How to Alleviate Economic Inequality

My previous post discussed the flow- like nature of monetary transactions, a model that roughly explains how wealth comes to be distributed so unevenly [worldwide, the top 1% held about 40% of all wealth in 2000 (http://escholarship.org/uc/item/3jv048hx#page-24), a number that has certainly not fallen since]. However, like any model, this one that I mentioned has its flaws. For one, the economy isn’t quite a “finite- sized system” – governments and banks continually create money out of nothing. Things like water and air are more or less finite, but wealth is essentially man-made: there was once no money, and now there is a whole lot. Additionally, natural systems of flow (like the examples from my previous post) are largely unimpeded. Sure, we’ve put up dams and levees, but we have many more ways to alter the “natural” flow/distribution of money. We’ve recognized that, by allowing for the uneven distribution of money, we are allowing for entire communities and nations to become impoverished. As Jason pointed out in his last post (https://physicsandsocietybc.wordpress.com/2013/04/30/poverty-and-affluence-and-environmental-impact/), this leads to the added problem of increased global environmental impact. So, what are these mechanisms for altering the flow of money to avoid the supposed inevitability of inequality? Here are a few:

1)      Income tax: A progressive tax code – one where tax rate essentially increases with income – logically reduces inequality. Allowing the poor to pay their debts and accumulate wealth, while those with stockpiles of money shoulder more of the tax burden naturally creates the conditions for equality of opportunity. Of course, we must be careful not to enter the territory that conservatives fear – where we will create a disincentive to work (if such a territory truly exists).

2)      Other taxes: Other areas of the tax code can have a similar effect. For example, taxes on capital gains, properties, and other assets affect only those who are wealthy enough to have any of these assets in the first place. On the other hand, gasoline tax, sales taxes, and licensing taxes (marriage, hunting, etc.) tend to affect everyone equally. Variations in these tax rates thus clearly affect the degree inequality (for a relevant example, see: http://opinionator.blogs.nytimes.com/2013/03/09/in-the-south-and-west-a-tax-on-being-poor/?src=me&ref=general).

3)      Government spending: Social programs, from welfare, food stamps, and unemployment benefits to public education and healthcare, can also increase equality of opportunity. Conversely, defunding these programs (like we’re seeing now) increases economic inequality. Government subsidies for basic goods and services such as food, gasoline, and housing would also fall under this umbrella.

4)      Reducing higher education costs: This one’s pretty obvious, too. Making college unaffordable for the poor exacerbates the issue of economic inequality. One method is to increase the availability of scholarships and loans. I think a better solution is to fund more public education, being that a college degree has become basically essential and demand is relatively inelastic.

5)      Raising the minimum wage: Clearly, minimum wage was established for a reason: so that poor, unskilled worked are not essentially enslaved by employers due to an over-abundance of labor. Raising the minimum wage regularly (with inflation) at the very least helps to keep inequality from growing.

6)      Unionization: When workers are allowed to unionize, they typically either mitigate income inequalities or bargain for conditions that have the same result in the long-run. There is obviously a reason why businesses tend not to like them.

7)      Regulating businesses: Corporations are regulated by health, safety, and environmental regulations, because it is simply not in their economic interest to self-regulate. When sectors of the economy become deregulated, there are naturally increases in environmental pollution, public health problems, worker disability, etc. The costs of these problems are either passed on to the public or the employees themselves – both of which increase economic inequality: more wealth for corporate executives and stockholders, less wealth for lower- ranking employees and the public (the relative public burden, of course, depends on the tax code). I’m sure we all recall the obvious example of this with the recent fiscal disaster and subsequent “bailout”.

8)      Property distribution – Similar to redistributing wealth, governments can also re-appropriate land for public or private use. I am reminded of the short-lived “40 acres and a mule” policy post- civil war, but more modern examples involve the use of “eminent domain”. When used the right way, this can lead to increased equality.

9)      Reducing discrimination – Basically, the definition of discrimination is to decrease equality (of opportunity, income, etc.) to one group, thus benefitting another. Creating and enforcing anti-discrimination laws necessarily increases equality.

10)   Inhibiting “globalization”(?) – When American- owned companies produce goods in other nations, the working class in America suffers from increased unemployment and lower wages while corporate profits increase. However, such processes also employ the impoverished in other countries – so, on a global scale, it’s kind of a wash, though it certainly increases domestic inequality.

11)   Limiting immigration (?) – Along the same lines, an influx of immigrants would increase labor competition. The net result is more domestic inequality, while global inequality would seemingly fall. I guess with these last two, policy would depend on your motives.

Okay, so that list was even longer than I’d thought, and it is surely incomplete. I can only hope that there are even more mechanisms yet to be uncovered. The biggest issue in play is that inequality of wealth actually begets greater inequality:

– The rich save more money because they don’t need to spend it on necessities (that is, their marginal propensity to consume is lower).

– They also have a disproportionate effect on government. Think campaign contributions and lobbying efforts.

– They also earn more money on their money. With money to spare, it can be invested in interest- bearing assets. Even think of how bank accounts work: you earn interest if you have a lot of money, but get charged fees when you don’t have enough (I’ve recently shelled out $12 for a couple months during which my account balance dipped below a certain amount).

In class, we’ve discussed ways that physicists (and mathematicians/ economists) measure income inequality (namely, the Gini coefficient: http://en.wikipedia.org/wiki/Gini_coefficient). Perhaps now we, as physicists (who are hopefully seeking to increase economic equality), can seek to physically model how the aforementioned “cures” affect inequality and discover how to tweak the variables in a way that will save the world. No big deal. Then, all we need to do is convince policymakers to wield their power for good – or maybe just become policymakers ourselves.

I leave you now with this recent video on wealth inequality in America: http://www.youtube.com/watch?feature=player_embedded&v=QPKKQnijnsM

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One Response to How to Alleviate Economic Inequality

  1. rfperlman says:

    Love the breakdown and the sense of humor! Saving the world one person at a time!

    A combination of all the above mentioned aspects in the right proportions can help to alleviate inequality.

    Ultimately, it is in the interest of the rich to be concerned with the state of the poor.

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