"Inequality not only stinks, but also damages economies"

New York Times columnist Nicholas Kristof - calling the Occupy Wall Street movement "America's Primal Scream" - looks at income inequality as the measure of an economy as damaged and dysfunctional:

RIP Jimmy Stewart

Living under Communism in China made me a fervent enthusiast of capitalism. I believe that over the last couple of centuries banks have enormously raised living standards in the West by allocating capital to more efficient uses. But anyone who believes in markets should be outraged that banks rig the system so that they enjoy profits in good years and bailouts in bad years.

The banks have gotten away with privatizing profits and socializing risks, and that’s just another form of bank robbery.

“We have a catastrophically bad misregulation of the financial system,” said Amar Bhidé, a finance expert at the Fletcher School of Law and Diplomacy at Tufts University. “Its consequences led to a taint of the entire system of modern enterprise.”

Economists used to believe that we had to hold our noses and put up with high inequality as the price of robust growth. But more recent research suggests the opposite: inequality not only stinks, but also damages economies.

In his important new book, “The Darwin Economy,” Robert H. Frank of Cornell University cites a study showing that among 65 industrial nations, the more unequal ones experience slower growth on average. Likewise, individual countries grow more rapidly in periods when incomes are more equal, and slow down when incomes are skewed.

Graph via Mother Jone

That’s certainly true of the United States. We enjoyed considerable equality from the 1940s through the 1970s, and growth was strong. Since then inequality has surged, and growth has slowed.

One reason may be that inequality is linked to financial distress and financial crises. There is mounting evidence that inequality leads to bankruptcies and to financial panics.

“The recent global economic crisis, with its roots in U.S. financial markets, may have resulted, in part at least, from the increase in inequality,” Andrew G. Berg and Jonathan D. Ostry of the International Monetary Fund wrote last month. They argued that “equality appears to be an important ingredient in promoting and sustaining growth.”

Inequality also leads to early deaths and more divorces — a reminder that we’re talking not about data sets here, but about human beings.

Some critics think that Occupy Wall Street is simply tapping into the public’s resentment and covetousness, nurturing class warfare. Sure, there’s a dollop of envy. But inequality is also a cancer on our national well-being.

I don’t know whether the Occupy Wall Street movement will survive once Zuccotti Park fills with snow and the novelty wears off. But I do hope that the protesters have lofted the issue of inequality onto our national agenda to stay — and to grapple with in the 2012 election year.