Vice-Presidential candidate Paul Ryan blithely divided the world into “makers” and “takers” of wealth. Ayn Rand‘s glorification of makers (those whom she claimed embody the highest moral purpose by pursuing rational self interests) and her disregard of takers (those who impede the wheels of growth with their demands) have been a well-established trope within certain circles. Rand rejected faith and religion, insisting that reason is the only means of acquiring knowledge. Ignoring Rand’s own appeal to her version of morality, are there reasons why those with wealth should be concerned about those without it?
Measures of Inequality
To frame this question, it’s useful to first look at indicators of disparity between those with and without wealth, for which the Gini Index is often used. A measure of income inequality, the Gini Index ranges from 0 – 1, where 1 reflects absolute inequality. The following two graphs show the U.S. Gini Index in two contexts. [Note: All graphs below link to versions at higher resolution. Data are from the U.S. Census Bureau and OECD. I generated all graphs using R. ) Graph 1 shows income inequality in the U.S. increasing steadily over the past forty years. Graph 2 shows how, among more developed nations, the U.S. lags only Chile, Mexico, and Turkey in terms of inequality.
Is inequality a bad thing?
While inequality might be growing, is inequality necessarily a bad thing? Some economists insist that inequality is a necessary by-product of growth. They argue that implementing policies to advance equality–to shift wealth from makers to takers–will remove incentives for growth, therefore hurting everyone in the end. On the other hand, other economists maintain that inequality stifles growth. A broad middle class enhances consumer demand; equality is a bulwark against plutocratic governance that primarily benefits the makers. Whom to believe?
To gain clarity on these complex issues, it helps to distinguish between principles of distribution and allocation. Imagine an ever-expanding family subsisting on pizza. The matriarch decides how large a slice of pizza each member should get; that is a distributive issue. As the family grows, the matriarch decides to bake a larger pizza so that all may benefit, regardless of the share each gets. This is an allocative issue.
There is nothing inherently wrong with inequality (a distributive issue), as long as growth translates into higher living standards and more economic opportunities for all (an allocative issue). Inequality is acceptable if a rising tide lifts all boats. Does it?
The following two graphs shed some light on the allocative and distributive aspects of income growth. Graph 3 below shows the share of total, after-tax income in the U.S. (adjusted for inflation), broken down by income group. For almost all groups, their share of the income pie has either held steady or gone down. For the top 5% of income earners, not only have they always had the largest slice of the income pie, but their slice has constantly grown larger in the past 40 years.
What of income’s allocative effects? One way to understand whether a rising tide has lifted all boats is to look at poverty levels, which the Census Bureau defines not by income alone, but by whether families can afford the basic necessities of a comfortable life. Graph 4 shows that poverty levels decreased until the early 1970s. Most recently, poverty levels plummeted in the 1990s, then went up again in the 2000s. Clearly, increasing income inequality has not been accompanied by increasing living standards for all.
But some argue that income inequality is precisely the incentive needed to stimulate the would-be makers–i.e. those NOT in the 47%; those not “dependent on the government;” those who “take personal responsibility and care for their lives.” I would like to believe this. I immigrated to the U.S. with nothing but an education and heeded those who urged me to “play by the rules and work hard.” America has rewarded me and I am grateful. But it’s best to separate anecdote from data. Graph 5 below, called “The Great Gatsby Curve,” sheds some empirical light on the systemic impediments to social mobility. On the extreme right of the line are countries like Peru, Brazil, and Chile, about which the data suggest, “If you were born poor, you will likely die poor.” Midway to the left is the U.S., less conducive to social mobility than a cluster of countries, including Spain, France, Canada, Germany, and Japan.
I now return to the question: setting morality aside–based on rational, self-interests alone–why should the rich be concerned about the poor? Answers to this question are usually based on allocative grounds. It is not irrational for makers to care about inequality if the proposed policy instruments improve the lot of takers without harming makers’ interests. But what if this is not possible? In a scenario where the poor can benefit only if the rich give up some of their wealth, what rational, self interests would motivate makers?
The Huk rebellion in the Philippines presents an extreme answer to this question. The Huks were insurgents, terrorists from the sharecropper class in a feudal nation. By one estimate, at their peak in 1949-51, they numbered as much as 12,000 armed men and women and they controlled a large portion of Luzon, the northernmost island of the Philippines. These “takers”–wielding firearms and waving knives–forced “makers” to take heed in the one way they thought available to them.
In the U.S., home to less extreme inequality and to a more stable public infrastructure (and yes, you–individual you–didn’t build that infrastructure), we are confounded when takers in dire, desperate straits rationally pursue their self-interests by resorting to means that are violent and disruptive.
I had once thought that endemic inequality, such as existed in the country I emigrated from, was anathema to the country I immigrated to.
(Below: Incarcerated Huk militia. Photo from 1950s Life Magazine.)