When Does Inequality Present Problems?

James Pethokoukis noted recently that Angus Deaton had some thoughtful things to say about inequality. How much of inequality is a result of private and public interests which stand in the way of free market prosperity? Neither the political left or right are blameless in this regard. From Deaton's interview in the WSJ article:

Inequality is partly a marker of success. If someone thinks of something, some new innovation that benefits us all, and the market works properly, they get richly rewarded...[But what] I worry about is that some of the enormous riches we're seeing in the U.S. today are coming from the activities that are in social doubt. 

Regular readers are familiar with my concerns in this regard. Instead of a marketplace which represents a wide range of income potential, too many basic features have been defined on the "hostage taking" wealth capture terms of non tradable sectors. For a long time, "raising the bar" nonetheless meant more wealth for all concerned, which could explain why few questioned the process. Now, a growing number of individuals and institutions alike, struggle to meet what have become rigid terms of engagement.

Growth potential in this environment, is mostly limited to further options for high income levels - on the part of governments and private interests alike. But just as government infrastructure holds no multiplier capacity through choice for those who already have access options, the same is true of private investment which competes for an already saturated consumer base. Plenty of growth potential still exists, but it needs to be generated through broader means for access and economic engagement.

Economic stagnation, is little more than policy maker reluctance to define economic conditions on more inclusive terms. Unfortunately, too much discussion regarding inequality focuses on income differences, instead of the underlying factors which place too much consumption beyond the reach of lower income levels. One social media meme put it well: "Sorry, the lifestyle you were seeking is currently out of stock."

In other words, inequality presents problems when neither public or private interests are really paying attention, to segments of the marketplace which could benefit from further investment and labor force participation. While prosperous regions could still take in newcomers to some degree, nations need to focus on the regions which have been left behind, where internal solutions can ultimately be found.

Today's inequality is not so much about income differences, as the distortions in housing, healthcare and other service formation which are in need of resolution. As a result, non tradable sectors have become largely identified with status signals and struggles for access. Just as today's high bar is problematic for individuals, it negatively impacts new business formation, and hampers the ability of local governments to find sufficient revenue in struggling regions.

Angus Deaton reflected on a political aspect of inequality in the above linked interview, as well:

[Former Supreme Court Justice Louis] Brandeis said a long time ago that you can't have an extreme distribution of income and democracy at the same time.

Fortunately, there are ways to utilize knowledge that would sustain local democracies for service formation, when national redistribution can no longer do the job. This would not only make digital educational options worthwhile, but also provide means to disperse knowledge without the expense associated with general equilibrium. Otherwise, the lack of a marketplace for knowledge use, would leave little capacity for potential digital benefits in service production.

Inequality becomes problematic when people build rigid systems, and then force others out of those systems when the least deviation in aptitude or ability makes it difficult to remain connected. Hopefully, policy makers will focus on the domestic issues that matter most in the years ahead, instead of allowing present economic and political uncertainties to grow.