Saturday, May 17, 2014

The political and social consequences of widening inequality

Much of the mainstream debates on inequality tend to get entangled with less important technical details. Critics of Thomas Piketty have sought to reduce the debate surrounding his book to a question of why the rate of growth of capital should always be greater than the rate of economic growth. A few have pointed to the apparent contradiction in the obvious socially beneficial effect of the emergence of 50 more Bill Gates despite its contributing to further widening of income inequality. Some others argue that the relevant metric should not be within-country inequality, but the that within the global population taken as a single unit (which has apparently declined). Still others argue that the income gap between those at the top 0.001 percentile and those at the 1st percentile is much higher and has grown faster than that between those at the top 10 percentile and the top 50th percentile, which in turn has outstripped that between those at the top 50th percentile and the 90th percentile.

I am less interested in the outcome of this technical debate. I am not even interested in the far less contentious argument about the economic desirability of some level of income inequality in promoting economic growth. My concern with widening inequality arise from two sources, both related to its role in eroding the social contract that underpins modern democracies. 

1. It has been a dominant characteristic of all historical human societies that political power has followed economic power. The financiers of the political process call the tune in setting the public policy agenda. There is ample evidence that politicians' preferences more accurately reflect the views of their financiers than of their constituents. For example, those holding the reins of economic power determine, to their advantage, decisions on taxation (whom to tax and by how much) and public spending (what to spend, where, and how much), the two levers of managing the modern social contract. This trend is most likely to become amplified as the scale of wealth concentration among the top 1 percent (or 0.1%) begets even more concentration of political power.    

Conservatives point to the remarkable progress achieved over the past half-century in the quality of life, even for the poorest (especially in the developed countries), as a response to the critics of widening inequality. Ironically, this progress in assuring a dignified human life to the vast majority may have had the effect of papering over the aforementioned less benign political economy consequences of widening inequality.    

2. Two, widening inequality is increasingly coming in the way of the central tenet of modern social contract - equality of access to opportunities. The result is the biblical Mathew Effect - "the rich remain rich and the poor remain poor" - which severely limits social mobility. For example, it is increasingly the case that access to high-income livelihoods is determined by being able to study in a top university, which in turn is disproportionately related to the family's economic profile.

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