It rests, I believe, on this idea, my fourth point:. Workers, as participants in a scheme of cooperation that produces national income, have a claim to a fair share of what they have helped to produce.
What constitutes a fair share is of course controversial. No one has reason to accept a scheme of cooperation that places their lives under the control of others. But the objections to inequality that I have listed rest on a different moral relation. Those who are related to us in this way matter morally in a further sense: they are fellow participants to whom the terms of our cooperation must be justifiable.
In our current environment of growing inequality, can such a justification be given? No one has reason to accept a scheme of cooperation that places their lives under the control of others, that deprives them of meaningful political participation, that deprives their children of the opportunity to qualify for better jobs, and that deprives them of a share in the wealth they help to produce.
These are not just objections to inequality and its consequences: they are at the same time challenges to the legitimacy of the system itself. The holdings of the rich are not legitimate if they are acquired through competition from which others are excluded, and made possible by laws that are shaped by the rich for the benefit of the rich.
In these ways, economic inequality can undermine the conditions of its own legitimacy. As Singer shows, the possibility of improving the lot of the poor is a powerful reason for redistribution. But it is important to see that the case for equality is powerful in a different way. About the author T. TED Talk of the Day. Al Gore How to make radical climate action the new normal.
Robert Arnott and coauthors examined the Forbes lists and found that of the individuals on the list, just 69 individuals or their descendants remained on the list. Piketty claims the opposite.
This is the new fact that the Forbes rankings help us bring to light. He seems to have only looked at the winners on the Forbes list and did not account for people who lost wealth and dropped off the list.
William McBride looked at changes in wealth for the individuals on the Forbes U. With that assumption, he found that the average annual real wealth growth rate over 26 years for the people on the list was at most a meager 2.
By contrast, the average annual real return on U. Active entrepreneurs often generate new wealth, but individuals on the lists who had inherited did not earn outsized returns—instead, their wealth was eaten away over time, as noted, by taxes, consumption, philanthropy, and sometimes bad investment choices. As many older fortunes decline, new fortunes are being made by entrepreneurs. Among those on the Forbes list, 43 percent were new in the prior 10 years. Many of the new billionaires have impressive achievements in building companies:.
The Forbes list of global billionaires shows a similar pattern. Other analyses of the wealthy show similar patterns. A substantial share of wealthy individuals had humble origins. On the Bloomberg list, 18 had no college degree. In sum, the wealthiest Americans are not idle rentiers, as some critics suggest.
Far from being idle, many of the wealthiest people in our society create new products, generate competition in markets, and drive down consumer prices. Their innovations have been diffused across the economy and benefited many millions of people. Most Americans understand this. In the process of building companies, many entrepreneurs have become wealthy. But are their rewards excessive compared to the value they created? William Nordhaus explored that question by estimating a model of U.
In sum, ownership of the largest fortunes in the United States is continually changing. The relative importance of inherited wealth has been declining for decades. Inherited wealth is being replaced by new wealth created by entrepreneurs introducing new products and building fortunes while adding overall value to the economy. In market economies, the level of wealth inequality reflects many factors, including differences in individual knowledge, effort, luck, and savings behavior.
Some individuals with unique talents are able to build large fortunes. However, governments also play a role in shaping wealth distributions through taxes, spending, and regulations. Many government activities redistribute resources from the rich to the poor, but some do the opposite.
This section explores an unpopular way that governments increase wealth inequality—cronyism, which generally means gaining narrow government benefits through lobbying or connections.
It usually entails businesses gaining benefits at the expense of consumers or taxpayers. Most income in America is generated in competitive markets, and most people admire individuals who gain wealth through talent and effort. More than two centuries ago, Adam Smith recognized that businesses often gained privileges from the government that undermined the public interest. He warned:. Such crony policies likely raise wealth inequality. Smith described in the 18th century how trade barriers create monopoly power for producers and harm consumers, and that is still a major problem today.
There is no hard definition of cronyism, but Table 1 suggests various types of tax, spending, and regulatory schemes in the United States that fit the bill. Some of the categories overlap. The general problem summarized in the table is that some businesses pursue their goals by harnessing government power to favor their interests over the interests of taxpayers, consumers, and other businesses. To what extent might such cronyism exacerbate wealth inequality? There are no overall estimates of the costs of cronyism or its effects on inequality, but we can put figures on some items.
Even some billionaire landowners receive farm subsidies. Federal sugar regulations and trade barriers increase sugar costs for U. To protect their interests, the Fanjuls have maintained close political ties to presidents and members of Congress. State occupational licensing reduces job opportunities while raising consumer prices.
Licensure boards are often dominated by existing providers who seek to exclude new entrants—classic cronyism. These rules raise incomes in protected professions but increase costs to U. Government contracting is rife with retail cronyism. Navy leaders in the Pacific to win hundreds of millions of dollars in lucrative deals to resupply Navy ships.
Francis had numerous moles inside the Navy steering government contracts his way. He wined and dined Navy officers, providing them with gifts, prostitutes, and other favors to get their help and protection. The Solyndra scandal was also classic cronyism. Solyndra was a spendthrift company and its products were uncompetitive. It went bankrupt and closed its doors in with taxpayers footing the bill for the failed loan.
Why did the DOE give Solyndra a big loan guarantee? As the federal government has grown larger, both wholesale and retail corruption have likely increased, thus contributing to wealth inequality. The larger that subsidies, procurement, and other government spending are, the more likely people will abuse the system and live high on the hog at taxpayer expense. At the same time, the experts who know how to manipulate the government have prospered.
Today, the federal government funds about 2, different subsidy programs, more than twice as many as in the s. Some share of lobbying stems from businesses protesting misguided regulations that in themselves create unfair restrictions, such as various barriers to competitive entry. People may believe that regulations fix failures in the economy and improve our standard of living.
Some do, but many regulations serve narrow private ends and do not improve economic or social outcomes. Bipartisan deregulatory efforts in the s and s increased competition in transportation and drove down prices, thus benefiting consumers and likely reducing wealth inequality.
A number of studies have compared corruption across countries, so we can get an idea of the relative extent of the U. It is widely recognized that corruption undermines economic growth.
If the United States took steps to reduce corruption or cronyism, it would likely boost overall income levels by reducing economic distortions. But given that we are one of the less corrupt countries, it seems unlikely that corruption or cronyism is a major driver of U.
Across countries other than the United States, 17 percent of billionaires were bad and 83 percent were good. In the United States, just 1 percent were bad and 99 percent were good. By contrast, countries with few politically connected billionaires rank well on corruption indexes—countries such as Britain, Singapore, Sweden, Switzerland, and the United States. Countries should focus on equal treatment and uniform laws so that people gravitate toward productive ways of generating wealth and not unproductive cronyist ways.
That result is not surprising because cronyism often entails regulations and subsidies that restrict competition and misdirect investment. Again, cronyism appears to undermine economic performance. In , it had crony billionaire wealth of 1. It is less relevant in countries that have lower levels of corruption, such as the United States. They tend to conflate wealth in general with cronyist wealth. Most wealth at the top in the United States is earned in open and competitive industries, not through cronyism.
It is true that the government intervenes in many U. Nonetheless, cronyism is an important problem, which probably does increase wealth inequality to an extent. Surveys show that Americans are concerned about cronyism.
According to a recent poll, 67 percent of voters surveyed said they believe that big businesses and government regulators often work together to create rules that are harmful and unfair to consumers. So how do we address the problem? Table 1 indicates the types of cronyism that we should target for reform. Our goal should be to allow open competition in every industry so that entrepreneurs can challenge established businesses on a level playing field.
Adam Smith stressed the benefits of competition:. The public should press policymakers to eliminate the subsidies, regulations, and tax preferences that fuel cronyism. If the government reduced its interventions in the economy, there would be fewer levers for special interests to pull. Interventions often begin with good intentions, but businesses twist and exploit policies to gain unfair advantage. Cronyism distorts the economy and likely increases wealth inequality. It erodes confidence in government and is rejected by the general public.
The problem the nation faces is not wealth inequality per se. Rather, the problem is government policies that protect and subsidize favored businesses and unjustly aid the wealthy.
One cost of these programs is that they undermine the incentives and the means for people to accumulate personal savings. As government programs for retirement, healthcare, unemployment, and other items have expanded over the decades, there has been less need for people to save for those expenses themselves.
At the same time, people are less able to save because higher taxes are required to pay for the programs. This has undermined wealth accumulation by the nonrich and thus increased wealth inequality. A number of social programs have asset tests, which discourage savings by disallowing benefits if household assets rise above set amounts. Also, numerous government policies raise costs for people with moderate incomes, which reduces earnings available for savings.
Therefore, wealth inequality statistics do not just reflect the workings of markets but also the negative effects of government policies on private savings. Politicians complain about wealth inequality, but their own policies are partly responsible. The largest federal program, Social Security, is a prominent example of crowding out.
Many Americans rely on Social Security for most or all of their retirement income. The program discourages workers from saving for their own retirement, and it reduces their ability to do so with its heavy In pioneering studies in the s, Martin Feldstein explored how Social Security displaced private savings. In doing so, Social Security denies the children of the poor the opportunity to receive inheritances. The fact that Social Security increases wealth inequality may surprise people because the program is thought to be a progressive achievement.
While the program may reduce income inequality, it raises wealth inequality. Other social programs create similar effects. Medicare provides large resources to retirees and thus also reduces incentives to save for retirement.
Unemployment insurance, welfare, education aid, and other programs reduce incentives for people to save for midlife expenses. In general, when the government provides income and other social benefits to people, savings incentives are reduced.
Higher government aid results in lower private wealth. They found that the main factor raising wealth inequality has been technological change that has increased wage dispersion. But they also found that the expansion of Social Security and Medicare has had a large effect:. Those are the two largest federal social programs, but other programs have likely added to this wealth inequality effect.
Total federal and state social spending as a share of GDP more than doubled from 6. Section 1 argues that the increase has been modest, but however large, a substantial share stemmed not from market forces but from expansion in government social benefits.
Generations of Americans have grown up assuming that the government will take care of them when they are sick, unemployed, and retired. They have responded by putting aside less of their earnings for their own future expenses.
Financing social programs requires not just the federal payroll tax but also a large share of other federal and state taxes. American families are less able to save because of higher taxes, and they have a reduced incentive to do so because of the expectation of receiving government benefits.
The Gini coefficient for wealth is similar in the United States 85 , Denmark 84 , Norway 79 , and Sweden 87 , which people usually think of as egalitarian nations. Another way to think about the effect of social programs on wealth is to estimate the present value of future promised government benefits as if it were real wealth. Social Security and other entitlement programs loom large in household finances for the nonwealthy and thus likely displace a large amount of private wealth.
As a result, all the widely cited statistics about wealth distribution—including Gini coefficients and top 1 percent shares—substantially overstate wealth inequality because they exclude Social Security.
That is true of Medicare benefits as well. To individuals, Social Security and other entitlements seem like wealth, but they only represent promises of future benefits, and those benefits are in jeopardy because these unfunded programs are driving huge and rising government deficits and debt. As currently structured, Social Security will only be able to pay a fraction of promised benefits down the road. The Cato Institute has long argued that the United States should move to a retirement system based on private savings accounts, as numerous other countries have done.
Other social programs could be transitioned to a savings basis as well. At the same time, richer countries have less social ills.
Economic prosperity goes along with stronger social bonds in society and thereby makes health and social problem less likely. The good news is that in most countries social ills improved somewhat between und , although it is difficult to pin down why.
In Europe at least, rising prosperity seems to have led to better societies with less social ills, but for the non-European countries is remains unclear why levels of social ills changed. Still, our results prompt scholars as well as the public to re-think the widespread negative image of contemporary society.
In many countries, there is small progress towards a better society with less social ills" explains Leonie Steckermeier, co-author of the study. The empirical analysis was based on a set of six social ills, namely low life expectancy, infant mortality, and obesity as health issues, and intentional homicides, teenage pregnancy, and imprisonment rate as social problems.