07/07/2020

Economic Participation Matters Most

Do we want to live in a society in which people profit when they have new ideas, products, and abilities that others are willing to pay for? If so, then we will also have economic inequality.

To most economists and ordinary Americans, inequality is the price we pay for an economy that rewards innovation, risk, and hard work. The topic has been a recurrent theme in our recent political discourse, however, because of two things: the outsized income of the nation’s top earners and the stagnation, or tepid growth, of middle-class incomes. The question is whether we think these two trends say something bad about America, and if so, what public policy can do about them.

On the first issue, the rising incomes of the rich, politicians and advocates who want to reduce inequality typically rely on one of three rationales.

First, there is the “piece of the pie” rationale. This view regards the economy as a kind of zero-sum game in which larger slices of the economic pie for the rich mean less for everyone else. But the evidence for this view is dubious at best. Even Paul Krugman has claimed to be a skeptic of the idea that inequality affects economic performance.

The second rationale is a kind of moral objection: It is simply wrong, or unfair, for the rich to earn so much. Behind the veil of ignorance, as the political philosopher John Rawls taught us to think, no one would choose to live in a society where 1 percent of the population earns more than $430,000 while everyone else averages one-eighth that amount. But, the fact is, we live in a non-Rawlsian reality in which many would roll the dice and say, “I’ll take those odds!”

Besides, as polls suggest, everyday Americans just don’t care about inequality as much as they care about upward mobility. They may dislike faceless “bankers” and “CEOs of insurance companies,” but they admire Steve Jobs and Mark Zuckerberg, whose earnings make most bankers and insurance executives look middle class.

The third rationale blames cronyism, the “rigged game,” for making people rich. It is unlikely that cronyism is the main driver of the top 1 percent’s income. Still, as research from Boston University’s Jim Bessen shows, there is a positive relationship between growing corporate profits and lobbying. .

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