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The problem with inequality

Adam Ozimek, echoing several others, (somewhat) rightly disparages some hollow (and common) anti-Walmart populism.   I don’t like Walmart much (on the other hand I have decided that populism is healthy and necessary in a democratic society), but it is certainly true that the fact that the six Waltons, who own Walmart, have as much wealth (note wealth, not income) as the bottom 30% of households means absolutely nothing about much of anything.   Except, of course, as a clever example of how to lie with statistics.

There are some issues that Adam is ignoring, however.

So what precisely ARE the problems with inequality?    I am thinking that inequality in wealth, poses the following possible dilemmas for society:

  1. Social-Moral Responsibility:   A society that can afford to feed its people, I would argue, has a moral obligation to do so.    Naturally, people will disagree on where social obligations end, some would argue that only complete equality is morally acceptable, but only some very few would say that there is no such thing (mostly people who have read too much Ayn Rand).   The right answer is somewhere in the middle.   This is the only purely moral case I’d appeal to.
  2. Anti-meritocracy:   Among the brighter libertarian types is the recognition that equality of opportunity and inequality of wealth are directly at odds.   A poor kid from the ghetto has fewer opportunities in life simply by being poor.    Tagg Romney has opportunities that even the reasonably well-off such as I can hardly imagine.   Meritocracy means recruiting talent from the broadest possible pool.
  3. Macroeconomic growth and stabilization:   As an empirical matter, it seems that high inequality may lead to slower growth in the long run and longer, deeper crises.   See here for a somewhat skeptical take, here for a classic view or here for an overview.   Causality has never been established conclusively, as far as I am aware.
  4. Political-Economic Feedback:   The crux of the argument of Acemoglu and Robinson’s book.   Wealth supports the ambitions of the powerful; the powerful use their influence to secure wealth.  As inequality of wealth worsens, the incentive to engage in this game, as well as the resources to win it, become greater.

When Adam suggests that it is not the top of the distribution, I think what he has in mind is that the problem with inequality is #1 and possibly #2.   Worry about the bottom and leave the top alone–perhaps they’ve earned it, or at least we should give them the benefit of the doubt.   At one time I would have agreed with that.

#3 may or may not be true.   Or it may be a consequence of #4.   It is certainly cause for concern that an extreme wealth distribution leaves society open to crises and slow growth, but whether or not you want to act on this kind of scant evidence says more about your priors than anything else.

I think #4 is a killer, though.   Economists want to ignore politics (most of us) in our policy recommendations, but if politics itself is shaped by economic outcomes then we are responsible.   And contra Adam, the problem is the rich not the poor.

Let me put it this way:  the Waltons, together, are worth about B$93.    This is approximately equal to the wealth of approximately 1 million median households in the US.   A small state, basically.   The comparison is much worse if you consider only “disposable” wealth (i.e. wealth not earmarked for things like retirement/education or bound up in housing–which can’t be sold without unfortunate consequences).

If political outcomes turn on the marginal contributions, rather than the marginal voters, then the Waltons (as an extreme lower bound) control 1% of the political process all by themselves (there are about 120 M households in the US).   What is the chance that the Walton’s cash would be pivotal in a given election (if deployed)?   I don’t know, but doubtless much much greater than 1%.   For comparison, a Senator could be expected to have much less of an impact than 1% in the outcome given policy dispute.

I haven’t even mentioned the problem of access to power which comes with wealth.

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