On Inequality and Its Discontents

Greg Wahl Stevens / Associated Press

Nouriel Roubini has written an essay on a subject that I have wanted to write on for some time now: the impact of inequality on society. Recall the Elizabeth Warren post I wrote asking about the appeal of the populism in her stump speech. What I was interested in, and remain interested in, is how much the increasing inequality is really starting to capture the attention of the average middle-class members of society. Obviously economic crises bring problems like inequality to the fore and to me the Occupy Wall Street movement is about a general sense of deep unease with a system that has such unequal outcomes and seems to reward not the noble and true but the devious and cunning.

Here is Roubini:

This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets: the Arab Spring; riots in London; Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the “Occupy Wall Street” movement in New York and across the United States.

While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.

The question is whether this is just an artifact of the economic crisis or is this really a theme that will start to change our view of government and markets?  Has history really ended or are will still living history?

Roubini points out the European approach that was more balanced perhaps between the market and the society:

Even before the Great Depression, Europe’s enlightened “bourgeois” classes recognized that, to avoid revolution, workers’ rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net. The push towards a modern welfare state accelerated after the Great Depression, when the state took on the responsibility for macroeconomic stabilization – a role that required the maintenance of a large middle class by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.

Thus, the rise of the social-welfare state was a response (often of market-oriented liberal democracies) to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940’s until the mid-1970’s, a period when inequality fell sharply and median incomes grew rapidly.

But we all know of the malaise of the 1970s and 80s and the ensuing Thatcher revolution in the UK which dramatically scaled back the roll of the state in the economy, which did usher in a period of growth and prosperity in the UK that had been largely absent since the industrial revolution.  This experience is something, no doubt, that the Cameron government has been very successful in using to justify the recent austerity measures.

But Roubini has reservations about the dismantling of the welfare state in Europe:

Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.

This is precisely what I am unsure of. Are these protests really going to last and grow until there is fundamental change? And if so, will it be for the better or worse? What exactly is the causal link between our very free-market approach and the amazingly innovative, creative, transformative economy we have developed?

I don't know the answers, but I have this sense that tectonic shifts are taking place that is going to rearrange the landscape if for no other reason but that we cannot sustain the entitlements we have and change is inevitable - the question is in which direction will we move?