Americans are egalitarian. This trait has long frustrated plutocrats who, more than a century ago, invented Social Darwinism to teach that the rich prospered because they were smart and productive. Few people believed this, not then and not now.
A new Census Bureau report released last week showed that since 2009 economic gains have accrued only to the top 5 percent of households; the rest have gained almost nothing; poverty remains high and inequality has worsened. Yet libertarians still ask: Does inequality matter? Is our fondness for equality good economics or does it stand in the way of creativity, hard work and just rewards?
Economists have argued about this for more than 200 years.
Of course, market outcomes are unequal. And to liberals’ chagrin, inequality is exacerbated in good times. Inequality is driven mainly by capital gains, stock options and the proceeds of venture capital and initial public offerings, all of which exploded during the information technology boom.
Here are two facts: First, rich countries are usually more equal than poor ones. Second, inequality and unemployment rise and fall together. If pay gaps are large, people will quit low-paying jobs (on farms, for example) and move to factory towns (or technology centers) where the jobs are better – but scarce. Those who can’t get the good jobs stay unemployed. It’s pretty simple. Also, if wage rules forbid low pay, then businesses innovate more rapidly and productivity increases. Decades ago the Scandinavians grasped this dynamic, and since then, those countries have become some of the richest on earth.
In short, as economics, inequality is like blood pressure. There’s a healthy range. Within that range, lower is better but too low can be dangerous and zero puts you in the morgue. When inequality rises, the symptoms aren’t necessarily immediate. It may even feel pretty good; credit booms do. But rising inequality is a sign of crisis to come. We saw that in 1930, in 2000 and again in 2008.
We can tolerate inequality, in other words, as long as we meet two conditions. First, there must be a strong, stable foundation for middle-class life with protection from poverty.
Second, great fortunes can pile up but they must then be dispersed. In a democracy, no one should rule by inherited wealth – or it’s no democracy to speak of. •
James K. Galbraith is the author of “Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.” Distributed by Bloomberg View.
