The publication of Thomas Piketty’s Capital in the 21st Century heralded a new age of engagement with the problem of inequality. Unlike previous work on inequality, Piketty turned his economic gaze away from developing countries and focused instead on patterns of income and wealth concentration in the developed economies of the United States and Europe. He argues that inequality matters for the long-term economic health of countries. But what about the consequences of inequality that reach beyond the economy?
Though Philip Alston argues that extreme inequality is the very antithesis of human rights, one strand in economic theory has long argued that some inequality is not only good, but also necessary for development: concentration of income provides the needed capital for investment in businesses and jobs. This line of argument also holds that a period of increasing inequality is temporary and will ease with time as a country develops, and subsequently, income distribution becomes more equal. This argument and the policies that supported it characterised much of development economics from the 1970s and the so-called “Washington Consensus” on the need for developing countries to allow price mechanisms to allocate resources in their economies.
The period of so-called Reaganomics or “voodoo” economics (a la Ferris Bueller’s Day Off) in the 1980s took this argument and applied it to already developed economies such as the US and the UK, where marginal tax rates were slashed and the promise of “trickle down” benefits would create new businesses and jobs. Analysis of tax returns data, long-term income and wealth data, and new data visualisation on income inequality in the United States shows that the policies set out in the Reagan period have by and large continued, and that income inequality is now much worse than in the years just before the Great Depression. Remarkably, the top quintile of wealthy Americans own 84% of all income, a figure that is not dissimilar to those found in the other advanced economies analysed by Piketty, and a figure that remains largely unknown to most Americans.
