Most Economists agree that income inequality is bad. What almost none of them can say is WHY it’s bad, not even mentioning negative externalities. This is where some Sociology comes in, and can shed light revealing the shadow of Adam Smith’s “invisible fist.”
Economic theory says that income inequality is bad simply because an economy never grows to its full potential. But is there an “up” side to income inequality? Sure, economically. Stock markets are up, and the rentier class (those who make money by producing nothing) is raking in the cash, buying expensive stuff that makes the GDP output go up (0.1% GDP growth is still GDP growth). Thorstein Veblen talked about this. But the social costs are high.
First, let’s measure income inequality in a way that everyone can agree on: the Gini Coefficient, except I’m going to break it down by race. I’m not trying to play the “race” card in economics. Quite the opposite; I’m going to show a negative externality (i.e. Social Cost) in the markets by showing what’s NOT there. This is sort of like looking for a black hole by looking for things getting sucked up around it.
Red: Caucasian, Blue: African American, Green: Hispanic, Purple: Asian American
There’s a lot of meaty surprises in this chart, the clearest one being that it seems that discrimination (overall) is alive and well in the United States. But is it real? More importantly, can it be attributed to a negative externality of the markets? There’s one market we can look at to find out – the labor market. Here are the U3 unemployment rates by race (Asian data was unavailable):
So if we know that markets can discriminate by race, likely through institutional (structural) factors, then can we suppose that markets also discriminate by class, or gender? We know that there is a huge gender and education gap, but we don’t know why for sure. Since measuring “class” requires measuring socioeconomic status, which is education, occupation, and income, we cannot truly measure “class” discrimination – that data doesn’t exist.
Scuttlebutt in Human Resource circles is that you cannot get a job unless you already have one. And there is some preliminary evidence to show this in the U6 rate.
We see the shadow of Adam Smith’s invisible fist knocking around people based on race, gender and education status. In other words, the black hole is sucking those people into it. What we cannot truly see is who, or how that actual fist is punching the hardest. However, class has to be somewhere around the “event horizon.”