April 10, 2012
I recently discovered that a game I played as a child, Chutes and Ladders, is actually an ancient game from India known as Snakes and Ladders. The original game was interpreted by some as an illustration of fate or destiny. The game is pure luck, there is no skill involved, so a player's destiny depends upon the roll of the dice and the structure of the game. But in another interpretation the ladders represent virtuous choices -- the path to prosperity -- while the snakes or chutes represent vices that lead to ruin. There were more snakes than ladders in the original game to teach that it is harder to stay on the moral path than it is to fall off of it.
There are interesting similarities between these two interpretations of the game and the two most common explanations for the large increase in inequality in recent decades. One explanation for growing inequality relies upon institutional and political factors. For example, proponents of this view often argue that changes in legislation favored by powerful business interests undermined unions. This gave businesses the upper hand in wage negotiations and allowed business owners to capture a larger and unfair share of income.
From the perspective of workers, this is a story where their destiny is partly determined by changes in the rules of the game, and those changes work against them. It's not the individual's poor choices that make it hard to climb ladders, avoid snakes, and reach the top of the board. It’s that those who make it to the top are able to use the power that comes with wealth to change the game in a way that protects their own positions on the board, and this comes at the expense of those who do not have this degree of influence.
The second explanation relies upon increasing returns to education brought about by skill based technical change, winner take all markets that have grown with globalization, and other economic factors to explain rising inequality. This is fundamentally a virtues and vices story. Those who make good choices and have the virtues that society values are appropriately rewarded and they rise to the top, while those who do not stay at the bottom. Manipulation of the game by the powerful has little to do with the outcome.
As society becomes more divided, it becomes more difficult for those at the bottom to make their way to the top if for no other reason than the distance between the two groups is expanding.
What is the solution to the inequality problem? If the widening gap in the income distribution is the result of unfairness, if some people are getting more than they deserve, then the answer is simple in principle but much harder in practice. In the short-run, take from the undeserving and give to the deserving, and in the longer run fix the problems that produce the unfair distribution of income.
But suppose that growing inequality has nothing to do with political power, market power, rules that favor the perpetuation of wealth, and so on. The evidence suggests these are important factors, but suppose the second group is correct. Should we accept that people are getting paid according to their contribution to the social good, conclude that’s fair, and leave it at that?
Even in this case there are reasons to pursue redistributive policies. As society becomes more divided, it becomes more difficult for those at the bottom to make their way to the top if for no other reason than the distance between the two groups is expanding. In this case, taxing the winners to create more opportunity for the less fortunate – to build more ladders and extend those that already exist – is justified.
FIXING A BROKEN RUNG ON THE LADDER
We also need to expand social insurance, especially during recessions. When a recession hits there is a substantial increase in the number of destructive downward chutes for those in the middle and bottom of the income distribution. There is also a substantial decline in the number of ladders. More chutes appear at the top as well, but they are generally short due to the built in protection that wealth brings.
If we want to address the growing inequality problem, one of the most important things we can do is to use social insurance to stop people from losing ground for reasons that have nothing to do with their own choices. Too many people work for years and years to climb small ladders only to have a recession or unexpected health problems, for example, take away their hard-earned gains.
Unfortunately, all indications are that we are moving toward less social insurance – more chutes and less help climbing ladders – at a time when we ought to be moving in the other direction. We are wealthier as a society every year, and we can afford to provide more social insurance to working class households. More tax cuts are not the answer.
Inequality is a difficult problem to address, and commonly cited remedies such as better education are unlikely to be enough to resolve the problem. In the end, redistribution may be necessary. But one thing is clear. We have no business at all making the inequality problem worse by allowing the powerful to reduce social insurance and rewrite the rules of the game in a way that tears down ladders and reopens the destructive chutes to ruin.