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Economic Inequality Divides Economics and Society

An unequal distribution of income paralyzes the whole economy and doesn't only hit individual households.. Redistribution from top to bottom ultimately depends on which social groups can enforce their interests more strongly. The advocates of the neoliberal side seek to push back the welfare state again and again.

By Matthias Schnetzer

[This article published on January 13, 2014 is translated from the German on the Internet,  http://blog.arbeit-wirtschaft.at.]

A car drive from posh Montgomery County to the southeast part of town of the US capital Washington D.C. takes less than an hour. It is a journey from one of the richest to one of the poorest regions of the US. With every mile, the life expectancy of the population falls seven months - from 81 to 60 years. The noble New York district Upper East Side and the poor South Bronx are very close only a walk away. As one crosses the Harlem River to the north, the median income of residents drops more than 80 percent.


The oppositions in the largest national economy of the world are impressive. However a glance at the different human living conditions around the globe reveals a much greater polarization. The cause for social inequality is identified by (neo-) liberal economists as the uneven economic development between the countries. In a famous essay, the economist Simon Kuznet in the 1950s made a connection between economic growth and income inequality. A temporary rise of inequality was unavoidable in the development from agricultural to industrial societies. According to the contested theory, the chasm between poor and rich opens up again in industrialized societies. There is no empirical evidence for this. On the contrary, a further increase of income inequality is striking in recent years in leading worldwide national economies.

The neoliberal side often justifies the increased inequality with the theories of Harvard philosopher John Rawls. According to this theory, even the poor in a society profit from rising inequality. The underlying idea was known as the contested "trickle down" theory. Prosperity should seep down from the rich to the lower income sectors. Income inequality spurs to harder work, higher productivity and greater investments resulting in growth and general prosperity, it is argued. Ultimately the poor profit from economic growth since new jobs will be created.

Former US President John F. Kennedy used to say: "A rising tide lifts all boats." In Austria, people speak mockingly of the horse-sparrow theory. If enough oats are fed the horse, something will land on the roads to feed the sparrows. For this reason, neoliberals vehemently resist any initiatives for redistributing income. These initiatives would reduce the incentive to work hard and seduce employees to more laziness. Correspondingly, redistribution has a negative effect on economic growth and this strikes the weakest in society, neoliberals claim.


An unequal distribution of income paralyzes the whole economy and doesn't not only hit individual households. The British economist John Maynard Keynes saw the spread of incomes as a cause for sluggish economic growth and skyrocketing unemployment. This is explained as deficient consumer demand since many households would gladly improve their living standard but simply lack the financial resources. The household budgets of these families would improve and their purchasing power w3ould increase through redistribution from top to bottom. Ultimately the famous multiplier effect occurs here with Keynes. Higher consumption creates incentives for investments of business leading to new jobs and higher incomes for employees. With that, the economy should be permanently stimulated and living standards lifted.

Another argument is that a high measure of income inequality can lead to political and economic instability. In their publications, the Nobel Prize winner Joseph Stiglitz and the former chief economist of the International Monetary Fund Raghuram Rajan examined the role of income inequality in the genesis of the economic and financial crisis. According to the two economists, the increasing spread of incomes fueled bubbles on the markets. Accordingly poorer classes of society spend a greater share of their income in consumption than the wealthy. The latter show a greater savings inclination and set aside a greater share of their income. A large part of these savings are invested on international financial markets and encourage speculation since the search for profitable investment possibilities leads to unstable bubbles. Redistribution from top to bottom would fire the consumption of low income sectors and economic growth. This would also reduce the possibilities for unrestrained speculation and serve as an instrument against a crisis-laden development of the economy.


Apart from this economic perspective, the degree of redistribution also decides over the living conditions of people. Current studies show an unequal distribution of income negatively affects health, education and security in a society. Low income households are mainly affected by these social problems, above all the children who grow up in this environment. In this connection, Harvard economist Amartya Sen urges the equality of realization chances. All members of a society should have the same starting conditions to level the inequality in view of the different family backgrounds. Therefore we need a functioning welfare state and not only a tax system that redistributes from rich to poor. This should simplify the living conditions for low income households and make available a good education and a quality health care and nursing system.

Ultimately the unequal distribution of economic resources can also become a danger for democracy. The wealthy can use their social position to meddle in political decision-making processes through social networks or political party donations. This represents an imbalance in participation in politics and democracy at the expense of low income members of society and makes difficult the efforts for redistribution in the political arena. Redistribution from top to bottom in a national economy ultimately depends on which social groups can enforce their interests more strongly. The advocates of the neoliberal side reject redistribution for the above-mentioned reasons and seek to push back the welfare state again and again. In contrast, employees fight for a just financial contribution of the rich to the social system and for better living conditions through higher incomes. This is a trial of strength between representatives of employees and industrialists as well as the wealthy around distribution policy and social justice. The different theoretical approaches do not offer any uniform guidelines. However the empirical findings show that an increasing polarization of incomes leads to undesirable social, political and economic results.


Carola Binder, Rewriting the Rules of the Federal Reserve, 12/14/ 2015
 link to rooseveltinstitute.org

Helmut Martens, "Social Inequality Today,' January 2015


Joseph Stiglitz, The Price of Inequality, 2012

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