Long on Lament, Short on Solutions? Dealing with Economic Inequality

Increasing inequality in the United States is a big problem. One recent analysis shows a disturbing graph, which displays not only that, in 2012, the top 1% captured 20% of income, but that the top 10% captured over 50% of income, a number that is higher than at any time in the last century, surpassing even the 1920’s. The graphs show this is not merely a matter of all the rewards of the recent recovery going to the top. As Eduardo Porter outlines it in brief, we are enduring a 30-plus-year stagnation of the middle-class. Bishops are speaking out on this. For many, a long lament on our “new Gilded Age” leads to a hope for a revival of Catholic social teaching. Even Catholic conservatives are taking note that “trickle-down” theories of dealing with poverty are failing. Michael Peppard and Michael Sean Winters have both recently commented that taking this problem seriously is both urgent and yet very difficult. (It is being made much more difficult by our absurd politics. But that would be a different post.)

It’s a difficult problem because we are long on lament, but really short on solutions that pay attention to the specific dynamics of our economy as it exists now. It is a truism that military leaders often “fight the last war” rather than the present one – so too, Catholics and their allies in fighting poverty can fall into talking about solutions that sound like “fighting the last economic war” – namely, that of the early 20th century.

Ever since World War II, Americans have wanted to believe in an economy where growth would lift everyone, so long as certain structures of government and unions existed. The drastic reduction in poverty in this era had a great deal to do with the emergence of a social security and pension system in which the elderly went from being the most to the least impoverishment group – and of course it had a lot to do with America’s unchallenged dominance in the world economy, the use of a lot of cheap and plentiful fossil fuel, and a cultural ethos of solidarity inherited from the struggles of the Depression and the war.

Our problem now is that “more of the same solution” won’t work… and we are very reluctant to understand and acknowledge this. Why won’t it work? The best explanation of this problem still lies in a prescient book from the mid-1970’s by economist Fred Hirsch, called The Social Limits to Growth. As opposed to the rising popularity of what became “Reaganomics,” Hirsch’s book provides a different and very sophisticated two-pronged critique of the possibility of sustaining the “economic growth for all” Keynesian model that predominated in the post-WW2 situation. These two prongs are the “social limits to growth” – that is, limits on the extent to which economic growth powered by individual self-interest produces collective well-being.

The first prong is purely structural: as economies develop, a larger and larger proportion of spending is devoted to what Hirsch calls “positional goods” – goods or aspects of goods that are sought simply for the position they provide relative to others. By definition, “more” of these goods cannot be produced, because at least part of what is being consumed is the relation of the good to others’ goods. If everyone spends for better interview suits, no one actually is better off, since everyone merely holds position – but resources are diverted uselessly to this “expenditure arms race.” The most obvious example is housing markets, where location and (especially) schools drive prices up disproportionately, and therefore force people to divert larger portions of their income to keep up. Note that this phenomenon need not be attributed to envy or superficial status – it is a rational response to the fact that, as we surpass a basic level, more people have more resources to spend in achieving the things related to position.

In such a novel situation, collective solutions to problems become more pressing. The problems increasingly become “smart-for-one, dumb-for-all” problems, or problems of securing reasonable social equity by restraining useless and wasteful relative competition. However, here is the second prong: the very pursuit of individualistic self-interest that drives the earlier growth depletes what Hirsch calls the “moral legacy” which functions internally to restrain all-out destructive competition. As he puts it, “Management of the system has become more necessary but the entrenchment of the individualist ethos makes it more difficult.” Indeed, since social scarcity of relative goods increases pressures on even relatively successful individuals, they do not see it as in their self-interest to restrain their pursuit, since others will not do so. So the proportional shift to positional goods exacerbates the tendency to pursue private self-interest, at the very moment when what is needed is collective action to restrain the competition.

Once one grasps this two-pronged problem, it is amazing how many social issues can be seen in this light. Environmental issues evidently require collective restraint, lest individuals (or individual companies) who try to restarin themselves “fall behind” their competitors. Adequate health care for all is threatened by constantly-rising costs as people seek the “best” care, oblivious to costs from which they are shielded by insurance. Education costs for college rise exponentially, because the better the school, the better the position coming out – and the competition is then pushed “downward” into rising housing prices and property tax rates for the “best” primary and secondary schools. Unionized workers demand promised pension benefits that cities can no longer afford, undermining the viability of current services. Perhaps even more strikingly, large companies must become ever-more dominant in their own markets, even if they face only one or two other competitors who will take advantage of any non-self-interested behavior. Paying CEO’s a huge premium makes sense (presuming they are actually good CEO’s), because if your business has a revenue of tens of billions of dollars, paying the CEO an extra $10 million will keep him/her from going to a competitor. In all these areas, collective restraint would make sense overall – since these changes simply funnel money to the top – but individual restraint is risky at best, and potentially fatal at worst.

Hirsch criticizes the Keynesian solution, because its supposed advantage – that altruistic “motivation could be subordinated to results,” meaning the results of aggregate economic increase lifting all – only holds for a short period, and unfortunately fosters the illusion that if we simply push the self-interest strategy and then “fine-tune” the overall economy, we will all be better off. Hence, once that strategy reaches its limits (which it does gradually as consumption shifts toward positional goods), the social ideals of collective restraint have been lost amidst a heightened sense of overall entitlement.

In light of Hirsch’s critique, the tendency of progressive liberals to advocate for essentially redistributive solutions to inequality thus have two effects. One, they produce a vigorous social backlash (already true with Reagan, and only more so now), and two, they can’t be sustained insofar as the redistribution is aimed at getting people goods that are at least partially positional. This is why liberals face problems on health care and can’t seem to find a way to meet environmental issues on any sufficient scale. The Affordable Care Act, while it has elements of genuine collective management, such as mandates to limit insurers’ profits, force pooling, and the like, is largely an attempt to bring health insurance to many more people by providing large subsidies for coverage. No one quite knows what will happen in this situation, but everyone agrees that there had better be cost containment, or else the whole thing is going to become very expensive. A fully-managed system would almost certainly reduce costs (as is evidenced in virtually every other developed country), and it would do so specifically by eliminating the many “expenditure arms races” that are present in the existing system. On environmental issues, the problem is (ironically) that vigorous redistribution would almost certainly result in MORE environmental problems, not fewer, since at present there are considerable restraints placed on many carbon-intensive expenditures simply because people don’t have the money. The easiest solution to environmental problems – a carbon tax and stiff regulation – would almost certainly fall disproportionately on those who already spend more of their income on fuel, transportation, home heat, and the like. Here again, the solution is collective action to manage the key issues of transportation, home size and efficiency, and business operation – but these are resisted as fiercely as the idea that you might not be able to choose your own doctor.

Perhaps the gravest example of these limits to growth is seen in the ongoing loss of smaller, local and regional enterprises, at the expense of large, centralized operations. There is nothing inherently virtuous about small banks or small hardware stores or small coffee shops – it can be argued, for example, that larger businesses can often pay employees more and provide access to cheaper, higher-quality goods. But what they certainly do is eliminate a lot of mid-level jobs – because that’s how their prices are lower. They invest in machines and in high-level management, and they hire the cheapest unskilled labor – and leave out a lot of the higher-paying mid-level jobs. (Even large universities are like this, with a few star faculty and a lot of adjuncts!) Indeed, many of the surviving mid-skill jobs have done quite well – teachers and nurses, who require education and cannot be replaced easily by machines or unskilled labor, now command genuinely solid incomes in the 60-80K range, far better than 1970’s pay, and exactly the range in the present economy that would support the kind of lifestyle once promised to the industrial assembly-line worker. Yet the stall in public-sector hiring in the recent recovery has meant that even these jobs aren’t expanding.

There is tragically little conversation about structural changes that would work against the problems with a McDonald’s/Walmart/Google/Amazon economy. Some of it – such as a $15/hour wage for fast food workers – verges on defying economic gravity. Other pieces – such as “getting health care costs under control” – would seem to endanger one of the few sectors creating jobs. And other pieces – such as the aforementioned Porter article – sing the praises of the very technological developments and expectations that kill mid-skill jobs. (Think about all those “meter maids” who no longer go around to parking meters because of smartphones.) For a long time – perhaps since the dawn of industrialization – it has been an axiom that technological advance displaces workers through production efficiency, but that they find work elsewhere, in new, even more creative areas. But perhaps it is time to face the fact that such a process is not indefinite, is not a law of gravity, but applies under specific sets of circumstances. This makes the problem of inequality more difficult. But it pushes us beyond mere lament.

David Cloutier is an associate professor of theology at the Catholic University of America and the author of Walking God’s Earth: The Environment and Catholic Faith.

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