Financial and Monetary Systems

Why society is paying the price of inequality

An employee is seen walking over a mosaic of pound sterling symbols set in the floor of the front hall of the Bank of England in London, in this March 25, 2008 file photograph. Sterling had its biggest one-day loss against the dollar in 11 months on February 22, 2016 after London Mayor Boris Johnson threw his weight behind the campaign to leave the European Union, dealing a blow to David Cameron by increasing the chance of a British exit from the EU.  REUTERS/Luke MacGregor/Files          TPX IMAGES OF THE DAY      - GF10000318413

High levels of inequality damage our health, harm social cohesion and damage economic performance. Image: REUTERS/Luke MacGregor

Mike Brewer
Professor of Economics and Director of the ESRC Research Centre on Micro-social Change, University of Sussex
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When high levels of inequality are pointed out, a common response is that the “politics of envy” are being deployed. I heard the phrase myself when I tweeted recently that the share of income going to the richest 0.01% of adults in the UK was almost at a record high, based on my new analysis of UK tax data.

After taking a few months out to write a book on what we know about economic inequalities, I was struck by the enormous amount of research showing how harmful inequality is for people. It’s increasingly clear that high levels of inequality damage our health and well-being, harm social cohesion and levels of trust, and act as a brake on economic performance. And there is increasing evidence that inequalities dramatically tilt the playing field for future generations.


Harming our health

Countries with high levels of inequality are more stressed and anxious, less happy and healthy, and have lower feelings of solidarity or trust across society. The best known research on this is by Richard Wilkinson and Kate Pickett.

Wilkinson and Pickett argue that in societies with high levels of inequality there is an ever-increasing cachet to being rich and it becomes more shameful to be poor. This heightens anxiety over social status. And money – and what one does with it – becomes evermore important to social status.

As a result, inequality worsens aspects of consumerism (“keeping up with the Joneses”), leads to feelings of entitlement for those at the top and shame for those at the bottom, and reduces social mixing, trust and social cohesion.

This may sound like a damning indictment on our 21st century culture of Instagramming our lives to death. But sociologist Thorstein Veblen observed these desires to establish superiority (among the rich) or conform (among the slightly less rich) in the 19th century United States.

Economic performance suffers

What surprised me about this recent work is that it is being led by the IMF and the World Bank. They are not exactly well-known hot-beds of radical thought, but Christine Lagarde, IMF chief until recently, said: “Reducing excessive inequality is not just morally and politically correct, but it is good economics.”

The OECD, the organisation representing the world’s wealthiest economies, adds:

The notion that one can enjoy the benefits from one’s own efforts has always been a powerful incentive to invest in human capital, new ideas and new products, as well as to undertake risky commercial ventures. But beyond a certain point, and not least during an economic crisis, growing income inequalities can undermine the foundations of market economies.

A high level of inequality is not a natural, and certainly not a necessary, consequence of a vibrant economy. Instead, key international organisations are worried that inequality is a drag on economic growth.

Opportunity is limited

Inequality also makes it harder to achieve equality of opportunity, and it perpetuates the division between those that have and those that have not. We used to hope that if there were some in society who had a lot less than others, then maybe this would be just a short-term blip. Or that people could improve their lot with hard work and effort.

We now know that, far from living in a world where all young people have equal chance to shine, success in life is heavily influenced by where you start from. Hard data and careful research show that the more unequal society is, the harder it is to achieve equality of opportunity, and the less social mobility there will be.

Have you read?

In the US, so often seen as the land of opportunity, a common route to the top of the income distribution is to be born there, or to marry into it. In which country does a child from a disadvantaged family have the best change of making it to the top? It’s Sweden.

Unfair and undemocratic

There’s a final worrying aspect about high levels of inequality, set out by economists Joseph Stiglitz and Thomas Piketty. If Western governments do not try to redistribute wealth or curb the very rich, and if money is allowed to shape political debates, then the 21st century could see the emergence of a super-wealthy elite akin to that which existed at the dawn of the 20th century. That would be profoundly undemocratic, and most definitely unfair.

Every year of high inequality is another year that strains our sense of fairness and of social justice, and another year where equality of opportunity becomes harder to achieve. It’s up to voters, politicians and other social actors to play their part in shifting the boundaries of what policy responses are politically feasible, and what levels of inequality are socially acceptable.

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Financial and Monetary SystemsEconomic Growth
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