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Income Inequality: Does it really matter?
By Nadeen H. Makhlouf
Guyana Journal, July 2012

THE UNITED STATES was founded on a number of ideals and basic values such as liberty, democracy, respect for private property, self-reliance, and small and non-intrusive government; but egalitarianism was not one of such founding principles. Unequal distribution of income and wealth has traditionally been accepted as a natural consequences of capitalism, which is based on, and supportive of, individual initiative and market forces that often lead to divergent financial rewards, and results in winners and losers and, eventually, haves and have-nots. Accordingly, whenever calls are made by some liberal politicians and other concerned members of society for taking steps to reduce income disparity through a more progressive tax system or other economic measures they encounter substantial resistance from conservatives and libertarians who want to reduce the role and size of government, and often blame the poor for being so. Although several social programs that  aim at helping the poor or the middle class – such as the Social Security Program, Food Stamps, Aid to Families with Dependent Children, and others – have been introduced over the last few decades, conservative critics continually call for cutting them or even eliminating them altogether. Joseph Stiglitz, the 2001 winner of the Nobel Prize in economics, observed in an article in the Washington Post (6/24/2011) that even the Federal Reserve Board “consistently failed to understand the links between inequality and macroeconomic performance”. He also wrote that “many of the fashionable models in macroeconomics said that the distribution of income didn’t matter.”

            Wall Street Occupiers have brought some attention to the growing inequality in income and wealth. Their choice of Wall Street, America’s financial center, aimed at dramatizing such concentration of wealth that financial institutions perpetuate.  Paul Krugman, the 2008 Noble Prize winner in Economics, among others, has estimated that inequality is now at its highest level since the early 1900s. Confirming this conclusion, a study by the Congressional Budget Office revealed in 2011 that the average income of the top 1 percent of Americans rose by 275 percent during the span of three decades. This substantial increase in the incomes of richest members of society compares to less than 20 percent rise for the bottom 20 percent of the population, and less than 40 percent increase attained by the middle 60 percent. Even if one doesn’t subscribe to the egalitarian ethic, the extreme gap between the top one percent and the rest raises some moral and ethical questions. In a speech in Osawatomie, Kansas, in December 2011, President Obama underscored how “the rungs of the ladder of opportunity had grown farther and farther apart, and the middle class has shrunk”.

            Historically, the United States has gone through several cycles of extreme inequality. For example, the period that preceded the Great Depression of 1929 was marked by an extreme concentration of wealth. In the 1930s through the 1960s, there was a movement in the opposite direction, thanks to President Roosevelt’s New Deal social programs, the civil rights legislation of 1964, and the subsequent Johnson Administration’s war on poverty. In the 1970s, another cycle marked by increasing income disparity began. During this cycle, incomes at the top levels increased at a much faster pace than those of the middle class and the poor whose incomes in real terms stagnated, and at times declined. The reasons behind this latest phase of income divergence include the shift from the progressive income taxes to the less progressive payroll taxes, the decline of unionism, the shift of manufacturing to the developing and emerging economies, and the political influence of corporate leaders and the more affluent members of society. Additional factors that have had an increasing impact over the last few decades are globalization that increased competition from low wage countries, and technological advances that benefited some and negatively affected others. Although technological changes raise labor productivity, the fruits of that change have not been equally or fairly shared throughout society.  

            A good question to ask is: Does inequality matter? If so, why?  From an economic standpoint, Stiglitz relates the growing rate of inequality and the prolongation of the economic downturn that began in 2008. In his opinion, “inequality prolongs the downturn and the downturn exacerbates inequality.” If public policies don’t address the causal factors behind extreme concentrations of wealth and income, more members of the middle class would slip into the ranks of the poor or near-poor, which is morally unacceptable in a country that despite some challenges still has the world’s largest economy and the greatest capacity for technological  and scientific achievements. Inequality can also undermine the freedom that is a basic foundation of the American system. As Nelson Mandela once said, “While poverty persists, there is no true freedom.”

About the writer:
Nadeen H. Makhlouf is a Ph.D. student in the public policy program at the American University in Washington, D.C.