Strategies for a Sluggish Economy
Even the most optimistic investors will admit that the economy will not get that ‘U’ shaped recovery that everyone was hoping for at this time in 2020. The loss of…
February 2, 2021
In the US, almost 85% of the wealth is owned by just 20% of the population, and the bottom 40% own just 0.3 percent of it. In 1960, a chief executive in the US typically earned 20 times as much as an average worker. Today it is more like 354 times.
You might have heard these startling statistics before, but they probably don’t really translate all that well to real life implications. You are likely not part of the top 1%, and your CEO does perhaps make 354 times your annual salary, but isn’t that just how it’s always been?
Income inequality is a measure of the distribution of financial resources in a society. In many countries, the gap between the owners of resources and the workers widens over years and over generations. The United States, for instance, is home to an extreme gap between the haves and the have-nots. Wealth inequality has become one of the world’s most serious issues.
Think about some of these gaps or inequalities in your own surroundings. There are growing income gaps between young people and older people, between recent immigrant families and American-born citizens, between genders, and between racial groups. All these ‘dimensions’ of inequality can be cumulative as well.
There are many factors that contribute to this ongoing (and growing) inequality. Over the past few decades, there are numerous studies depicting the rising cost of living in conjunction with stagnant wages, decreasing numbers in unionization, cost of education, availability of resources (like supermarkets that provide fresh produce), and more.
How do these factors impact our society as a whole? Not surprisingly, as the gap widens, the impact grows to envelop most aspects of our life. Human beings rely on each other to create and maintain complex societies. As historian Yuval Noah Harari wrote: “One on one, even 10 on 10, we are embarrassingly similar to chimpanzees. Significant differences begin to appear only when we cross the threshold of 150 individuals, and when we reach 1,000-2,000 individuals, the differences are astounding.”
1. Economic inequality cause imbalances in control and power
Many economic systems have ‘owners’ of resources like land, money, and technology, and ‘workers’ who translate these resources into goods and services that are needed in the society. If there is an unequal distribution of wealth, owners can end up controlling aspects of the lives of the workers such as: where and how they can work, what they can buy, where they keep their savings, who they marry, what they do in their leisure time, and more. As an example, ownership of a public media outlet, such as a newspaper or a television channel, can give control over how others in the society view themselves and their lives, and how they understand their society.
2. Wealth inequality can exacerbate unfair political measures
In many countries, including the US, politicians and policymakers depend on donations and contributions from their supporters for their political campaigns. In these cases, they may be more responsive to the interests and demands of wealthy contributors while constituents who are not rich may not be fairly represented.
The wealthiest patrons may be able to exert disproportionate political influence when it comes to budgets and policies where their interests are involved. They may be able to make the law work for them rather than for everyone. Enough economic inequality can transform a democracy into a plutocracy, a society governed by the wealthy.
The emergence and popularity of PACs (Political-Action Committees) shows how individuals can exert political control under the guise of charity and donations. Through PACs, individuals and corporations can contribute financially to a policy that they support and withdraw millions of dollars to prove a point and show displeasure with a political party that no longer supports their vision.
3. Wealth inequality damages belief in the economic system itself
Every society and economy requires cooperation and belief in the system by those who live in it. Even the concept of money and currency would fall apart if, for example, everyone in the world decided to withdraw their money from the bank at the same time.
Economic inequality makes it difficult, if not impossible, to create equality of opportunity. When serious wealth inequality exists, it means that some children will enter the workforce much better prepared than others. And people with few assets find it harder to access the first small steps to larger opportunities, such as a loan to start a business or pay for an advanced degree. Over time, this will cause the economic system to break down. If there are no opportunities for economic mobility (or enough people believe that there are no opportunities for economic mobility), workers may start acting on their feelings of resentment and hostility.
4. Wealth inequality works against basic economic principles of supply and demand
If an economy is producing an increasing level of goods and services, then all those who participate in the economy should theoretically share in the benefits. When wealth inequality is so high that the rich end up sitting on more money than they can spend, all that money is doing is hanging around in a bank account. This impact can actually be proven: In 2014 the Organisation for Economic Co-operation and Development (OECD), a collective of the world’s 35 wealthiest countries including the United States, found that rising inequality in the United States from 1990 to 2010 knocked about five percentage points off cumulative GDP per capita over that period.
Having access to credit and loans does help, but if more money was widely distributed, there is a direct increase in demand for goods and services, investments, and other economic activity. Inequality also means the market for new goods shrinks. One study shows that if incomes are more equal among people, people who are less well off, buy more. Having this larger market for new products incentivizes companies to create new things to sell.
Overall, as the gap in resources and wealth ownership widens, there is a net negative impact on society. Those who have money and those who don’t are increasingly segregated, even when it comes to where they shop for groceries, where they study, and where they invest their money. These differences only add up over time, as technology and automation come in the picture.