My previous post addressed Nebraska football, lotteries and the American Dream, but of course the core topic was US income inequality (I will often use the terms ‘income’ and ‘wealth’ interchangeably for simplicity of argument, even though they are not the same). It drew four conclusions about the large and growing American underclass: they have not shared in the nation’s prosperity over the last half century; that exclusion has not been due primarily to their own personal failings; their hopes for the American Dream’s upward mobility have rarely been fulfilled over this time period; and they are not content with this status. But some might say, ‘So what? Just another liberal espousing class warfare!’ Here I try to provide answers to a couple of ‘so what’ questions.
First, isn’t some inequality acceptable or even desirable? The simplistic answer – – yes. But the more important and elusive question is ‘how much?’ Since there is a vast literature on this topic one can find philosophical answers that range from ‘none’ (Gracchus Babeuf) to ‘unlimited’ (Ayn Rand). But as a practical matter no one really advocates complete equality of economic results, not even Karl Marx. Why not? In a market-oriented economy it’s widely accepted that income inequality provides the necessary incentives for labor mobility, hard work, self-improvement and innovation that drive the system. But by the same token, almost everyone (excepting a few modern day Republicans) recognizes the possibility that an unconstrained capitalist society may generate too much inequality. Even Adam Smith, the 18th century moral philosopher and father of modern economics, did not accept huge disparities in income as the necessary trade-off for prosperity. In Smith’s free market system, pervasive competition and other preconditions simply precluded steep inequalities and excessive accumulations of wealth.
So let me simply assert a reasonable (but obviously not universally accepted) answer to the ‘how much is too much’ question: Some substantial economic disparity is both necessary and desirable in the American capitalist system, but the current distributions of income and wealth are socially unacceptable and unsustainable. A quick review: Currently the bottom 50% of US households earn only 12% of the nation’s total income and own just over 1% of its wealth, while the top 1% of households receive 25% of our total income and own 40% of our wealth. Put differently, the richest 1% in the US now own more wealth than the bottom 90%.
And these levels of inequality have both grown substantially worse in the last half century. For example, from 1965 to 2015 average worker wages in the largest American companies increased a total of 10.3% adjusted for inflation, while average CEO compensation in these same companies increased by 941% over the same period! That average CEO today ‘earns’ 300 times the corresponding average worker pay (roughly $15.5 million vs. $56,000), up from 20 times more in 1965. Alarming. Unacceptable. Unsustainable. Too much.
Why? First the moral argument, short and sweet, with no need to cite Rawls, Kant, or Bentham. Instead I rely on Moore’s Axiom: There is no moral justification for paying ‘superiors’ 300 times more than ‘subordinates’, or for the richest 1% to have more wealth than the bottom 90%. If you don’t agree then don’t bother to read on because your time would be better spent recalibrating your faulty moral compass.
There is also no compelling economic justification for such enormous disparities. According to the neoclassical theory of marginal productivity, every individual is paid in accordance with his or her contribution to economic success. Similarly, the agency theory of shareholder primacy asserts that corporate CEOs are compensated on their ability to enhance shareholder value. In other words, disparities in income simply reflect disparities between rich and poor in productivity or performance.
Sounds good, except they don’t. For example, despite theoretical and measurement limitations many studies have been undertaken to test the CEO ‘pay for performance’ hypothesis. The results have generally been mixed and therefore inconclusive, but the most comprehensive recent (2014) analysis is noteworthy. Three professors from Purdue, Cambridge and the University of Utah reviewed 17 years of executive compensation and corporate performance data, and found that the more CEOs were paid the worse their companies performed over the next three years. What about the CEO ‘superstars’ about whom so much has been written? The negative effect on corporate performance was more severe in the 150 firms with the highest paid CEOs! So not only is there no evidence that corporate CEOs are 300 times more productive than their production workers, but their compensation doesn’t seem to be linked that closely to their (or their firm’s) performance at all.
So with no compelling moral or economic explanation, America’s current income disparities are unjustified. They are also unsustainable, for several reasons summarized by Nobel Prize-winning economist Joseph Stiglitz and many others. First, growing inequality is the flip side of shrinking opportunity for many – the antithesis of a healthy economy. Second, many of the distortions that lead to inequality – economic power, preferential political treatment of monied interests (Citizens United anyone?), perverted incentives, e.g., choosing careers in hedge funds rather than public service – undermine the efficiency of the society. Third, as evidenced many times throughout history the have-nots eventually decide to fight back. As former corporate CEO Peter Georgescu observed recently in the NY Times,
“I’m scared. . . . So are many other chief executives. Not of Al Qaeda, or the vicious Islamic State . . . We are afraid where income inequality will lead. If inequality is not addressed, the income gap will most likely be resolved in one of two ways: by major social unrest or through oppressive taxes.”
Maybe most importantly, a healthy and sustainable nation often needs collective action and collective thinking. It needs public investments in infrastructure, education, health, basic research and technology. But as the nation’s wealth distribution becomes more lopsided many of the wealthy become more reluctant to spend money on societal needs. Put simply, they can buy most of these things themselves. There are notable exceptions (see e.g., The Giving Pledge campaign led by Warren Buffett), but they are just that – exceptions.
More generally we need thinking that sometimes gives preference to the ‘common good.’ In 1835 Alexis de Tocqueville first identified what he saw as a chief part of the peculiar American genius – what he called “self-interest properly understood.” While everyone is motivated by self-interest, de Tocqueville recognized a broader mindset in 19th century America. At that time we appreciated that addressing everyone’s self-interest, i.e. the common good, was in fact ultimately a precondition for individual well-being. As Stiglitz describes the observed peculiarity: “Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul – it’s good for business.” We’re not there now, and our very social sustainability may depend on a reemergence of ‘proper understanding.’
Garygrams 
I agree that income inequality has moral and economic implications. Taken to the extreme and we are moving to the extreme, income inequality will lead to reduced consumer spending which will lead to recessions, higher government spending, and more inequality.
A further note is that income inequality can be reduced through higher taxes, but conservatives almost never support any proposal to raise taxes (even cigarette taxes). The main issue in the Affordable Care Act was the higher taxes paid by high income people which was a redistribution of income from high income people to low income people. The American Health Care Act eliminates the taxes for wealthy individuals but also reduces insurance coverage for many low income people.
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