The Price of Inequality: How Today's Divided Society Endangers Our Future (25 page)

Perceptions of inequality and individual behavior

As we discussed in chapter 4, if individuals believe that they are being treated unfairly by their employer, they are more likely to shirk on the job. If individuals from some minority are paid lower wages than other equally qualified individuals, they will and should feel that they are being treated unfairly—but the lower productivity that results can, and likely will, lead employers to pay lower wages. There can be a “discriminatory equilibrium.”
20

Even perceptions of race, caste, and gender identities can have significant effects on productivity. In a brilliant set of experiments in India, low- and high-caste children were asked to solve puzzles, with monetary rewards for success. When they were asked to do so anonymously, there was no caste difference in performance. But when the low caste and high caste were in a mixed group
where the low-caste individuals were known to be low caste
(they knew it, and they knew that others knew it), low-caste performance was much lower than that of the high caste.
21
The experiment highlighted the importance of social perceptions: low-caste individuals somehow absorbed into their own reality the belief that lower-caste individuals were inferior—but only so in the presence of those who held that belief.

Perceptions of fairness and the politics of inequality

I explained earlier how our perceptions are affected by “framing,” and thus it’s not surprising that much of the battle today is over the framing of inequality. Fairness, like beauty, is at least partly in the eyes of the beholder, and those at the top want to be sure that the inequality in the United States today is framed in ways that make it seem fair, or at least acceptable. If it is perceived to be unfair, not only may that hurt productivity in the workplace but it might lead to legislation that would attempt to temper it.

In the battle over public policy, whatever the realpolitik of special interests, public discourse focuses on efficiency and fairness. In my years in government, I never heard an industry supplicant looking for a subsidy ask for it simply because it would enrich his coffers. Instead, the supplicants expressed their requests in the language of fairness—and the benefits that would be conferred on others (more jobs, high tax payments).

The same goes for the policies that have shaped the growing inequality in the United States—both those that have contributed to the inequality in market incomes and those that have weakened the role of government in bringing down the level of inequality. The battle about “framing” first centers on how we
see
the level of inequality—how large is it, what are its causes, how can it be justified?

Corporate CEOs, especially those in the financial sector, have thus tried to persuade others (and themselves) that high pay can be justified as a result of an individual’s larger contribution to society, and that it is necessary to motivate him to continue making those contributions. That is why it is called
incentive pay
. But the crisis showed to everyone what economic research had long revealed—the argument was a sham. As we noted in chapter 4, what was called incentive pay was anything but that: pay was high when performance was high, but pay was still high when performance was low. Only the name changed. When performance was low, the name changed to “retention pay.”

If the problems of those at the bottom are mainly of their own making and if those collecting welfare checks were really living high on the rest of society (as the “welfare deadbeats” and “welfare queen” campaign in the 1980s and 1990s suggested), then there is little compunction in not providing assistance to them. If those at the top receive high incomes because they have contributed so much to our society—in fact, their pay is but a fraction of their social contribution—then their pay seems justified, especially if their contributions were the result of hard work rather than just luck. Other ideas (the importance of incentives and incentive pay) suggest that there would be a high price to reducing inequality. Still others (trickle-down economics) suggest that high inequality is not really that bad, since all are better off than they would be in a world without such a high level of inequality.

On the other side of this battle are countering beliefs: fundamental beliefs in the value of equality, and analyses such as those presented in earlier chapters that find that the high level of inequality in the United States today increases instability, reduces productivity, and undermines democracy, and that much of it arises in ways that are unrelated to social contributions, that it comes, rather, from the ability to exercise market power—the ability to exploit consumers through monopoly power or to exploit poor and uneducated borrowers through practices that, if not illegal, ought to be.

The intellectual battle is often fought over particular policies, such as whether taxes should be raised on capital gains. But behind these disputes lies this bigger battle over perceptions and over big ideas—like the role of the market, the state, and civil society. This is not just a philosophical debate but a battle over shaping perceptions about the competencies of these different institutions. Those who don’t want the state to stop the rent seeking from which they benefit so much, and don’t want it to engage in redistribution or to increase economic opportunity and mobility, emphasize the state’s failings. (Remarkably, this is true even when they are in office and could and should do something to correct any problem of which they are aware.) They emphasize that the state interferes with the workings of the markets. At the same time that they exaggerate the failures of government, they exaggerate the strengths of markets. Most importantly for our purposes, they strive to make sure that these perceptions become part of the common perspective, that money spent by private individuals (presumably, even on gambling) is better spent than money entrusted to the government, and that any government attempts to correct market failures—such as the proclivity of firms to pollute excessively—cause more harm than good.
22

This big battle is crucial for understanding the evolution of inequality in America. The success of the Right in this battle during the past thirty years has shaped our government. We haven’t achieved the minimalist state that libertarians advocate. What we’ve achieved is a state too constrained to provide the public goods—investments in infrastructure, technology, and education—that would make for a vibrant economy and too weak to engage in the redistribution that is needed to create a fair society. But we have a state that is still large enough and distorted enough that it can provide a bounty of gifts to the wealthy. The advocates of a small state in the financial sector were happy that the government had the money to rescue them in 2008—and bailouts have in fact been part of capitalism for centuries.
23

These political battles, in turn, rest on broader ideas about human rights, human nature, and the meaning of democracy and equality. Debates and perspectives on these issues have taken a different course in the United States in recent years than in much of the rest of the world, especially in other advanced industrial countries. Two controversies—the death penalty (which is anathema in Europe) and the right to access to medicine (which in most countries is taken as a basic human right)—are emblematic of these differences. It may be difficult to ascertain the role the greater economic and social divides in our society has played in creating these differences in beliefs; but what is clear is that if American values and perceptions are seen to be out of line with those in the rest of the world, our global influence will be diminished, as we suggested in the last chapter.

How ideas evolve

Changing ideas about these fundamentals are both cause and consequence of a changing society and economy—including changes in societal inequality.

The history of ideas describes how ideas evolve. No one controls the evolution.
24
Change is more organic. Ideas emerge from a variety of sources—often in response to the events of the moment, sometimes as part of a natural evolutionary process.
25
Ideas get thrown out (one can think of them as intellectual mutations), and some find fertile ground: they help people understand the world, especially
as it is in their self-interest to understand it
.

In the past, beliefs sometimes changed in ways that enhanced the well-being of the elites, as when ideas that justified slavery or inequality became prevalent. Sometimes beliefs changed in ways that worked against their interests. Surely elites in the UK would have preferred that Enlightenment ideas had not crossed the Atlantic. Slave owners in the South would have liked to keep the expression “all men are created equal” more narrowly defined. That there were at least some instances in which beliefs evolved in ways that were counter to the interests of the elites suggests that, at least in the past, the elites didn’t in fact fully control their evolution.

Globalization has, for instance, brought new ideas to many countries, including ideas about democracy, human rights, and equality. A change in technology or market structure—the move from agriculture to manufacturing, or from manufacturing to a service sector economy—inevitably is accompanied by societal changes of enormous magnitude, including ideas about how society and the economy should be organized. The development of manufacturing required a more educated labor force, and it was difficult to make an argument
not
to extend voting rights to the well educated, even if they were not members of earlier elites.

Successes and failures of governments and markets have played an important role in the evolution of ideas about the role of each in the past century. With the Great Depression, when one out of four workers was out of a job, it was hard for anyone but a devoted ideologue to see markets as always efficient. It was not surprising that under those circumstances, the idea that government should play a more important role in macromanagement gained strength. Before 1960, in most developing countries around the world, markets (at least as shaped by colonial powers) by themselves were not delivering growth. It was natural that many in these societies came to the conclusion that government should play a more important role in development. With the failures of communism, though, it was similarly hard for any but a devoted ideologue to believe that government should take a
dominant
role in the economy. Out of these experiences, out of observations that markets often fail, but so do governments, the idea advocated here—that there needs to be a balanced role between markets, the state, and civil society—naturally evolved. What that balance would be could differ across countries and over time. In East Asia there arose the idea of the
developmental state,
one that orchestrated development, but used market mechanisms. There were some enormous successes, the fastest sustained growth ever, with huge reductions in poverty, and large gains for the vast majority of citizens.

But ideas and interpretations of historical events are always contested. Some look at these experiences and, somehow, come up with alternative interpretations. Some (like the Nobel laureate and University of Chicago economist Milton Friedman) constructed an interpretation of the Great Depression that focused on government failure, just as the Right looks at the Great Recession and seeks to put blame on government efforts to promote housing for the poor. Some looked at the enormous successes of the United States in the years after World War II—its relative stability, its rapid growth, a growth from which all shared—and said that growth could be even faster, if only we deregulated and lowered taxes. (Of course, as earlier chapters pointed out, that didn’t happen: growth in the era of deregulation and lower taxes was slower, and the country grew apart.)

As our discussion of equilibrium fictions emphasized, evidence doesn’t always resolve these disputes: the advocates of different perspectives see evidence in different ways. Even if growth in the era of deregulation and low taxes was slower and most Americans didn’t do well, something else can be blamed—there were still too many regulations and too much uncertainty caused by those advocating more regulations. Analyses showing that Fannie Mae and Freddie Mac were not at the center of the Great Recession are simply dismissed.
26

Some ideas are transformative, but for the most part societal change and change in beliefs occurs slowly. Sometimes, there is a disparity between the pace of change of ideas and of society; sometimes the disparity between beliefs and reality is so startling it forces a rethinking of ideas—or a change in society.

Change often occurs less rapidly than it seems that it should, and the slow evolution of ideas is one of the reasons that societies sometimes change slowly. The Declaration of Independence may have enunciated clearly in 1776 the principle that all men were created equal, but it would be almost two centuries before the United States adopted civil rights legislation that would embrace this principle, and full equality has yet to be achieved.

One of the reasons that ideas change slowly is that ideas and perceptions are
social constructs.
My willingness to hold a belief is related to others’ holding similar beliefs. As I travel around the country and the world, I am often struck how in some places one set of ideas is part of conventional wisdom—such as that government is necessarily inefficient or that government caused the recession or that global warming is a fiction—and in others just the opposite is taken to be the “truth.” Most individuals don’t themselves examine the evidence. Few have the capabilities of assessing the evidence on global warming even if they had the time. But the fact that others that they talk to and trust hold certain beliefs reinforces their conviction in their correctness.

Some of these socially constructed ideas and perceptions provide the lens through which we see the world. Categories, like race and caste, are relevant in some societies, but not in others. But as we have noted, these “ideas” have real consequences, which can persist.