Income Inequality: Right or Wrong?

income inequality

Thomas Piketty, a French economist, made a big splash in 2014 with his book Capital in the 21st Century. It piqued my interest in regard to social justice. Specifically, social mobility, status quo, and economic freedom. I believe that America has a serious issue with wealth inequality, and income inequality, and has for quite some time. We are now less of a socially-mobile society than many countries in Europe are. Cross that with some of the standard of living/life satisfaction measures in which Europe and a few other countries do well, and you have a fairly grim assessment of the United States.

Of course, in this era of American hegemony, media absurdity, the farce that is our President, militarized police, government bailouts of the banking and auto industries, racial tension, Enron, scapegoated immigrants, politicians in hock to the lobbyists, Citizens United, human-caused climate change, income inequality, wealth inequality, and flagging pay, it doesn’t take a Herculean mental effort to imagine that America is in trouble. I hate to be the bearer of bad tidings, but as a student of Western civilization, I have seen virtually every preceding empire collapse of its own weight. We can do better, we should do better, we must do better. I believe the rich now hold a share of wealth that proportionally far exceeds what was present in 1928. Sure, there will be stunning success stories rivaling Oprah Winfrey or Kevin Hart, but, as Piketty wrote: “Money tends to reproduce itself.” This means that no, a worker making $11 an hour is never going have a decent standard of living. Not even close.

Social and economic justice is fundamentally about the question: Can people get ahead or are they stuck? Can one have one job and “make a living”? If education is not equally accessible, and the status quo reigns from generation to generation, we’re talking about a fundamentally unfair system. Fundamentally unfair is not what America should aspire to – even if that was what the founders of the country had in mind and even if the Supreme Court finds it acceptable. Is America still the land of opportunity? “The US Declaration of Independence (1776) asserts that everyone has an equal right to the pursuit of happiness,” as Piketty wrote.

Here are some intelligent and well-informed thoughts about income inequality and social justice present in the barn-burner of a book, Capital in the 21st Century, by Thomas Piketty.

“Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.”

“As I have shown, moreover, inherited wealth played a smaller role in the United States than in Europe, and U.S. wealth was for a long time less concentrated, at least up to World War I. Throughout most of the twentieth century, however, and still today, the available data suggest that social mobility has been and remains lower in the United States than in Europe.”

“The issue of unequal access to higher education is increasingly a subject of debate in the United States. Research has shown that the proportion of college degrees earned by children whose parents belong to the bottom two quartiles of the income hierarchy stagnated at 10–20 percent in 1970–2010, while it rose from 40 to 80 percent for children with parents in the top quartile. In other words, parents’ income has become an almost perfect predictor of university access.”

“The second way of achieving such high inequality is relatively new. It was largely created by the United States over the past few decades. Here we see that a very high level of total income inequality can be the result of a “hypermeritocratic society”….

“…[The] decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.”

“The very high concentration of capital is explained mainly by the importance of inherited wealth and its cumulative effects….”

“Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries.”

“To sum up: the inequality r > g has clearly been true throughout most of human history, right up to the eve of World War I, and it will probably be true again in the twenty-first century. Its truth depends, however, on the shocks to which capital is subject, as well as on what public policies and institutions are put in place to regulate the relationship between capital and labor.”

“Inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it.”

 

Below is a graph from a paper: “CEO Compensation” (MIT Open Access Article, Carolya Frydman and Dirk Jenter) which is available here. It shows the drastic increase in CEO pay from 1936 to present day. College tuition and student debt follow similar trajectories. It’s not good news at all. Nor is this fundamental fact about the American economic reality lost on most workers; there is a distinct “class consciousness” now – greater than anything since 1941 in my estimation. Piketty writes: “If we move even higher up the salary and bonus scale to look at the top 0.1 or 0.01 percent, we find even greater increases, with hikes in purchasing power greater than 50 percent in ten years.22 In a context of very low growth and virtual stagnation of purchasing power for the vast majority of workers, raises of this magnitude for top earners have not failed to attract attention.” It’s got my attention, and apparently, yours.

 

Graphic from C. Frydman and D. Jenter

 

Interestingly, my sanguine friend Robert L. Lloyd, Ph.D., an economist, says this in response when I brought up this idea of wealth and income inequality and social justice with him:

“It just seems that you see my country as the end product, I see it as a work in progress. Is our government corrupt? You bet. So are ALL others. Can we do better in a lot of areas? You bet. ALL countries and systems have their flaws. But I look at how far we have come. More black Ph.D.s in the U.S. now than in any country, ever. More blacks live above poverty level here than anywhere else. Women have made great strides; income is quickly approaching equality. I guess it’s just easier to be against something as initiator of change than to see the good expand on it and use that as the initiator of change. Perhaps it is just the eternal optimist in me, but my faith is renewed when I walk and talk to REAL people in the community and see neighbors helping each other in Houston [which was hit by a major hurricane].

Please don’t get me wrong, I fully understand your pessimism, I totally appreciate and respect your opinion. I see all the negatives you point out, but I believe in human resilience and (albeit gradual) forward progress. The world and standard of living (overall) is better than ever in the past. Yep, we tend to keep making the same mistakes over and over, the pendulum swings back and forth (I wish it wouldn’t knock plaster off the wall on each side before swinging back). As humans, it seems we need to reach the precipice before we make real changes – but we always have. I remember fearing in middle school that the next ice age would hit soon because of the hole in the ozone. Or hiding under my desk in grade school during nuclear bomb drills (like that would help!). I remember Black Panthers, Kent State student shootings, JFK, RFK, MLK, on and on. Yes, some things are really freaking bad but things have been worse and we always come out on the other side better for it. 

I firmly believe that we get more of what we focus on. I’ll keep focused on the good things, do my best to change things (and myself) in my immediate environment and circle of influence. There are enough people, it seems, focused on the negatives. I have just evolved to know that my life is happier and so much more rewarding with an optimistic viewpoint. If I focus too much of my attention and energy on the negatives, it seems to bring me down and be just plain old depressing.”

 

I am not sure if I am being dark and neurotic, or if Bob is being Panglossian in his optimism. I imagine he tends to think I am a bit green (he has the Ph.D. in economics, not me). I think I have a lot of heart, though, and I don’t tend to apologize for championing the cause of the disenfranchised. I want America to be better; that’s what we were promised. There is no asterisk in the United States Constitution that modifies the phrase “the pursuit of happiness” to actually mean “the pursuit of happiness – and if your parents had sophistication, means, education, and wherewithal, you have a much better chance of finding said happiness.”

New York Times columnist David Leonhardt feels passionately about income inequality. In this piece, he examines it from a laudable perspective (LINK). Here is a snippet:

“When progress is the norm, it feeds on itself. People can trust that their own sacrifices will usually pay off. They can endure hard times without becoming cynical and can be generous toward others.” In a later paragraph, he refers to wage stagnation and wealth disparities between the social classes — namely, it has been largely flat for decades unless one is very wealthy — and writes of how caustic it can be, socially:

“…this stagnation looms over life. It breeds political dysfunction, and it helps explain why so many Americans aren’t swayed by facts. When you have been struggling for decades, you tend to lose faith in society’s institutions and their sober-minded experts.”

I’m not 100% comfortable pinning the awesomely-bad decision made by 49% of voters (maybe 25% of the populace, when one calculates the low voter turnout we suffer through in this country) to elect Donald Trump, but I do believe Leonhardt is right. His thesis is basically that income stagnation and lack of economic progress has a pernicious effect on the American psyche for all but the very wealthy. I don’t know that it is obvious to the casual observer how this causal mechanism works, or what the effects on our political and social lives are. I do know there is a very strong correlation between 1) stagnating social mobility and 2) shocking levels of partisan rancor, lack of faith in traditional institutions, and starkly divergent views of virtually everything — depending on one’s political stripe. Can that really be a coincidence? The chances are 1 in 10.

Indeed, Leonhardt continues: “Without that faith, all of our other problems become harder to solve. America’s standing in the world will be diminished. The damage from climate change — one problem that’s even more important than stagnation — will accelerate in the face of inaction.”


See the book Capital in the 21st Century for more in-depth reading on income inequality and economics and the history of economics.

Type in “income inequality” or any other keywords in The Wisdom Archive and see what quotations on economics, social justice, and education pop up.

Here is a podcasted interview I did with some experts called “A Progressive Perspective on American Economics,” in which there are a few examples of income inequality and divisions of wealth in America – and other helpful information revealed.

In the spirit of academic freedom, here is an anti-Piketty book.