Whenever the topic of socioeconomic inequality is brought up, the emphasis is usually placed upon its moral and humanitarian consequences. While this is certainly a valid approach — after all, there’s a lot of human suffering involved — there is another factor to consider: inequality is bad for business, the economy, and the nation’s long-term political stability (one would hope that this would also win over those for whom poverty isn’t a moral problem, but many such individuals typically either don’t recognize inequality as a growing problem, or reject that it has such consequences).
An article by Daniel Altman of Foreign Policy highlights the argument fairly succinctly, noting that the practical problems of inequality could actually just as bad, if not worse, than the social ones:
When any market has a shortage, not everyone gets the things they want. But who does get them also matters, because it’s not always the people who value those things the most.
Economists Edward Glaeser and Erzo Luttmer made this point in a 2003 paper about rent control. “The standard analysis of price controls assumes that goods are efficiently allocated, even when there are shortages,” they wrote. “But if shortages mean that goods are randomly allocated across the consumers that want them, the welfare costs from misallocation may be greater than the undersupply costs.” In other words, letting the wrong people buy the scarce goods can be even worse for society than the scarcity itself.
This problem, which economists call inefficient allocation, is present in the market for opportunities as well. It’s best for the economy when the person best able to exploit an opportunity is the one who gets it. By giving opportunities to these people, we make the economic pie as big as possible. But sometimes, the allocation of opportunity is not determined solely by effort or ability.
For example, consider all of the would-be innovators, thinkers, and other social contributors who are otherwise precluded from realizing their potential — and benefiting society further — due a lack of resources? Conversely, what happens when unqualified or immoral people are allowed to amass disproportionate amount of wealth and resources, and thus gain all the outsized political and economic influence that goes with it? As the article goes on to note, unless you meet the ever-higher financial demands needed to access the avenues of influences and personal development, you wont’t get far in America:
To a great degree, access to opportunity in the United States depends on wealth. Discrimination based on race, religion, gender, and sexual discrimination may be on the wane in many countries, but discrimination based on wealth is still a powerful force. It opens doors, especially for people who may not boast the strongest talents or work ethic.
Country club memberships, charity dinners, and other platforms for economic networking come with high price tags decided by existing elites. Their exclusion of a whole swath of society because of something other than human potential automatically creates scope for inefficient allocation. But it’s not always people who do the discriminating; sometimes it’s just the system.
For instance, consider elected office. It’s a tremendous opportunity, both for the implementation of a person’s ideas and, sad to say, for financial enrichment as well. Yet running for office takes money — lots of it — and there are no restrictions on how much a candidate may spend. As a result, the people who win have tended to be very wealthy.
Of course, political life isn’t the only economic opportunity with a limited number of spots. In the United States, places at top universities are so scant that many accept fewer than 10 percent of applicants. Even with need-blind admissions, kids from wealthy backgrounds have huge advantages; they apply having received better schooling, tutoring if they needed it, enrichment through travel, and good nutrition and healthcare throughout their youth.
The fact that money affects access to these opportunities, even in part, implies some seats in Congress and Ivy League lecture halls would have been used more productively by poorer people of greater gifts. These two cases are particularly important, because they imply that fighting poverty alone is not enough to correct inefficient allocations. With a limited number of places at stake, what matters is relative wealth, or who can outspend whom. And when inequality rises, this gap grows.
I would hope that it goes without saying that it’s problematic when a majority of society’s policymakers, public officials, academics, corporate executives, and other influential classes come from the same small (and narrowing) economic class of people. Diversity of experience and background is valuable to informing how society should be run. If all kinds of groups are locked out of the avenues of power due to not fitting some arbitrary requirement (in this case money and the connections that it brings), then it bodes ill for our ability to solve pressing problems.
So here comes the tricky and controversial part: how do we solve this problem?
If you believe that poor people are poor because they are stupid or lazy — and that their children probably will be as well — then the issue of inefficient allocation disappears. But if you think that a smart and hardworking child could be born into a poor household, then inefficient allocation is a serious problem. Solving it would enhance economic growth and boost the value of American assets.
There are two options. The first is to remove wealth from every process that doles out economic opportunities: take money out of politics, give all children equal schooling and college prep, base country club admissions on anonymous interviews, etc. This will be difficult, especially since our society is moving rapidly in the other direction. Election campaigns are flooded with more money than ever, and the net price of a college education — after loans and grants — has jumped even as increases in list prices have finally slowed. Poor kids who do make it to college will have to spend more time scrubbing toilets and dinner trays and less time studying.
The other option is to reduce inequality of wealth. Giving poor children a leg up through early childhood education or other interventions might help, but it would also take decades. So would deepening the progressivity of the income tax, which only affects flows of new wealth and not existing stocks. In the meantime, a huge amount of economic activity might be lost to inefficient allocation.
The easiest way to redistribute wealth continues to be the estate tax, yet it is politically unpopular and applies to only about 10,000 households a year. All of this might change, however, as more research estimates the harm caused by inequality through the inefficient allocation of opportunities.
This kind of research is not always straightforward, since it measures things that didn’t happen as well as those that did. Nevertheless, some economists have already shown how value can be destroyed through inheritance and cronyism among the wealthy. Scaled up to the entire economy, the numbers are on the order of billions of dollars.
These costs are not unique to the United States. Even as globalization has reduced inequality between countries, it has often increased inequality within them; the rich are better able to capitalize on its opportunities. Where nepotism and privilege are prevalent, the costs are amplified.
Needless to say, this a complicated issue that will take a lot more than a few changes to regulatory and tax policies. What do you think of this issue or the solution posited?