On income inequality and social mobility

By on November 7, 2012

For decades, economists have tried to justify the unequal distribution of wealth associated with a capitalistic society using the marginal-productivity theory. This theory associates higher incomes with higher productivity and a greater contribution to society. Thus, inequality is good for the national economy because it gives people an incentive to work harder. Furthermore, they assert that by working harder, they are assisting their society.

However, new research suggests that countries facing growing income inequality such as the United States, may face economic instability in the future. Several studies have found that when income distribution becomes drastically skewed, it could halt economic growth and job creation in the long-term.

The International Monetary Fund has also shown concerned, warning the United States that economic growth accompanied by high income inequality is more fragile and unstable. IMF economists use the following analogy to describe the current situation: “Some dismiss inequality and focus instead on overall growth – arguing, in effect, that a rising tide lifts all boats. But when a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.”

How significant is the income gap? Nobel Laureate Joseph Stiligitz points out that the top 1 percent of Americans own 40 percent of the nation’s financial wealth. The bottom 80 percent owns a mere 7 percent of the nation’s financial wealth. Today, the top 1 percent is taking in more of the nation’s income than at any other time in American history since the 1920’s. They control 25 percent of the nation’s income. They also have only 5 percent of the Nation’s personal debt, while the bottom 90 percent has 73 percent of the national personal debt. Since the 1980’s, the gap between the 1 percent and the 99 percent has steadily been growing.

Some economists fear that the increasing gap between the upper and lower class and the diminishing middle-class are indicators of a larger underlying problem. First, growing income inequality suggests shrinking opportunity for the middle and working class. When the rich get richer and everyone else gets poorer, this suggests that social mobility in the U.S. is becoming increasingly difficult. This is troublesome for America’s future. Societies with little opportunity for social mobility lack incentives for people to strive. Those born in lower socioeconomic classes will be resigned to remaining where they are. Countries that generate opportunities for all of their citizens will maximize their population’s talent and increase their own productivity. For centuries, America has always prided itself being the latter, providing equal opportunity for all. However, statistics suggest otherwise. The chances of a poor citizen or even a middle-class citizen climbing the social ladder are smaller than in its European counterparts.

Second, the distortions that result in income inequality such as monopoly power and preferential tax treatment, undermine the efficiency of the economy. It promotes further abuse of the system by those on top. Those who benefit from tax loopholes and monopolies, such as bankers and corporate businessmen, lobby politicians for the continuation of these practices. Capitol Hill is becoming a virtual corporate state where the voice of the common American is buried under large campaign donations and lobbying.

Third, a modern economy requires “collective” action to grow. It needs both government and the people working together for the common good. When a society’s wealth distribution becomes lopsided, it leads to the separation of society. The thriving wealthy become reluctant to spend money on common needs. The rich do not need government to provide resources such as education, medical care, or personal security. They can readily provide these things for themselves. Rather, inequalities in the system benefit the rich because they gain more wealth and privilege. Strong government becomes their enemy because it has the ability to take away some of their wealth and invest in the common good.

The ordinary person cannot provide all of these things for themselves. By trying to do so, they live beyond their means. Thus, the common person needs government to level the playing field and provide basic human necessities such as education, health, and security. Essentially, for government to be effective in providing equal opportunity, it needs the assistance of the 1 percent.
History has illustrated time and time again that the fate of the 1 percent is very much tied to the fate of the 99 percent. The fate of the 99 percent is very much tied up in the efficiency and opportunities government provides. Thus, to combat income inequality in America we need everyone to take responsibility. We need to change our tax policies and work together to promote a stable economy for our future.

Shejuti Paul
Staff Writer
paul0217@uab.edu

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