Sunday, May 18, 2014


The Merits Of Income Inequality: What's The Right Amount?

French economist Thomas Piketty has warned in his best-seller Capital in the Twenty-First Century that inequality is likely to grow. 

That's because capitalism tends to reward the owners of capital with a greater and greater share of the economy's output, he says. Meanwhile, wage-earners get a smaller and smaller share.

Milanovic says that concentration of wealth is a threat to democracy. "The elites start dominating the political discourse and even political decision-making, and then they reinforce their own privilege," he says.

Still, Milanovic says some level of inequality is needed to make capitalism work.

"It provides incentives for harder work, study, investment and ... general desire to better one's condition and the condition of one's kids," he says.

But what's the right level of inequality? Tyler Cowen, an economist at George Mason University, says whether a certain level of inequality is good or bad depends on how it came be.

Income inequality is a big problem, many economists agree. But they also say some level of inequality is necessary for capitalism to work.

Inequality in the U.S. has risen to levels not seen since the 1920s. The top 1 percent pocket more than 20 percent of the nation's income, and the 400 richest people in the country own more wealth than everyone in the bottom 50 percent.

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That's not healthy for the society or the economy, says Branko Milanovic, an economists at the City University of New York Graduate Center. For one thing, he says, it undermines the idea of equal opportunity.

"It makes some people excluded or poor and unable to actually, for example, go to school, complete studies and contribute to society," he says.

That hurts individuals and, Milanovic says, it hurts the broader economy by not allowing a whole segment of society to be as productive as it could be.

"If your society has a lot of inequality because a lot of your producers have done very well selling their products on global markets, that kind of inequality is not harmful in general," he says. "But if you have inequality because your poorer people don't have enough economic opportunity, I would say that is a big problem."