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Why the growing wealth inequality matters

The rich are getting richer than ever before. Is this a new Gilded Age or the seed of class warfare?

(See also Facts and figures)

One of the oldest truisms of the capitalist economy is that the rich keep getting richer while the poor only get poorer, and a cursory look at the wealth tables would appear to bear this out. For example, when Canadian Business produced its first Rich 100 in 1999, there were only 23 billionaires on the list, led by Ken Thomson. This year, the Thomson family is still on top, but they are now trailed by 57 others worth a billion or more. Total wealth of the Top 100 now sits at $185.1 billion — up about 74% since 1999. In the same period, the Canadian stock market has risen about 60%, while GDP per capita has risen about 40%.

The situation appears even more stark when we look at the United States. When Forbes magazine produced the first of its now-annual ranking of the 400 richest people in America in 1982, there were 14 billionaires on the list. By 2007, every single member of the list was a billionaire, with the price of admission to this most exclusive of clubs pegged at US$1.3 billion.

There is no doubt that we live in an increasingly unequal society. Since the late 1970s, income inequality in the United States has steadily increased, to the point where the top quintile of Americans now own 84% of the country’s total wealth. The picture is similar in Canada, where the top 20% of households control 70% of the wealth.

But carving the population into quintiles masks the true nature of what is going on. Over the past few decades, virtually all of the increase in wealth has gone to the relative handful of individuals in the top 1% of the income distribution. In the United States, that 1% of the population wields about 35% of the nation’s wealth. In Canada, the situation is similar if slightly less compressed: the top 1% of the population possesses 14% of total wealth. As Laval economist Stephen Gordon wrote in a column for Canadian Business last July, ‘In recent decades, the rising economic tide has floated a small number of luxury yachts, leaving everyone else beached ashore.’

This understandably inflames our class envy, but is it truly a problem? Or is it just a reflection of productive people getting their just reward? Certainly a growing chorus of critics has singled out the ultra-wealthy as the root of social and political decay in North America — warning that we risk a return to the Gilded Age, when America was ruled by a plutocracy of robber barons. Meanwhile, equally strident free-marketers claim that increasing income inequality is either a myth, or a problem only in the minds of envious and economically illiterate socialists.

The truth, as always, lies somewhere in the middle. While we are not living in anything like the original Gilded Age, rising inequality is not a myth, either. The good news about inequality in the United States and Canada is that, unlike inequalities of yore, where kings and aristocrats enriched themselves largely by confiscating wealth from the masses, it is not coming at the expense of those lower down the pay scale. The poor are not being economically impoverished — in fact, they are doing better in absolute terms than ever before. It is just that the very rich are running away from the rest of us. The bad news is that unchecked and runaway inequality, regardless of absolute income levels, and regardless of its causes, has unhealthy consequences that get worse as the chasm between rich and poor grows.

This is why the argument over inequality matters. The stakes are significant, and huge questions of public policy — including the shape of the tax system, the size and scope of social programs, and the priorities of the government — hinge on whether we care to rein in the widening divide between society’s most and least fortunate.

When we ask people what they think about the income gap, the results are fairly consistent. Most people agree that society should have some degree of inequality to serve as an incentive to risk and entrepreneurship, and as a reward for talent and hard work. But it offends our basic sense of fairness when there isn’t at least a rough correlation between income and contribution to society, or when great wealth accrues to those who are fortunate by virtue of birth or social connections.

But this only raises the question of why there isn’t more public outrage. Why hasn’t the spike in inequality led to outright class warfare? There are two reasons: ignorance, and comfort.

In the United States, at least, evidence suggests the public is simply deluded about the extent of the inequality and its negative consequences. A new paper from economists Dan Ariely and Michael Norton ( Building a Better America One Wealth Quintile at a Time) presents the results of a survey asking Americans for their thoughts on income inequality in the United States.

What they found was quite surprising. First, people think the split of income across society is a lot more equitable than it really is. More interesting, when shown three unlabelled pie charts where one showed total perfect equality, another reflected the actual wealth distribution in the United States, and a third represented the distribution in Sweden (which is significantly more equitable than the U.S.), respondents preferred Sweden to either total equality or, by an overwhelming 92%, to the United States. This result was robust across all demographic groups, including Republican supporters and the wealthy, suggesting that the main reason for the public’s apparent insouciance about the income gap is that they simply have no idea how extreme it has become.

At the same time, it certainly helps that even as the income gap has widened, living standards across the board have continued to rise. After all, what good is income? We don’t actually want dollars or paycheques. What we want is the stuff that we can buy with our money. And there is solid evidence that while wealth inequality is growing, consumption inequality — that is, the gap between what the rich consume and what the poor consume — is not getting any greater, and in some ways might actually be narrowing.

One of the great triumphs of 20th-century consumer culture is that it made available to even the poorest families goods and services that would have been the privilege of only the richest men a century earlier. There has been a tremendous convergence in the quality of food, clothing, shelter and transportation, with even the poorest families having access to miracles such as electricity, refrigeration, central heating, air conditioning, automobiles, television — you name it. There is something pleasantly democratic in the knowledge that Bill Gates eats the same Big Macs as the rest of us, that the cans of Cherry Coke that Buffett scarfs by the caseload taste the same as the ones anyone can purchase in the corner store down the street. The general point holds even for many so-called luxury goods: as the economist Will Wilkinson puts it, ‘Despite a vast difference in price, the difference between driving a used Hyundai Elantra and a new Jaguar XJ is practically undetectable compared to the difference between motoring and hoofing it.’

Given this, it is tempting to conclude that income inequality is not a big deal. As long as everyone is doing better in absolute terms, what does it matter if a miniscule fraction of the population is enjoying exploding wealth?

But this emphasis on absolute levels of wellbeing only goes so far. Whatever else it indicates, income is a measure of your relative status, and plenty of very real benefits accrue to those who are higher up the income ladder from seemingly superficial things such as increased reputation and prestige to better opportunities for dating and marriage to — perhaps most important — superior access to top-notch education and health care.

The value of relative income becomes apparent when we recognize that a great deal of consumption by the ultra-rich consists of a bidding war for goods such as penthouse apartments, high-end artworks and ocean-front villas. These positional goods get their value precisely from the fact that, unlike Big Macs or Cherry Cokes, not everyone can have them. This sort of competitive consumption is nothing more than a widespread arms race for status goods, and like all arms races, it is just a tremendous waste of resources that could be better spent, and thus a form of economic inefficiency that’s growing rapidly.

The influence of rising inequality on health is even more pernicious. The relationship between relative wealth and relative health is simple: the better off you are, the better the quality of health care you are able to afford, even in a country with a public health-care system such as Canada’s. But one of the most striking facts about increasing inequality of wealth is how bad it is for a society’s overall health.

In their 2009 book, The Spirit Level, British researchers Richard Wilkinson and Kate Pickett surveyed the large body of literature on the social determinants of health, and they concluded that societies with more a equal distribution of incomes have better health outcomes than ones in which the gap between richest and poorest parts of society is greater. Most interesting, the differences seem to have little to do with absolute levels of national income; instead, simply living in an unequal society is bad for your health, at almost all income levels.

Why is this? According to Wilkinson and Pickett, one of the biggest advantages of being at the top of a hierarchy is that it gives you control over your life. In contrast, the more you go down the status hierarchy the less control you have. As a result, people in an unequal society are highly stressed, with their fight or flight systems always primed to fire. The result is a higher incidence of a host of health problems associated with stress, including heart disease, hypertension, anxiety and depression.

Perhaps as a result of the stresses associated with living with unrelenting status anxiety, significant inequality is also correlated with higher rates of crime and other forms of social dysfunction. At the limit, as the very rich abandon the common institutions of civil society — including public schools, the health-care system and public office — it can lead to a breakdown in social trust and undermine democratic institutions.

Given all of this, how can rising levels of inequality be tolerated, or even considered a good thing? One argument that is frequently advanced in favour of inequality is that it serves as an incentive to achievement, and wide inequalities can be tolerated when social mobility is correspondingly high. On this view, the wealthy and successful serve as a sort of motivational lodestar, pointing the direction toward which all of us can strive. And in some countries, this argument holds. Australia, Canada, and the Scandinavian countries all have very high levels of social mobility, measured as the absence of a strong link between individual and parental earnings.

In the United States, though, it is a different story. The promise at the core of the American dream has always been that it is the one country where the circumstances into which you are born do not determine who you can be. The promise is increasingly being broken. A great deal of new research indicates that the United States is becoming increasingly rigid, with what is now a comparatively low level of intergenerational mobility. According to a recent paper from the Center for American Progress, a think-tank based in Washington D.C., among comparable high-income countries such as France, Canada, Germany and Sweden, only Italy (which is famously corrupt) and United Kingdom (with its famously calcified class structure) have a lower rate of mobility than the United States. This combination of high levels of inequality and relative social immobility represents an inherently unstable situation, where excessive optimism about possibility for advancement must inevitably run headlong into the realities of living in a rigid and highly unequal country.

How unstable could things get? Barack Obama might have swept to power two years ago on a banner of ‘Yes we can’ social solidarity, but his biggest opponents right now, in the Tea Party movement, are more concerned about the effects of his policies on middle-class tax rates. In fact, almost the only ones in America who are leading the charge to soak the rich these days are the rich themselves: Warren Buffett, for example, has been arguing for ages that ‘people at the high end, people like myself should be paying a lot more taxes.’

This seems paradoxical, but it isn’t. In his 2006 book, The Moral Consequences of Economic Growth, the Harvard economist Benjamin Friedman argued that economic growth is crucial to the social and political well-being of a nation. In the absence of growth, people look for answers in intolerance and fear — which is exactly, and not coincidentally, what the Tea Party leaders are selling. The steady economic growth of most of the past decade has helped temper any public frustration over increasing inequality As long as everyone was doing a bit better, year in, year out, there was little attention paid to the vastly outsized benefits going to the hyper-elites.

We have now entered what even the most optimistic economists suspect will be an extended period of low growth, if not outright stagnation. Public finances everywhere are in bad shape, at exactly the moment when we should be starting to prepare for the looming demographic crisis that has been creeping up on us for the past decade. The United States, in particular, is in a precarious situation, with its enormous debt, low tax rates, and a growing cascade of entitlements and unfunded liabilities.

Sooner than later, all of these bills are going to come due. And as the developed country with the most extreme disparity between the rich and the poor, when it comes to finding the money to pay for it all, Americans are going to know just where to look.

Facts and figures

% of national wealth owned by top quintile, U.S.: 84%
% of national wealth owned by top quintile, Canada: 70%

% of national wealth owned by top 1%, U.S.: 35%
% of national wealth owned by top 1%, Canada: 14%

GINI Index of Income Inequality
(zero is absolute equality, and 100 absolute inquality)

U.S.: 40.8
Canada: 32.6
Sweden: 25
U.K.: 36