Is High Economic Inequality Ethical?

It is widely known that the rise of globalization has led to large disparities in the wealth and incomes of the countries and citizens of the world. The trend of rising economic inequality has been caused primarily by these major structural changes in the global economic system, induced by new technologies and innovations. Regardless, the growing gap between the rich and the poor is of dire concern. Is it ethical to allow rising inequality to continue? Are the effects of economic inequality morally justified? What does justice require?

1. Global and Domestic Inequality

Over the last 50 years economic inequality has increased tremendously both within and between countries worldwide. A study done by the World Institute for Development Economics Research found that in 2000, a mere 1% of the world’s adults owned 40% of the world’s wealth, with the top 10% altogether owning 85% of the world’s total wealth. The study found that the United States alone had 25.3% of the world’s wealth, while containing just 5.5% of the world’s population; whereas China had only 8.7% of the world’s wealth, and about 22.8% of the world’s adult population.

As striking as these numbers may be they fail to explain that wealth and income are also highly unequal within the U.S., China, and other countries of the world. In 2005 little more than 50 million people in China had more than roughly $3000 (CNY 20,000) of disposable income, while almost 750 million people didn’t even have $800 (CNY 5,000) of disposable income. In the rural areas of China, where the majority of the population is, the poorest 10 percent now hold only 2% of wealth while the richest 10% hold 31% of all wealth. The major disparities in wealth and income are not unique to China. In fact, 30 out of 177 countries had sharper income inequality than China in 2006 according to the widely used Gini coefficient measurement (measures economic inequality).

The United States has one of the the highest Gini coefficients at above 40 and this measurement has risen 4.4% in the last decade. In the U.S., the share of income now going to the top .1% has more than tripled since the 1980s. In the 1980s a successful CEO could expect to take home about 40 times more pay than their average worker but in 2001 the same CEO could take home as much as 350 times the pay of typical workers. In 2005, Wal-Mart’s CEO Lee Scott Jr., made more than 900 times the pay and benefits the typical Wal-Mart worker made in 2005, or roughly the same amount the average Wal-Mart worker earns in a lifetime. To shed some light on the relative poverty of the poorest countries to the wealthiest, imagine this: average wages of people in poor exporting countries are one-tenth that of average wages in U.S., and so are perhaps almost 9000 times less than the wage of an American CEO such as Lee Scott Jr.

Whether or not such a disparity is an issue will be discussed later in this paper. Moreover, there is a common misconception that rising inequality is acceptable because absolute gains have been seen by all, however, this is not the case. In China for example, despite an increase in total income, the average income of the poorest 10% of households fell by 2.5%. Not surprisingly, inequalities in standards of living are also greater today than they have been for 50 to 100 years, and many economists expect the growth of these inequalities to continue.

2. Negative Effects of Extreme Inequality

There is an abundance of research on economic inequality and it’s effect on the quality of life and social relations within countries of the world. Many studies have shown significant relationships between economic inequality and crime rates, community involvement, political participation and polarization, health, and even trust and happiness. Political unrest and terrorism may also be closely related to extreme economic inequality.

One particularly distressing side effect of increasing economic inequality is its impact on the safety and cohesion of society. As Richard Wilkinson said, “How cohesive a society is, how much people trust each other and are involved in community life, is an important social asset that makes a very substantial contribution to the quality of life.”

Studies show that people actually trust each other much less in countries with larger income differences. One study plots trust levels (based on % who say “Most people can be trusted”) and the income inequality of countries on a graph. The study found that that Brazil, a country with high income inequality, had the lowest levels of trust, while Sweden, which has a very equal income distribution, had the highest level of trust.

Along with being less trusting, unequal societies are also likely to have more crime. It might seem appropriate to associate high levels of violence in a society with rates of absolute poverty, but the evidence points to relative poverty as the true origin of violent societies. As Wilkinson explains, “If we were, for instance, to ask why areas such as Harlem in New York had such high levels of violence, the answer is less likely to be that the absolute level of poverty in Harlem is the true cause rather than the fact that people in Harlem are poor in relation to people in the rest of the United States.” Studies of violent crime and homicide provide convincing evidence for a relationship between income inequality and the safety of society. More than 50 studies have shown that a tendency towards violence is more common in societies with larger differences in income.

In one study done in 2002 using international data for 37-39 countries; Pablo Fajnzylber, Daniel Lederman, and Norman Loayza found a significant statistical relationship between homicide/robbery rates and income inequality. By plotting on a graph the Gini coefficient of the 37-39 countries, along with the homicide rates of those countries, they found that there is a positive correlation between homicide and income inequality. Moreover, the countries with the most unequal income distributions have the highest rates of homicide. Another study found that U.S. states with more equal income distribution to be much safer, with significantly lower rates of homicide.

It should now be clear that extreme economic inequality is detrimental to the cohesion and safety of societies and also of the international community. As Wilkinson put it, “What the relationship with inequality actually demonstrates is that societies that tolerate the injustices of great inequality will almost inescapably suffer their social consequences: they will be unfriendly and violent societies, recognized more for their hostility than for their hospitality.”

Another concerning feature of economic inequality is it’s impact on health and happiness.  In the U.S. the gap in life expectancy has dramatically widened as inequality has grown. In 2000 for example, men in deprived counties had an average of 10 years’ shorter life expectancy than women of affluent counties, and poor black men lived almost 14 years less than affluent whites. Another study in 2007 showed that people with incomes less than $50,000 a year have a significantly shorter lifespan than those with incomes above $50,000. Furthermore, a study conducted by the Pew Research Center finds that happiness may be linked in inequalities. In the study, 50% of people earning more than $150,000 a year described themselves as, “very happy,” while only 23% of people earning less than $20,000 a year responded as, “very happy.” In a comparison of nations, Iceland and Norway, some of the most equal nations, were found to be the happiest. Altogether, the evidence suggests that more equal societies will be healthier and happier.

Perhaps the most worrisome effect of extreme economic inequality is that it reduces political equality and polarizes policy-making. What does this mean? Essentially, there is a distinct gap in policy preferences between the rich and the poor. As economic inequality grows, the policy gap widens. Furthermore, the political power of the rich increases as they become relatively more wealthy, even if the poor achieve absolute gains. This enables the rich to become even more effective in capitalizing on their policy preferences. As the U.S. has one of the highest levels of economic inequality, and has been widely studied, it will provide excellent empirical evidence for the effect of economic inequality on politics.

Since the 1960s, election turnout rates for the U.S. have declined by almost 15%.Election turnout rates are now at their lowest levels since 1924, when income inequality was as wide as it is today.The reduction in participation that has occurred is an effect of a widening gap between the rich and the poor in the United States. This is simply because money, rather than time, is the most powerful method of participation in the political system. For example, the top two income groups form less than 10 percent of the population but donate more than half of all money that goes to political campaigns. Political campaigning and advertising is expensive in almost every country in the world now. As Verba, Scholzman and Brady wisely note, “When money replaces time at the principal form of political currency, the playing field is no longer level.”

Measures of polarization, in both the house and the senate, have also shown dramatic increases since the late 1960s. The foundational cause of both the reduction in participation and the increase in polarization is the increasing gap between the rich and the poor. When plotted on a graph, the change in the Gini index of family income, highly correlates with the polarization index. Beginning in the late 1960s, the gap between rich in poor began to dramatically widen reaching its highest levels since the 1920s. The polarization index also shows notable increases since the 1960s. The most obvious explanation for the link between income inequality and polarization is that the gap in income between rich and poor has created a gap in economic policy preferences.

Clearly, the effect of economic inequality on politics is unethical and should be undesirable for a democracy. Political voice should be equally shared by all. Polarization prevents meaningful policies from being considered and harms the political cohesion of a country. Political engagement is the foundation of every Nation-State and should, therefore, it should be extremely distressing that economic inequality in increasing world-wide.

3. The Agent of Rising Inequality

Most scholars would agree that globalization is the primary culprit behind the incredible increase in global economic inequality, but what is “globalization” and what has led to this phenomenon? In this paper globalization is used in an economic context. Essentially, economic globalization is the process by which national economies have been integrated into the wider international economy. International trade, capital flows, migration, foreign investment and the spread of technology have made national economies more interdependent and have created a new global economy.

The rise of globalization is due to new technologies and growing populations. As Robert Reich explains, “…the critical ingredient igniting globalization was a raft of new transportation and communications technologies…that drastically reduced the cost of moving things from one point on the world’s surface to another.” The development of the world-wide web has allowed investors to trade stocks and transfer capital around the world at the click of a button. Cargo ships, cargo planes, overseas cables, steel containers, satellites and computers have all helped to lower transaction costs substantially, enabling companies to mount cost effective endeavors worldwide.

While globalization has been made possible because of new technology, it has been perpetuated by marketization. Capitalism defeated communism and even countries such as China and Russia, who were once icons of communism, are embracing the market. As the world becomes more connected, or interdependent, because of trade and capital markets, firms and countries have struggled to become more competitive.

Fueling globalization, and perpetuating inequality, is a rising level of competition among firms, as consumers around the world are demanding lower prices and investors are seeking higher returns. As Reich suggests, “The real explanation involves the way technologies have empowered consumers and investors to get better and better deals—and how these deals, in turn, have sucked relative equality and stability, as well as other social values, out of the system.” The development of new information and transportation technologies has increased competition among market actors to attract investors and reach more consumers. Perhaps the most profound result of this has been that companies are under extreme pressure to cut costs in order to deliver better deals and show higher profits. For example, as payrolls are about 70% of the average business’s costs, CEO’s must cut wages and reduce benefits in order to please consumers and investors. Furthermore, firms claim that astronomical wages must be paid to CEOs in order to attract the most talented, and sometimes the most ruthless of people, who will be willing to do what is necessary to increase profitability. The result of this new global system is that small groups of people seeing higher and higher wages, while the majority of people’s wages are stagnant.

The new global economy, forged by innovations in information and transportation technologies, may benefit the consumers and investors of the world, but the workers and citizens are losing ground. As Reich put it, “Consumers and investors gain power, citizens lose it.”Globalization has created enormous tension between the market and social groups who attempt to fight it through their respective governments. As Dani Rodrik articulated, “The process that has come to be called “globalization” is exposing a deep fault line between groups who have the skills and mobility to flourish in global markets and those who either don’t have the advantages or perceive the expansion of unregulated markets as inimical to social stability and deeply held norms.” Competition for consumers, investors and even for talent, is leading to vast economic inequalities.

4. How Could Economic Inequality be Reduced?

The trend of economic inequality will not end if nothing is done to stop it. If anything, inequality will likely rise in the coming future without comprehensive intervention. As Rodrik suggests, “Advances in transportation and communications technologies render national borders more porous to foreign competition than they have ever been, and nothing short of drastic government restrictions can alter that.” The problem is that the international market doesn’t have a supreme political authority to regulate it. Therefore, countries must regulate domestically in order to affect economic inequality globally.

In one proposal by U.S. Senator Jeff Bingaman, domestic governments would put strict rules on corporations whom operate in their countries. The plan is to offer generous government subsidies and tax cuts for corporations who enter what is called the “A-Corp” program. To qualify as an A-Corp, companies would have to contribute at least 3 percent of their payroll to pensions, 2 percent to training and education, and would have to set caps on salaries of the highest-paid employees.The cap on total compensation means that the highest-paid employee (probably CEO) could not make more than 50 times that of the lowest paid full-time worker. It seems reasonable for the highest paid employee to earn 50 times more, rather than the 350 times more that is currently typical. Senator Bingaman also proposes a small tax on short-term trading, which would generate enormous revenue, that could be used for reducing inequality.The former Secretary of Labor, Robert Reich, has also proposed a small transfer tax on the sales of shares of stock. He suggests that this might slow the movement of capital slightly, and decrease some of the negative effects of competition.

The suggestions above could be effective in reducing economic inequalities in the world if national governments committed to implementing regulations. Capping executive pay, discouraging short-term stock trading, and creating rules to protect the welfare of of the lower classes would be practical methods to approaching the problem of economic inequality. The problem is that the governments and media outlets of the world are primarily controlled by the wealthy and prevent much of these important changes from happening. Citizens must rise up and force their respective governments to protect them from the new global economy.

5. What Moral Obligation do States Have?

Obviously economic inequality is not an evil or morally unacceptable characteristic of a society. In fact, inequality is most certainly necessary to maintain a functional, healthy and motivated society. However, the extent that economic inequality exists in domestic and global society is what concerns us. As John Rawls said in The Law of Peoples, “The law of peoples….holds that inequalities are not always unjust and, that when they are, it is because of their unjust effects on the basic structure of the Society of Peoples, and on relations among peoples and among their members.” This is similar to the view held by this paper; it is the highly unjust effects of economic inequality that makes it morally wrong, but in my view the extreme inequality of relative gains in the world is also unjust.

Rawls provides three reasons for reducing inequalities within domestic society. The first reason for reducing inequalities is to relieve the suffering and hardships of those in poverty. Rawls further suggests that once the poor have what they need to be fully functional and effective in society, then there is no longer a need to narrow the gap between rich and poor. Second, Rawls suggests that economic inequalities lead to some citizens being, “…stigmatized and treated as inferiors…”, which he says is unjust. Finally, in accord with earlier findings of this paper, Rawls also suggests that a gap between rich and poor has profound implications on fairness in the political processes. Rawls believes that every citizen should have equal opportunity of attaining social or political positions. However, Rawls does suggests that public financing of political parties and campaigns could offset the gap in power between rich and poor people.

One rather radical proposition of Rawlsian theory is to imagine oneself behind a “veil of ignorance.” Basically, if we were to create new rules for a society and we knew that goods would be unequally distributed, how would we want them allocated? Rawls claims that most people would want goods to be equal, but would allow inequalities only if they were attached to positions open to everyone and advantaged all. This is Rawls’s difference principle, which states: inequalities in wealth, income, and social power are permissible only if they worked to everyones advantage and maximally benefit the least advantaged class in society. The current level of global inequality is in stark violation to this principle as it benefits those who are most advantaged. Despite the nature of global inequality, Rawls only prescribed the difference principal, and reduction of economic inequalities, to domestic societies.

However, Charles Beitz, a Cosmopolitan, has argued that both international interdependence, and the principle of respect for individuals, mandates that the difference principle be applied universally. As Beitz said, “Global economic and political inequalities are so great that one would think those who hold to liberal egalitarian principles in the domestic politics of the rich countries would be more concerned about them, and on different grounds, than many evidently are.” Beitz’s assertion seems reasonable. Clearly interdependence and globalization have changed the world so dramatically, that new rules are needed to prevent the change from increasing world inequalities. The reasons provided by Rawls for reducing inequalities in the domestic sphere are equally applicable to international relations.

Even if global inequalities were permissible, in a world of interdependence States have a moral obligation to address not only global disparities, but also to address disparities that are created domestically in other States. This is because economic self-determination does not exist and cannot exist in the new globalized economy. The economic situation of every country in todays world, is dependent on that of another. As Beitz said, “International interdependence involves a complex and substantial pattern of social interactions, which produces benefits and burdens that would not exist if national economies were autarkic.” If countries were autarkic, or self-sufficient, it might be ethical to ignore their national economies, but due to the level of interdependence that exists, states are morally obligated to mitigate the negative effects that the global economy may have on particular countries or groups of people.

Conclusion

To sum it up, the extent of economic inequality that now exists in the world is so extreme that it is unjust to let it continue. Furthermore, given the evidence provided, it should be concluded that the effects of economic inequality on health, happiness, crime rates, and political participation are morally and ethically unacceptable. Since everybody is in some way responsible for the trend of growing inequality, the only way to slow it down is through smart and comprehensive legislation. As Robert Reich said, “The only way for the citizens in us to trump the consumers and investors in us is through laws and regulations that make our purchases and investments a social choice as well as a personal one.”

National governments and international institutions have an ethical and moral obligation to protect a relative sense of economic equality worldwide. This would not only increase the well-being of millions of people around the world, but would also create a more stable and peaceful world. Global justice demands action to be taken.

By Jeffrey Brittain (B.A. Political Science, UC Berkeley)

References

Beitz, Charles R. “Does Global Inequality Matter?” In Global Justice, by Thomas W. Pogge. Malden, Massachusetts: Blackwell Publishing , 2001. < http://books.google.com/ books? hl=en&lr=&id=cA00jlfLLqsC&oi=fnd&pg=PA106&dq=The+morality+o+global +inequality&ots=MqC5LozwAs& > (accessed May 7, 2010).

Beitz, Charles R. Political Theory and International Relations. Princeton, New Jersey: Princeton University Press, 1979.

Bingaman, Jeff. “Legislating Responsibility: A proposal.” Does America Still Work? Harpers Magazine. Harpers Magazine Foundation, May 1996.

Bourguignon, Francois, and Christian Morrisson. “Inequality among World Citizens: 1820-1992.” The American Economic Review. vol. 92, No. 4 (September 2002): 727-744. American Economic Association. < http://www.jstor.org/stable/3083279 > (accessed May 9, 2010).

Ehrenreich, Barbara. The Nation. “This Land is Their Land.” June 11, 2008.

Fajnzylber, Pablo, Daniel Lederman, and Norman Loayza. “Inequality and Violent Crime.” Journal Of Law and Economics, vol. XLV (April 2002): 1-40. The University of Chicago, 2002.

Fiorina, Morris P. Parties, Participation, and Representation in America: Old Theories Face New Realities. Stanford University. March, 2001

McCarty, Nolan. The Policy Effects of Political Polarization. The Transformation of American Politics: Activist Government and the Rise of Conservatism. Princeton University Press. 2007.

Pear, Robert. “Gap in Life Expectancy Widens for the Nation.” The New York Times. March 23, 2008.  <http://www.nytimes.com > (accessed March 6, 2010)

Rawls, John. The Law of Peoples. 4th ed. 1999. Reprint, Cambridge, Massachusetts: Harvard University Press, 2002.

Ravallion, Martin. “The Debate on Globalization, Poverty and Inequality: Why Measurement Matters.” International Affairs (Royal Institute of International Affairs 1944-) Vol. 79, No. 4 (Jul., 2003), pp. 739-753. Blackwell Publishing on behalf of the Royal Institute of International Affairs. < http://www.jstor.org/stable/3569571 > (accessed March 8, 2010).

Reich, Robert B. Supercapitalism: The Transformation of Business, Democracy, and Everyday Life. New York: Vintage Books, 2007.

Rodrik, Dani. Has Globalization Gone Too Far? Institute for International Economics. Washington, DC. 1997.

Verba, Sydney, Kay Lehman Schlozman, Henry E. Brady. (May-June 1997) The Big Tilt: Participatory Inequality in America. The Tocqueville Files. The American Prospect.

Wilkinson, Richard G. The Impact of Inequality: How to Make Sick Societies Healthier. New York: The New Press, 2005.

Woolf, Steven H., MD. “Future Health Consequences of the Current Decline in US Household income.” Journal of the American Medical Association. vol. 298, no. 16 (October 2007): 1-6.

Young, Nick. How Much Inequality can China Stand? From the China Development Brief, 2007.

1 comment to Is High Economic Inequality Ethical?

Leave a Reply