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Creating Opportunity in a Changing Economy

There are few questions about economics that garner as much attention as those surrounding inequality. Over the last 30 years in particular, as we have watched income and wealth inequality rise in the United States, there has been considerable scholarly and popular attention to questions about fairness in our economic system. This attention is well-warranted. Christians, in particular, live in a tradition that has long questioned the morality of wealth and poverty, and has prioritized concerns about justice in the economy. Moreover, there have been dramatic changes in inequality in our lifetimes, both in the U.S. and globally, that are worth paying attention to. In this first part of our conversation I would like to set the stage by describing some recent trends in economic inequalities, then examine a range of explanations that are given for these trends, and then finally offer some suggestions for Christian thinking about inequality.

 

Domestic Divergence and Global Convergence

There are two broad trends in recent history that are worth understanding, just to set the stage for the conversation.  First, inequality in the U.S. has increased by a variety of measures since the early 1970’s. The trend is consistent enough that, while there is debate about the magnitude, significance, and cause of the change, the trend is not in dispute. For those who like to examine the numbers, a recent detailed report of income, poverty, and inequality statistics is available from the U.S. Census bureau here. One descriptive comparison from this report is characteristic of the last 40 years in the U.S.: between 1976 and 2016, the average household income in the lowest-earning fifth of the U.S. grew 7% after inflation, whereas the average income in the highest-earning fifth of the U.S. grew 71%. While the standard of living has generally increased for the whole population, the income and wealth of the most wealthy have increased far more dramatically. The incomes at the very top of the income distribution (those in the top 1%) grew much faster, moreover, than those in the top 5% or 10%.

At the same time, globally, inequality has been diminishing and there has been faster economic growth, on average, in historically poorer parts of the world than in historically richer parts. While inequality had grown worldwide for some time, since the 1980’s, there have been consistent declines in absolute poverty and improving circumstances for the many of the poorest parts of the world. In recent years, in fact, world-wide extreme poverty has declined faster than ever before. As a counterpoint to the statistic I offer about U.S. growth in inequality, based on calculations I made using numbers from this study, between 1988 and 2008 the average income of the lowest-earning fifth of the world’s population increased by close to 30% while the average income of the richest fifth of the world population increased by only 13%. While the very richest people in the world saw incomes grow faster than anyone, the incomes of those in 70% to 90% percentiles grew slower than the rest of the world.

In short, there is a broad trend toward inequality within the U.S. and in other countries as well, but at the same time, there is a parallel trend toward more equality worldwide, driven by rapid gains among the poorer parts of the world, and very slow gains by those at the bottom and middle of the income distributions in richer countries. The fact that the world is becoming more equal does not, of course, give us reason to ignore the dramatic differences in standards of living around the world, but it does offer hope that things can get better. For much of the remaining part of this essay, I will focus on the growing domestic inequality. We can come back to the positive global trends later in the discussion.

 

The Stories We Tell about Inequality

As we start to think about a Christian response to these issues, I would like to first note that there are three different kinds of narratives about inequality that are common. The kind of story that we think is the most accurate will also often determine the degree to which we think inequality is a problem, and what, if anything, should be done about it. Consider each of these in turn.      

1. Rich people are productive risk-takers, poor people have chosen poverty.

If we believe that people who are wealthy got to their position, most of the time, through hard work, talent, and delayed gratification, then it is easy to see them as heroic figures. Similarly, if we believe that people who are wealthy usually get that way by providing valuable goods that people need and want, then wealth creation is pro-social and laudable. Along the same vein, if we believe that the primary reason why people are poor is that they have made poor choices, it is easy to dismiss their hardship. This combination of assumptions will usually lead to the conclusion that inequality is not a moral problem. On the contrary, it might be the sign of a just system. To be consistent with this narrative, the rapid in equality growth over the last is usually explained by social breakdown in the U.S. among those with low income and education. While it is rare for this kind of story to be told in a form this blunt outside of the pages of an Ayn Rand novel, many of the arguments of economic conservatives in the U.S. follow this kind of narrative.

2. Rich people are corrupt, poor people are exploited victims.

If on the other hand, we flip the script, and make those who are rich the villains of the story, it is easy to argue, instead, that the richest Americans, usually those in finance or in the leadership of large corporations, have worked to rig the economy in their own interests, and against the interests of the working class. Poor people, on the other hand, are painted as the victims of this corrupt capitalism, with little bargaining power and few advantages in a winner-take-all game. In this story, income inequality is sign of injustice. Under this narrative, the domestic rise in income inequality is likely to be explained by political and economic victories by those who serve the interests of the wealthiest citizens. While, again, the narrative is not always painted this starkly, a story of this type is often told by those most economically progressive.

3. Structural economic changes have caused economic inequality to increase

The last kind of story we tell about inequality is that there is some large shift, largely outside of our control, that has changed the economy and caused increased inequality. For example, some have explained inequality in terms of broad trends in education and technology, arguing that technological developments have tended to reward those with the right set of skills and education, and have replaced workers with less education. Sometimes described as “skill-biased technological change,” this explanation is exemplified in a 2010 book by two Harvard economists. Other stories in this genre include references to increased international competition, immigration, the rise of internet commerce, and declines in aggregate productivity as explanations for the rise of economic inequality. This kind of story about inequality is usually favored by economists, and it tends to leave issues of justice outside of the story altogether.

One of the reasons why this topic is so difficult is that all three of these narratives about inequality are true, in some respect, and all of them are also problematic. First, consider the first two narratives. There plenty of anecdotes and statistics to support both stories, and so it is easy to fall into one camp or the other and assume that the other side is horribly mistaken. Part of the temptation of these kinds of narratives is that they each give convenient cover for a political program, either on the right or the left, and they identify clear heroes and enemies. People on the right can dismiss concerns of those on the left as being motivated by envy, people on the left can, in turn, assume that the concerns of those on the right are motivated by privilege and greed. Both of these stories see the economy as exemplifying a struggle for justice.

While I find all three stories convincing on different days, I usually lean toward the third kind of narrative. In the midst of our ideological battles, it is easy to miss that there are big structural changes in the economy that are slowly pushing us toward inequality. Moreover, we can usually have a more productive conversation about how to address inequality if we avoid the kind of characterizations in the first two stories, and pay close attention to broader economic forces.  The danger in this third kind of story is that it allows scholars to pretend that inequality is merely a technical problem, and ignore the fact that these broad trends are made up of smaller story arcs about hardship, discrimination, luck, lifetimes of hard work, unemployment, crime, exclusion from community, and culpable opulence. That is to say, there are substantial moral questions at stake.

 

How should Christians think about inequality?

Christians can be found across the political spectrum, making many different arguments about inequality. I cannot speak for the Church broadly, but I can draw upon a few themes that have motivated Christian thinking about the economy and explain my current approach to the topic.

In the Bible, and the Old Testament in particular, property and wealth are often framed as a blessing that allows someone to provide for their own needs and the needs of those around them. Moreover, the treatment of wealth in the Sabbath laws seems to prioritize the inclusion of everyone in the economic community. Anyone who had more than they needed was obligated to include others by giving loans, jobs, or gifts to sustain them. Extraordinary wealth, moreover, clearly gives one the power to include others in the community or exclude others from their calling, a danger is highlighted throughout scripture. In the bible, it seems that the economy is a system that has a particular end: the sustaining of the life of a community, and the inclusion of everyone in that community. In Catholic theology, this has been summarized in the principle sometimes called “the universal destination of goods.” My Reformed friends have usually included this all under the theme of “stewardship.”

An emphasis on this starting place pushes my thinking toward the theme of participation in the economy as a key element of economic justice. In particular, much of the recent trends in inequality can be thought through in terms of people’s ability to participate in the process of wealth creation. The wide global divergence, and now convergence in income follows a long period in which many people around the world were politically and geographically excluded from the global economy. The recent declines in global inequality have resulted from the inclusion of huge populations in China and India, where trade, specialization, and education are dramatically changing the lives of millions in a short period of time, and where extreme poverty is on a fast decline.

Within the U.S., much of the reward from dramatic increases in production have gone to those who are able to take advantage international trade, advances in technology, and mass markets. Those with little education or those separated from global markets by geography or social standing are left with fewer opportunities and increased international and domestic competition. There is a real long-term danger that, left to current trends, we would find that there is ever less investment in common public goods, and less investment in those institutions that create broad opportunity. To counter this, Christians should serve their neighbors by devoting their resources and political energy toward sustaining those institutions -- like education and health care -- that allow us to invest in people’s ability to pursue their own calling. We should likewise be careful to limit the ways in which the rules of the economy can be rigged against those without economic power, such through regulation that favors established corporations, or an excessively punitive justice system that locks people out of the economy through debt, incarceration, or deportation.

 

Redistribution of Wealth?

What we call “capitalism” or a “market economy” is a way of doing two things at the same time: it is a method of allocating people, technology, and resources to create things that people value, and it is also a way of distributing the wealth that is created. It is tempting to separate these two: leave the market in charge of making stuff, but let the government step in when it comes time to distributing the gains, so that the result is more equal.  The problem, of course, is that one of the reasons that our economic system is so good at making goods and providing services, is that we tend to reward people (with income) as a result of doing something that people find valuable and scarce. This means that sometimes when we redistribute wealth, we also end up decreasing the total amount of wealth there is to share. We fight, politically, about which is more important: creating more valuable goods and services, or equalizing the distribution of rewards.

Given my concern about participation in the economy, I tend to be most concerned about people being left behind despite hard work. It may be that creating institutions of opportunity is not enough. Even among those with an education who work full time and who obey the law, there is still rising inequality. Unfortunately there is no guarantee in economics that trends in technology and trade will always bend toward rewarding hard work. I tend to think, then, that in the U.S., we should move toward more redistribution in the economy, following two principles:

1. Survival of the fittest for products and production methods, not people.

 There is an element of a market economy that has a Darwinian flavor. The competition and innovation that drives progress and productivity is an unforgiving force. The once dominant tech giant, Kodak, was reduced over my lifetime to a fraction of its former size, largely replaced by new products and technologies. People can build up long successful careers, only to find that their skills have become obsolete and jobs scarce. While we count on competition to make sure that resources are used efficiently, and to drive the development of new and better processes, too often the casualties of this competitive process are people, not just bad ideas or obsolete organizations. If we are going to embrace market competition, and fast-changing technologies, then we should also embrace a robust safety net for the individuals whose lives are turned upside down. In addition to our current programs, I would like to see universal health care coverage, cheaper college education and training, as well as a more robust guarantee against hunger.

Too often, our political efforts flip this principle, trying to save corporations and industries rather than people. Our current administration, for example, seems intent on saving the coal industry, despite the fact that the decline of coal is well-warranted in the face of cleaner and ever-cheaper energy alternatives. This is a really inefficient way to help coal workers, since propping up this industry will only delay the transition to other industries that could serve these people much better.

2. Progressive Taxation

Taxation is a means to an end, and is never popular. In order to fund the kind of safety net and investment in public institutions, however, it is an important element. I start with the premise that material wealth has a purpose, and that those blessed with wealth have a calling to support and care for creation and the people nearby. Those who have an abundance of wealth and who are not using it to support those in need, therefore, are not “owning” their property properly. The moral claim that they have on their property is weaker. This sets the stage for a three-fold justification of progressive income or wealth taxation, when combined with a generous charitable giving exemption.

  • Those with greater income or wealth have a greater ability to contribute to taxes without suffering comparable loss.
  • Those with great greater income or wealth, if not putting it to good use, have a weaker moral claim to their wealth, and thus can be taxed more.
  • Progressive income or wealth taxation pushes against inequality, even if it does not address the underlying causes.

The other large check in our tax system on economic inequality has traditionally been the estate or inheritance tax. It is only in recent years that this has become the target of conservatives, to the point where the estate tax is much lower than it had been. While there can be a legitimate debate about whether people should have a protected right to leave large amounts of wealth to their children, the estate tax on large estates is preferable to other methods of taxation, for two reasons.  First, there is a lower efficiency cost to this kind of tax than there is a comparable tax on income, since people are less likely to adjust their productivity and earnings because of the estate tax.  Second, this tax can limit people’s ability to become wealthy solely through birth. When comparing those who earned and saved their money to those who inherited it, the former has a stronger moral claim. A high estate tax, a progressive income tax, and comparable taxes on income-generating assets, therefore, are good ways to fund the kind of redistribution of wealth that makes up a reliable social safety net and investment in public goods.

 

Economic Opportunity?

Sometimes, when we imagine a “land of opportunity” we immediately jump to inspiring rags-to-riches stories. I would like to conclude by reiterating that the rising inequality among a population measured in the hundreds of millions cannot be explained by the virtues or vices that make up these kinds of stories, however, and instead probably reflects a growing divergence of opportunities and higher stakes across the board. Like some of my colleagues, I fear that people are less able to participate in society in a reasonably secure and healthy way because of these changes, and that the power and position of the wealthy will only become more pronounced. We can make choices that will counter this trend, but they require a political consensus behind paying the price for broad investments in the whole population.

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