Wednesday, June 06, 2012

Why increasing concentration of wealth is bad for the economy

There is a good article by Joseph E. Stiglitz, Nobel laureate in Economics, in The Atlantic. He shows why the increasing concentration of income and wealth the hands of the top one percent of American families is a problem.

  • It causes "the consumption problem". Poor people spend a greater portion of their income on goods and services; they need to in order to get by. As a result, the greater the portion of the income that is captured by the rich, the smaller the portion that is recycled into the economy. We saw this process in the 1920s and the 2000s before the crashes. (The economy can appear to grow if there is a bubble that makes ordinary people feel richer than they are and thus go into debt to consume. When such a bubble bursts, there are major economic problems. It makes me wonder if there may be some hidden causality in which a consumption problem leads to bubbles, bursts, and crises.)
  • It causes "the rent seeking problem". The rich get richer by drawing income from rents. The rents include not only rent from real property, but also from the power to appropriate funds from others. Basically rent seeking transfers money from those with less power to those with more power, and in our society, from the poor to the rich. This is what Stiglitz describes as the problem with rent seeking: "Rent seeking makes nothing grow. Efforts are directed toward getting a larger share of the pie rather than increasing the size of the pie. But it’s worse than that: rent seeking distorts resource allocations and makes the economy weaker. It is a centripetal force: the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else."
  • It causes "the fairness problem". The demand for fairness is a deep psychological phenomenon characterizing American society as a whole. If people don't feel that they have a fair break in the economy, they tend to work less. Indeed, widespread feeling that the country is not treating people fairly can lead to political unrest. It is clear now that many Americans feel that the economy is increasingly unfair due to the increasingly visible wealth and conspicuous consumption of the one percent, and the long term economic stagnation of the poor and the middle class.
I would suggest that the economy functions better when buyers trust sellers and sellers trust buyers. Indeed, there are a lot of people that trust is a key part of "social capital" -- that a society invests in building trust in its economic and political institutions, and they work better as a result of that investment, yielding long term benefits to the public. If people feel that the society is not fair and that the rich are using their power to take money from the rest of us, how much trust are they likely to feel in "the system"?

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