil, Haiti, and South Africa, where inequality is some of the world’s highest, crime is fueled by a perception that the poor have no legitimate path to success.  Crime is not just the victims’ problem.  High crime in Latin America has been blamed for cutting incomes by 14 percent because it cuts growth, income and investment in favor of more spending on protecting people and property.

Four, high inequality destroys lives. In addition to crime, high inequality is also associated with higher drug abuse, more alcoholism, domestic violence, obesity, divorce, bad public health and other ills.   In addition to being terrible for people, these problems are very costly economically.  A Washington Post article illustrates what we all already pay when peoples’ lives self-destruct:  “Alcohol-related costs are $128 billion a year (equal to 50¢ a drink), highway accidents cost $112 billion (or $575 a vehicle)… drug abuse is $122 billion, violent crime costs $50 billion, gunshot injuries cost $39.7 billion and tobacco costs $94.4 billion for health care costs alone.”  Worsening inequality will raise all of these costs.

Finally, high inequality is dangerous for democracy because it gives the rich too much say in politics and polarizes the electorate.  Without accountability to a wider group of voters, inequality can result in system unable to respond to pressing political, social, and economic problems.  Instead of serving the middle, it will serve the wealthy, leading to alienation – which will either result in disengagement or violence.  While anger can take the form of crime or self-destruction, it can also fuel political extremism.  Whether it’s called Communism, fundamentalism, Fascism, regional chauvinism or racism, it’s all bad.  Extremism and high crime can also result in a vicious circle of bad governments.  For example, in some parts of Latin America these problems result in a cycle from “get tough” elite-controlled dictatorships to ineffectual democracies to populist dictatorships – and then back to elite-controlled dictatorships or weak democracies.  Past failures to give people hope have rolled back democracy in Venezuela, Nicaragua and Bolivia.  Significantly, democracy is healthier in more equal places such Chile, Costa Rica and Uruguay.  High inequality weakens democracy because it creates a society divided between nervous people living in gated communities and the angry masses.

In modern economy where competition, technological change and international trade are increasing the speed of “creative destruction”, it’s important to mitigate increasing differences in wealth.   High inequality undermines equality of opportunity and social mobility, saps competitiveness, increases violence, reduces trust, fuels self-destructive behavior and while weakening democracy.  All of this makes wild capitalism’s world of “public squalor and private opulence” unsustainable – it will either force a correction to a more just system, lead to chaos or result in a defensive crackdown by the elites.  This threat is why progressive, liberal and social democratic politicians have tried to reduce the market system’s sharp edges.  Contrary to libertarian or conservative thinking, liberalism is not the enemy of capitalism.  It is its savior.

None of this means that there cannot be too much equality.  This can also create serious problems.  When there is too little to be gained by working hard and investing, there is a danger that initiative will die and talent will flee.  While this is not a problem in the United States now, this is an issue in parts of the European Union today.  Like for many other things, there is an optimum range for inequality in the middle.

To cut excessive inequality, the government needs to support equal opportunity while reducing the influence of money on policy.  The realistic hope of advancement gives people hope and helps to ensure political responsiveness by building a stable middle class.  The recent expansion of health insurance in the United States was a huge step forward, but it’s not enough.  Other important changes include improving public services in poor areas (especially education), increasing access to higher education and job training and raising taxes on the rich.  I’ll make the case for this next week.

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  1. Mekonen Haddis #

    The role Of Neo-Liberalism, in widening the income gap between the rich and the poor.

    June 5, 2010 by

    The role of Neo-Liberalism, in widening the income gap between the rich and the poor.

    “One of the most pronounced effects of Neo liberalism is to create wealth inequality within national borders and between states. Within a decade of adopting free market policies, the class divide in the US and UK became significant.” Professor G. William Domhoff. UC @ Santa Cruz.
    It is just another indictment of Neo liberalism and its multi-faceted destructive policies encumbered upon people of the world. It is very fascinating to note, that the income gap between the poor and the rich has more pronouncedly been evident in the US and UK, the joint creators of Neo liberalism.
    This enormous income gap between the rich and the poor in the US has concentrated more power in the hands of the rich and has created a feeling of helplessness on the majority of American citizens who have been marginalized by Neo liberal policies.
    Consequently, sooner or later, the question will arise, whose country is it anyway? It is obvious that the widening of the income gap in the US is close to the breaking point. It is not if, but when it breaks, no one can forecast how it might end. It is just that the Corporations are blinded by greed, and our representatives are muzzled by big business.
    Writing on the subject of Neo liberalism’s impact on social cohesion, David Coburn, from the University of Toronto writes: “While it has been asserted that neo-liberalism produces a lowered sense of community it might also be argued that the rise of neo-liberalism is itself a signifier of the decline of more widespread feelings of social solidarity. The political rise of neo-liberalism is freighted with a more individualistic view of society and, perhaps, itself reflects a decline in the notion of we are all in the same boat. Not only do neo-liberal policies undermine the social infrastructure underlying social cohesion but neo-liberal movements themselves are partial causes of the decline of a sense of social cohesion.”
    It is absolutely frightening, what Neo liberalism is doing to societies. It is corroding the very fiber that societies are built upon. Neo liberalism is cancerous. It is undermining our Democratic system. When a government becomes a by stander when millions are practically becoming paupers, while the few are amassing billions, then, the people have no protector. Laws, Rules and Regulations are in the books only to protect the interest of the rich.
    In a wonderful article entitled, “Skewed Wealth Distribution and the Roots of the Economic Crisis”, David Barber, a Professor at the University of Tennessee, wrote:

    “And what is true in the United States of the unequal distribution of wealth, and of the consequences of that unequal distribution, is true again on a world scale. This super-poor mass of humanity, from whose soil is ripped vast amounts of mineral and agricultural wealth, and out of whose labor the world’s manufactured goods increasingly come, are almost wholly excluded from participating in the world’s market economy”. So, what is to be done?
    While a number of social scientists have forwarded divergent solutions for anarcho-capitalism to save itself, Professor Michael Rustin at the University of East London suggests the following points are “made necessary by the implosion of the neo-liberal system in the current financial crisis, and are needed to construct a new post-neo-liberal phase of democratic capitalism”.
    The five points he has put forward are the following:

    (1) A more active role for governments in regulating markets, and especially global financial markets

    (2) Constitutional reforms which enhance democratic processes and civil liberties, and create more representative and pluralist systems

    (3) Policies, which reduce inequalities, and give greater weight to social justice and social inclusion.

    (4) The enhancement of the capacities of international institutions, and especially the EU, to maintain economic stability and growth

    (5) Programmes to address the problems of climate change.

    Very sensible, are they not? But Wait!!! We have to see which governments have any backbones left in them to try and regulate the market, and do away with thirty years of destruction of the people that started with Reagan and Thatcher.

    As I am ready to post this article, I hear a news story that stated that “Hungary might default on its debt”. What is the world coming to. Wasn’t Hungary the darling of the West? Didn’t it do everything that it was asked to? It privatized everything. It reduced government employment. It cut welfare as it was told to do by “free Market Reform” advisors. Hungary did everything a good and obedient follower of Neo liberalism is supposed to do. Yet, it is threatening to “default” on its debt in spite of a $24 billion IMF and EU loan few months back. This is the fruit of Neo Liberalism.

    Do you wonder, which devoted and submissive follower of Neo liberalism will bite the dust, next?

    Professor Mekonen Haddis.

  2. 2

    I agree with your posting. The free market system needs to be tamed a bit to be survivable. Although I know every regulation and redistribution has an economic cost, there is more to life than just efficiency. If a society is too unequal or polluted or financially unstable, this result can be disastrous. I believe liberalism (aka social democracy) saved the free market economy — and will be writing about this soon. Thank you for your comment.

  3. 3

    Can I repost this as a guest blog post in the near future?

  4. 4

    That sounds great. Thank you for visiting.

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