Some pundits and politicians insist that economic inequality is a necessary consequence of a functioning capitalist system — and that in such a system, every one is ultimately better off even if some are better off then others. Perhaps some economic inequality is inevitable in any system, but the facts are clear: the more economic inequality there is in a society, the worse off everyone and everything is.
Not only are the poorest in society worse off (obviously) but even the best off and richest are actually worse off than they otherwise would be. What's more, overall economic growth is lower than it otherwise would be.
Economists used to believe that we had to hold our noses and put up with high inequality as the price of robust growth. But more recent research suggests the opposite: inequality not only stinks, but also damages economies.
In his important new book, “The Darwin Economy,” Robert H. Frank of Cornell University cites a study showing that among 65 industrial nations, the more unequal ones experience slower growth on average. Likewise, individual countries grow more rapidly in periods when incomes are more equal, and slow down when incomes are skewed.
That’s certainly true of the United States. We enjoyed considerable equality from the 1940s through the 1970s, and growth was strong. Since then inequality has surged, and growth has slowed.
One reason may be that inequality is linked to financial distress and financial crises. There is mounting evidence that inequality leads to bankruptcies and to financial panics.
“The recent global economic crisis, with its roots in U.S. financial markets, may have resulted, in part at least, from the increase in inequality,” Andrew G. Berg and Jonathan D. Ostry of the International Monetary Fund wrote last month. They argued that “equality appears to be an important ingredient in promoting and sustaining growth.”
Inequality also leads to early deaths and more divorces — a reminder that we’re talking not about data sets here, but about human beings.
Some critics think that Occupy Wall Street is simply tapping into the public’s resentment and covetousness, nurturing class warfare. Sure, there’s a dollop of envy. But inequality is also a cancer on our national well-being.
So why do people insist on defending a system that increases economic inequality? What's the upside and for whom?