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Why Inequality Matters

January 14, 2014
By Oren M. Levin-Waldman, Ph.D.

During the recent mayoral race in New York City, Mayor Elect DeBlasio made an issue out of income inequality. For market purists, this is no doubt a red herring used to justify redistribution. A free market where individuals enjoy equal opportunity means that they can make their own choices. As such, those who end up with more obviously made the right choices. Moreover, they worked hard for whatever they acquired.

Those who end up with less either made the wrong choices or perhaps lacked the requisite skills to earn more. Therefore, it is up to them to acquire the requisite skills that would enable them to have more.

In our modern global economy, the reason for growing income inequality is a function of skills-biased technical change. Old and obsolete industries that did not require much skill has been replaced by the new and technologically more advanced where skill has become key. The result has been a dual economy with highly educated and skilled workers earning high incomes at the top and poorly educated and unskilled workers earning low-wages at the bottom. Crowded out, of course, has been the middle class.

In recent years many have argued  including Nobel laureate Joseph Stiglitz, that income inequality is the product of deliberate government policy. Since the 1980s tax policies have favored the rich. Also the Reagan administration launched an assault on labor by stacking the National Labor Relations Board with those more favorable to business, and with the firing of the PATCO air traffic comptrollers union the message was sent to private industry that it was OK to fire striking workers. On top of this federal courts have been too quick to assert managers’ property rights, without recognizing equivalent property rights of workers.

Meanwhile, declining union membership has lessened the influence of organized labor, which historically was the key constituency behind the type of legislative policy favorable to the middle class. Of course, unionizing has become more difficult with increasingly more states passing right-to-work laws. At the same time, the federal minimum wage was allowed to stagnate. In short, with decline of labor market institutions income inequality grew.

And yet, for all the discussion over the causes of income inequality, it is largely irrelevant. Let’s say for the sake of argument that income inequality is due to globalization and the loss of manufacturing that has attended structural change, has it not been aided and abetted by the consequences of the assault on labor institutions — the same forces that has resulted in greater income inequality?

The problem with focusing on causes is that we lose sight of why the consequences really matter. Income inequality has without a doubt become symptomatic of the declining middle class. It isn’t a question of fairness, rather it is the health of democracy that is at stake. Unequal distribution of wealth and income adversely affects individuals’ ability to participate in the democratic process on the an equal footing with others. Those lacking in wealth and income don’t enjoy the same access to political and policy officials.

Those at the top of the distribution find themselves in a better position to use their wealth toward the attainment of their political and other ideological objectives. Additionally, those at the top of the distribution often enjoy inordinate power and are able to not only limit redistribution, but also shape the rules of the game in their favor. This is particularly problematic in a big city like New York City where income inequality tends to be even higher than the rest of the nation.

According to data from the Current Population Survey’s Civic Participation file for 2008, civic engagement was higher among those in households with higher levels of income. Six measures of civic engagement were looked at: daily discussions of politics, daily readings of newspapers — intended to speak to one’s knowledge about and interest in politics — involvement in protests, attendance at political meetings, visits to public officials, and participation in civic organizations.

On all of these measures, those in households earning more than $100,000 a year were more likely to be civically engaged than those in households earning less than $30,000 a year. Those at the highest end of the distribution were not necessarily more likely to be engaged than those in households earning between $30,000 and $99,999, but those in households with income between $30,000 and 59,999 were considerably more likely to be engaged than those in households with income below $30,000. This would suggest that entry into the middle class would make a huge difference when it comes to active civic participation.

Why is this important? Because democracy cannot survive without a strong and vibrant middle class. True democracy requires active involvement that extends beyond the merely nominal of voting. That requires that we develop our social capital, which is predicated on active involvement in communal affairs. But we cannot develop our social capital if the effect of severe income inequality is to create more poverty, which only in the end deprives us of our capabilities. Deprived of our capabilities we cannot be autonomous.

At a minimum, democracy requires that we be autonomous. But a democracy cannot survive if our lack of engagement is due to the political anomie that surely results from lack of trust. If income inequality leads to others having greater influence than others, then institutions that were supposed to promote trust have essentially failed. Those who claim that the preoccupation of some with inequality is merely another attempt by the left to attain fairness and social justice simply have it wrong. It is about strengthening our democratic institutions, our middle class, and ultimately maintaining the basic contours of a free market. 


 

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