The Lasting Damage of High Inequality

In my previous post, I shared the grim results of a recent OECD study that found a consistent rise in wealth and income inequality across much of the developed world, with the U.S. taking the lead among the richest countries (though comparatively less wealthy countries Chile, Mexico, and Turkey were ahead).

Reporting on the same survey, the New York Times delved further and explored the impact that this worsening inequality is already having on societies:

By the group’s calculations, the rise in inequality in 19 of its members between 1985 and 2005 reduced economic growth in those countries by 4.7 percentage points between 1990 and 2010. The O.E.C.D. countries where inequality is the highest include the United States, Mexico, Turkey and Chile.

What’s most interesting about the report is that it provides strong evidence that greater inequality hurts the economy by denying opportunities to the poorest people in society. In countries with high inequality, the O.E.C.D. says that people at the bottom of the income distribution are less likely to graduate from a university, spend less time in school or college and are more likely to be unemployed. In other words, the report says, “in societies experiencing higher inequality, individuals might become less and less able to move outside the earnings class in which they were born”.

When American political leaders, including President Obama, talk about inequality they often take great pains to distinguish between what they call “inequality of outcomes”, or existing inequality between the rich and the poor, and “inequality of opportunity”, or the ability of poor people to become rich and vice versa. That is in large part because they do not want to be accused of engaging in “class warfare”. But the O.E.C.D. report shows that the distinction between outcomes and opportunity is false, or, at the very least, deeply flawed because high inequality today tends to lead to more inequality in the future.

The O.E.C.D. offers several suggestions for what governments can do about this: reduce the gender gap in employment and wages; increase access to better-quality jobs; invest in education and training; and provide more financial support to the poor. That’s an ambitious agenda and, sadly, one that lawmakers in Washington are unlikely to take up anytime soon.

Despite all the talk and attention being dedicated to this topic — among analysts, politicians, and the public at large — little of substance has been done in most of the afflicted countries. Will it take many more years of widespread misery and strife — and the subsequent political and social agitation — before the powers that be feel compelled to act? Or is it up to the masses, especially those in the growing ranks of the poor working class, to speed the process up?

Indeed, I disagree with the contention that it is up to lawmakers to do anything about it. Obviously, it would be ideal if our ostensible representatives did their part to address the needs of their constituents. Governments certainly have the tools and resources to do something about the problem, as they have in the past (albeit in some periods or places more effectively than others). But the state can (and indeed should) only do so much.

It is business and private capital that arguably have more resources and more direct leverage of the problem: after all, they are the ones employing ever-more impoverished workers, and the ones who complain loudly about lack of demand for their goods and services (as if beggared workers have the disposable income keep commerce going). It is investors, shareholders, and financiers that are extracting more and more capital from potential use as better wages and benefits, and instead siphoning it to the top through generous bonuses, dividends ,or obscure financial instruments that enrich only a small minority.

Given the potential to do much necessary good with these vast resources — at the very least to pay people a living wage or salary, as can well be afforded — why aren’t the business and financial elites (not to mention their allies in government) doing their part to turnaround the coming stagnation and strife before it gets worse? The simple answer is because, so far, they see no need or interest to do so. They have the money to insulate themselves physically and psychologically from the consequences of the inequality they help perpetrate (and indeed benefit from).

But given the findings of this and other studies, it appears that it will not be long until the problems caused by inequality reach such an extent that it will indeed be in their interests to do something about. Few societies have ever remained stable or prosperous across the board while maintaining such naked injustice and socioeconomic disparity.


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