The Consequences of Income Inequality - Democratic Underground

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The Consequences of Income Inequality

For most of human history, raising material living standards was necessary for raising the quality and length of human life. But there is a limit beyond which further increases in average material living standards within societies fail to increase the quality or length of human life. In modern times that limit has been reached in the industrialized nations of the world.

Richard Wilkinson and Kate Pickett conducted epidemiological studies of the relationship of average income and income inequality within societies to various measures of social well-being and social problems within those societies. They discuss and explain their findings in their book, “The Spirit Level – Why Greater Equality makes Societies Stronger”.

Their first major point is that, though average income per person strongly affects both human longevity and quality of life in the poorer countries, the relationship becomes much weaker to nonexistent among the richer nations. Life expectancy and quality of life rises very steeply with increasing average income among the poorest countries. But at about an average of $10,000 per person, the rise in life expectancy and quality of life with additional average income becomes much less. At about $20,000 per person, there is virtually no additional rise in life expectancy with additional average income, and the rise in quality of life is very small.

But while among the industrialized countries of the world there is little or no effect of average income upon average length and quality of life, within countries individual income is strongly related to length and quality of life.

Take the United States, for example. It has the highest average income level of any nation in the world. Yet life expectancy in the United States is lower than that of most of the industrialized nations of the world, and even lower than that of some of the poorer ones. But within the United States (as within all countries) richer people live longer and happier lives on average.

It is important to keep in mind that average income can be a very misleading term in societies which are characterized by high levels of income inequality. A single billionaire among several hundred poor people can represent a reasonably high average level of income.

Thus it is that the social well being of a society that has reached a modest level of average annual income is much more related to income inequality than it is to average income. These are the relationships that Wilkinson and Pickett studied and described in their book.

The effect of income inequality on the health and social problems of societies

As a measure of income inequality within a country, Wilkinson and Pickett used the ratio between the top 20% of individuals and the bottom 20%. This data is available from the United Nations for all countries. For their measure of health and social problems (which they termed “index of health and social problems”) they used mental illness (including drug and alcohol addition), teenage births, homicides, imprisonment rates, infant mortality rate, low life expectancy, low level of trust, low children’s educational performance, and low social mobility to comprise the index. Data for each of these components were identified from official statistics that measured each component in the same manner for each country.

The authors looked at the relationship between income inequality and “Index of health and social problems” among the richest countries in the world, which included Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

There was a very strong and consistent relationship between income inequality and the Index of health and social problems among those countries. At the very top of the scale was the United States, which demonstrated by far the highest level of income inequality and the highest Index of health and social problems. At the other extreme end of the scale was Japan, with the lowest levels of both. Closely following Japan in income equality were the Scandinavian countries, which also exhibited among the lowest indices of health and social problems. It is also important to note that among those same countries there was virtually no relationship between average income per person and the index of health and social problems. The United States has the highest average income and yet also the highest index of health and social problems.

Relationships between societal income inequality and specific social issues

Childhood well being
An “Index of child wellbeing in rich countries” compiled by the United Nations Children’s Fund (UNICEF) was compared with income inequality. The relationship was strongly negative. The United States, with the highest level of income inequality had the second lowest index of child well being. There was no relationship between a country’s average income and child well being.

Trust
Trust level was assessed by an international survey that simply asked whether people agreed with the statement “Most people can be trusted”. There was a strong negative relationship between income inequality and trust. Trust varied tremendously between countries. At the top were the Scandinavian countries, with scores averaging between about 60% and 70%, and at the bottom was Portugal, averaging a little above 10%. Ameri cans averaged a little below 40%. The authors provide an example of trust:

In Norway it is not unusual to see cafes with tables and chairs on the pavement and blankets left out for people to use if they feel chilly while having a coffee. Nobody worries about customers or passers-by stealing the blankets.

Women’s status
Women’s status was measured by political participation, employment, earnings, and social and economic autonomy. There was a significant negative relationship between women’s status and income inequality. The United States was pretty much in the middle with regard to women’s status. The Scandinavian countries were at the top.

Percent of Gross National Product spent on foreign aid
Income inequality varies inversely with the percent of the GNP spent on foreign aid. Only Norway, Sweden, Denmark, and the Netherlands meet the UN recommended target of 0.7%. All other countries are below 0.6%. The United States is the second lowest (just above Portugal), with between 2% and 3%.

Mental illness
There is a strong positive relationship between income inequality and mental illness rates within the past year. The United States is at the top, with about 26%, while the lowest rates of national mental illness are about 8%. Among the mental illnesses, the strongest relationship to inequality is shown for the anxiety disorders and the impulse-control disorders.

Illegal drug use
There is a significant positive relationship between income inequality and illegal drug use. Australia has the highest rate of illegal drug use, with the US, the UK, and New Zealand a close second.

Infant mortality rate
I’ve already noted that life expectancy is higher in the more equal countries. Similarly, infant mortality – which provides a good measure of the quality of health care in a country – is lower in the more equal countries. The United States has the highest infant mortality rate among the rich countries, at about 7 infant deaths per 1000 live births. At the low end of the scale are Japan, Sweden, Finland and Norway, all with between 3 and 4 infant deaths per 1000 live births.

Homicide rate
There is a significant positive relationship between homicide rate and income inequality. The United States has by far the highest homicide rate among the rich nations, at over 60 per million persons per year. The next highest is Portugal, with a little over 30 per million persons per year. Japan has the lowest, with about 5 per million persons per year.

Educational performance
One measure of educational performance is average math and literacy scores. There was a significant negative association between income inequality and average math and literacy scores. The United States was near the bottom for math and literacy scores. Finland was at the top.

Imprisonment rate
There was a very strong positive relationship between imprisonment rate and income inequality. The United States has a far higher imprisonment rate than the other rich nations of the world – and in fact has the highest imprisonment rate of any nation in the world. At the bottom, all with imprisonment rates of about 10% or less than that of the United States, were Greece, Japan, and the Scandinavian countries.

Comparisons of states within the United States

In an effort to improve their confidence in the consistency of the relationships between income inequality and social indicators demonstrated among the rich countries of the world, the authors also looked at the same relationships among the states of the United States.

In virtually every instance the relationship was very similar. Those states with the highest levels of income inequality demonstrated on average a significantly higher “Index of health and social problems”, lower levels of trust, lower women’s status, lower life expectancy, higher infant mortality rate, lower math and literacy scores, and higher imprisonment rates than those states with low levels of income inequality. The southern states, with the exception of Florida, stood out on most of the indicators of social problems as being very high – even higher than would be expected based on their relatively high levels of income inequality.

An explanation for income inequality as a predictor of social problems

Wilkinson and Pickett explain that income inequality within a society is a reflection of the extent to which that society is hierarchical. It’s not just income. Large income inequality generally translates to a society that is divided along class lines, with large differences in social status between classes. The authors explain how that produces so many ill effects within societies, including the many social problems described above.

Greater inequality seems to heighten people’s social evaluation anxieties by increasing the importance of social status. Instead of accepting each other as equals on the basis of our common humanity… getting the measure of each other becomes more important as status differences widen. We come to see social position as a more important feature of a person’s identity…

As greater inequality increases status competition and social evaluative threat, egos have to be propped up by self-promoting and self-enhancing strategies. Modesty easily becomes a casualty of inequality: we become outwardly tougher and harder in the face of greater exposure to social evaluation anxieties, but inwardly probably more vulnerable, less able to take criticism, less good at personal relationships and less able to recognize our own faults…

Not only do large inequalities produce all the problems associated with social differences and the divisive class prejudices which go with them, but it also weakens community life, reduces trust, and increases violence.

I would add that large inequality of income almost always manifests itself in political inequality as well, as those who have the most wealth use that wealth to influence government to create legislation and policies that benefit them in every way, at the expense of everyone else. That in turn leads to further degradation of society.

Take our prison system and our obscenely high imprisonment rate, for example. Over the past few decades wealthy individuals have used their wealth to influence our government to put much of our prison system into their own private hands. They then continued to use their wealth to pressure government to pass laws and create policies (such as the “War on Drugs”, mandatory minimum sentences, and three strike laws) which have had the combined effect of tremendously increasing our prison population.

Significance for national policy

The worst depression the United States ever experienced followed what was at the time perhaps the largest level of income inequality our country had ever seen. Franklin Delano Roosevelt was elected president in 1932 and soon initiated the New Deal, which led to by far the highest rate of job creation our nation had ever seen, a reversal of income inequality lasting several decades, and the greatest sustained economic boom in American history. Here is a graph titled “Plutocracy Reborn – Re-creating the Gap that Gave us the Great Depression:

The chart plots income inequality, measured as the ratio between the average income of the top 0.01% of U.S. families, compared to the bottom 90%. Note that preceding the great stock market crash of 1929, which plunged us into depression, the ratio rose from about 250 at the start of the 1920s to a peak of about 900 by 1929. The ratio then plunged, and by the start of WW II it had declined to about 200, where it remained with some relatively minor ups and downs until the beginning of Ronald Reagan’s Presidency. It then began another precipitous climb, with a sharp decline beginning during the last year of Clinton’s Presidency, but then another sharp increase beginning at about the time that the Bush tax cuts for the wealthy first went into effect, so that by the end of 2006 we exceeded even the peak ratio of 1929 that preceded the Great Depression. The first two green bars in the chart represent the stock market crash of 1929 and the last pre-Reagan year. This chart explains why so many economists predicted our current economic woes, the worst since the early 1930s.

So if inequality is the source of so many of our problems, why shouldn’t our government make every attempt to reverse it? First of all, there are some very powerful interests that will do everything they can to prevent that from happening. And secondly, they have convinced a great many Americans that our government has no role in such matters. Any motion in the direction of reducing income inequality – such as national universal health care – brings on cries of “Socialism!” or “class warfare”.

What these right wingers convey with their dire warnings is that income inequality is the natural result of a divide between producers and lazy freeloaders. They tell us it would be wrong of government to step in to ameliorate the situation because that would merely provide a positive incentive for the lazy. They want us to believe that our unemployment rate skyrocketed because of people who are too lazy to work rather than because of the scarcity of jobs. Hence the excuse of the Republican Party for obstructing the continuation of unemployment insurance. The right wing bottom line message is that those who are on the bottom end of the economic scale are there because they simply don’t deserve better. In short, people receive the income that they deserve.

But this argument leaves out so many things. It leaves out the fact that economic status in highly unequal countries is inherited to a very large degree. It leaves out the fact that the fortunes that people accumulate is a function of government created laws and policies that enable them to accumulate those fortunes. And especially it leaves out how the dismantling of the New Deal that began with the Reagan administration and soon led to our upward spiral of income inequality included the facilitation of monopoly control of our economy by private corporations, which directly led to the pinnacles of wealth and power among a small minority of wealthy elites that we see today in our country.

Some final words on the Reagan era that led to our current predicament

I’ll end this discussion with some words from William Kleinknecht, from his book, “The Man Who Sold the World – Ronald Reagan and the Betrayal of Main Street America” because it was the Reagan presidency, with its mantra of “Greed is good” and its purposeful dismantling of the New Deal, that brought us to our current state of affairs:

In the Reagan years, corporate leaders were crossing lines that a few years before would have been unthinkable. A 1984 article in the New York Times… captured the moral revulsion aroused by the budding era of greed: “a ‘me-first, grab-what-you-can’ extravagance appears to be cropping up among the nation’s top executives. It shows itself in the disproportionate salaries and bonuses paid to so many corporate chiefs… the multi-million severance payments awarded even to CEOs who fail and drive their companies into the ground”…

After the stock market bubble burst, these towers of speculation and accounting chicanery came tumbling down. The falling stock market revealed the inherent instability of huge companies hastily put together by mergers… Enron’s mind-boggling betrayal of employees and shareholders and its unseemly manipulation of power prices in the midst of California’s electricity crisis should in itself have been enough to forever repudiate Reaganism.

Where was the Securities and Exchange Commission while this free-for-all on Wall Street was reshaping the corporate map? Where were the Federal Energy Regulatory Commission, the Federal Trade Commission, the Justice Department Antitrust Division, and a host of other federal regulatory agencies whose job it is to protect citizens from corporate thievery? They were fulfilling the promise of Reagan and his Millionaire Backers. They were letting the market work its magic.

It is these laws, policies, and attitudes that must be reversed if we are to provide our citizens with the opportunities for a fulfilling life and reverse the obscene income inequality that has brought so many tragic consequences to our society.