Daniel Payares Montoya is a full-time graduate student in UC Berkeley’s Master of Development Practice program.
Inequality is at the center of the economic debate. Much of this is because of the publication of Capital in the 21st Century by economist Tomas Piketty in 2014. Although Stiglitz (2012), Deaton (2013), Reich (2010) and Bourguignon and Atkinson (2000), among others, preceded him on discussing inequality with relative success, only he was able to attract the attention of politicians, academics, the media and civil society worldwide.
This has enabled the consolidation of the World Inequality Database and the World Inequality Report, tools that make available data and methodologies to measure the distribution of income and wealth to provide facts to engage in informed public debates on inequality.
Using these tools, Piketty, Saez and Zucman (2018) show that in the US the top 1% and top 10% of the income distribution accrues 20.2% and 47.0% of the total pretax income produced in the economy, respectively. On the other hand, the bottom 50% of the population is getting only 12.5% of total pretax income. Although this situation is partially corrected after taxes and transfers, the net wealth for the top 1% has been increasing to levels like those of the beginning of the last century.
These findings have unleashed a debate on how to reduce inequality. Congresswoman Ocasio-Cortez recently asked for a 70% top marginal income tax for those who make more than $10 million a year. This was followed by a proposal of Senator Warren on taxing the wealth of those who have more than $50 million worth in assets. Both ideas have been catalogued by some commenters as socialism. This is the first round of a discussion that will be part of the primaries and the presidential election of the next year.
How much inequality is good or bad for a country and who win or loses with it? The answer can´t be definitive since it depends not only on economic factors but also on political agreements and social preferences within each society. The evidence, however, suggest that “high” levels of inequality can jeopardize democracy, benefiting those at the top of the wealth and income distribution with more economic and political power, while diminishing the material and psychological well-being of the rest.
TOP 1% NET PERSONAL WEALTH SHARE IN THE UNITED STATES, 1913-2014
Stiglitz (2012) and Fukuyama (2014) focus on the influence on the State by corporate interests that try to avoid competition to capture rents, thus generating inefficiencies in the economy. Chomsky (2017) explains how special interests have been trying to rig the capitalist system in their favor for the last five decades, at the expense of the well-being of society. “All for ourselves and nothing for other people” is their maxim, affirms Chomsky. On the other hand, Wilkinson and Pickett (2011) show that higher levels of inequality are related to worse results in education, violence, mental health, social cohesion and social mobility in rich countries and US states. They mention that “the quality of social relationships in a society rests on material foundations … the level of inequality is a powerful policy instrument for the psychological well-being of all of us.” Finally, Acemoglu and Robinson (2012) explain that the economic power of the elite, if not restricted, can be used to capture political and economic institutions to keep on increasing their wealth. As income and wealth concentrates at the top it may exclude the rest of the society of economic opportunities and political rights, thus eroding democracy.
This discussion is important from the perspective of a development practitioner because it allows her to understand inequality not just as an outcome of the economic process, but also as the cause behind poverty, corruption and violence, among others, in different countries.
In addition, today is possible to have more informed debates about inequality in places where data is available, like in the US. This means more opportunities for countries to experiment and measure policies to reduce inequality. Because the lessons that will emerge from this process could signal the path for other nations struggling with high or increasing levels of inequality in their quest for well-being, this discussion cannot be overlooked by any development practitioner. The future of millions depends on this.
- Acemoglu, D., Robinson, J. (2013). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Currency
- Atkinson, A., Burgueignon, F. (2000). Handbook of income distribution. Amsterdam: North Holland
- Chang, H-J. (2015). Economics: The User’s Guide. London, Bloomsbury Press
- Chomsky, N. (2017). Requiem for the American Dream. New York: Seven Stories Press
- Deaton, A. (2013). The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton: Princeton University Press
- De Janvry, A., Saudulet, E. (2015). Development Economics: Theory and practice. London: Routledge
- Fukuyama, F. (2014). Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy. New York: Farrar, Staus and Giroux
- Reich, R. (2010). Aftershock: The Next Economy and America’s Future. New York: Vintage
- Piketty, T. (2014). Capital in the 21st Century. Cambridge: Belknap Press
- Piketty, T., Saez, E., Zucman, G. (2018). Distributional National Accounts: Methods and Estimates for the United States, in The Quarterly Journal of Economics Vol. 133, Issue 2, 553-609
- Stiglitz, J. (2012). The Price of Inequality: How Today’s Divided Society Endangers Our Future. New York: W.W. Norton & Company
- Wilkinson, R., Pickett, K. (2011). The Spirit Level: Why Greater Equality Makes Societies Stronger. London: Bloomsbury Press
 The relationship between economic growth and inequality is not necessarily linear (de Janvry and Saudulet, 2013). In some cases, the latter may constitute an incentive for economic activity up to a certain level after which it may cease to be so. It may also be that in the short term it does not affect it (China’s case) but in longer periods it becomes unsustainable. There are also different channels through which inequality can influence growth, both positive and negative.