Inequality and its perils

Jonathan Rauch writes: At a salon dinner in Washington recently, the subject was inequality. An economist took the floor. Economic inequality, he said, is not a problem. Poverty is a problem, certainly. Unemployment, yes. Slow growth, yes. But he had never yet seen a good reason to believe that inequality, as such—the widening gap between top and bottom, as distinct from poverty or stagnation—is harmful to the economy.

Perhaps he spoke too soon.

Once in a while, a new economic narrative gives renewed strength to an old political ideology. Two generations ago, supply-side economics transformed conservatism’s case against big government from a merely ideological claim to an economic one. After decades in which Keynesians had dismissed conservatism as an economic dead end (“Hooverism”), supply-siders turned the tables. The Right could argue that reducing spending and (especially) tax rates was a matter not merely of political preference but of economic urgency.

Something potentially analogous is stirring among the Left. An emerging view holds that inequality has reached levels that are damaging not only to liberals’ sense of justice but to the economy’s stability and growth. If this narrative catches on, it could give the egalitarian Left new purchase in the national economic debate.

“Widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term,” Joseph E. Stiglitz, a Nobel Prize-winning economist, writes in his new book, The Price of Inequality. “Taken to its extreme—and this is where we are now—this trend distorts a country and its economy as much as the quick and easy revenues of the extractive industry distort oil- or mineral-rich countries.”

Stiglitz’s formulation is a good two-sentence summary of the emerging macroeconomic indictment of inequality, and the two key words in his second sentence, “extreme” and “distort,” make good handles for grasping the arguments. [Continue reading…]

An interview with Richard Wilkinson co-author of the book The Spirit Level: Why Greater Equality Makes Societies Stronger and co-founder of The Equality Trust:

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One thought on “Inequality and its perils

  1. delia ruhe

    Quote from the article: ‘As Christopher Brown, an economist at Arkansas State University, put it in a pioneering 2004 paper, “Income inequality can exert a significant drag on effective demand.” ‘

    In what way is this a “pioneering” insight? If consumers have neither the money nor the credit, they can’t consume. Sounds like logic to me.

    Besides, this is where government must become the consumer of last choice. If people can’t spend, the government has to pick up the slack. Because it’s all about the circulation of money from producer to consumer to producer, etc., etc.

    Instead, what we get is the banks muscling in with all kinds of crap financial products: “Let them eat credit,” indeed! I prefer the “pay them enough to buy your product” strategy a lot better.

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