The economics of inequality: Why the wealth gap is bad for everyone

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Protecting the rich at the expense of the poor isn’t just immoral, says this economist—it is a recipe for economic disaster.

Charles Clark probably doesn’t win a lot of friends in his chosen profession when he says that most economists don’t really understand the economy. But even though he earns a living teaching economics at St. John’s University in New York, Clark believes that understanding how the economy really works requires more than just a classroom education.

“I’ve probably learned more about economics working in factories than I did from my Ph.D. program,” says Clark. Working on an assembly line in a motor oil canning factory for $2.35 an hour, he saw how racial and ethnic minorities are treated differently in the workplace. A job at a wire striping factory helped to illustrate Adam Smith’s theory on the division of labor. And earning $9.10 an hour to wash pots at a nursing home helped Clark appreciate the power of unions.

In the real world Clark found that ideologies proposed by economists fail to hold up. “This is really the big problem with my profession,” he says. “We look at markets as if they’re like the ones we teach in textbooks and they’re all the same. But they’re not. Every market has to be established with a set of rules.”

Too often, Clark argues, those rules favor the rich at the expense of the poor. But applying Catholic social teaching to real world economics may just offer a solution that benefits everyone. Hopefully his students are taking good notes.

What do most economists get wrong about the economy?

They have this one theory, which they don’t know well enough to know that it doesn’t hold together, and they just keep on applying it. It’s all based on this idea that the market will always lead you toward full employment if you get out of the way. But there’s no evidence of this working.

Whenever we move more in that direction, we crash the economy. We did this in the 1920s and ended up with the Great Depression. And following the era of Ronald Reagan and Margaret Thatcher, we’ve had more financial crises in the past 20 years than we’ve had Olympics.

The problem with most economists is that they have an ideology that they will not think outside of. The one thing about Catholic social thought that makes it so challenging, at least for academics, is how unideological it is. Even though it’s based on universal ideals and universal principles, what matters is what actually works. You can’t just wish things to work.

That’s the problem for someone like Paul Ryan. What he thinks he knows about the economy is completely wrong.

What is he wrong about?

Ryan has this idea that we can help the poor by getting rid of government. Find me one example where that’s happened. He thinks we can improve health care if we promote market competition. Find me one example where that’s happened.

My complaint with Paul Ryan isn’t that he’s a bad Catholic. I have no idea whether he’s a good Catholic or not. My problem isn’t even that he doesn’t understand Catholic social thought. He doesn’t, but lots of people go to heaven not knowing what subsidiarity really means. We don’t have to pass a test to get into heaven, I hope.

The problem with Paul Ryan is that he doesn’t understand the nature of a modern capitalist economy. His policies are all ideologically driven. He gives policy-based evidence, in that he looks for evidence to support the already reached conclusion that markets always work and governments are bad. What is needed is evidence-based policy—what work to create jobs or reduce poverty. Look around the world and you will see that austerity only increases unemployment and poverty.

First, we can stop the job-killing austerity policies and the irrational fear of budget deficits and government spending that have paralyzed Washington. We have a jobs crisis, yet few people in Congress are talking about job creation. But even if we had full employment, we would still need policies to address poverty.

As a Catholic you have to say, “Well, there are people who are hurting, so I have to help them.” Then you have to figure out what actually helps them. I think Ryan’s own children would have to be thrown into poverty before he realizes that his policies are actually hurtful to poor people.

How can we create economic policies that would help the poor?

We have enough experience around the world to know what will help. Often the best way to help the poor is through collective action, making institutions more inclusive, and today most of our collective actions, especially changing the rules, are carried out by governments.

We don’t have one single magic solution, because people are poor for many reasons. Generally, increasing social protection helps people out of poverty and reducing social protection throws more people into poverty.

If you give universal access to health care, for example, you’ve dealt with a good deal of what causes poverty and keeps people in poverty, but that’s not everything. If you give universal education, you can start to deal with generational poverty, where the children of the poor are also poor.

You never eliminate poverty for various reasons, one of which is that yes, people do make stupid decisions. People become drug addicts. Even though the Netherlands might have great policies, they’ll still have a lot of people sleeping on the streets because that’s where heroin addicts in Europe like to go. That’s not an economic issue, that’s something else.

For multiple reasons—and there are almost as many reasons as there are people—you will have people living at lower ends of the economy. You can’t design social systems so that they’re perfect because these are human institutions and humans will sin. And the sin that creates the most poverty is greed.

But you can design systems that work much better. We can look to other countries to see what works and what doesn’t. American exceptionalism shouldn’t be reduced to the fact that we have the highest levels of poverty and inequality.

It used to be that we had the highest mobility and that people at the bottom had the best chance of getting to the top, and we had the biggest middle class. Now America has the least mobility among rich countries. This really changes the character of our country.

How did we end up with so much economic inequality?

You get great inequality in an economy when the rules favor one group over others. If you have political and economic institutions that are very inclusive, which means they help bring everyone in, then your economy will move toward more equitable outcomes. There will still be some inequality. Jobs that are dangerous or take a lot of time to get training for will have to pay more so that people will put the effort in to get those jobs.

We have so much inequality now because we’ve created exclusive institutions, where the rules shift the benefits toward a small group. The rules no longer help to include everyone else.

After the Great Depression, the New Deal brought a dramatic change in our labor laws. We had inclusive institutions that helped people get into economic positions where there was security, there was protection, and it was easy for unions to organize. There were more regulations on capital and more protections, not just for workers but with things like Social Security.

We regulated those on the top from about 1946 to 1973, which brought about an increase in equality, a consistent one throughout that whole time period. The incomes on the top grew a little slower than the incomes on the bottom, so for every income group it was almost perfectly progressive; the bottom 20 percent grew the fastest, then the next 20 percent grew the second fastest. Then the next two groups were about equal.

Incomes for the wealthy still grew, but they were the slowest. So the rich did get richer, but everyone else was getting richer faster.

What happened to change that?

It started with deregulating industries, which actually happened under Jimmy Carter. Then with Ronald Reagan, the National Labor Relations Board became very hostile to workers, and so not only was it hard to unionize, it was very easy to break up unions.

That affects all the wages that unions protect, which is much more than just union jobs. When I was in college, I worked at a nursing home as a pot washer and we got paid on the same scale as the hospital two miles away. They were unionized, we weren’t. But whenever they got a raise, we got a raise. So unions helped protect a whole group of workers.

Once that started to shrink, along with the deregulation of finance, then all the power went to those at the top. The thing that moves us up to the Great Depression levels of inequality are the changes in the rules that benefit finance and allow corporations to pit their workers against foreign workers, or just move their production overseas.

Can you give us an example of an exclusive institution?

Look at Apple. I used to make fun of Bill Gates all the time and then my computer would crash the next day. Now my kids gave me an iPad and I’m sure it’s going to break tomorrow for saying this, but Apple is an example of this. 

When the iPhone came out, they were selling it for $599, and the cost to produce it was $300. They made $300 in profit on each iPhone they sold. Apple was being asked why they don’t make the phones in the United States and they said, “Well, that would add $100 to the cost.” They could easily sell them for $599 and make $200 per phone.

In economics, unless you have exclusive institutions, you cannot maintain such a high profit rate because someone else will make the same product and sell it for less. The exclusive institution that protects Apple is the insane intellectual property protections in the United States, which allow companies to restrict competition.

Not to speak ill of the dead, but Steve Jobs got a style patent for drawing a rectangle with curved corners and saying, “That’s what an iPhone is going to look like and if anyone does anything that looks like that, we’ll sue them.” And they did. They sued Samsung, and Samsung has to stop making phones with that shape. Apple could bankrupt lots of companies for what is just a piece of paper with a box drawn on it.

Now my grandfather, the person I’m named after, had a bunch of patents. He was an engineer for Otis Elevators and I looked up his patents. I can’t understand any of it, all the complicated graphics and design. That’s serious work. What Steve Jobs did is something a child could have drawn, but it is an exclusive patent which prevents competition.

What’s wrong with a system where successful people can become a lot wealthier than everyone else?

There is nothing wrong with successful people becoming wealthier when their activities actually contribute to the common good and make everyone else better off. What is harmful is that so many people, mostly on Wall Street, got really rich by doing things that hurt the common good and made most people worse off. That is the exact opposite of how a competitive market is supposed to work.

The negative effect of income inequality is that not enough money gets circulated back into the economy. Money is the blood of an economy—it has to circulate. If money, like our blood, gets caught in one area and doesn’t circulate, then the overall health of the economy is damaged.

We saw this in the 1920s. All the money went to the top, and the top were just living the Lost Generation lifestyle, buying mansions in Europe and a lot of luxury goods. But what they weren’t doing was buying enough of the regularly produced goods that employ people.

If all the money that goes to the top were put into banks and the banks lent it all out, then at least all the money is getting spent. Paul Krugman argued in the New York Times recently that the rich could always just buy more yachts. But that doesn’t happen. The rich don’t become rich by spending all their money.

The rich become rich because they invest and save their money in ways that keep it from flowing back into the economy. So their investments are not job-creating investments. They are just buying pieces of paper and hoping that someone will want to pay more for that paper.

They’re really just placing bets on currencies, or on commodities, or on interest rates and inflation, much like people betting on March Madness. Not only does that not benefit the economy as a whole, it hurts it because this speculation causes bubbles in oil prices and food prices which create immense suffering for the poor, especially in developing countries.

That doesn’t have any real benefit for the economy. It doesn’t help firms innovate, invest, create, or hire people. It’s just like we’re playing a game of poker to see who can get the most money in the end. But it’s none of us; all this financial innovation has not made the country more productive, it’s just shifted wealth from the bottom and middle to the very top.

But aren’t the wealthy the job creators?

I tell my students this all the time: The real job creators are consumers. Nobody works unless someone wants to buy what they make. Once they stop buying, you’re fired, unless maybe you’re the owner’s son-in-law.

That’s one difference between the Republicans and Democrats. Democrats, in terms of economic policy, are more likely to look at demand. If you need to intervene in the economy, try to stimulate demand. That’s usually done in terms of tax cuts or spending increases.

For example, something that’s very successful is the payroll tax holiday. All the evidence shows that is one of the best ways to create jobs—getting poor people to have more money. Why? Because you know they’ll spend it.

Republicans, on the other hand, still think that we have a supply-constrained economy, that really what you need to do is help businesses lower the cost of their production or help them innovate. I think they’re completely wrong.

Why wouldn’t that work?

Businesses will supply goods as soon as it’s profitable. Giving them better incentives isn’t going to make them profitable; giving them customers is.

Lowering taxes on businesses, for example, isn’t going to make a difference because corporations have such good tax lawyers. The federal government gets about 2 or 2.5 percent of its income from corporate taxes. Twenty years ago it was double that amount.

No, corporations are not overtaxed. You line up the consumers, and corporations will make the products.

Are there other negative effects of economic inequality?

We’re finding out more and more that inequality has all kinds of social and health effects. Countries with greater inequality have higher infant mortality rates and higher rates of many diseases.

Public health experts are saying that we can now measure how many more people are going to die because of increases in inequality. Part of that is they don’t have the money for good medical care. Part of it, they’re arguing, is also that people feel they are excluded and that this is going to have a depressive effect.

Of course, we all know that increase in stress is one of the major reasons why people get sick. There’s no reason why that shouldn’t apply to poor people and not just rich CEOs who have heart attacks. It’s crazy to think that the poor don’t have stress, too; that taking care of your investors is somehow more taxing than taking care of sick relatives.

In fact many Americans enter poverty through an illness in the family. My sister had ALS, and we took care of her. It was very stressful, but we had means. My wife is a nurse practitioner, so we had someone who knew the medical system and could manage it.

If you’re poor, you don’t usually have those connections. You don’t have someone who can walk up to the top doctor in New York State and get the best advice. It’s incredibly crushing, and people have these daily crises all the time. And the cost of dealing with these things is just so much higher on low-income people.

Would raising the minimum wage help the people at the bottom?

Economists love to debate the minimum wage because their theory says it only causes unemployment. It drives them nuts that the evidence shows that it doesn’t really cause unemployment.

The economists are saying half the people who earn the minimum wage are teenagers and suburban households, so who are you helping by raising it? A lot of poor people don’t earn the minimum wage—they are on a salary. But really all low wages are tied to the minimum wage.

The research clearly shows that once you raise the minimum wage, the whole bottom wage structure rises with it. The last study that I saw found the bottom 40 to 50 percent of wages start to creep up once you raise the minimum wage. That’s a way of creating rules to push people up.

There’s a very clear relationship between levels of social protection and income growth and inequality. The wages in countries that have high levels of social protection have been going up over the past 30 years while ours have been flat. Productivity in those countries is through the roof. If we had high levels of social protection, as Europe does, then that would help our wages go up.

I did research in Ireland on poverty, and one of the policies I worked on was a proposal for a guaranteed minimum income. Instead of having lots of different social protection measures, it would just say, “OK, this is the poverty level. We’ll give everyone this level of income to ensure a decent standard of living for all, and then allow the market to determine the rest, with all earned income taxed at the same rate.”

We almost had that in the United States, too, under the Nixon administration. But when it came up through Congress it got killed by the Southern Democrats, who did not want social protection to be extended to blacks.

Would that system really work?

You could create really complex systems to cover everyone, but in the end someone’s going to raise their hand and say, “Well, what about left-handed blind people who live on the West Coast of Cork?” So in Ireland we said, “Well, why don’t we just have a minimum floor and figure out how can we pay for that?”

That was so much easier, because you couldn’t miss people. The only people you miss are people who don’t cash their check. It seems to me that just having that minimum is the most effective way to get people out of material poverty, so that social welfare agencies can concentrate on all the other problems families face.

One of the nice things about Catholic social thought is that it doesn’t view poverty solely in economic terms. Poverty is exclusion, and people are excluded from more than just the economic life of the community: exclusion can be social, political, cultural, and even spiritual. These are areas where the church, I think, can be most effective. 

The church could never have enough money to adequately address material poverty; all charities combined only deal with about 5 percent of food insecurity in America, with food stamps providing 95 percent. But we should have enough love and compassion to bring those on the margins fully into our communities, as God’s love is not a scarce resource.

If we had that policy, people would claim we were turning to socialism.

Our political discourse is basically junior high-ish. You come up with a name and you try to make it stick. It’s incredible to me that anyone would call Barack Obama a socialist.

In a democracy, we should have a government that people want. If people want health care to be provided for everyone, it doesn’t have to be owned by the government. The government has to create the space and the rules to make it happen, though. Socialism is when the government is owning businesses, but there’s nothing wrong with that either. It is better to have national defense provided by the government rather than Halliburton.

There’s this idea that if the government is doing something, they’re infringing on people’s freedoms. This would be the Ryan argument—that people aren’t creatively solving their own problems. That view is so divorced from all human history. We have this pioneer mentality without knowing anything about what the pioneers were like.

The pioneers were collectives, almost like communist groups going across the country in wagon trains where they had to help and rely on everyone. There’s not one man on every wagon on their own. No, they were all one, they all shared.

Humans do things collectively. To do it in an organized way that doesn’t turn into chaos, you’ll have to have some civil order, and so far that’s only been by having a government that has the ability to put people in jail because they’re not playing well with others.

I’ve heard some people make the argument that we should not do things that way because that’s what the Europeans would do. It’s totally ridiculous. If the Europeans come up with a way to cure AIDS, we shouldn’t do it because it’s the European solution? It’s so phenomenally dumb, especially from people who are basically European Americans.

What would Catholic teaching say about this economic approach?

The basic fundamentals of Catholic social thought are that first, we all have human dignity regardless of our income level, race, gender, nationality, etc.; and second, we have a social nature, which means we have to live in community.

Besides, the realistic fact is that nobody conceives themselves, nobody raises themselves, nobody changes their own diapers. As successful as you are, everything you’re doing is based on what everyone else did. There’s no way that what we earn is based on what our real contribution is.

All creation was a gift that we didn’t deserve, and our salvation is a gift that we don’t deserve. This idea that this is my money that I earned—no, you played a role, and it’s an important role. We want to give incentives so people work harder, but there’s no way that a Christian can say that this is something that I deserved. These are the gifts we were given, and we were told to share them.

This article appeared in the July 2013 issue of U.S. Catholic (Vol. 78, No. 7, pages 26-30).

Read more about the economy from Charles Clark in our web-only sidebar "Catholic economics 101: Charles Clark on capitalism, government spending, and alleviating poverty."

Image: Flickr photo cc by the yes man