U.S. Tolerance of Income Inequality

Throughout the world, nations have developed varying attitudes towards income inequality.  Among developed countries, the United States currently accepts the highest level of income inequality. Many conservatives in the United States defend income differences in what could be considered the philosophical defense of income inequality.  This defense broadly states that U.S. income levels stimulate entrepreneurism, which in turn stimulates higher levels of economic growth than in countries with more equitable income distribution.

 The U.S. stance on income inequality stands in stark contrast towards Western Europe and Japan, where a more redistributive tax scheme is aimed at increasing national cohesion by reducing inequalities.  The Gini coefficient, a widely used measure of income inequality (where higher coefficients represents higher inequality), confirms the existence of these differing attitudes.  While the United States, Germany and Japan have similar levels of inequality before taxes, Japan and Germany’s tax policies produce major reductions in their Gini coefficients while tax policy in the United States does not.  The ratio of pay between average chief executive officers and workers also sheds light on the differing attitudes towards the issue.  While Japan has a ratio of 11 to 1 and Germany 12 to 1, the United States ratio is an exorbitant 319 to 1.  In the developing world, different regions have adopted both attitudes towards the debate.  Latin America, for instance, has generally followed the U.S. path while much of Asia has adopted the Western European mindset.  As a result, Latin America today stands as the most unequal region in the world.

 Lost in the much of the debate over income inequality is whether the U.S. attitude has produced larger economic returns.  While Japan experienced higher growth rates than the United States for many years, that trend has reversed itself over the past several decades.  In comparison to Western Europe, the United States has outperformed the region for several periods while being outperformed in others.  One thing is sure; while the United States may have slightly higher growth rates among developed countries, the consequences of unemployment are much more severe there than in Japan or Western Europe, even without including the loss of health care insurance that is largely tied to employment in the United States.

 Despite the high income inequality that characterizes the United States today, it has not always been the case.  During the 1960s, 1970s, and 1980s, the compensation ratio between CEOs and ordinary workers oscillated between 30 and 40 to 1.  What has produced the rapid increase in inequality since then?  There is likely no single answer to the question.  One evident answer has been the growth in power of special interest groups-namely business leaders-while organized labor has continued to see its influence decline.

 This commentary closes with the observation that “the extent of U.S. economic inequality that now exists was aggravated by the extent of special and successful pleading in recent U.S. history. If efforts at financial reform and reducing the vast differences in compensation between executives and workers are stymied—as current special pleading seeks to accomplish—the damage done to the U.S. polity could be substantial.”