WonkblogAnalysis

How rising inequality hurts everyone, even the rich

By Christopher IngrahamFebruary 6th at 11:00 AM

Over the past 40 or so years, the American economy has been funneling wealth and income, reverse Robin Hood-style, from the pockets of the bottom 99 percent to the coffers of the top 1 percent. The total transfer, to the richest from everyone else, amounts to 10 percent of national income and 15 percent of national wealth.

It's part of a massive concentration of wealth and income among the rich that has put the United States at levels of inequality not seen in this country since before World War II. It's a trend that economists such as Thomas Piketty believe will continue unchecked in the coming decades, with the top 1 percent of Americans capturing a quarter or more of the national income by 2030.

The problem is commonly understood as an issue for those who have less, and it certainly is. But recent studies demonstrate that inequality is bad for everyone in society.

Some of the pain is economic: The studies suggest that the inequality depresses economic growth, leaving less for society to divvy up — regardless of how its members decide to do so. And some of it is social: Studies have found that inequality, particularly the high level seen in the present-day United States, gives rise to criminal behavior.

Those effects can take a chunk out of your paycheck, regardless of whether you're in the bottom 99 percent or the top 1 percent. Leading economists and economic organizations are coming around to the idea that to maximize income and wealth for everyone — including those at the top — there have to be meaningful checks on income and wealth inequality.

Inequality hurts economic growth, especially high inequality (like ours) in rich nations (like ours).

In 2014 the Organisation for Economic Co-operation and Development, a collective of the world's 35 wealthiest countries including the United States, found that rising inequality in the United States from 1990 to 2010 knocked about five percentage points off cumulative GDP per capita over that period. Similar effects were seen in other rich countries.

“The main mechanism through which inequality affects growth is by undermining education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development,” the OECD found. Children from the bottom 40 percent of households (a huge chunk of the population) are missing out on pricey educational opportunities. That makes them less productive employees, which means lower wages, which means lower overall participation in the economy.

While that's obviously bad news for poor families, it also hurts those at the top. If you're a billionaire owner of a retail or manufacturing company, you want people to be able to afford the stuff you're selling. Henry Ford offered his workers high wages not out of any altruistic impulse but because he wanted them to buy his cars.

Not all inequality is necessarily bad. A 2015 World Bank paper found that a certain amount of inequality boosts per capita GDP in developing economies by allowing wealthy entrepreneurs to invest more. But that effect gets reversed in advanced economies like our own, primarily because of the detrimental effects on educational attainment outlined above.

Even in countries like ours, not all inequality is harmful. A report by the International Monetary Fund last year found that inequality could be beneficial to growth at low to moderate levels. On a 0-100 scale known as the Gini coefficient, where 0 means everyone has the same income and 100 means just one individual has it all, inequality spurred growth in countries with index values below 27. Unfortunately for us, our current Gini index value is somewhere around 41, well beyond the threshold where inequality becomes harmful.

Lots of other reports back these findings up. I won't bore you with the details on all of them, but if you want to learn about how inequality harms overall growth by decreasing per capita income, damaging health and well-being, decreasing disposable income, or enticing middle-class individuals to incur debts they can't pay, here are the links.

Inequality breeds crime.

This is somewhat obvious, but it's worth highlighting a few key studies: If you have a society sharply divided between winners and losers, some of those losers are going to conclude that the game is rigged and that it's not in their interest to play by the rules.

A 2016 London School of Economics study, for instance, found that greater income gaps between neighboring U.S. neighborhoods led to more property crime in the richer neighborhoods. “Income differences create an incentive for those relatively poor to steal from richer households,” the authors explain.

Perhaps surprisingly, the links between inequality and violent crime are even clearer. A 2002 World Bank paper found strong correlations between inequality and rates of violent crime, both within countries and between them. The authors say the relationship appears to be causal, even after controlling for a number of other known determinants of crime. The implication is that high levels of inequality create a permanent underclass forced to compete, sometimes violently, either with itself or with other classes for scarce resources.

This phenomenon is particularly clear in present-day Mexico, according to a 2014 World Bank paper. Because of the proliferation of gangs during the country's drug war, the costs of crime decreased as criminal knowledge and skills diffused throughout the broader population. The high level of inequality in Mexico (Gini coefficient: 48.2), meanwhile, meant that the expected benefits of crime increased. What you get is a perfect storm of incentives for violent crime.

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It's worth pointing out that inequality isn't the sole driver of crime. In the United States, for instance, the violent crime rate has fallen since the early 1990s even as inequality has increased. There are a lot of factors at play there: policing, overall economic growth, even environmental lead levels. What the studies above suggest is that, if the rise of inequality had been less severe, American crime rates would have fallen even more.

Similarly, a lot of factors beyond inequality drive economic growth. But the near-unanimity in the studies above, particularly pertaining to rich countries with high levels of inequality, presents a compelling case that inequality will be harmful to all of us in the long run. That's why organizations like the OECD, the International Monetary Fund and the World Bank are increasingly sounding the alarm on this issue: Skyrocketing inequality hurts everyone regardless of economic status.

But a substantial segment of American voters has responded to the unprecedented rise of inequality at the dawn of the 21st century with a collective shrug. Last year, for instance, 35 percent of Americans told Gallup they were satisfied with the way wealth and income were distributed in the United States. In 2016, similar percentages said they felt the distribution of money and wealth was “fair” and that the richest Americans were already paying a fair share or too much in taxes. Almost  half said they disapproved of redistributing wealth via higher taxes on the rich.

Many Americans view inequality as the natural outcome when talent and ability are unevenly distributed throughout society — the rich are rich, the thinking goes, because they worker harder, smarter and more productively than everyone else. High inequality is largely a function of merit, in this view, and not something to be overly concerned with. It's a feature of the capitalist system, not a bug.

But even if you feel that the rich are entitled to a larger share of the national pie because of their talent, productivity and hard work, current economic research suggests that unchecked inequality means less pie for everyone — even the rich.