For the true believers in laissez faire economic policy, the recent and ongoing national discussion over income and wealth inequality probably seems like it was started as a cynical ploy for those on the left to gain a political advantage. After all, if rising inequality is a problem, you would be hard pressed to find any solutions offered by the right wing.
It would be laughable to argue that left-leaning politicians aren’t using the issue for political advantage. But focusing on that fact alone misses one of the main reasons we have begun to pay more attention to inequality, which is the fact that we have better tools for measuring and understanding inequality than ever before. This is thanks to the work of economists like Emmanuel Saez and Gabriel Zucman, who have dedicated their careers to compiling and analyzing wealth and income data. Without these numbers, advocates for concerted effort to combat inequality would have no foundation for their argument.
Saez and Zucman released another working paper this week, which studies capitalized income data to get a picture of how wealth inequality in America, rather than income inequality, has evolved since 1913. (Income inequality describes the gap in how much individuals earn from the work they do and the investments they make. Wealth inequality measures the difference in how much money and other assets individuals have accumulated altogether.) In a blog post at the London School of Economics explaining the paper, Saez and Zucman write:
The advent of the income tax has made measuring income much easier for economists, but measuring wealth is not as easy. To solve the problem of not having detailed government records of wealth, Saez and Zucman developed a method of capitalizing income records to estimate wealth distribution. They write:
Saez and Zucman show that, in America, the wealthiest 160,000 families own as much wealth as the poorest 145 million families, and that wealth is about 10 times as unequal as income. They argue that the drastic rise in wealth inequality has occurred for the same reasons as income inequality; namely, the trend of making taxes less progressive since the 1970s, and a changing job market that has forced many blue collar workers to compete with cheaper labor abroad. But wealth inequality specifically is affected by a lack of saving by the middle class. Stagnant wage growth makes it difficult for middle and lower class workers to set aside money, but Saez and Zucman argue that the trend could also be a product of the ease at which people are able to get into debt, writing:
So, why should we care that wealth inequality is so much greater than even the historic levels of income inequality? While inequality is a natural result of competitive, capitalist economies, there’s plenty of evidence that shows that extreme levels of inequality is bad for business. For instance, retailers are once again bracing for a miserable holiday shopping season due mostly to the fact that most Americans simply aren’t seeing their incomes rise and have learned their lesson about the consequences of augmenting their income with debt. Unless your business caters to the richest of the rich, opportunities for real growth are scarce.
Furthermore, there’s reason to believe that such levels of inequality can have even worse consequences. The late historian Tony Judt addressed these effects in Ill Fares the Land, a book on the consequences of the financial crisis, writing:
In other words, there’s evidence that rising inequality and many other intractable social problems are related. Not only is rising inequality bad for business, it’s bad for society, too.