Income inequality a problem for all, not just those at the bottom

Income inequality a problem for all, not just those at the bottom

By George Gollin

The public discourse on income inequality is sometimes framed as a conflict between the right and left, in which conservatives seek to protect the assets and incomes of the wealthy — whose affluence is said to reflect their contributions to society — while liberals seek to redistribute some of the resources of the affluent to the disadvantaged. But the debate is more accurately cast as a conflict between those who would use their influence to distort our system of laws to personal advantage and those who believe that our laws should be written with an eye toward fairness. A proper discussion of income inequality must consider the role of fairness in our governance.

We teach our children about fairness when we stress the importance of honesty in their play, and guide their interactions with siblings at home. They learn to distinguish unequal outcome from unfair opportunity: there is nothing inherently unfair about winning a football game, though it would be unfair for the touchdowns of one team to count for more than those of the other. Children internalize these lessons easily and, if we are successful as parents, hold onto them as adults.

Our understanding of the difference between unequal outcomes fairly and unfairly obtained carries over to the economic sphere. I doubt that anyone would call the high prices charged by an extraordinary restaurant unfair. And Steve Jobs' wealth, accumulated over a lifetime of astonishing creativity, was not unfairly gained.

But we are troubled by economic advantage that derives from the misfortunes of others. One study found that "82 percent of respondents in the general population believed it was unfair to increase the price of snow shovels after a storm." Though basic economic principles suggest it is natural for snow shovels to cost more after a blizzard, most people feel it is an unfair enrichment of the few at the expense of the many.

The intentional creation of unfair advantage elicits even greater hostility. Imagine the reaction if a city council were to pass an ordinance forbidding residents from buying cheaper shovels in a neighboring town, or one in which council members were to be charged less sales tax than everyone else. There would be rumblings about bribery and abuse of power and, in short order, the elected officials would be voted out of office. Underlying the community's response would be anger over the unfair nature of the laws promoted by the council.

How strange that we tolerate these kinds of abuses in the federal sphere! U.S. citizens are not allowed to buy lower-cost prescription medicines from Canadian pharmacies. The "carried interest" income earned by managers of private equity funds is taxed at a lower rate than the portion of their salaries identified as ordinary income. Bankruptcy law, originally intended to prevent financial crises from destroying the lives of debtors, has been jiggered to protect lenders rather than borrowers, reducing the incentive for lenders to refuse loans to those who will be unable to repay them.

The abuse of power for personal advantage is not an abstract issue with abstract consequences. The minimally regulated practices of predatory mortgage lenders brought about the Great Recession of 2008, driving up unemployment and reducing the revenues available for basic research, infrastructure repair, education and social programs. The distortions of markets caused by monopolies stifle innovation, as well as competition in product price and quality. Much of this has arisen from the corrupting influence of money in politics, exacerbated by the Supreme Court's unconscionable Citizens United ruling.

We share the costs of maintaining our schools and roads, policing our streets, and defending our country. As a society we have decided — it is encoded into our tax laws — that the affluent will shoulder a larger financial burden than those who are disadvantaged. We do it this way because it is fair. But the political clout of the 1 percent has changed the way our country pays its bills. Tax rates for the rich have gone down, while loopholes — for example, in which unearned income is taxed at a lower rate — fill our laws like the voids in Swiss cheese. Social services such as food stamps and unemployment compensation, intended to protect us from the ravages of unemployment, are cut; struggling families are cast into poverty.

The transfer of resources from the disadvantaged to the affluent has slowed recovery from the mess of 2008. And as middle class spending falls, demand for goods falls so that manufacturers have little incentive to hire new workers. While tax savings for those of limited means are spent on daily necessities, money returned to the wealthy generates less economic activity as it flows into savings instruments and offshore tax shelters. Distinguished scholars like Joseph Stiglitz, Paul Krugman and Robert Reich have argued convincingly and forcefully that income inequality is a problem for all of us, not just those at the bottom.

Over and above the economic arguments against rising income inequality is a moral one: it is inherently unfair in nature and in origin, and not to be tolerated in a society striving for greater justice.

George Gollin, who ran for Congress in the March primary, is a physics professor at the University of Illinois.