A common problem of the current global political and economic order is the soaring inequalities in income, wealth and poweralongside slow growth. There is a simmering debate on inequality’s causes and consequences and how this problem can be fixed.
The econ undergrads exposed to the original Kuznets law (inverted u-shaped curve relationship between inequality and per capita income) and the subsequent Kuznets law (inverted u-shaped curve relationship between inequality and environmental degradation), and also Arthur Okun’s famous law of equity-efficiency trade-off that permeate mainstream economics, must now read Scientific American (2018), Dillow (2019) and IJLR (2014) in order to appreciate new demystifying findings of recent times on these topics. In this post, I present a collage ofsome salient pointers in this connection.
Inequality has become bothersome now, rather belatedly though, due to its following ramifications.
First, inequality is an obstacle to growth and employment. The reason is that people tend to consume more of their income if they are poor than if they are rich. This implies that a concentration of income and wealth at the top depresses aggregate demand. Inequality is also bad for growth because (a) it encourages the rich to invest not in innovation but in the means of entrenching their privilege and power; (b) unequal corporate hierarchies demotivate junior employees; (c) it leads to less trust so that people will not enter into transactions where there is a risk of them being ripped off; (d) it prevents long-term productivity enhancing organizational and technological changes within firms and inter-firm industrial organizational changes; bosses doing nicely with increased market power of their firms are not interested in long term changes; nor are they committed to professional ethics. They are just bothered about measureable short term targets at the cost of less measurable things that are nevertheless important for the success of firms such as a healthy, transparent and accountable corporate culture; (e) the rich are loath to invest on fear of future redistributions or nationalization; and (f) inequality of power in the sense of workers’ voices being less or not heard and trade unions becoming less powerful makes the governments abandon the aim of truly full and decent employment even as the firms are enabled to boost their profits by suppressing wages and working conditions.
Secondly, inequality leads to a host of social and health problems, which are greater across income groups in more unequal societies. Inequality undermines social cohesion and eats into the social fabric. High economic inequality intensifies social hierarchies and leads to low social trust—the extent to which people trust most others in their society—and low institutional trust—the extent to which people believe their public institutions can be trusted to deliver public services. The lives of the rich and poor hardly ever intersect. Further, corruption in terms of people having to pay bribes or use personal contacts to get what they need from the public sector, and powerful, moneyed lobbies extracting undue favour from the government, undermines institutional trust and as a result social trust as well. Corruption in the public sphere increases inequality by transferring resources from the public to the elites and, more generally, from the poor to the rich. The poor have to pay more in bribes as a fraction of their income than both the rich and middle classes, who have ways to circumvent corruption or to take advantage of it. In this milieu, people will not support policies like high taxes for more public services that increase equality. What is more worrisome is the fact that economic inequality promotes social stressors that feed into the biology of disease for the entire society. The lower socio-economic status of most people in unequal societies means negative psychology as also less access to education and opportunities on that basis; less access to health care and living in more disease-prone neighbourhoods. Lower socio-economic status creates chronic financial worry that distracts and exhausts.The rich are not excluded from this kind of predicament. They too have stressors. With increasing inequality, they typically expend more resources insulating themselves from the world underneath the bridges, so to speak. They spend more of their own resources on gated communities, private schools, bottled water and expensive organic food. And they give lots of money to politicians who help them maintain their status. The stressors for the rich and poor influence the biology of disease for the entire society. People with more total life stress gain more weight and smoke and drink more than people with fewer stressors. Most people lose interest in actively engaging themselves in civil and political spheres for the betterment of society. In a nutshell, there is psychological and biological drain of inequality that makes people sucked into entropy and social decline and fall instead of evolutionary changes for the better.“Everything is f….d”, and there is no hope. Period.
Thirdly, inequality and ecological crisis are connected. Status increases in importance in more unequal societies, which is reflected in status competition via proliferation of consumerism and resource-depleting and all kinds of pollution-increasing lifestyles on the part of the market participants. The basic reality is put forward as follows. When people who could benefit from using and abusing the environment are economically and politically more powerful than those who could be harmed, the imbalance facilitates environmental degradation. And the wider the inequality, the more the damage. Furthermore, those with less power end up bearing a disproportionate share of environmental injury. Decision makers in the government or private-public partnerships ignore the costs to the less powerful and side with the benefits to be obtained by the more powerful people with more economic power, i.e. purchasing power. What is dynamically worrisome in this regard is that disproportionate pollution exposure of the poor hurts their children in particular, resulting in higher rates of infant mortality, lower birth weights, a higher incidence of neurodevelopmental disabilities, more frequent and intense asthma attacks, and lower school test scores. Among adults, exposure is linked to work days lost to illnesses and the need to care for sick children. Over time, these health effects reinforce the disparities that make communities more vulnerable to environmental harm in the first place.
Finally, economic inequality leads to political inequality, thus undermining democracy and promoting megalomaniac demagogues. Extreme forms of income and wealth distribution make it easier for affluent groups and harder for poorer groups to put pressure on political decision-makers. This results in the implementation of policies that cement and reinforce the existing power imbalances at the economic and political level, both nationally and internationally.
Increasing inequality has materialized largely as a matter of political choice—a consequence of policies, laws and regulations that have been put in place since the mid-1970s. The rules of the economic game have been rewritten, both globally and nationally, in ways that advantage the rich and disadvantage the rest. There is a vicious spiral as already pointed above. Economic inequality translates into political inequity, which leads to rules that favour the wealthy and make them rig or capture the economy, which in turn reinforces economic inequity. This is the best explanation consistent with facts, as Joseph Stiglitz, the great mainstream renegade economist,emphasizes, and holds good for the US and elsewhere too. Little wonder that there is no more progressive taxation and high quality public funded education and other services with affordable access. There are no modern competition laws to deal with the problem posed by the 21st century market power on the rise. There is no stronger enforcement of the laws that are already there. There are no labour laws to protect workers and their rights to unionise. There are no corporate governance laws that curb exorbitant salaries bestowed on chief executives. There are no stronger financial regulations that will prevent banks as robber-barons from engaging in the shameless exploitative practices that have been their hallmark. There is no better enforcement of anti-discrimination laws. And there are no more sensible inheritance laws that will reduce the inter-generational transmission of advantage and disadvantage. In short, we have gotten into the pits of a lawless world that is potentially incendiary.
In light of the reality-check as above, it is understandable why neither liberal-rightist governments such as in the US and India nor authoritarian-leftist governments such as in China, havepromoted equitable development (Sharma, 2018). We can also understand why most people in the world do not elect equality promoting politicians connected to grassroots activism—a significant paradox of our time!
Some very interesting new empirical findings remain in the academia as follows all the same. Economies with greater equality of income and wealth distribution perform better, with higher growth, better average standards of living and greater stability. High economic inequality comes along with several undesirable outcomes, such as higher levels of violence and lower levels of health, happiness and satisfaction with life. More inequality, independent of absolute levels of income, predicts higher rates of crime, including homicide, and higher incarceration rates, higher rates of kids being bullied at schools, more teen pregnancies and lower literacy. There are more psychiatric problems, alcoholism and drug abuse, lower levels of happiness and less social mobility. And there is less social support. This grim collective picture helps to explain the immensely important fact that when inequality increases, everyone’s health suffers, deaths of despair shoot up, and riots do happen off and on.
This is not all. Countries with lower rates of adult literacy, fewer political rights and civil liberties, and higher income inequality—all considered to be indicators of more unequal distribution of power—tend to have more polluted air and water. Greater inequality is also associated with less access to clean drinking water and sanitation facilities, both crucial to the environment and human well-being. Wider inequality is also associated with weaker environmental policies and the weaker policies are associated with more environmental stress and poorer public health. The proportion of plants and animals threatened with extirpation or extinction is higher in countries with more unequal income distributions. Rates of deforestation are higher in countries with greater corruption associated with greater inequalities. Public expenditure on environmental research and development and patents on environmental innovations are lower in industrial nations with greater income inequality. More inequality is also linked to higher carbon emissions per person and per unit of GDP.
As regards fixing the inequality problem, the usual contrast is between the strong solution of raising tax rates for the minority of people of high income and wealth (as proposed by Thomas Piketty) and the weak solution of arranging for mild redistributive measures and the provisioning of a viable as also effective, decent social safety net for people at large (as has been found in Brazil). Most governments are not even prepared to do the latter. Policy makers are thus still ultra-conservatively stuckin the slushy Okun’s equity-efficiency trade-off, with mud on their face, so to say!
Dillow, Chris. 2019. How Inequality Makes Us Poorer. Stumbling and Mumbling Blog. May 17.
IJLR. 2014. The Challenge of Inequality. International Journal of Labour Research. 6 (1).
Scientific American. 2018. Science of Inequality. November.
Sharma, Shalendra. 2018. A Political Economy of the United States, China and India: Prosperity with Inequality. Cambridge University Press.
By Annavajhula J.C. Bose
Department of Economics, SRCC