This article reflects my personal opinion.
The economic article published here two weeks ago gave a short introduction to income inequality and showed that it has been on the rise again for the past decades in most developed countries. And while there is less reliable data available, the same is most likely true for wealth inequality. Inequality of opportunity has probably been stable and hence failed to work as a countermeasure. These developments have led to movements around the globe fighting for more equality and demanding a higher contribution to society from the rich and wealthy. Their voices are increasingly being heard and some of them have developed inspired, constructive propositions to reshape societies, with the recently most prominent one being the campaign of Bernie Sanders in the United States. However, at this point in history, one can assess that perfect equality is neither achievable nor desirable. While it might work in small, very homogenous communities, every time it has been tried on a larger scale it led to oppression and persecution of dissidents and the formation of a new, politically legitimised elite. So given that inequality is not inherently bad, the question arises: When does inequality become a problem that should be tackled by society?
First, one has to understand that inequality is not synonymous with the common concept of injustice. Consider income inequality. In order to incentivise workers to deliver their best results, higher productivity has to be remunerated with a higher income. This is due to the fact that workers would feel treated unfairly if they worked more and harder but still received the same income as everyone else. Hence, from a productivity perspective, income inequality is only harmful if it arises from unbalanced bargaining power, i.e. if it is not caused by inequality in productivity but by high earners getting paid more than they contribute to the economy. This could be caused by the loss of power of labour unions, a too high supply of low-skilled workers or an ideologically motivated shift towards higher top incomes (all developments that could recently be observed in Western countries). Additionally, in most jobs it is impossible to observe a monetarily measured productivity, giving them a weaker bargaining starting position. Think for example of nurses, policemen and teachers. But even if workers were to be paid according to their productivity, income inequality could still be socially harmful. For example, if low-skilled workers who receive low incomes get into such a dire economic situation that they begin to turn against society, it could be beneficial for high earners to give up higher shares of their income to save social peace. While a simple redistribution of income might mitigate the consequences of high inequality (it cannot solve the fundamental problems of such a society), it would probably not be perceived as “just” by its members.
In the long run, the latter problem of a high “justified” income inequality can only be tackled by a better education system that gives more people the opportunity to become highly productive members of society. This leads to the second dimension of economic inequality: Inequality of opportunity (an issue often referred to as economic mobility). In general, it describes by how much a person’s potential to succeed in life is determined by their parents’ social and economic status. Additionally, it directly links income to wealth inequality: If there is a high level of income inequality where rich individuals can accumulate high levels of wealth and there is a high level of opportunity inequality where children of high earners are much more likely than their peers to become high earners themselves, there will naturally be a very unequal distribution of wealth (And indeed, wealth distribution is always much more unequal than income distribution). The perceived level of opportunity inequality also influences the level of income inequality that is socially tolerated. For example, in the United States, the poor have less problems with an unequal distribution of income as they believe that they have a high chance of becoming rich themselves one day. The fact that the US are less economically mobile than most European countries does not change that, as only the perception counts. This relation emphasises the importance inequality of opportunity has on the perception of a society’s level of justice.
With prestigious private schools with high tuition fees, an increasingly long time students have to spend in the education system and often times the need to gather unpaid work experience to succeed, the developed countries still face a high level of inequality of opportunity. This poses a problem as the high levels of inequality are not justified by ability and ergo lead to a waste of a lot of talent that could be beneficial for the economy. Comprehensibly, many people think that this problem is closely related to wealth inequality. Hence, those who want to create a world with a more equal distribution of opportunity often are proponents of a meritocracy, where a person’s status is based on his ability and talent, combined with an equal starting point for each individual, independent of social or economic status of the parents. A thought experiment: What is needed to achieve a true meritocracy that is at the same time detached from influences of wealth and social status? First, one would have to abolish inheritance in order to give everyone the same economic starting point. But wealthy parents still might have more time to educate their children and the money to send them to better schools. So one would also have to send every child to the same education system, preferably full-time. To rule out unequal cognitive starting points due to early-childhood education, this has to be done at a very early age. But now that an individual’s success is not determined by the parents’ status anymore, it is determined by inherent talents and weaknesses. But these are just as randomly distributed across children as their parents’ wealth, making the new system not more “just” than the old one. And should a government have full control over a child’s education? And do people not have the right to try to help their children to live a fulfilled life? In general, when thinking about issues of inequality, one should accept the fact that the concept of justice does not work in practice. There will never be a perfect equality of opportunity and trying to establish a perfect equality of outcome will always end in disaster. Rather than trying to build a “just” education system that gives everyone the same opportunity to succeed, one should try to curb high-priced private education that leads to the waste of a lot of talent and build a system that maximises everyone’s potential (Notice the theoretical difference: while in the first case, children that lag behind their peers due to inherent characteristics are assisted up to a point where they can compete with the others, in the second case, an education system is devised that educates each individual as long as the benefits outweigh the costs).
As already brought up, high levels of income and opportunity inequality will inevitably lead to high levels of wealth inequality. And the scarce available data suggests that the distribution of wealth has already become alarmingly unequal (e.g. in the United States, the top 0.1 percent approximately own as much as the bottom 90 percent). This can result in unequal distribution of political power, lead to severe cases of old-age poverty and cause asset markets to fail to yield efficient allocations (think of the world’s luxurious “ghost apartments”). While wealth inequality can be a natural consequence of demographics or the byproduct of an efficient level of income inequality, there are strong signs that a lot of developed countries have reached socially harmful levels that might not be sustainable peacefully.
Economic inequality issues are worrying. But they do not call for an overreacting condemnation of inequality in general that only serves to divide societies along ideological lines but for a rational approach that assesses causes, threats and possible solutions and tries to find a social consensus. Income inequality is not a problem in and of itself and the goal of governments should not be to create an “equal” income system but one that incentivises the maximisation of productivity and the minimisation of social costs. Coherently, inequality has to be coped with when it is harmful to society. For example, the excessive bargaining power of high earners that most likely contributes to growing inequality has to be met with better protection for labour unions and the implementation of minimum wages that ensures workers a remuneration of their productivity. Additionally, higher taxes on top incomes should not be justified with a “fair” redistribution but with the funding needs for an aforementioned education system that maximises its students’ potential, to mitigate the social strain caused by un- and underemployment and for other public services like health care and security (It is ironic that, most of the time, the politicians who demand less government and less taxes also call for more police and wonder why underfunded ministries struggle to do their job). Capital and inheritance taxes should not be advertised as equalisers of opportunity but as a technical necessity if an evermore increasing concentration of wealth that is detrimental to a working society is to be stopped.
There are numerous tools that governments can consider in order to oppose harmful inequality: A broadening of the tax base combined with a simplification of the income tax system (countless opportunities to deduct taxes are another example of a failed attempt to achieve a just system, causing more harm than good), higher taxation of exorbitant incomes (e.g. above 10 average incomes), lower taxation of middle-class incomes and hence getting rid of the income tax hump, higher taxation of capital incomes or a new income definition that does not differentiate between labour and capital income, high inheritance taxes above a threshold that leaves enough room to “leave something for your children” (e.g., 50 average yearly incomes), taxation and regulation of economic activities that add no value like high-frequency trading, stopping socialising the risks of investors through bail-outs of the financial system, pushing for international treaties that stem corporate and individual tax avoidance and evasion across borders, expansion of the education system on all levels, provision of sufficient spots in daycare centres, establishment of a minimum wage that is related to the average wage and many more (where the former suggestions can be used to finance the latter). While governments can do a lot (and already start doing a little) against growing inequality, there also has to be a cultural change of thinking, creating the narrative of a new middle class that is worthwhile living in and should be rewarded worthily.
The fight against harmful inequality is not a class war: If society fails to keep inequality at a level that is efficient and can be justified by disparities in individual characteristics, everybody will lose. A combination of high income, wealth and opportunity inequality will leave a group of poor and poorly educated people behind that have no perspective to flee their dire situation. In their despair, they will project their hate onto minorities and will try to escape their poverty by engaging in criminal activities. The wealthy will have to hide in gated communities, sending their children in armoured limousines on their way to isolated private schools. To see that this is not dystopian, one only has to look at countries like South Africa and Brazil or at the ghettos and gated communities in the United States. To avoid these consequences (or an aggravation of them), there has to be a spirited approach to curb economic inequality. But for it to work and to get sufficient support from the public, one has to look at the problem in a nuanced manner and distinguish between necessary, tolerable and harmful inequality. The goal should not be some romantic idea of equality but a system that tackles inequality only if it is not justified by disparities in ability and productivity or puts a heavy strain on society, but does so in a decisive way. It is not the case that there are no measures that work. Rather, governments have so far been reluctant to use them.
Next week, I will publish a less-serious economic article that is also on inequality but covers a topic that a lot of people, especially in Germany, should be able to relate to. Stay tuned!
Music – The Rolling Stones – You Can’t Always Get What You Want
Film – La Haine, Killing Them Softly, Wall Street
Reading – Thomas Piketty – Capital in the Twenty-First Century, The Guardian’s Simon Hattenstone – Is the new meritocracy a sham?
Written by Jonas