I had a discussion with an economics professor about the growing inequality of American society last year. My theme in that conversation was that the United States, like Brazil, is embarking on a path of becoming a nation of haves and have-nots.
The Gini coefficient — familiar to economics students — is a widely quoted measure of the inequality in a nation. A value of zero represents a perfectly equitable society, whereas a value of one describes an economy in which one person owns all the resources.
Japan and the Scandinavian countries are the world’s most income-equitable countries. They have income Ginis of about 0.25. On the other hand, Brazil’s figure is 0.61. Closer to home, Canada has an income Gini of 0.32, while here in this country it was 0.41 when last measured in 1998 and it is growing quickly. By most estimates, this number now probably stands close to 0.45.
But all these numbers are really abstract. What exactly does it mean for a country to have a Gini of .25 as opposed to .61? To get a sense of the disparity between rich and poor, in Japan the richest 10 percent earns five times as much as the bottom 10 percent. In Brazil, the factor is 66. In the United States this ratio is 17 — and growing.
The increasing inequality is highlighted by the salaries of CEOs. In 1960, the average American CEO pocketed 40 times as much as the average floor worker. This number now stands at about 550. For comparison, in Europe and Asia, CEO salaries are about 25 to 50 times that of the average floor worker.
Do I dislike inequality per se? No. As an economist I know that incentives matter. Inequality drives humans to internalize their behavior, lest we have a society in which no one cares to work. However, when inequality becomes as stark as in Brazil, a country in which millions live in urban slums and shanty towns alongside millionaires, it leads to social unrest. More importantly, inequality is inherited: with some exceptions, those born poor stay poor; those born rich stay rich.
We are not powerless to stop this society from becoming the next Brazil. We are adults and so have the power to vote and to choose the kinds of policy that will guide this country. And we can see that the Bush doctrine is building a society with greater inequality. President Bush has the audacity to cut taxes at a time of war; that is completely irresponsible.
Perhaps inequality is not a problem for you, depending on your values. If one is libertarian or believes in a meritocracy, then government intrusion should be minimalized. Ultimately, as the saying goes, we sleep in the bed we make. However, I challenge anyone to tell me that our society is a meritocracy when George W. Bush entered Yale with a less-than-stellar high school record, unless you consider having a wealthy and connected family to be merit. Moreover, as political scientist John Rawls ’43 so eloquently espoused, the most libertarian among us would be the first to plead for charity if she had the misfortune of being born poor or lame.
There is also a valid argument advanced by some that inequality is needed to generate growth. Indeed, among certain circles in Canadian politics, it is almost taken as gospel that there is a trade-off between income and inequality. These people point to the United States with its impressive GDP per capita — second highest in the world — and argue that Canada could achieve these numbers too, if it were only willing to bear more inequality.
But is such a society optimal? It depends on which side of the equation you fall. If it benefits you, you cheer. If not, you cry foul. This brings me back to my original topic. Should we care that this society is becoming so stratified? After all, some of us would be the beneficiaries of such a society. It all really boils down to your thoughts on social justice. For me, it is not a just world when one can be a C student at Yale and still become president of the United States.
Kai L. Chan is an economics graduate student from Toronto, Canada.
(My preferred title is “The economics of inequality.”)
Published: Thursday, October 14th, 2004