Why you should care
All this fuss over economic inequality means more attention to the underlying economics, which are more interesting than you might think.
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Pooja Bhatia is an OZY editor and writer. She has written for The Wall Street Journal, The New York Times and the Economist, and was once the mango-eating champion of Port-au-Prince.
In recent months, some very powerful people have said some very powerful things about economic inequality. The president called it one of the defining challenges of our time. The pope believes it endangers our very souls. The World Economic Forum deemed it the main risk to global stability, which prompted even the plutocrats at Davos to hoist the economic inequality banner last month. (They quickly dropped it.)
One outcome of all the fuss: We’re paying more attention to the economics underlying inequality, including its causes, trends and remedies. Some highlight the political effects of inequality. Others dispute that inequality is even a problem. And a high-profile economist argues that capitalism itself has tended to create big disparities between rich and poor.
When the international advocacy organization Oxfam released a report on economic inequality last month, the response was off the hook — “mind-blowing,” says co-author Nick Galasso. And that’s due largely to one statistic that went viral: The world’s 85 richest people are wealthier than the 3.5 billion poorest. In other words, fewer than 100 people own more than what half the world’s population does.
Underneath that freaky stat was a new concept of wealth as a tangible resource. Oxfam coined the idea of “opportunity capture” for the report to describe how the extreme concentration of wealth distorts political processes and erodes a level playing field. The wealthy use their influence to ”capture” all the best goodies for them and their own: low tax rates, plum educational opportunities and the best health care. It’s potentially a trap for developed societies, Oxfam warns, that “creates dynamic and mutually reinforcing cycles of advantage that are transmitted across generations.”
Which is why Oxfam released its report on the eve of the World Economic Forum’s meeting in Davos. It was meant to urge participants to eschew opportunity capture — including dodging taxes — and instead to “use their influence to bring about more shared prosperity,” says Galasso. “We’re trying to get them not just to talk the talk, but walk the walk.”
While inequality talk is no longer verboten, some still argue that inequality is not the real problem. Instead, they say, it’s decreasing social mobility. Here’s Richard Haass of the Council on Foreign Relations:
Worrying over social mobility is politically safer than worrying about economic inequality. After all, mobility is a bipartisan thing, encoded in the American DNA, and rags-to-riches, self-made bootstrappers are the heroes of our collective American dream. That’s why both Sen. Paul Ryan and President Barack Obama find common ground in worrying about declining social mobility.
But here’s the thing: Social mobility hasn’t much changed in the United States over the past couple of generations, according to a study released last month by some bright young economists, including Harvard’s Raj Chetty. Contra Obama, Ryan and Haass, mobility in the U.S. is the same as it long has been — which is to say pretty low, at least compared with mobility in Western Europe and Canada.
While the period from 1913 – 1970 saw increasing equality, Piketty believes that era was a blip, an aberration.
Still, stagnant mobility rates don’t mean there’s nothing to worry about. Indeed, economists say, our low rates of mobility combined with rising income inequality mean that it’s harder than ever to escape poverty. The reason? Rising inequality means that higher rungs on the income ladder are harder to reach. As Chetty said to the New York Times, “It matters more who your parents are today than it did in the past.”
Chetty is one of a merry band of economists who are defining the era’s research into inequality. Their ringleader is probably Thomas Piketty, a French economist you’re sure to hear more about very soon. The English translation of his book Capital in the Twenty-First Century is set for publication next month, and economists of every ilk have long been salivating with anticipation. “[W]e are in the presence of one of the watershed books in economic thinking,” raved one review in the Journal of Economic Thinking.
The book does sound like an opus: a door-stopping, 950-page-tome that delves into everything from the capitalized value of slaves in the 1800s South to the 2013 Cyprus financial crisis. Oh, and French literature, too. Piketty pinpoints something called Rastignac’s dilemma, named for a character in Honoré de Balzac’s Le Père Goriot. Rastignac is presented with the choice of either slaving away for a decade or just marrying rich.
The trade-off is salient in societies where capital earns more than labor. Piketty argues that our own society is rapidly heading that way, and toward ever greater wealth inequality. While the period from about 1913 to 1970 saw increasing economic equality, Piketty believes that era was a blip, an aberration. Historically, capitalism tends toward greater and greater inequality, he argues.
Piketty himself is 42 and boyish. He eschews ties, the better to leave his top buttons undone, and his accent français eez rah-zher eh-vee. The hipsters love him. Come March, you might, too.