Living with Inequality

Inequality is, always and everywhere, a fact of economic life. It is also, always and everywhere, a recurring subject of moral controversy. Americans have for the most part avoided preoccupation with the topic”they have generally worried more about equality of opportunity than of results”but our recent economic difficulties have made concerns about distribution of income more pressing and intense than usual.

In one sense, the contemporary debate about inequality has lost much of its customary edge. The disappearance of socialism as a live political option in the West has eliminated from discussion the radical ideal of essential equality of condition. We are all capitalists now, and in all capitalist economies”which is to say in all modern economic life”the question is not the existence of inequality but its extent. Given human differences, a free economy simply will be an unequal one; the matter at issue is how to discern when, and under what circumstances, inequality becomes inequity.

The narrowing of the question has not much dampened the moral fervor it generates. Not, at least, on the left. Liberals typically assume that inequality is a major and remediable problem; that it results, more often than not, from flaws in the socioeconomic system; and that even where it reflects differences in individual ability and effort it ought to be reduced to the amount required for efficient allocation of economic resources. Not the least of John Rawls’ contributions to modern liberal theory is his further specifying the allowable amount as that which provides the maximum marginal benefit to the least advantaged. (Rawls unfortunately revealed no algorithm for arriving at that optimal condition.)

Conservatives, in their usual muddling way, have no comparable formula for addressing the problem”to the extent, that is, that they concede there is a problem. People on the right generally suppose that, assuming free and fair competition (a large assumption), the prevailing distribution of economic rewards, however unequal, is “natural””reward corresponds to effort”and therefore just. Efforts at redistribution by the government, in this view, have no basis in justice (society ought not be in the business of coercing charity) and typically serve only to hamper economic efficiency and to restrict personal liberty.

Only libertarians of the strict observance resist all government intervention on principle. Most American conservatives, for example, accept the need for a social safety net to provide assistance to those who, for any number of legitimate reasons, cannot make it on their own. But conservatives expect that intervention to avoid destitution will apply only to a small, and mostly non-continuing, segment of the population. They recognize that while poverty rates don’t vary much”they have hovered in the 11-to-15 percent range since the 1960s”the identity of those in poverty at particular times changes significantly. Many people move in and out of poverty over the course of a lifetime. In any case, conservatives distinguish intervention to reduce hardship from efforts directed specifically toward making incomes more equal.

Much of the popular concern about inequality stems from the implicit assumption that inequality and poverty are intimately associated. But that need not be the case. If, through some fortuitous economic circumstance, we could tomorrow double the income of every American family, we would greatly reduce poverty but we would reduce inequality not at all. Surely, however, the “problem” of inequality would, in most people’s eyes, be significantly diminished. (The problem would be unresolved for those who define poverty in relative, not absolute terms, but such people, one can safely assume, are in a small minority; not many Americans would lose sleep over inequality if no Americans lacked economic necessities.)

Still, the connection between inequality and hard times is so prevalent in folk wisdom that expressions of alarm over the nation’s distribution of income followed in the wake of the recent economic downturn pretty much as night follows day. And those concerns were not without foundation. A long post-1945 trend toward greater equality petered out in the early 1970s, and since then economic rewards have gone disproportionately to those already well off, especially to the very well off. That development was little remarked on as long as the economy remained healthy, but it has come prominently to attention since the onset of the economic nosedive in late 2007.

The causes involved in the renewed trend to inequality are varied and complex”family structure, education, immigration, weakening of trade unions, international competition, technology, decline of industry, politics and public policy”and analysts emphasize those factors that coincide with their ideological inclinations. Critics interested in relating inequality to economic decline have focused their attention on the activities of “Wall Street””the shorthand term for all those involved in the world of high finance. Not since the Great Depression have bankers and financiers been such objects of condemnation, a situation that, in almost everyone’s view, is very much of their own making.

Even were their behavior unrelated to our economic difficulties (which few suppose), the leaders of finance would be suspect for their enormous wealth. Attitudes toward the rich vary greatly. Few of us begrudge Kobe Bryant his millions: We know we could duplicate neither his fadeaway jumper nor his ability to draw people to part with large amounts of money to watch him shoot it. Similarly, we more or less happily indulge the wealth of anyone”artist, inventor, entertainer, entrepreneur”whose work clearly contributes to some perceived public good. Not so with those who gain wealth from manipulating financial instruments. Build a better mousetrap, fine; devise an arcane derivative for the futures market, not so fine.

Yet, leaving the matter of the financial elite aside, few economists would draw a direct causative line from distribution of income to the Great Recession. The two are separate, if sometimes related, issues, and, as everyone concedes, some degree of inequality is intrinsic to capitalism. In any case, while we may presently have more of it than is necessary or economically good for us”though specification in such matters is difficult”the argument about inequality is not primarily an economic one.

How people vary in their thinking about inequality can be got at through a thought experiment. Imagine that we could tomorrow begin the world over from scratch. Imagine further that we would begin with equal economic resources in a system of open and fair competition where the only differences among competitors would have to do with their own effort and ability. What do you expect would result? If you’re a typical liberal, a world much closer to the egalitarian ideal than what presently obtains; if you’re a typical conservative, a world with the greater range of inequality that has characterized the American experience.

Or, to get at the matter from a different angle, imagine the economy as a pie. At any given time, we as individuals and families have different-sized slices of that pie. What do we think should be done to improve the condition of those whose slices are the smallest? The inclination of liberals is to find a way to slice the pieces more evenly; that of conservatives is to leave the relative size of the slices to themselves and concentrate instead on baking a larger pie so that the least well off, along with everyone else, improve their situation. In the real world, of course, most people would opt for some combination of the two approaches, but it is the initial inclination”and resulting policy emphasis”that divides us left and right. From those differing inclinations come significantly different views of the proper role of government in the economy. We finally wind up, at the end of the path those inclinations lead us along, either as social democrats or democratic capitalists.

Transnational comparisons indicate that, in the perennial tradeoff between freedom and equality, Americans differ from most Europeans in preferring freedom. They assume”or so their preferences would indicate”that inequality is not always, or even most of the time, evidence of inequity. It is not for them the moral outrage that so many of their intellectuals tell them it should be. And that commendable absence of outrage reminds us that, as much in the moral life as elsewhere, nothing takes precedence over common sense.