Effects of Inequality

The effects of inequality challenge our beliefs about fairness and justice. Is this just jealousy? Or is there something of real social value stirring in us?

Like most people I know, I become jealous when I see people “getting away with it”. You know, the types who milk the system, whether that’s social security or their employer. We all agree that the single mother spending all day looking after our grandmother in a care home for a few pounds an hour is doing a wonderful job, but can we afford to pay higher care fees? We feel helpless to act against the inequality staring us in the face, let alone even consider taking action against the multinational corporations and corrupt regimes that seem to get what they want.

We also collude with inequality. We pay hundreds of pounds to watch sports live or on TV. We buy music from mega-rich pop stars. And we see blockbuster Hollywood releases featuring actors among the highest paid in their profession. That’s OK, though, isn’t it?

Well, it might be or it might not be. Let’s consider what we might mean by inequality. There are as many expressions of inequality as there are ways to quantify any aspect of society. And while we might not be too interested in equal access to a certain supermarket or whether the road past my house is in worse condition than the road past your house, some more fundamental inequalities have a more far-reaching and profound effect. These might include various forms of prejudice, on race or gender for example. But here I’ll look at just three.

Income Inequality

Many people automatically think of inequality as being something based on income. In other words, you and I are not equal because your take-home pay is different from mine. And we’re both different from Bill Gates and we’re both different from a beggar on the streets of New Delhi. This leads us to become angry when we see some professions rewarding employees at much higher rates than others. People in financial markets might earn millions each year, while care workers and nursery staff take home minimum wage. Which leads me to re-quote one of my favourite one-liners: Why is it we pay people more to look after our money than to look after our children?

Some professions seem to get away with it. Footballers, for example, might take home similar pay to bankers. Dame with those at the top of their game in other sports (golf, boxing, tennis). Actors, popular musicians and TV celebrities too. Entrepreneurs like Warren Buffett and Bill Gates take home much more again. But to some degree we respect what these people have achieved, as opposed to bankers and bond dealers who are just doing their job.

The interesting thing about income inequality is that by some measures, it’s actually reducing rather than increasing. And as the IEA points out, the least wealthy have seen their income rising. However a lot depends on where you are taking your readings. The top 1% are pulling away from the rest of the top 10%. And the top 0.1%, well, you get the idea.

Income inequality is to some extent redressed with progressive tax rates. Those on minimum wage pay little or no income tax whereas high earners might pay 40% or higher on amounts over a certain threshold. Those on the left of politics believe that the top rate of income tax should be much higher. Libertarians would, in their Utopian ideal world, prefer the rate to be zero.

Income inequality is unavoidable without strong central control of people’s lives. Critics point to the economic failure of economies which have tried to achieve this such as the USSR and North Korea and, more recently, Venezuela. But ideologically, it raises another aspect of inequality: power inequality.

Power Inequality

Most people will have come across the cliché: Power corrupts. In fact it’s an abbreviated form of a quote attributed to Lord Acton which goes “Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.” This implies that the control required to enforce equality on a people requires a power which is so absolute that it likely results in a corrupt central regime. Indeed those at the centre of power in communist states tended to lead a more advantageous life than their fellow nationals. Indeed the Mossack Fonseca leaks showed that China’s leaders hid large amounts of personal wealth offshore. The Chinese government censored the news relating to the matter.

Power inequality isn’t just the domain of corruptible communists, of course. Dictators the world over have been siphoning wealth out of their countries for decades. In democracies, where people at least have some way of removing corrupt leaders, corruption takes a different form. At local government level, stories have existed for years about bribes from developers to planning committees and contracts for work awarded to favoured suppliers, connected to the officials awarding the contracts. At national government level, these things are sometimes harder to spot. Yet that hasn’t stopped Jacob Zuma, South Africa’s president, from using state funds for his personal pleasure, with the law slowly now catching up on him.

But the main source of power in what we might call free markets is connected to wealth.

Wealth Inequality

Not to be confused with income inequality, wealth inequality concerns the absolute wealth of an individual or organisation. Central to any democracy is its justice system, and it doesn’t come cheap. The USA is well-known around the rest of the world for its highly litigious ecosystem. It has one of the highest number of lawyers per capita in the world. For large corporations, legal fees run to billions of dollars, greater than their R&D budgets. The point relevant to this article isn’t so much about the apparent waste of resources (it would be better for everyone if that money was spent on R&D) but about the clout that a large corporation has in a free world. If you or I want to sue a large corporation for (say) copyright infringement, we would stand little chance because we simply can’t afford the legal fees. Yes, we could go down the no-win-no-fee route, but that’s more a game for the legal profession than for us as individuals to right a wrong. And it requires finding a law firm with a large budget and a belief that they can win the case. And it’s not just individuals that find themselves up against corporations. National governments also find that theyir decisions are challenged in courts if, say, they restrict the activities of companies that they believe might cause harm, such as in the sale of GM crops or certain drugs. Democracy itself is challenged by a concentration of wealth.

I have often promulgated a rationale for wealth taxation. It has redistributive power beyond that achieved through income taxation. Further, the wealth of a nation is jointly owned by its people, who have every right to distribute it in whichever way they choose. Why? Well, moral arguments aside, it’s the democratic state that holds the guns. It’s tempting to critique this idea by stress-testing it, perhaps postulating that the ultimate outcome would be a total redistribution of wealth. But that wouldn’t happen in practice. Partly because wealth would move out of the country, away from the local jurisdiction. And partly because that destroys any motivation for wealth creation. Nobody would do anything if they got a share of everyone else’s increase in assets.

A wealth tax would only be part of national taxation, and would really have to be limited to a Land Value Tax. After all, someones “footprint” in the national wealth is in the land they own. And it’s not possible to dodge paying it through creative accounting. Wealth in the form of other assets such as equity, credit, and cash would be harder to tax and all of these could move offshore, away from the tax authorities.

In a free market, everyone benefits?

Libertarian think tanks will repeat this mantra. They claim it doesn’t matter about inequality so long as the poorest are increasing their standards of living, the rich can get richer without penalty. They look at the reverse case (communism) and demonstrate that it doesn’t work. But isn’t that like saying that because the bath water is too cold, I’ll leave the hot tap running and running?

In the early phases of a free market, yes, everyone does benefit. The American Dream is founded on this principle, and until the last generation or two, US citizens often did see their standards of living rising quickly since their country was established. But in recent years, that hasn’t been as true. Why?

Money Questioner’s thoughts

Well, I don’t know the answer either. This article is as good as any I have read which tries to explain the situation. In short, it looks like money is chasing a limited supply of goods. That favours the wealthiest, driving the standard of living down for the rest. In my post last year on the free market I likened wealth inequality to a game of Monopoly. As the wealthiest buy up more and more land (in this case), the rest of the players become rent slaves with no hope of getting back in the game. They could either die a debtor or they could resort to crime (cheating) or revolt (turning the board over). Oxfam describes the situation as: Inequality keeps poor people poor and powerless, and weakens the capacity of economic growth to eradicate poverty. It is imperative that democracies recognise this outcome and ensure that the Monopoly situation isn’t allowed to happen. And to achieve that end result, what better than a Land Value Tax to aid the blood-letting of bloated concentrations of wealth? Imagine how long a Monopoly game would last if property owners had to pay 10% of their land wealth into a redistribution fund each turn?

The effects of inequality, and in particular wealth inequality, would result in an affront to our democracy if left unchecked. It’s important that we maintain everything our ancestors fought and died for in the battles against authoritarianism, colonialism and oppression. And it can all be done democratically.