According to The Economist, it is accepted widespread knowledge, that inequality has increased. However, when looking at the data and accounting for changes in demographics (such as marital status), economic inequality has actually remained constant over the past decades (Check out the Economist’s The Intelligence Podcast from Dec 03, 2019: With allies like these: NATO’s bickering leaders hold a summit). Why has rising inequality become general knowledge, while the data is not clear on it? Because the actual inequality doesn’t matter as much as the effects of it and the effects of inequality might have actually changed significantly over the past decades.
Inequality is a highly emotional topic. It impacts many people directly in the form of wages, they can earn, which health care they can afford, and which education possibilities they might have. Therefore, politicians often use emotions to discuss economic policy, especially envy and jealousy. It’s a great pitch, claiming that an immigrant will take away your job. You cannot help but feel scared. However, this way of thinking does not only affect less educated or less experienced people.
As Stephen Dubner explains on the Freakonomics podcast (Nov 28, 2019: How to Change your Mind), smarter people (in whatever way you want to define that) are even worse at looking at facts for opinion finding. The “smarter” a person is, the better they get at supporting their emotional opinion with facts and not vice versa. In short: No matter how smart and rational you think you are, there is a high probability that you have an emotional opinion, for which you selectively find facts. You are probably not the rational fact-based person, that you think you are. So whenever we talk about issues, such as inequality, we need to keep this in mind and we need to check ourselves repeatedly, whether our emotions have taken over our rational thinking.
You cannot talk about equality without mentioning equality versus equity. In more practical terms, it comes down to formal equality versus informal equality. The former is usually explicit, while the latter is often implicit or structural. The US is full of these structural or implicit disadvantages. When you live in a poor neighborhood, your school tends to have less money and the bank is less likely to give you a loan. But wherever you live, you have access to the same school system and it’s the same algorithm calculating your credit score. So there is definitely equality in how you are being treated. This doesn’t mean that there is equity or you have equality of opportunity. So while both types of (in-)equality are intertwined, we need to be aware of the difference and how to address them.
We also have to differentiate between the equality of opportunities and the economic and political consequences of (in-)equality. The lack of equal opportunities is a theoretical or very personal problem. You don’t get to attend your dream university or live in your dream house? That sucks, but that’s life. When the lack of education and house, however, starts to impact your job, your earning potential, your political power, and every other aspect of your life, it can become a real multidimensional problem. Every aspect of a person’s life is then impacted and when this happens to larger parts of a community, it becomes a serious problem to society. The lack of equal opportunities is often the reason for unequal economic and political consequences, which make equality visible.
Equality is also relative. While economists try to put (in-)equality in quantitative terms, it is often not that simple. If your neighbor has a gigantic mansion, while you live in a shack, you are more likely to feel feel the inequality than if you lived in a shack surrounded by other shacks in a slum. That’s just life and there is no need to complain. A practical example of this is Sweden, which has a high number of millionaires, but little animosity towards them. They just don’t show it and behave modestly (The Economist’s Podcast: The Intelligence: Running into debt: Argentina’s new president, from Dec 10, 2019). Instead they eat at the same restaurants, that you might go to with a decently paying job. They might be sitting next to you, without you ever noticing.
The past couple of decades have given the super rich several platforms to show off their wealth, especially social media. They even made a movie about this: Crazy Rich Asians. It is now so easy to pictures and videos of rich people partying with the most expensive champagne and traveling on private yachts and planes. The wealth of the wealthiest people is now continuously on display. Influencers spend days and weeks just to post an image that creates the impression that it is super easy to live a super luxury life and millions of people follow their accounts. The followers look at those pictures from their desks in average paying jobs, which suddenly seem low-wage, as few people will be able to afford the luxury vacation, that the freelancer just posted. It is not difficult to see, how the feeling of inequality, suddenly became very strong and might turn into political demands. This is where envy and jealousy come in and form people’s opinion, which facts cannot change.
Yet, it is not universally agreed, that inequality is the problem. As three Yale scientists claim: ” it’s not inequality in life that really bothers us, but unfairness” (The Guardian, 2017). This brings us to the economic and political effects of this inequality.
In a capitalist economy, it is not always most profitable, to maximize the number of customers. An example of this is inflight wifi. For several companies, it is a revenue generator and they aim to maximize their profit. ” As long as business flyers with corporate credit cards are out there, then Wi-Fi in the sky is going to be a luxury on the big airlines” (Fortune, 2015). By pricing a service in a way that only 10% of the population wants to or can afford it, the wifi provider maximizes their profit. When this model is applied to services, such as health insurance, which is getting more expensive, as medicine advances, leaves a significant chunk of the population without this service. One could argue that this is just economics, but health, as well as education, is important to one’s professional career and also one’s political power. It is a reinforcing cycle which results in so many children of wealthy politicians end up in a successful political career after their parents retire (or even earlier). On the other end of the spectrum, uninsured citizens don’t have the regular medical care they need, which makes health insurance at a later point in life even more expensive and unaffordable, because they will probably have accumulated quite a couple of preexisting conditions. The system is self-reinforcing by widening the gap between rich and poor, educated and uneducated, healthy and sick.
This effect is not only unequal, but also unfair, if we believe in the spirit of the American constitution, which offers every citizen the same opportunities, the same rights, and the same political power. Why should someone have significantly more political power, just because they are children of a wealthy politician? Why should someone be able to get health insurance, covering life-saving treatments, just because they were born to rich parents? It is not a surprise that leftist ideas gather support, when people are faced with such an unfair system.
With the rise of digital platforms, these issues are not only about economics, any longer. They impact the core of our society: democracy. It is now easier than ever to turn money into political power. A decent amount of social media marketing budget allows you to shape opinions and voting preferences. The developments in past and current US presidential elections are supporting this thesis: Russia was able to influence voters in the US, just by spending a marketing dollars with Facebook. Bloomberg enters the race, just because he has money and does not need to rely on donors, which are also an important part of the political process. It has never been easier and cheaper to reach and influence people all over the globe to your advantage. Doing this 25 years ago, would have been significantly more difficult, as it would have required vast on-the-ground operations in every region, which was to be targeted. The social media platforms even use their data to choose the audience most susceptible for your advertisements.
Money has always meant political power. As a result, super-rich people need to be considered super-powerful. In a liberal world, without restrictions, the dangers become obvious. When governments and taxes for the rich are kept small, a lot of influence from the rich goes unmatched. Collective bargaining is one way to match the monetary power of the rich. But with enough money, you can even make unions disappear. If the wealth-inequality becomes too big, the whole democratic system is endangered.
The topic of inequality is endless and complex. The 2 takeaways should be, however, that inequality only matters when it is visible and when it has unfair consequences, such as undermining our democracy. Inequality in itself does not have to be bad. But even if inequality hasn’t changed over the past decades, it doesn’t mean that it shouldn’t be addressed. Maybe, the 21st century needs less inequality than the centuries before. Maybe the economy and politics of the 21st century don’t work well with the inequality of the 20th century.
Alternatively, it might be necessary to address the effects of this equality in the 21st century. Political processes and structures need to be strengthened. Regulation needs to be put in place to allow every human being to be treated medically, even if it ‘doesn’t make sense economically’. In the right environment, economies can benefit from inequality as an incentive for entrepreneurs and employees.
As always, a one dimensional look on this issue is a great populist strategy for politicians, but not a path to a better world.