Inequality: The Structural Aspects

Despite the unprecedented attention that income and wealth inequality has received in this year’s presidential campaign in the United States and in several recent elections in Europe, one cannot but have the impression that, for many centrist politicians, inequality is just a passing fad. Their belief is, I think, that once the economies return to sturdy growth of at least 2 to 3 percent per year, and unemployment falls to 5 percent (or in Europe to single digits), people will just forget all about inequality and everything will go back to where it was some 20 years ago. Nobody would care about inequality again.

This, I think, is an illusion because it disregards the structural changes in societies wrought by the long and sustained process of increases in wealth and income inequality during the past 40 years. When there are deep structural changes, reminiscent of similar processes that have played out in Latin America during most of the 20^th century, aggregate indicators, such as the growth rate of the economy (which is nothing else but the growth rate of income at the mean of income distribution, that is around the 65^th or 70^th percentile), lose the meaning that they normally have in economically more homogeneous societies.

I see three such structural changes: disarticulation of many Western societies, political influence of big money (plutocracy), and inequality of opportunity.

Disarticulation was a term used by the dependencia literature of the 1960s-1970s to express both the divergence of interest and different positions in the international division of labor of various classes in the developing world. On the one hand, there was a domestic elite linked with capitalists internationally, participating in the global economy, both on the production side (as high-skilled workers or capitalists) or in consumption  (as consumers of international goods and services). And then there was a majority of the population that lacked any connection with global economy and produced and consumed locally.

The situation in rich countries, and especially in the United States,  is nowadays somewhat similar (see my earlier post, “Disarticulation goes North”). There is an elite (whether it is the notorious top 1% of 5% or even 15%), that is entirely plugged into the global economy and that lives and consumes globally. Then, there is a shrinking middle class, whose incomes have been stagnant for 30 to 40 years and which is linked to the global economy in a negative way, that is, lives in a permanent fear of job or income loss because of competition from poorer countries or migrants. These groups, rather than the bottom of the income distribution, are the disenchanted groups, so easily won over by Trump’s protectionist speeches. I am not discussing whether their expectations can ever be satisfied in a globalized economy or not; I simply want to note a deep disconnect between the interests of the top and the interests of this middle class, a breach that has been created by globalization and rising income inequality. When the economic interests of the two groups are so divergent, it becomes hard even to speak of something that would be a “national economic interest”; moreover, the divergence of interests carries over to a number of other divergences, in the way of life, perception of politics, cultural interests. This is the first structural gap.

The second is simply the extension of the first into politics. Due to a number of accommodating processes, including most famously Citizens United vs. Federal Electoral Commission, the role of big money in politics, always important in the United States, has further  increased.  But even without the facilitating court decisions (and these decisions could, in turn, be considered endogenous to the process of income differentiation), the very increase in income inequality would have brought greater political power to the rich. More concentration in economic power simply means that there are fewer people who have sufficient funds to help politicians and political causes they either like or (more probably) benefit from, and the economic concentration thus naturally leads to the concentration of political funding. Ultimately, influence in politics simply reflects uneven economic power. This then in turn, as has been argued by several political scientists (Benjamin Page, Larry Bartels and Jason Seawright; Martin Gilden’s “Affluence and Influence”), leads to political decisions that economically favor the elite and ultimately to further deepening of the economic differentiation.

The third structural change wrought by income inequality is rising inequality in opportunities. As income inequality gets more entrenched, it does not end simply In current income inequality but tends to carry over to the next generations. The chances of success of children from the rich and poor families diverge. In a process similar to what we can observe in Latin America, the divergence is not simply limited to inherited wealth, but is transferred to the acquisition of education (where the increasing importance of private education further exacerbates the trends), and family connections and networks that are often crucial for success.

Now, these structural inequities will not go away, may even be deepened, when the economy goes back to its long-run rate of growth. Higher rate of growth and lower unemployment might have been sufficient before the structural fault lines became strong because growth would have “papered over” these differences. But when the structural cleavages are deep, growth alone (as we have seen in the case of Latin America, again) is not enough. If I can risk a medical analogy, an ordinary cold may be cured by essentially doing nothing other than lying in bed and taking more liquids. Gradually we revert to the status quo ante. But if the cold continues for a while and transforms itself into a more serious illness, which is what a long process of inequality has done to the body-politic, stronger remedies are needed.

I recently reread some of Simon Kuznets’ writings from the 1960s. He argued that every income distribution should be judged by three criteria: adequacy, equity and efficiency. Adequacy is ensuring even the poorest have an income level consonant with local customs and economic ability of the society.  Equity is absence of discrimination whether it is a discrimination in current incomes, as for example in racial or gender wage gaps, or in future possibilities (what we now call inequality of  opportunity). Finally, efficiency is achievement of high growth rates. When it comes to the interaction between equity and efficiency, Kuznets sees it going both ways: in some cases, pushing for equity too hard, as in full egalitarianism, may have detrimental effect on the growth rate. But in other cases, the very achievement of higher growth rates requires greater equity, be it because a significant part of the population is otherwise socially excluded, not allowed to contribute, or because it leads to the fragmentation of society and political instability.  I believe that Simon Kuznets would have seen today’s position of the developed Western economies as being at that second point and argued that pro-equity policies are not a waste of resources but rather an investment in, even the prerequisite, for future growth.

This post was first published on Branko Milanovic’ Blog