How inequality harms

I try to avoid politics here on the blog, even though it’s something I read about and talk about quite a bit. But there’s a point about inequality that I’ve been startled to see conservatives either missing or ignoring. In the clip above, Rich Lowry makes what I believe is a very misguided statement, arguing that inequality doesn’t cause harm per se. His exact words: “It’s just not true that [the bottom fifth of the population are] not getting ahead because of inequality… That Peter Orszag goes to Citigroup and makes two or three million dollars and merrily joins the 1% has zero effect on people who may be stuck at the bottom fifth in the Bronx, for instance.”

Woven in here is a point about poverty in America but I’m going to treat this as an example more broadly of the claim that the rich getting richer doesn’t make anyone else worse off. Perhaps I’m misinterpreting Lowry; perhaps he was very narrowly talking about the “stickiness” of serious poverty in the U.S. But the more general argument is something I’ve seen pop up elsewhere.

As for the broader claim that inequality isn’t hurting anyone… There is a logic to it, as I’ll explain, but it ultimately doesn’t really hold up to scrutiny. Before I get started, let me say this: even if everything I say here is correct, it doesn’t necessarily imply any particular policy responses to inequality. My aim here is to get past some faulty reasoning so that we can focus on the difficult questions around inequality that ultimately will determine what policies we do or don’t favor. So if you’re a conservative, try to keep an open mind as I go through this. Nothing here implies that you have to change your policy views.

A Simple Economy

To think about this, let’s consider inequality just between you and I. And even though we’ll eventually want to think about incomes, to keep it simple let’s start off just talking about wealth. I have $100 and you have $100. Now you come into some money and suddenly your wealth increases by $1000. You’re now quite a bit richer than I am, at $1100 net wealth to my $100. But am I worse off in any sense? Seemingly, no. This is the point I believe Lowry was trying to make.

Considering Alternatives

But here’s the problem with that line of reasoning: in saying I’m not any worse off, we’re comparing my current state only to my previous state, rather than to any other alternatives. Back when we each were worth $100 there weren’t many interesting alternatives to consider. I couldn’t become any richer without you becoming poorer (in our simplified, static model). Doing so would be unfair – or to stick to the language of harm, if you assume diminishing marginal utility, transferring money from you to me would lead to a loss in overall welfare.

But now that there is so much more wealth in the system, the alternatives get more interesting. What would happen if you gave me $100? I’d have $200 and you’d have $1000. Again, assuming diminishing marginal utility, that’d be a net welfare improvement. To take it even further, you could give me $500 so that we each had $600 of the full $1200 in the pot.

If at this point you’re thinking something along the lines of “It’s my money; I have no obligation to share it with you” try to put that to the side for now. It’s a legitimate feeling and I will return to it later. My point now is that from the perspective of welfare/utility/harm, the new unequal situation – while not worse for me than my previous situation – is worse than some other alternatives we can suddenly imagine.

What We Can And Can’t Afford

I want to consider one more super simplified scenario before trying to map some of this to anything approaching the real world. Imagine the same scenario where we each had $100 and then you got a sudden windfall of $1000. But now imagine that we jointly owe $100 in debt (which we inherited) to some third party. Now the Lowry’s of the world are basically saying 1) that I’m not any worse off than I was before you got that windfall AND 2) I had better cut back on my spending because I simply can’t afford to live the same lifestyle I’ve been living, given the fact that we’re jointly in debt.

As in the previous example, it’s clear that while I’m not worse off relative to my state prior to your windfall, I am worse off than I would be in various alternative distributions of the $1200 in the economy. The additional point to be made is this: I’m now being told that we can’t afford for me to maintain my lifestyle.

This is where I want to draw my first parallel to reality. Conservatives maintain that the top 1% getting filthy rich doesn’t make anyone else worse off. And then they turn around and claim that the economy simply can’t afford to maintain the social safety net (Social Security + Medicare + Medicaid) that the middle class has come to depend on. But as my examples have hopefully made clear, the 99% – while not worse off than they would have been had no one gotten richer – are much worse off than they would be if that wealth were more equally distributed. And it is in this context that claims of “we can’t afford it” become downright perverse. A world in which wealth were equally distributed would be a world in which we could afford it, at least in part.

Considering Objections

A quick recap: I’ve argued that while the rich getting richer doesn’t make the rest of us worse off relative to status quo, it does leave us worse off than we would be if that new wealth were more equally distributed. I’ve further argued that this argument has particular salience at a time when the 99% are being asked to make major sacrifices in the form of a reduced social safety net in order to reduce the deficit and pay down the debt. Claims that we can’t afford it rightly trigger consideration of alternative distribution schemes more than might be the case in less austere times.

But as I said at the outset, none of this implies that we must act to mitigate inequality (if we even could agree on how to do that). I want to mention the two most obvious objections to doing so, even if one accepts everything I’ve laid out here:

1) Property rights. If you were thinking¬†“It’s my money; I have no obligation to share it with you” then fair enough. This is essentially an ethical question, so I won’t bother arguing about it here. If you believe that this is more a question of rights, that could be grounds for being ok with inequality. But don’t claim that it’s not hurting anyone. Relative to more equal distributions of wealth it is.

2) Economic growth. I’ve ignored the role of growth in all these little examples, but a common complaint about economic redistribution is that it tempers growth. That, one can argue, hurts even the worst off over time. That may or may not be true, but it’s at least a legitimate point to raise.

My hope is that we can move on to debating #1 and #2. They are both tough questions, but to me they’re where the action is. Claims that inequality isn’t harming anyone make little sense once alternatives are considered. I’d like to see conservatives abandon that argument so we can focus on the ethical question of property rights and the empirical question of economic growth.

UPDATE: A great graph via Mother Jones puts some numbers to this:

3 thoughts on “How inequality harms”

  1. Hey Walt,

    Enjoyable post and definitely an important topic right now. I do have an issue with your hypothetical “windfall” situation though. How do you think this changes if the new wealth is created by conscious productive human action, not through happenstance since wealth can’t actually be magically created. Or conversely, through theft (i.e. crony capitalism)?

    Do you think the cause of income inequality is an important consideration?

  2. Thanks Harris! Short version: no, not really. Longer version: only to the extent that mitigating the inequality would dampen the prospects for creating new wealth. In other words, to the extent that redistributing the $1000 that you earned keeps you from creating new wealth going forward, sure I care. But if it turned out that it didn’t – that you were intrinsically motivated, say – then no, the fact that you created the wealth for yourself wouldn’t matter to me. A consequentialist view where deserts are valued only to the extent that they incentivize. Not necessarily the most common view, I know. But I think this gets addressed once you get passed “it’s not hurting anyone” and start talking about the mixture of rights/property and growth.

  3. Walt, I think you are right to focus on opportunity costs as the real harm in inequality, but I don’t think that you’ve touched on the pernicious assumption that undergird an assertion that inequality is not harmful. Economic wealth is valuable, not because it allows for consumption (we over consume as a political body), rather, its useful because it gives an economic actor freedom to choose among options – e.g. what college to attend, whether to make the investment of homeownership or opt for the relative freedom of being a renter, or whether to relocate in search of a more fulfilling life/career. The real harm of unequal wealth distribution is that individuals who would otherwise have had a positive impact, are not able to do so and we’re all worse off because of it. Its foolish to think that the only thing that set Einstein apart was his intellect- he had genuine economic opportunity. Thomas Jefferson and James Madison had economic opportunity, but only the history of the winners gets written. Untold numbers of humans that could have made the world a better place have not had the opportunity to do so because they have been relegated to lives of toilsome labor because of the moral luck of their birth. You’ll often hear people claim that “anyone can pull himself up by the bootstraps,” but these Horatio Alger stories are a fiction in contemporary America and most such stories commit the logical error of generalizing from the specific to the general (‘so and so made it out of poverty so anyone can make it out of poverty’). To deny that inequality is a problem is to deny the fundamental equality of all men, women, minorities, ethnicities, etc. If you do not believe that economic inequality is a problem then you tacitly support the position that the less wealthy are inherently less able to contribute to the social good. The opportunity cost of continued inequality is that 99% of the country will never be given the opportunity to make public policy, go to graduate school, or fully participate in the democratic process. How many brilliant minds never have the opportunity to address nearly intractable problems for no reason other than an unequal concentration of wealth. For every MLK or Steve Jobs, there are untold numbers of individuals with equal measures of talent who will forever remain anonymous because they did not have the economic freedom to chose their path in life.

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