Inequality, Part 2

Seeing Inequality for All, featuring Robert Reich, provided a fine springboard for discussion of my last post. I won't delve into the film in detail, but I'll make reference to it in answering my own previously posed question: namely, moving beyond intuitive concerns about fairness, what are the specific problems that extremely income inequality creates in a society, and what are the most important and effective arguments in favor of the contention that such inequality is detrimental?

Here are my candidates, in no particular order:

1. Arguments about the economic ramifications of the diminishing marginal propensity to consume. Reich addresses this concept through his interview with the wealthy capitalist, who points out that the bulk of his income is devoted to savings rather than to the purchase of goods and services. Reich, in broadly Keynesian fashion, more or less treats the economic implications as self-evident: consumption is necessary for strong economic performance, so a broad-based middle class with a high propensity to consume is more conducive to growth and stability than a top-heavy distribution.

2. Arguments about the diminishing marginal utility of wealth. Reich doesn't address this issue; it's quite separate from, though related to, the above, which is relevant by virtue of its negative economic effects. What matters here, in contrast, is the intrinsic ethical inefficiency that extreme inequality implies. To the extent that a higher income increases utility--such as by enabling enriching life experiences and by creating an abiding sense of stability and security--the salutary effects of each additional dollar earned fall off drastically at extremely high income levels. Conversely, each additional dollar produces a much higher degree of personal well-being at low income levels. In a naive fixed-resource account that ignores the role of economic growth, the utilitarian case for redistribution is therefore straightforward and incontestable. Complications arise from (a) effects on growth, such as through incentive structures; and (b) ethical considerations about the justness of redistribution. Both are fascinating topics which I'd love to discuss further.

3. Arguing that inequality leads to an increased likelihood of speculative bubbles and financial instability. Reich addresses this in the context of consumer debt, but it's a two-sided issue; Matt Yglesias has a strong summary here.

4. Arguments that inequality leads to the capture of the political system. Inequality produces strong ethical considerations about the distribution of political agency: to the extent that wealth correlates with power and voice, and to the extent that we consider equity in power and voice to be necessary to democracy, inequities in wealth undermine democratic governance . It's worth noting that, arguably, what's really problematic here is the susceptibility of the political system to the influence of wealth in the first place, but that's a pragmatically meaningless distinction. Reich explores this issue fairly thoroughly.

Now for what I consider to be bad arguments against inequality:

5. Concerns about the intrinsic justice, or lack thereof,  of an unequal distribution of resources: an appeal to "fairness." This is really the weakest argument, both rationally and politically, and the ethical side is better addressed by reference to the above, especially #2 and #4. Fortunately Reich doesn't lean on this.

6. Pointing to stagnating wages at the middle and bottom of the income distribution. This is where it's crucial to disentangle concerns about inequality per se with concerns about the broader state of the economy. Reich sort of brings the two points together by discussing how the doctrine of maximizing shareholder value lends itself to wage and workforce reductions, but he doesn't address the larger tension here, which accompanies a lot of discussions about inequality. Namely, what's problematic about a working-class family struggling to make ends meet is not, strictly speaking, the inequality of the situation, i.e. the fact that a mega-rich upper class exists; the problem is that the working-class family is subjected to an objectively poor quality of life. A world in which the incomes of working- and middle-class families rose dramatically would represent a status quo improvement even if the incomes of the top percentiles rose in even greater proportion, rendering the society more unequal. Inversely, a more equal society with objectively poorer living standards for everyone would represent a decline from the status quo. In other words, concerns about the level of inequality in a society should be secondary to concerns about the well-being of the least advantaged: it's a case of values being more important than ratios. This is a somewhat controversial contention, admittedly, especially in light of #4.

I hope to follow this post up by addressing arguments in favor of inequality's beneficial effects, and by elaborating further on #5.