Breeding Inequality

Economists and policymakers are finally beginning to see the elephant in the (relatively small) room. The elephant is economic inequality and the room is the economy.

Income inequality is immaterial. Income inequality that persists over time through wealth buildup should be the primary concern. It is the wealth buildup that allows people to maintain and even grow income inequality. This post in the Freakonomics blog discusses income inequality being associated with lower intergenerational social mobility (moving from one social class to another; lower to higher is the preferred move).

It’s relevant to my argument in the following manner. Income inequality in the current period allows the one with the greater income to pass on the benefits of the income that was not consumed by the earner. In other words, it allows the earner to build up not only his/her own wealth but also of those who are depending on him/her. Current ability to be a bidder in different markets allows the gap to grow between the haves and have-nots. This allows leaving the mark of income inequality on his/her future generation(s).

The market can be for any good or service that is being produced, food, education, healthcare, etc. The steeper inequality is, the more pronounced will be the impact of current inequality on the next generation.

Wealth inequality, and with it other forms of inequality, is fueled by income inequality that persists for a significant length of time, in other words, when the passage of life allows the growth of wealth for the earning person. Some people will persistently earn more and some will earn less, so wealth inequality will obviously grow. However, alongside wealth inequality other measures of inequality will grow. Monetary possessions (or its equivalent), health outcomes (from access to healthcare), nutritional inequality (the difference in the food consumed), lifestyle inequality (impacts of lifestyles) are some dimensions that can be used to track inequality.

A common factor in all these forms of inequality is that they are connected via income and wealth inequality. Study after study (that I do not have access to at the moment) have found that income and wealth were important factors in influencing other forms of inequality. I had gone through a study titled “Addressing Inequality in South Asia” by the World Bank that showed other forms of inequality (health, nutritional, educational etc.) being segregated by earning. In nearly every measure, those who earned more were better off than those who earned less.

Those who earned more were able to position themselves better to take advantage of any opportunity that arose to improve the future well-being of their progeny. The end result being that their children (or dependents) were in a better starting position to take advantage of life. Therefore the better positioned ones are able to maintain or further inequality.

The phrase that has been highlighted is why income inequality breeds social inequality. In the short run, the effects can be negligible but over time, sustained inequality between sets of people will give rise to differences in economic status that will express themselves in social structure, political structure, and even in the overall economy.

Extra #1: Study shows upward mobility no tougher in US than two decades ago. Two decades ago is roughly around end of 1980 onwards. The American economy had transitioned to being a free market economy with lower government regulations. The period looked at is not that much different than today. If social mobility was really being measured, the periods 1940s – 1970s and today should yield more interesting results.

Extra #2: How Piketty’s bombshell book blows up libertarian fantasies, another article that talks about growing inequality and its solution.

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