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What's so wrong with economic inequality?

Date

Cass Sunstein

Western budgets aside, policy should not be about cutting wealth at the top, but providing economic security to all.

Thomas Piketty’s improbable best-seller, Capital in the Twenty-First Century, has put the question of econimic inequality into sharp relief. As just about everyone now knows, Piketty contends that over the next century, inequality is likely to grow. In response, he outlines a series of policies designed to reduce wealth at the very top of society, including a progressive income tax and a global wealth tax.

But Piketty says surprisingly little about why economic inequality, as such, is a problem. He places a lot of reliance on his epigraph, which comes from France’s Declaration of the Rights of Man and the Citizen: "Social distinctions may be founded only upon the general good." To say the least, that is a highly controversial proposition. With respect to economic disparities, nothing of the kind can be found in the US Constitution, or the Universal Declaration of Human Rights, or even the International Covenant on Economic, Social and Cultural Rights.

Most people do not show much enthusiasm for imposing a ceiling on the rich or for imposing limits on economic inequality as such. 

Piketty's prescriptions require a philosophical argument, not an analysis of economic trends. Suppose that in a democratic nation, almost everyone is getting richer, slowly but steadily, and that poverty is disappearing, but that the wealth of the top 1 per cent is growing very rapidly. Is that a serious problem?

To support an affirmative answer, Piketty refers to the work of the great American philosopher John Rawls, who embraced what he called "the difference principle". Rawls argued that economic inequalities are compatible with justice only if they operate to the advantage of the least well-off. In Rawls' view, a society that allows great inequalities would be unjust if those inequalities do not work to the benefit of those at the bottom.

In philosophical circles, however, the difference principle is highly controversial, and many people reject it. Here is an alternative principle, which would allow far more inequality: Ensure that average income in a society is as high as possible while also making adequate provisions for those at the bottom.

Studies find that numerous people in Canada, Poland and the US favour something like this alternative approach, and that they reject Rawls' difference principle. In the same studies, most people do not show much enthusiasm for imposing a ceiling on the rich or for imposing limits on economic inequality as such.

To see why, imagine that you are given a choice between two societies. In Society A, there is little poverty and the social average is very high, but some people are extraordinarily wealthy - far more so than everyone else. In Society B, there is little poverty and the social average is not very high, and no one is much richer than anyone else. Isn’t Society A better, simply because the average is higher?

It is true that when a few people at the very top have spectacular wealth, democratic nations can run into genuine difficulties. Without campaign finance limits, economic inequality can turn into political inequality, and the wealthiest people might be able to "buy" their preferred policies.

Cornell University economist Robert Frank has emphasised a different point: The lives of the wealthiest members of society can create the frame of reference for the rest of us, potentially creating "expenditure cascades," as people with less money struggle to catch up. There is also a risk that large disparities can have adverse effects on growth and produce a degree of demoralisation - in extreme cases, a degree of civil unrest.

Piketty himself makes a strong argument that if the goal is to create good economic incentives, it is unnecessary for the very wealthiest to be so far ahead of the rest of us. To that extent, a progressive tax that falls most heavily on the wealthy, and that uses those funds to help the disadvantaged and to provide public goods (such as infrastructure), is not difficult to justify.

Fair enough. But if we focus our attention only on the wealthiest members of society, we might get distracted from what should be the more fundamental goal: providing decent opportunities and minimum security for all. When the 20th century's greatest American president, Franklin Delano Roosevelt, summarised his years in office, he did not rail against inequality. He argued instead for a Second Bill of Rights, which was, in his words, based on "a clear realisation of the fact that true individual freedom cannot exist without economic security and independence."

To provide that security, Roosevelt called for recognition of the right to a good education; the right to a useful and remunerative job; the right to earn enough to provide adequate food and clothing; the right to a decent home; the right to adequate medical care; and the right to adequate protection from the economic fears of old age, sickness, accident and unemployment.

To build a just society for the 21st century, Roosevelt's Second Bill of Rights, and not Piketty's prescriptions, is the best place to start. Our focus should not be on the spectacular incomes of those at the top, and not even on economic inequality as such, but instead on providing a foundation for individual freedom: economic security and independence for all.

Cass R. Sunstein, is former administrator of the White House Office of Information and Regulatory Affairs, a professor at Harvard Law School and a Bloomberg View columnist.

95 comments so far

  • Wealth inequalities lead to power and health differentials. In health terms, at least, people are better off with more equality than less, even if the average wealth is lower.

    Commenter
    Anna
    Location
    Sydney
    Date and time
    May 15, 2014, 1:37AM
    • Cass Sunstein should read the 'Spirit Level: Why More Equal Societies Almost Always Do Better' by Wilkinson and Pickett. That will explain why equality of income is important to society. This budget is bad for society and is completely against the supposed Australian ethos of 'a fair go'.

      Commenter
      Chris
      Location
      Wantirna
      Date and time
      May 15, 2014, 10:11AM
    • Yes. Also, it s in the best interest of society as a whole to have as many as possible above a level where you are not constantly anxious and socially excluded - otherwise, resentment and crime are inevitable.

      Commenter
      Mardi
      Date and time
      May 15, 2014, 1:11PM
    • People who prefer greater equality to greater average prosperity are perfectly free to go live in one of those lovely communist countries.
      Thanks to capitalism and a modest degree of inequality, the average Australian is amongst the richest in the world. We pay truck drivers $180k pa.
      If you don't like it then vote with your feet and celebrate your economic equality to everyone else in Vietnam.

      Commenter
      Gatsby
      Date and time
      May 15, 2014, 1:49PM
    • As I understand it Pickety's work (not having read it I'll admit) is more analytic and doesn't focus on offering facts to support any particular social outcome or model. Sunstein seems here to be offering a typical neocon rebuttal based on the old communist capitalist black and white dichotomy merely as a way to discredit stuff Pickety hasn't really said and further discourage people from either reading it or taking it's fairly obvious and damning analysis of capitalist outcomes seriously.

      Commenter
      GOV
      Location
      Sydney
      Date and time
      May 15, 2014, 3:14PM
    • Given the very good evidence that a leading determinant of health status in society is the gap between rich and poor, this argument is suspect.

      Social inequality is one of the leading determinants of ill-health. One only has to look at the appalling health stats in the author's own country to see that - vast expenditure on health care and vital health statistics comparable with many developing countries. This also translates to other social outcomes.

      This argument is a thinly veiled version of the "trickle down effect " argument so beloved of some economists. This was summed up by an old labour pollie ( Pete Steedman ) many years ago as "the trickle down effect is when the rich piss on you "

      Why do we have to take all our lessons from the USA? How about a good long look at Scandinavia to see how to build a just and civilised society?

      This might involve a few of Joe and Tony's friends having to come to grips with the concept of paying tax, but might be worth a shot.

      Commenter
      andrew
      Location
      hampton
      Date and time
      May 15, 2014, 3:27PM
    • I notice that procreation is missing from the suggested list of new human rights. If you are physically able and mentally willing, surely its as much of a right as feeling secure. The standard of living concept assumes that all people keep up with and can afford the new gizmo's and latest housing what nots that progressive societies inevitably make necessary. To my mind, this is an assertion from the financially secure that does not hold true in the lower classes. First home buyers are priced out of the market. It stands to reason that rent will follow suit. How do you manage offspring without a roof over your head?

      Commenter
      Rachael
      Location
      Sydney
      Date and time
      May 15, 2014, 3:50PM
    • To those saying things like health status (I presume you mean something like likelihood of illness) or crime increases with inequality. Rubbish. Over the last 30 years life expectancy has been increasing and crime rates have been decreasing. Both while inequality has been rising. If you mean the difference in health outcomes, maybe, but I don't know. But even then, for the average person for the poor the health outcomes is surely better than in a more equal and overall poorer society.

      Commenter
      Nick
      Date and time
      May 15, 2014, 4:36PM
    • When it comes to the most vulnerable and 'less well off', I thought that optimising their health and economic opportunities was a bedrock responsibility for any civilised society.
      The amount of money made by those at the top of the food chain should not be of such importance - providing it doesn't have a detrimental impact of those at the other end of the food chain.
      An important way of reducing the potential for any detrimental effect is to ensure the 'well to do' pay their due taxes; everyone else suffers if the wealthy don'y pay their fair share.
      Also, it leads to social unrest and resentment - understandably.

      Commenter
      Howe Synnott
      Location
      Sydney
      Date and time
      May 15, 2014, 4:52PM
    • Wealth inequality leads to the poor rising up and cutting the heads off the rich.

      has happened multiple times in Europe, lead to the rise of Communism. Hence Europe is a lot more focused on it than America.

      Would be nice if the pollies gave the people a vote to choose our future. Those who advocate for the USA dog eat dog, screw thy neighbour way of life tend to point to Greece as the alternative. There is a perfectly good alternative in the way the Scandinavian states operate . You can have equally and big government and be prosperous.

      Commenter
      MT
      Location
      Melbourne
      Date and time
      May 15, 2014, 8:38PM

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