What Thatcher Didn't Understand: Inequality Hurts the Rich and Poor Alike

The conservative icon famously accused liberals of preferring to make the poor poorer if it made the rich less rich. Here's why that might not be a bad idea.
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In the aftermath of Margaret Thatcher's death this week, the television-watching public was treated to an incessant loop of her quip that the political left "would rather the poor were poorer, provided the rich were less rich." This rebuke was not, in fact, originally Thatcher's: conservative economist Milton Friedman fired off different versions of the attack throughout his influential career. But it did tidily sum up the argument Thatcher sold to the British public on her way to Downing Street.

The obvious problem with the statement is that it simply assumes left-wing policies can't improve the incomes of the poor. The cross-country data that we have generally suggest that they can and do.

But there is an even deeper flaw with Thatcher's barb. It presumes that nobody could ever seriously support making the poor poorer in order to make the rich less rich. Admittedly, the idea seems ridiculous on first glance. But there's substantial evidence that suggests inequality, in and of itself, generates a whole slew of social problems that are harmful to individual and collective wellbeing. It is therefore conceivable that policies that reduce inequality could be worth pursuing even if they leave everyone, the poor included, with less income than they would otherwise have.

In The Spirit Level, Richard Wilkinson and Kate Pickett draw upon decades of research to show that, among rich countries, high levels of inequality correlate with lower levels of social cohesion and social mobility, worse mental and physical health, and higher levels of crime, violence, drug use, and imprisonment. These problems do not merely afflict the poor. Rather, they touch people across the social spectrum. The implication is that large income gaps, by themselves, are significant contributors to these particular sources of human misery.

For example, residents of countries and American states with higher levels of income inequality are less likely to believe that most people can be trusted. There are a few reasons that might be the case. Yawning income gaps could cause communities to segregate along class lines, preventing the rich and poor from mingling. The wealthy might come to believe the poor just want to take their money. The poor might believe they're being exploited.

And indeed, social trust in America has declined over the past few decades in lockstep with our rising income inequality. We might personally experience this in simple, day-to-day ways. Think of walking down the street and worrying you might be mugged, or walking into work and assuming your boss will try to bilk you out of overtime pay. But it's also not hard to think of examples of how this has shaped our politics. Just recall conservatives railing against "takers" during the election, or Occupy protesters fuming against the rich. Americans up and down the social ladder believe others are out to get them.

Meanwhile, the data show that trust in others makes us feel more secure and cooperative, and are more likely to donate time and money to helping our communities. In short, widespread trust makes our lives more pleasant, and income inequality undermines it.

Inequality may also be driving our sky-high rates of depression and other mental illnesses. Wilkinson and Pickett draw on World Health Organization data to show that higer-inequality countries like the U.S., the UK, and Australia have double the rates of mental illness of lower-inequality societies like Japan, Belgium, and Germany. Additionally, anxiety-related disorders are a much larger percentage of mental illnesses in higher-inequality societies than lower-inequality societies.

This too has a very straightforward causal story: Members of high-inequality societies have to contend with status anxiety, among other issues. In such societies, the poor will suffer anxiety and depression over their especially low status and inability to acquire the material things associated with high-status individuals and success. The rich will suffer anxiety related to the possibility of losing their top spots: when the rungs of the ladder are far apart, you have a long way to fall. More than worries about themselves, the rich probably worry about their kids being able to out-compete others to capture a similarly remunerative spot in their future life, anxieties that have gotten so bad in some cases that rich parents even hold their kids back a year from kindergarten on the hopes that they will be more physically and mentally developed than their future classmates.

All of this is to say that there are non-material ways in which high levels of inequality diminish quality of life, for the poor especially, but even for middle and upper-income individuals. Distrust and mental illness are two prominent areas, but there are many others. It is easy to imagine, then, a scenario where a rich country like the U.S. may be willing to make the poor slightly poorer in order to make the rich dramatically less rich. Compressing the economic distribution has its own benefits, and those benefits could overwhelm the loss of well-being caused by everyone having less stuff. As it stands, we do not have to make this choice because it is possible to compress the economic distribution without making the poor poorer, and only making the rich less rich. But if we did, it wouldn't necessarily be unreasonable, no matter what Thatcher's ghost might say.

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Matt Bruenig writes on economics and politics at MattBruenig.com and for the Demos Policy Shop blog. 

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