Dear Dr. Dollar:
The media constantly report that "there is a growing disparity of wealth," and as far as I know this is true. But I would like to know why I should care. For all those who say it is important, I have a simple question: Would you rather live in a country where the poorest 20% average $10,000 while the richest 20% on average make $1,000,000 or in country where the poorest 20% average $7,500 while the richest 20% on average make $90,000?
—Zein M. Alameddine (by email)
This article is from the September/October 1999 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/1999/0999drdollar.html
This article is from the September/October 1999 issue of Dollars & Sense magazine.
In the country with the more equal distribution of in- come, there would probably be less social conflict, less crime, and more economic security for more people. The more equal country will, in addition, probably have better and more widespread social services.
Also, while the average person in the more unequal country would indeed be able to buy more with her greater real income, she almost surely would have even greater material needs. Needs, after all, are not innate (beyond biological subsistence) but are socially determined. We learn to need things by seeing what other people have. People in poor countries seldom "need" cars, color TVs, or many sets of clothing—needs we in the United States take for granted. Furthermore, creating a high level of income generates needs of its own: for cars and highways to get us to and from work, for multiple sets of clothing to work in a modern office, etc.
Then there is the long term. Is the richer more unequal country likely to stay richer? Over the long run, faster economic growth is often associated with a more equal distribution of income. Greater equality, for example, tends to be associated with more widespread education which, in turn, tends to be good for economic growth. Also, inequality is likely to be bad for economic growth because it breeds social conflict and instability. (Thereís simply no historical basis for the idea so popular among some politicians and textbook writers that great inequality yields more rapid growth!)
Perhaps most important, inequality in the distribution of income and wealth means inequality in political and social power. Even in a country with the formal institutions of democracy (elections, civil liberties, the right to organize), meaningful democracy is likely to be thoroughly undermined by extreme economic inequality. Democracy is a good thing in itself. Moreover, without effective democracy, inequality is likely to get worse (as the rich use their control of the political process to enhance their material position) and long term growth is likely to be harmed.
So now I am ready to answer your question! Would I rather live in a country characterized by a higher level of income, more inequality, more social conflict, more crime, more insecurity, worse social services, greater material needs, more poverty, the likelihood of slower economic growth over the long run, and a lack of democracy? Or would I rather live in a country characterized by a lower level of income, less inequality, less social conflict, less crime, less insecurity, better social services, less material needs, less poverty, the likelihood of more rapid economic growth over the long run, and a more secure democracy? I choose number two. What about you?
Whatever your answer, remember that the "choice" is often not the one you posed in your question: rich countries are not necessarily more unequal than poor ones. In the United States, people try to justify our inequality by saying it is the price we must pay for our riches. Yet Scandanavia, most Western European countries as well as Japan are both relatively rich and relatively equal. Likewise, some middle income and poor countries are very unequal—like Brazil, Kenya, and Malaysia—and some are relatively equal—India, Morocco, and South Korea. So letís add a third choice to your list: a country that is both rich and equal!
(One point about definitions: In your question you first refer to "wealth" but then write about how much money people get each year. Wealth refers to the assets that people possess: their houses, cars, stocks, bonds, etc. Income is the buying power (the money) that people obtain in a given amount of time: their wages and salaries, profits, interest receipts, etc. Wealth and income are connected of course, and a highly unequal distribution of income tends to go along with a highly unequal distribution of wealth. They are, however, different concepts. In the language of economics, wealth is the "stock" of what people have at a point in time and income is the "flow" of what people get during a period of time. In the United States, wealth is far more unequal than income.)