Did inequality create our deficit?

Yesterday, we examined seven ways to measure social inequality–how far the poorest of the poor are from the richest of the rich, and what share of the economy everyone in-between holds. By every measure, the United States has been becoming more unequal in the last 30 years.

During this time, we’ve also seen mounting deficits. I remember Ross Perot’s pie charts and warnings about government debt, long before the wars in Iraq and Afghanistan doubled those numbers. Are the two phenomenon related?

Law professor Stephen Cohen, who gave us yesterday’s seven measures, had a simple thesis: If inequality is growing, and the poor and middle class have increasingly less monetary power, then if we need to reduce the nation’s debt, it shouldn’t be on the backs of those who are already struggling but on those whose incomes are steadily increasing.

But I wondered: If inequality should be a part of the discussion of how we solve the debt and deficit crisis, did it have a role in starting it?

I turned to Cohen first for an answer. His answer was yes … and no.

“One cause of the deficit increase is the Bush tax cuts–heavily tilted toward the most wealthy.  Total cost was about 1.8 trillion, of which 700 billion was the cost of tax cuts for the wealthiest,” he wrote. “These tax cuts tilted toward the wealthiest are one cause of both increased inequality and the increased debt.”

But while much of the talk about reducing the nation’s future deficit is centered around entitlement programs, those are future costs, not sources of current debt. Instead, our debt comes from sources like the stimulus, the wars in Afghanistan and Iraq, all occurring at the same time as revenue losses from the Bush tax cuts.

But another study, done by the Economic and Financial Affairs department of the European Commission, linked societies with greater inequality to greater debts. The study took data from countries around the world and compared their levels of inequality to all kinds of measures of economic success. They found that countries with greater levels of inequality have more difficulty with debt and economic performance.

Their findings?

– Countries with a lower-than-average score of income inequality tend to record lower budget deficits and a higher share of social spending in total government expenditure.

– Political instability–protests, riots, etc.–is more frequent in more unequal societies. The authors guess that in societies with more protests and riots, politicians may use government spending to keep the peace and keep themselves in power.

– Income inequality hurts a country debt-wise when two conditions are met–a large, left-leaning party and a party that represents significant special interests. Why? The majority of voters are poor, and elect a left-leaning party to help them, running more deficits. That doesn’t explain our situation totally–especially when the majority of the debt was run up by a conservative president–but may explain today’s political situation.

– Countries with unequal incomes benefit least from economic growth. The authors hypothesize that this is because an unequal society demands that government spend these revenue increases.

“Fiscal discipline is easier to safeguard in comparatively more even societies, as equality seems to moderate political pressures for overspending,” they wrote.

All of this hearkens back to the conversation I had with Margaret Stapleton at The Sargent Shriver National Center on Poverty Law about possible cuts to Medicaid.

If you really want to cut spending on Medicaid, do something so there’s fewer poor people,” she said. “Raise the minimum wage. Get people back to work.”

Maybe it’s the solution for the nation’s debt and deficit as well?

© Community Renewal Society 2011

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  • So, I assume that Greece and Italy are the most discriminatory countries on the planet, and that China, being a net creditor nation, is the most egalitarian on earth. That kind of equality, we don't need.

    Again, another professor spouting nonsense. Maybe you should go to Judge Richard Posner, one of the founders of the Law and Economics theory at the University of Chicago Law School. Oh, I forgot, he's a conservative, and won't look at it through the prism of race and poverty.

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