From 5th grade, I remember a history lesson about Emperor Nero playing his beloved fiddle while the Great Fire of Romeburned through the country in 64 CE. I recall thinking to myself why would anyone not want to help if their nation was burning?
In my Principles of Economics class, we discuss a basic trade-off in economic decision-making – between efficiency and equity. Efficiency is when all goods are allocated to their most valuable use minimizing waste. An efficient allocation could be where one individual holds all the wealth of a country and everyone else has a dollar. Open markets are very good at creating an efficient outcome. Equity (different from equality) is a concept of fairness. Society, via government, has the responsibility to sometimes re-allocate an efficient outcome to create more equity.
The basic social contract of western democracies, especially in the US, inherently incorporates both efficiency and equity. If individuals work and study hard, they can pull themselves up to the upper-echelons of society. Hard-working individuals will prosper and everyone should have a shot at the American Dream.
Since the 1980’s, policies have tilted economic rules towards greater efficiency – for example deregulating industries, lowering trade barriers – creating greater wealth so that more people could achieve the dream. Through global movements of products and finance, we now manufacture shirts cheaper in Bangladesh, gather rare- Earth minerals from Sierra Leone and make investments in Mongolia. As a global society we now are the richest we have ever been, but this has come at three major costs.
First, Thomas Piketty has described how income inequity in capitalist democracies has increased over the past half century and is reaching levels similar to the 1800’s in France and England. Comparable to historic periods, the people not benefiting from global progress are asking that the social contract be re-written indicating this level of income inequity as unsustainable.
Second, different from past eras, even those who have benefited from the systemic inequity, are unhappy as well. Although beneficiaries of the system have merited their earnings according to the social contract, they are also working harder in terms of brute hours than the middle class on average, and are receiving most of their income by working. This is in stark contrast to the elites of bygone eras who were part of the “leisure class” and gathered more of their income as inheritance. Daniel Markovits at Yale has called this a meritocracy trap.
Finally, even though the nation overall is wealthier, it is harder to move from becoming poor to rich. The American Dream is becoming unattainable in the US. As several economic studies indicate the US is 27th in the world for social mobility, the US is at the lowest level of social mobility for the past 150 years, and children’s chances of earning more than their parents has been declining.
The social contract that we have carefully constructed over 250 years is being consumed by inequity, while Covid-19 and unemployment are feeding the flames.
Even if Federal leadership may ignore the blaze, what is our personal responsibility in putting out the fire? I am a) rethinking what companies to support – do I really need to save $5 by buying products produced more cheaply b) which non-profit organizations I am supporting, and c) which candidates we are endorsing. Mala’s colleagues at the IMF collected these free or low-cost resources describing how to discuss inequity with children.
To address this situation of inequity, leadership matters. When we allow the social contract to be burned – we lose tolerance, forgiveness, charity, community. But even more important we may actually lose the democracy the contract is built on.
Please do forward any interesting articles you are reading.
