by Rob Dietz
Faulkner deplored the inequalities that mired Johnson in a life of poverty. He wrote, “To live anywhere in the world today and be against equality because of race or color is like living in Alaska and being against snow.”7 All his life he witnessed the social ills of inequality at home in Mississippi, and he wrote frequently and forcefully about it—a brave thing to do in the Deep South.
The racist and segregationist policies that created the disparities between Willie Johnson and William Faulkner have largely disappeared, and attitudes about justice and equality have changed with the times. In the years after Johnson and Faulkner died, it appeared that income inequality was also fading. But over the last few decades it has staged a comeback. In the 1950s and 1960s, top corporate executives in the United States took home 25 to 30 times the income of typical workers. In 1980, CEOs earned 40 times more than workers. By 1990 the gap had widened to 100 times. And in 2007, the difference was an astonishing 350 times.8 More and more, wealth is concentrating at the top of the pyramid.
Economic growth is frequently used as an excuse to avoid dealing with such inequality. The conventional wisdom is that “a rising tide lifts all boats,” but this trickle-down approach has not worked. The richest fifth of Americans make eight and a half times more than the poorest fifth, while the richest fifth in the United Kingdom make over seven times more than the poorest. Such income gaps are much larger than in most other high-income countries (Figure 7.1).9 It appears that the rising tide is lifting the yachts and swamping the rowboats.
FIG. 7.1. The gap in income between the richest 20 percent and poorest 20 percent of earners varies across countries. The ratios shown are averages for the years 2003 to 2006. SOURCE: see note 9.
As the fruits of economic growth have continued to concentrate in the storerooms of the rich, negative consequences have piled up for people across the income spectrum. As Richard Wilkinson and Kate Pickett show in their groundbreaking book The Spirit Level, less equal societies have a powerful tendency to become dysfunctional. Inequality, both among high-consuming countries and among the fifty U.S. states, is correlated with the signs of “broken societies” (Figure 7.2).10
The hierarchical structure that forms in unequal societies results in widespread mistrust, crime, violence, and a host of related problems.11 Inequality produces the conditions for social ills, but it also contributes to environmental problems. Large income gaps lead to unhealthy status competition and consumption of materials and energy beyond what’s necessary to meet people’s needs. These higher levels of throughput, as described in Chapter 5, can degrade ecological systems.
The growing gap between the rich and the poor could be a product of human nature (if we believe that people are inherently greedy), or it could simply be the result of an economic system that encourages this type of behavior. Conventional economic theory paints people as “rational utility maximizers.” This theory assumes that individuals make decisions to maximize personal gains, and under this assumption, people are justified in attempting to earn as much as possible. But scholars who study behavior are finding that people often behave with fairness in mind, and not according to purely selfish motivations. Sociologists Gerald Marwell and Ruth Ames designed an experiment decades ago that demonstrates this finding.12
FIG. 7.2. Nations with greater income inequality have more health problems (e.g., mental illness, shorter life expectancy, obesity) and more social breakdowns (e.g., high rates of imprisonment, homicide, and teenage motherhood). The close-fitting trend line demonstrates a strong correlation. SOURCE: see note 10.
In the experiment, participants are given a number of tokens and presented with a choice: invest their tokens in a “private bank” that guarantees a small payout per token invested, or invest tokens in a “community bank.” The community bank pays a return to all participants, whether they invest in it or not. But the more participants invest in the community bank, the higher its payout. And with only modest investment, this payout quickly surpasses the payout of the private bank. A rational utility maximizer would invest all his tokens in the private bank to gain the biggest payout, acting like a “free rider” on the virtuous investments of other participants who put tokens in the community bank. But that’s not what happens in practice. Instead, people put a substantial share of their tokens (about 42 percent) in the community bank. Interestingly, students of economics had the lowest rate of investment (20 percent) in the community bank.13
Evidence of the preference for fairness-seeking over self-serving behavior can also be seen in the public’s increasing frustration with income inequality. Outrage is in the air—you can breathe it on the streets. Protestors around the world, from Wall Street to Syntagma Square, have expressed their indignation over the inequality between the top 1 percent of income earners and the remaining 99 percent. Having experienced a series of economic crises, starting with the sub-prime meltdown of 2008, growing numbers of citizens are finding that the idea of a more equitable distribution of income and wealth resonates with their sense of fairness.
WHAT COULD WE DO INSTEAD?
Henry Wallich (1914–1988), a distinguished American economist and central banker, once said, “Growth is a substitute for equality of income. So long as there is growth there is hope, and that makes large income differentials tolerable.”14 Wallich’s sentiment may be true, but if so, then the reverse is also true. Greater equality of income is a substitute for growth, and it’s a desirable one in a world where the economy is bumping up against biophysical limits.
More than just a desirable substitute for growth, equality of income may also be a necessary substitute. In a steady-state economy with a stable level of resource use, total income would remain relatively stable—in correspondence to the finite quantity of resources flowing through the economy. To adapt to this situation (and prevent the political turmoil that would result from an unfair distribution), society needs to develop customs, laws, and institutions to distribute the nongrowing stream of income in an equitable way.
The good news is that the benefits of a more equitable distribution are well documented. As Wilkinson and Pickett show, more equal societies perform better on a variety of health and social measures. The list of positive outcomes that accrue to more egalitarian societies is remarkable:
• People enjoy better health and a higher life expectancy.
• Fewer citizens develop drug addictions.
• People are less victimized by violence.
• Birth rates among teenage girls are lower.
• Children experience higher levels of well-being.
• The rate of obesity declines.
• Mental illness is less common.
• Fewer people end up in prison.
• Opportunities for social mobility are more widespread.
In addition, the benefits of equality are not confined to the poor—they flow to all members of society. For instance, the wealthiest people in societies with narrow income gaps tend to live longer than the wealthiest people in societies with large income gaps.15
But wait, doesn’t the possibility of receiving higher pay serve as an incentive for hard work and innovation? That’s a common argument made against policies that encourage greater equality. The thinking is that monetary incentives, in the form of large salaries and big bonuses, provide motivation for entrepreneurs and inventors. But do societies really need high levels of inequality to foster innovation? If this were the case, you’d expect more patents to be issued in societies with larger income gaps, but that doesn’t happen.16 In fact, research suggests that larger financial incentives lead to poorer performance on almost anything but the most rudimentary tasks. People perform best when they are given the freedom to direct their own work, the opportunity to improve their skills, and when they feel that their work has meaning and purpose.17
Such insights lead to the conclusion that wealthy nations can improve their living conditions by focusing on equality rather than economic growth.18 Improvements in qualit
y of life within these countries depend more on social relations than on higher levels of consumption,19 and the reduction of income gaps provides a golden opportunity to enhance such relations. Greater equality can improve social relationships by lessening status competition, suppressing unnecessary and conspicuous consumption, and improving psychological well-being. In short, an economy that features greater equality is likely to have both healthier citizens and a healthier environment.
The question, then, isn’t about whether we would benefit from greater equality; the question is how to achieve it. There are two basic strategies. The first is straightforward redistribution of wealth and income through the use of taxes, social programs, and minimum income requirements. Sweden and the state of Vermont are good examples of societies that achieve high equality using taxes and generous social programs. The second strategy is to encourage a smaller difference between the wages of high and low earners to begin with, so that redistribution is less necessary. Japan and the state of New Hampshire achieve high equality without large taxes and redistribution by maintaining a smaller wage gap.20 Regardless of how a society goes about achieving greater equality, changes can happen quickly. At the end of World War II, Japan had an inequitable distribution of wealth, and the United States had an equitable one. The two nations have since swapped positions.21
Progressive taxation and social programs have been used effectively in many places to attain a more even distribution of wealth. Programs like Social Security and Medicaid in the United States provide a boost and essential services to people with low incomes. Many nations have become comfortable with applying taxes and using such programs, but another untried intervention could more directly address income inequality and the social ills that accompany it.
A citizen’s income (also known as a minimum income or basic income) provides an unconditional, automatic payment to each individual in a society as a right of citizenship.22 A high-profile U.K. study found that insufficient income is associated with diminished prospects for long-term health and life expectancy. A citizen’s income could provide better prospects by placing everyone on the same starting line—a line that allows each person to meet basic needs related to nutrition, physical activity, housing, social interaction, transportation, medical care, and hygiene.23
As a universal benefit, a citizen’s income could replace other direct benefits provided by the state. Elimination of such benefits would free up money to fund a citizen’s income. It could also be funded by establishing a ceiling on income or the accumulation of wealth. Consider the wealth held by the heirs of Sam and Bud Walton. When the two brothers who founded Walmart died, their heirs received a huge inheritance. Today these six people, born into their positions of privilege (actually, one of them married into it), have as much wealth as roughly the bottom 30 percent of Americans.24 That’s more than 90 million people! Enough money sits in the accounts of the super-rich (with more flowing in by the day) to cover the costs of a citizen’s income. In addition, an income ceiling would further reduce the gap between rich and poor.
The strategy of redistribution through taxes or a citizen’s income may be effective, but it comes with a risk. A government can easily abolish taxes or overturn income policies. And governments have been known to be influenced by special interests and the wealthiest members of society. That’s a large part of the story behind the widening income gap from the 1950s to the present day.
The second strategy, which is on display in Japan and New Hampshire, overcomes this risk by narrowing income differentials from the outset. This strategy can be categorized as workplace democratization; its thrust is to weave democracy into the fabric of economic institutions. Policies that address inequalities where they originate (most notably in the workplace) are likely to be the most effective way to achieve long-lasting equality. The key is to put control of companies, government agencies, and nonprofit organizations into the hands of the people who work in them, use their services, or live in the communities affected by them.25 Some approaches to do this include the following:
Set maximum pay differentials. Some organizations have successfully instituted pay-scale ratios, such that the highest-paid employee can earn only a certain percentage more than the lowest-paid employee. For example, the Mondragon Cooperatives in Spain have a range of pay differentials from 3:1 to 9:1 (with an average of 5:1).26 Other cooperatives in the United Kingdom have established similar ratios, and a 20:1 ratio has been proposed for U.K. public sector employees.27
Establish more employee-owned companies. In such companies, employees are the shareholders, and profits are reinvested into activities that the employees consider to be valuable. There is less of a tendency to undertake speculative or needlessly risky actions in pursuit of profit, and employees have more say in company policies, including those that determine wages.
Transform enterprises into cooperatives. A cooperative is a member-owned and member-governed organization that exists to serve its members and share its profits. Democratic control is a cornerstone of cooperative enterprises, and examples of flourishing cooperatives can be found in a variety of economic sectors (see Chapter 11 for a broader discussion).28
Improve gender balance. Having more women in positions of power within economic institutions could help drive income equality. As institutions reexamine their cultural climates, they may be able to dismantle social hierarchies that inhibit income equality (along with gender equality).
The strategy of workplace democratization may also produce cascading effects that help ensure fair distribution of wealth and income over the long run. Democratization could help build a culture that values income equality, which would make it easier to establish and maintain tax policies and social programs that contribute to even greater equality.
WHERE DO WE GO FROM HERE?
If you listen to “Cold Was the Night, Dark Was the Ground,” you can practically feel the hardship in Willie Johnson’s voice. In all likelihood, he would have been healthier and happier had he lived in a more equitable society. Reduction of inequality can certainly help individuals struggling with poverty, but it can make everyone else better off as well. The inspiring benefits of greater equality are waiting to be taken advantage of. The key is to attack inequality on a variety of fronts, starting with a strong movement to democratize economic institutions. Oftentimes an external threat compels such a fundamental social or economic shift. For example, Japan’s modern-day equality sprang from its horrendous experience in World War II. Whether such a threat or crisis appears or not, we can build a stronger and more resilient economy by actively seeking the transformation of economic institutions to provide greater equality.
But even with good intentions and well-designed policies, it may still prove difficult to reduce inequality because of certain aspects of human nature. Base human emotions such as fear, greed, and desire for status may drive inequality and push society toward wide income gaps. Although human beings also have other, more altruistic motivations, our negative emotions are reinforced and exploited by advertising, news stories, television, movies, Internet sources, and other forms of consumer culture that send misguided messages about the benefits of having more. But what’s the point of material success amid social failure—can we be truly wealthy in a broken society? A cultural shift away from the endless and exhausting pursuit of more to the satisfying and secure recognition of enough is a prerequisite to implementing the required changes to economic institutions (see Chapter 12 for more about this cultural shift).
Cultural shifts and big policy changes require a home that provides an enduring base of support. The Occupy movement, which began as a protest on Wall Street in September 2011 and morphed into a worldwide phenomenon, may turn out to be such a base for establishing greater income equality. The movement’s call for greater income equality can be seen as a continuation of past efforts to win other types of equality. As such, it and other future movements could benefit by looking to and learning from those efforts, especially the
Civil Rights movement, which would have put Willie Johnson and William Faulkner on an equal footing if they were alive today. Thanks to these past efforts, racism, sexism, and homophobia have become socially unacceptable. The goal now is to make greedy behavior just as unacceptable.
Two big lessons from past movements can guide action toward achieving greater income equality. Lesson number one is that people will only accept a big social change if they believe that they and their families will be secure after the change. New economic institutions must demonstrate that they can provide this security. We need to build and nurture working examples of democratized workplaces. The Evergreen Cooperative Laundry in Cleveland, Ohio, provides one inspiring model. It’s an employee-owned, environmentally conscientious enterprise that’s meeting community needs and offering jobs and hope within a poverty-stricken urban area.29
Lesson number two is that public education is a critical component of the cultural shift; people have to understand the benefits of equality and democratized workplaces before they’ll support them. Corporate board members who understood equality would refrain from authorizing oversized salaries and bonuses. Legislators who understood it would maintain fair tax laws and eliminate loopholes. Most of all, neighbors who understood it would see one another in a different light. They would realize that there is no prosperity unless it is a shared prosperity.
[ CHAPTER 8 ]
ENOUGH DEBT
Reforming Monetary and Financial Systems
Even the apparently simple question of where money comes from is hard to answer. It’s not the government printing press; money really originates when banks make loans. And since they charge interest for those loans, part of the endless-economic-growth model is in place right from the beginning—without the growth, you can’t pay off the interest.