The Problem With Inequality
Inequality is a hot issue in the USA today, but for people who aren’t in or near poverty, it can be difficult to see the problems inequality can bring. A common thread in my political philosophy is that it’s important to recognize future effects before they become bad, rather than after. In doing so, you can hopefully prevent negative outcomes altogether, or at least avoid a situation where it’s too late to fix things at all.
To start, let’s define inequality as the concentration of wealth, and thus power, in a small upper class. The more money is moved from the commoners to the elites, the more inequality there is. In the USA, income inequality has been on the rise for decades. In this previous post, I showed how the average American didn’t benefit as much as the elites from economic growth over the past several decades. There’s also an extensive Wikipedia page with many charts showing increasing inequality in the US, so I won’t rehash it. The short summary is: Inequality has been rising for decades in the US, and the US has the worst inequality of any western nation.
So why is this a problem?
There are two main reasons. The first is simple: as more money gets concentrated at the top, more people at the bottom end up in poverty. At any point in time, there’s a set amount of money in a country. If that money concentrates more at the top, then there’s less to go around at the bottom. I made an animation to show how this happens. This chart is showing the income of every percentile of the income distribution. In a perfectly equal country, this would be a horizontal line, meaning everyone has the same income. The frame where Gini coefficient = 0.48 is roughly the state of the US today. The Gini coefficient is a measure of wealth inequality, based on the graph of wealth vs. percentile, which is similar to, but not the same as, the income vs. percentile graph shown below.
Figure 1: Poverty Rate as Inequality Increases
As you can see, the higher the inequality, the higher the poverty rate. I think it’s pretty much universally agreed upon that countries should try to have lower poverty rates, so it’s clear why this trend is bad. And even for people who don’t end up in poverty, there’s a pretty good chance they’ll still make less money than otherwise, considering very few people are at “the top”, economically.
The second issue is a little more subtle, but equally as important: money in the common folks’ hands stimulates the economy more than money in the elites’ hands. When someone living in poverty makes money, they’re very likely to go spend it on food, rent, or something else, which means that money has now increased someone else’s profits. When extremely wealthy people make money, they save most of it, which makes that money stagnant. The idea described here is called the velocity of money. An economy where money changes hands quickly is a stimulated economy with lots of opportunity. When money is stagnant, it’s hard for people to make money, and the economy itself stagnates.
So the way this ties into inequality is simple: as inequality increases, more money goes from the working/middle class, who stimulate the economy with their earnings, to the elites, who allow the money to stagnate. If you give $100k to someone who already has $5 billion, they wouldn’t be able to tell the difference, and their spending habits wouldn’t change. If you give that $100k to someone living in poverty, you can bet some, if not all, of it will be spent immediately. This is the idea behind taxing the wealthy at high rates. Once someone is a billionaire, additional money will do nothing for them, and will actually slow the economy by not being in the hands of someone who will spend it. This impacts everyone who isn’t already financially independent because it hurts the economy as a whole.
Path Forward
We need to support politicians who are fighting for the working class, not ones that are fighting for the elites. Those fighting for the elites are only increasing inequality in this country, which is bad for everyone else (which is basically everyone).
Things like higher taxes on the rich, taking corporate money out of politics, regulating businesses, and supporting unions are all ways that inequality can be reduced. In the US, the progressives tend to be the ones fighting for this most.
It’s also important to recognize and point out the harmful rhetoric the elites use to prevent people from supporting better wealth distribution. Economies are stronger when wealth is distributed more evenly, as described in this post. Taxing the wealthy and supporting the working class is not an example of “lazy people looking for handouts”, it is sound economic policy that is good for the entire economy.
