August 14, 2017

Inequality can be either good or bad, depending.

Assuming behavior is ethical and legal, it is good for extra reward to go to those who work harder, are more creative, or take greater risks than the rest of us. The opportunity to earn extraordinary rewards is healthy and something we do not want to quash with taxes so high as to destroy the motivation to take risks.

It’s perfectly acceptable that there are people at every economic level. Every citizen can strive to achieve the high rewards if prepared to “pay the price,” which often involves very hard work and significant risks to sleep, health, relationships, and more.

It’s important for Liberals like me to endorse this kind of “good inequality,” because Conservatives often seem to think we only want socialism–everyone exactly at same income and wealth, with no motivation to try for more.

Please understand–we don’t want that.

In my view, bad inequality occurs in four major ways. First, if the behavior leading to greater income and wealth includes any of the following, it results in bad inequality: Corruption, immoral, unethical, or illegal behavior; using power to take advantage of laborers, purposefully capturing “rents” which are rightly deserved for labor, not for capital. How this is to be judged is not the purpose of this post, but it is often obvious.

Second, if the amount of high remuneration is not correctly correlated to performance and contribution, it results in bad inequality. Just because a compensation committee of the board of directors decides the CEO’s salary, bonus, and stock options doesn’t mean it is correlated with the CEO’s actual contribution. It’s usually not right, in this writer’s opinion, if the CEO earns 331 times that of the average employee. Surveys show the public thinks CEO’s are vastly overpaid.. This writer thinks 100 times would be a good target for policy intervention, and that’s way above the level of the 1960s.

Third, it is bad for significant wealth to be obtained through inheritance. The kids didn’t earn it, didn’t take the risk. Inherited wealth promulgates bad inequality. There should be a modest limit to what can be transferred, and a high tax on the remainder. This means a wide variety of transfer mechanisms need to be removed.

And fourth, if the share of income and wealth attributed to the top percentiles of the populations is very high and the share for those in the bottom percentiles very low, inadequate to live a decent life, inequality has risen to a level which is dangerous to the society as a whole. This is bad, regardless of whether the wealth is earned fairly.

The US has all these characteristics at this time–much good inequality, but all the forms of bad inequality. The combined effect results in creating the fourth condition, with the highest inequality among highly developed countries. The negative effects of high inequality have been elaborated in previous posts.

This high level of inequality is not the result of the natural and inevitable progress of healthy capitalism. The march of technology and globalization has contributed to the growth of inequality. But of equal or greater impact has been the steady advance of conservative economic policies designed to benefit business and capital at the expense of workers. We have tools to moderate the impact of all these influences.

The Federal Reserve has an objective to manage inflation (which also affects inequality) within upper and lower limits. Similarly, there is a lower and an upper limit to healthy inequality. Inequality is an issue which requires management and needs moderation.

We should have a government objective to keep inequality within a moderate range.