Is Inequality a Moral or Economic Issue?

There is so much talk about inequality these days — it is clear that no consensus has arisen because parties are simply talking past each other.

Most of those who argue that inequality is NOT a problem argue from economic grounds. They state that inequality provides strong incentives for economic effort (the bigger the carrots for success the better the incentives), and that capitalism inevitably produces inequality as certain people produce more goods and services and add value to society. Inequality is thus necessary and unavoidable in a well-functioning competitive economy; and to some degree the better it functions the greater the inequality.

Most of those who argue that inequality IS a problem argue from moral grounds. They start with the conviction that a person’s opportunities to deploy their skills and efforts and reap the rewards should NOT be limited by the income of their parents; to the extent that large inequalities of wealth favor the children of the wealthy in getting education, jobs, health, and opportunities, such inequalities undercut the moral basis of a society that professes equality of opportunity for all its citizens. Moreover, they argue that democracy requires all citizens to have a stake in their society and the ability to participate in political dialogue and decisions; if inequality is so great that the wealthy can drown out the voices and interests of ordinary citizens, what is left of democracy in practice? Finally, in a wealthy society of equal citizens, can it be tolerated that even families with adults who work full-time and contribute their efforts to the economy and society are nonetheless unable to secure housing in safe neighborhoods, sound schooling for their children, access to recreation, nutritious and adequate diets for their families, and necessary health care without constant stress and dependence on private or public charity?

These alternative positions tend to polarize and by-pass each other in frankly foolish arguments about inequality, looking at all or nothing positions. I actually heard a commentator on radio condemning the absurdity of having a society in which the “government redistributes all income to make everybody equal” — even though no sensible critic of inequality would ever make that request and such extreme socialist practice has disappeared by common consent. At the same time, defenders of inequality treat ANY even minor effort to balance social obligations and wealth — such as taxing the income earned by workers as salary at the same rate as income earned by wealthy investors from dividends and capital gains at the same rate — as a Nazi-style attack on the principles of humanity.

We need to leave such absurdities on both sides far behind. What we need is a temperate, thoughtful debate on just HOW MUCH inequality is compatible with BOTH a strong economy AND a functional and legitimate democracy. That is a debate we have not yet begun to have.

Arthur Laffer gained fame by drawing a picture on the back of a napkin noting that if taxes are too low, then government cannot function to regulate and defend society and society will fail; but if taxes are too high, then effort is discouraged, capital flees, and society will fail. So there must be an optimal point in between at which taxation is sufficient to support vital government services, but low enough not to impede entrepreneurial and business effort.

The same is clearly true of inequality. If there is too much inequality, a minority will dominate the economy and politics and democratic society will fail; if there is too little inequality effort will be discouraged and government interference will be too high and society will fail. So there should likewise be an optimal point (or range) in the middle where inequality is sufficiently high to call forth business, worker, and entrepreneurial effort, but not so high as to discourage efforts by those at the bottom and undermine the value of citizenship and democracy.

Where are we now in the United States? Here are a few bits of evidence: overall inequality as measured by the Gini coefficient is the highest for any advanced industrial society in the world; the portion of national income going to the top 1% is at all-time historic highs; and the rate of participation in the labor force and in elections is at historic lows. Economic growth, however, is not very strong. So it seems pretty clear that we are at a point where inequality is high enough to discourage effort in job-seeking and voting; but not doing much of anything to promote strong economic growth. That seems to me to argue for taking some measures to reduce inequality, and see if things improve!

There are many ways to improve equality without undermining all rewards for business: raising the minimum wage; equalizing capital gains and earned income taxes; increasing inheritance taxes; all of these make it bit harder to accumulate vast fortunes, but not impossible. People have become rich in America during periods when all these measures were different in real terms than they are today.

Reducing inequality a little bit from the historically highest levels in our history and among the highest in the world will not eliminate inequality; it will just push it back to historically more common levels. If we cannot even pursue that goal, we are far from a democracy indeed.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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