A few weeks ago, I wrote about the vast demographic and economic divide between Brunswick and St. Simons Island, and I promised a follow-up to address how we should respond to the data. The answer to this question is complex and may differ depending on whom you ask — an Islander, a Brunswickian, a businessperson, a policymaker, a nonprofit leader, or a member of the clergy. Each would have a different perspective, and many, no doubt, are greater authorities on the subject than I.
As an economist, I will attempt to shed some light on how inequality affects us in terms of society’s economic growth and individuals’ economic wellbeing. I will approach the topic from the point of view of a capitalist, though, of course, a communist or socialist would have much to add to the discussion.
I should warn you, though, that even among capitalist economists, there is more than one school of thought here, and debate on this topic has spanned decades.
First, it is worth mentioning that almost all economists agree there is no finite limit to society’s wealth, and that in general, the poor are not poor because the rich are rich. We should not view inequality as a consequence of some individuals taking wealth or income away from others. Our question, then, is not one of whom to blame for the existence of inequality but of whether or not it should concern us and, if so, what we should do about it.
According to traditional capitalist theory, inequality is neither to be deemed good nor bad. It simply is a description of the way things are, and in some sense, it is proof that capitalism is working.
The fact that some are able to accumulate great wealth is evidence that the American dream is attainable and serves as incentive for less wealthy individuals to work hard, to create, and to innovate to grow their own wealth and, as a byproduct, to spur overall economic growth.
Wealthy Americans save more of their incomes than others, and middle or lower income Americans are more likely to devote their income to consumer spending. Thus, increasing inequality, typically due to greater wealth accumulating to the upper class, could negatively affect growth by decreasing consumer spending.
However, macroeconomic theory tells us economic growth depends heavily on savings, which are used to finance investment in human and physical capital. Thus, when more wealth lies with the rich, their investment should boost growth, benefiting even the less wealthy through lower prices and more jobs.
Therefore, many economists believe inequality is not something to be fixed, per se, but is a natural consequence of healthy capitalism.
Others believe inequality is a grave threat to our capitalist economy. This idea stems from the notion that sustained poverty hinders economic growth and from the existence of the phenomenon known as the poverty trap.
I will plan to write more on this second point of view in my next column.
Reg Murphy Center