“Too big to fail” but what about “Too big to ignore” (Inequality)

Robert Frank – Professor of Economics at Cornell University and author of the book “The Economic Naturalist” – wrote his usual thought provoking piece in the New York Times. His focus was on the increasing levels of inequality in the US economy and how economists seem to be unwilling to grapple with this matter – to them it requires a moral judgment by philosophers.

But surely economists promote policies, like tax cuts for the higher-income groups, that increase inequality substantially. Also, economics was founded by moral philosophers – Adam Smith was a professor of moral philosophy at the University of Glasgow and author of the celebrated “Wealth of Nations,” which was itself peppered with trenchant moral analysis.

Frank comes up with some very interesting stats:

U.S. total income that went to the top 1% of American households:
-1976 = 8.9%
-2007 = 23.5%.

but during the same period, the average inflation-adjusted hourly wage declined by more than 7%.

Recent research by Frank and other economists found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress eg:

- these counties had the largest increases in bankruptcy filings.
- largest increase in divorce rates
- long commute times as families move to cheaper housing to make ends meet
- the middle-class squeeze has also reduced voters’ willingness to support even basic public services.

There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street.

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