The tangible harm of inequality

The Economist's blog asks egalitarians to point to some "tangible harm" from income inequality.
In some senses, the question is silly. To see why, imagine a slave society in which the slaves are reasonably content. It would be hard to point to a tangible harm, but something would be wrong.
This just shows that the "tangible harm" criterion is psychologically, economically and philosophically naive. Psychologically so, beecause people adapt to their circumstances, so "losers" don't feel too bad. Economically, because a gain foregone should count as much as a tangible cost; in a slave society no-one can see that freedom creates prosperity better than slavery, but this fact should surely count in our judgment. And philosophically, because inequality matters for more than consequentialist reasons. Justice matters too.
Anyhow, let's address the question. Aside from the ill-health which the Economist mentions - as if death were not tangible enough - I'd cite five other possible harms:
1. Crime. Basic economics says the relatively poor commit more crime than the relatively rich. This is because their opportunities to make money honestly are more limited, and the cost of being imprisonment - foregone earnings - is lower. Empirical work corroborates this. Is it really a coincidence that unequal countries (south America) have more crime than egalitarian ones (Japan, Korea, Scandinavia).
2. Lower social mobility. Societies with higher income inequality have lower social mobility. Politics in the US and the national media in the UK are now largely hereditary occupations. Many of you might think this unhealthy.
3. Slower growth. There are some reasons to think inequality can retard growth, say, by reducing social capital and therefore investment, or by creating credit constraints that prevent potential entrepreneurs.
4. Bad customer service and job dissatisfaction. The inequalities that matter are not merely of income, but of power. Some people have it, some don't. And in companies, these inequalities breed slovenliness and inefficiency. Cloke and Goldsmith put it thus:

Through years of experience, employees learn that it is safer to suppress their innate capacity to solve problems and wait instead for commands from above. They lose their initiative and ability to see how things can be improved. They learn not to care and to accept things as they are. They justify making mistakes and are allowed to be irresponsible and pass the blame to others for their mistakes. They become mindlessly obedient, fatalistic, intransigent and hostile.

5. Inner-city blight. Another consequence of inequalities in power is that poor areas become bad areas, with urban decay, poor schools and crime, because the poor lack the power to get the state to provide proper policing and schools.
So, there are almost certainly tangible harms from inequality. The more awkward question for egalitarians is: would there be more harm done by reducing inequality?

Comments

[Tim Worstall]

To repeat an ealrier question though.

What's the "right" level of inequality?

[The Pedant's Apprentice]

"forgone" not "foregone".

[pommygranate]

Interestingly countries with the highest Gini co-efficients (a measure of income equality) also tend to be the most free. Hence, i would advocate pushing our govts to free up the economy to not only make it wealthier but also to make it more equal.

[pommygranate]

Interestingly countries with the highest Gini co-efficients (a measure of income equality) also tend to be the most free. Hence, i would advocate pushing our govts to free up the economy to not only make it wealthier but also to make it more equal.

[jameshigham]

Psychologically so, beecause people adapt to their circumstances, so "losers" don't feel too bad.

Yes but is that such a bad thing - blissful oblivion? I'm not so sure it's bad.

[Miguel Madeira]

"Inner-city blight."

I imagine that, outside english-speaking world, in these context, the "inner-city" should be translated to "suburbano"

[Sam Z.]

A real downside of inequality for the non-poor - and you really see this if you compare the UK or any urban area in the US with Germany or the Nordics - is that you get a much stronger distinction between good and not-so-good neighbourhoods. The huge gaps in income, wealth and culture (there are gaps everywhere, but it seems to me they are gaping in unequal societies) seem to lead to a state of affairs in which middle-class people become absolutely obsessed with avoiding the underclass. I think this may be contributing to the rapid growth in house prices we've seen in the UK and in mixed, urban areas of the US (like the Bay Area), although that's a topic for another day. Now, if you live in the UK or urban US, can you honestly say you wouldn't prefer it if these decisions - housing, school, even where to park! - didn't have so much riding on them? I would say the higher urban crime rates in the US and UK actually understate the difference from more equal societies, because the rates are conditioned on the low-risk behaviour of middle-class people, which is in turn motivated by a desire to avoid the unpleasant situations which can arise when they run into the underclass.

Sam.
(compulsivetheorist.blogspot.com)

[Cecilieaux]

Excellent!

I'm asking people who come to my blog -- where I ended up posting on a subject I thought you would have done a much better job (see my post Portal for Billionaires) -- to come up with instances of inequality in their immediate environment.

[Vindico]

"To see why, imagine a slave society in which the slaves are reasonably content. It would be hard to point to a tangible harm, but something would be wrong."

We are all 'slaves' in some sense to the Governmnet, but most of us are content! So just as freedom is better for the individual slave in your example, so freedom from government is better for all of us.

[chris]

Arg! I hate Free Exchange. It's such BS.

Sapolsky's done a lot on socioeconomic status and health:

http://www.johnhawks.net/weblog/reviews/health/social_hierarchy_sapolsky_2005.w

http://scan.oxfordjournals.org/cgi/content/full/nsm013v1

http://www.amazon.com/Why-Zebras-Dont-Get-Ulcers/dp/0716732106

[Bob B]

"A real downside of inequality for the non-poor - and you really see this if you compare the UK or any urban area in the US with Germany or the Nordics - is that you get a much stronger distinction between good and not-so-good neighbourhoods."

Interesting but curious. It's curious because income is even more unequally distributed in America than it is in Britain.

Sad to say, the often conspicuous distinction of "not-so-good neighbourhoods" in Britain owes much to the distinctive look and ambience of council estates and because statutory rent controls for much of the post-war period in Britain made the renting of residential properties unprofitable without subsidies - which is why so much rented housing on the market now is due to subsidised housing associations.

In West Germany, most of the massive task of housing reconstruction after WW2 was left to the private sector. The result was that housing developments were much smaller and more architectually diverse than the massive council estates in Britain. Even now, rented housing is a much larger percentage of the overall housing market in West Germany than it is in Britain.

[Mark Wadsworth]

Yes Bob B, the Germans left it to the private sector ... funded with massive tax breaks for higher income people who bought flats to rent out.

So while it all looks very nice (it really does, to the point of being a little bit dull), it came at a huge overall cost.

[Will Davies]

On one level, the Economist's challenge is just very narrow-minded Benthamite crap. The presumption that ethical questions need to be answered with 'tangible' evidence is the mark of robotic thinking.

But on another level, it does reveal one of the short-comings of our contemporary policy framework: current economic orthodoxy does find it very difficult to say much about inequality, other than to bracket it as an 'equity' issue which is for someone less analytical or rational (politicians) to deal with...

[Jim]

"Interestingly countries with the highest Gini co-efficients (a measure of income equality) also tend to be the most free. Hence, i would advocate pushing our govts to free up the economy to not only make it wealthier but also to make it more equal."

Ha. I suggest you look up the real meaning of high Gini coefficients and come back to us. I look forward to hearing from you.

[reason]

Will Davies...
yes looking just at GNP means implicitly assuming that $100 has the same value to Bill Gates as it does to a beggar. If you assume diminishing marginal utility of money then ceterus paribus more equality means increased welfare. The problem comes with the ceterus paribus of course.

[Matt Munro]

"imagine a slave society in which the slaves are reasonably content. It would be hard to point to a tangible harm, but something would be wrong."

What would be wrong though ? There seems to be an implicit assumption that equality is the default state and is de facto desirable. All human progress has been made through inequalities (of capital, of risk, of knowledge) and as western societies have obsessed about equality they have become uncompetitive and by the middle of this century will decline and get overtaken by emerging eastern economies. There are no equal societies in nature (even ants have a hierarchy) so why the conviction that it is a "good" thing ?

[James Kroeger]

It's one thing to talk about unequal distributions of income or money-wealth but quite another to talk about unequal distributions of REAL wealth.

The tangible reason why we have rich and poor is because there are simply not enough of the most desirable goods/services out there for everyone to experience them. Given this scarcity, someone has got to be rich. If we had never known scarcity, if there had always been enough of the most desirable goods and services out there for everyone to experience them, then we would never have arrived at the concepts of 'rich' or 'poor.' Scarcity is the reason why it is impossible for true Equality of Economic Experience to ever be achieved. It is why the rich 'will always be with us.'

The Economist's blog:

The more awkward question for egalitarians is: would there be more harm done by reducing inequality?

This is actually a very good question; one that every economist should be able to answer. Unfortunately, most cannot.

Even if society were to institute a steeply progressive income tax, it would not deprive the wealthy in any tangible way because they would still have all the money they'd need in order to obtain the scarcest goods/services/experiences produced by the economy. Because we have a market economy, prices would simply drop to a level that the wealthy would be able to afford. They'd still be able to enjoy the same 'lifestyle'; they'd just be paying fewer dollars for it. It is actually not possible to deprive the wealthy of their claim to the scarcest goods/services/experiences as long as they still have more money to dispose of than everyone else.

So the answer to the question asked by The Economist is no. In fact, no tangible harm whatsoever would be visited upon the wealthy if [disposable income] inequality were reduced by a steeply progressive income tax. The purchasing power of the disposable incomes of The Rich would be maintained, even while they are being reduced in nominal terms by higher tax rates over a period of time. All of society---including the wealthy---would benefit from the public wealth that the government would be able to produce with the 'excess earnings' of the wealthy. The cost of these great benefits to the wealthy in real terms: nothing.

[Kevin Carson]

James Kroeger,

Your argument from scarcity makes an assumption of fixed quantity similar to that involved in the so-called "lump of labor" fallacy. While wealth is "scarce" in the sense that it's not a Mengerian non-economic good, most of it is not absolutely scarce in the same sense as non-renewable resources (i.e., increased purchasing power bidding up a fixed supply). For goods in elastic supply, wealth is scarce in the sense that it requires human effort to produce more of it; but it is also abundant in the sense that a near-unlimited amount can be made in response to increased demand, with the application of more effort.

Some disparities in wealth would result from different levels of willingness to engage in effort, and different levels of entrepreneurial skill in predicting and meeting demand. But the lion's share of wealth in today's society results from articial scarcities and resulting rents that enable some to collect wealth entirely out of proportion to their effort, and require others to put out far more effort than actually required to produce the wealth they consume.

[James Kroeger]

I'm afraid you're missing something, Kevin. While there are relatively few luxury goods/services that can be made more plentiful by investing more resources in the effort to bring them to market, most of the purchases that the wealthy are interested in making are for 'permanently scare' goods/services/experiences, e.g., beachfront property, Rembrandt's, the 'best' restaurants/entertainers/etc. Suppy is perfectly inelastic. Making it possible for wealthy people to throw more money at these markets does not increase the available quantities of such items.

Re: those luxury goods/services/experiences that CAN be produced in greater quantities, it is normally not necessary to throw extra money at the supply side in order to bring those 'extra' items to market. Luxury markets are such that suppliers are always knocking themselves out to try to bring more to market. If it costs more to bring more to market, they will simply charge more and the wealthy will be happy to pay the extra amount. You can't get a better return on the retail level.

The 'economic rules' that apply to most people simply do not apply to the wealthy.