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Income Inequality Increases, Economists Unwilling To Comment On Effects

Income Inequality Increases, Economists Unwilling To Comment On Effects

Reporter ,  22-Oct-10

Though elders often tend to paint the past in overly rosy colors, some things were defintiely better in the past. A studey has revealed that in the three decades after World War 2, incomes in the US rose at a rate of over 3 per cent per year, for all income levels. However, in the last three decades, the economy has grown more slowly, though the top 1 per cent of earners earned a whopping 23.5 per cent of the income in 2007, up from 8.9 per cent in 1976. What this means is that the rich got richer, while the poor did not fare as well. But this goes against the tenets of a capitalist economy, in which economic growth of the top layer adds to the economic growth of the layers below it and so on, till the complete economy is benefited. So how could this happen?

Economists are unwilling to face the question, claiming it is a judgement call left to philosophers, but since the area of economics claims its origins in philosophy – remember socialism and Karl Marx – it is morally bound to address the issue. However, research from other sources might give us an indication of how the rising inequality has led to enormous losses and fewer gains, even for those who have benefited.

Beyond a certain point, spending or consumption increases offer no additional benefit. The first glass of water when you are thirsty is infinitely more satisfying than the tenth. However, with conspicuous consumption, the more you spend, the higher goes the bar for those wanting to be considered part of the same strata. So if Mukesh Ambani builds a billion dollar home, no matter how ugly, others in his economic bracket must do so as well if only to be considered on par. However, spending a billion dollars on a home would make none of them happier than before, when they had a home of say 500 million. No-one would willingly step down, since we live in a social system where the yardstick is applied by peers.

The outcome therefore of the process would be increased spending by the layers below, without a commensurate increase in satisfaction levels for anyone. Instead, the lower layers viz the middle class would suffer more as a result, since the additional spending would stretch their finances. This expenditure cascade is what causes the inequality to take place, and it is started off by the rich. Therefore, in areas where the economic disparity is highest, the level of unhappiness would be highest as well. And since most of the spending now goes towards keeping up with the norms of their social circle, less is saved for long term financial goals, leading to further unhappiness.

Any boom results in a certain set of people increasing their earnings and therefore spending capacity. Their ability to spend more pushes up the prices and adversely affects those unable to raise their incomes to the new levels. A typical example is the cities which have seen real estate booms due to growing commercial activity. For example, in Mumbai and Bangalore, it has become increasingly difficult to purchase a home on a single income, resulting in both spouses working in most middle class households. At the same time, those that are able to spend are not really able to enjoy the satisfaction of their increased income as prices catch up to the new levels fairly quickly.

This is an issue with long term effects and needs to be dealt with. Inequality will persist, but there have to be ways of easing its effects on the less fortunate in society.

PS: A robust discussion and comments are welcome.


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