04 March 2012

On Wealth Inequality

Inequality is bad for growth, stability and efficiency. … Inequality peaked both before the Great Depression and before the Great Recession, and it's not an accident. So basically, when we have a lot of inequality, demand goes down. … All this inequality was offset by creating a bubble. The bubble allowed people to consume more. Now we have the inequality but we don't have a bubble, and that means that we will have persistent, weak demand, and therefore unless we create another bubble it's going to be very difficult for us to get back to full employment.
A lot of the inequality that we have in the United States is created by distortions – excessive financial sector, monopolies like Microsoft … giving the oil companies, mining companies resources at a discount. … These things distort the economy, while they create wealth at the top. So it's not wealth creation – it's wealth redistribution, which makes the size of the pie smaller.

In a materialist sense, no two people are equal.  We each have differing physiques, talents, interests, motivations, limits, and abilities.  As such, even if given perfect equality of opportunity, it is reasonable that we would never have equality of outcome.  Thus, there will always be some level of inequality among human beings.  This is perfectly natural, and entirely unavoidable, no matter how many Marxist revolutions try to say otherwise.

That said, there is something to Joseph Stiglitz’s observation that this degree of inequality is economically detrimental.  Stiglitz is undoubtedly better versed on the subject of inequality than I am, but I wonder if his tendency to view these sorts of matter through the mainstream economics lens handicaps him, and so I disagree with his assertion that radical inequality causes economic decline.  I theorize that it merely correlates with economic decline.  As Stiglitz noted, there are many economic distortions caused by the federal government, and these economic distortions have a nasty habit of benefiting the wealthy, politically connected elite.

As such, there should be an inherent distrust of radical inequality, and it should be coupled with a suspicion that the wealthy are trying to use the government to exploit everyone.  This is a fairly common occurrence in the world today, and has been the historical norm.  Businessmen,* therefore, are no more deserving of trust than politicians because both groups are human, and are more or less equally susceptible to the vices that have plagued humans for millennia:  greed, lust, and hunger for power.  Therefore, any time inequality is present to a radical degree, it should be suspected that the wealthy elite are in cahoots with the government to enrich themselves.**

*   Caveat no. 1:  “businessmen” is not synonymous with “free market.”  I fully support the free market because it is an inherently trustworthy process.  Even though the market may be an implicitly trustworthy process, it does not follow that its participants are.

** While we should suspect collusion, we should not assume it.  We should merely check to see if businessmen are, in fact, colluding with politicians for the purpose of self-enrichment.  If they are, we should demand that said collusion be brought to an end. And if they are not, we should get over our envy.