The decision by General Electric to sell off its financial unit, GE Capital, is important, though not for the reasons many have been giving. General Electric focusing on manufacturing instead of lending represents one of the few retreats for creeping financialization – the transformation of every corporation into a banking and trading concern – in recent decades. More importantly, the positive market reaction to GE’s decision shows that Dodd-Frank, if anything, didn’t go far enough. If you can break up GE Capital without systemic disruption or loss of global competitiveness, you can break up the banks, too.
While much of the original research on inequality focused on how differences in income affected upward mobility (I covered that work extensively here), research has now also tackled the relationship between wealth and mobility. Gregory Clark, for example, findsthat wealth takes generations to dissipate. Meanwhile, W. Jean Yeung and Dalton Conleyfind that, “Liquid assets, particularly holdings in stocks or mutual funds, were positively associated with school-aged children’s test scores.” Another study, by Juan Rafael Morillas finds that the differences in earnings between black and white Americans “arises partly from the wealth inequality in assets ownership of blacks and whites.”
2) It decreases economic growth
The implications of stalling upward mobility have implications for economic growth. When inequality presses down on opportunity, many low-income people can’t fully develop their capacities. As Stephen Jay Gould once noted, “I am, somehow, less interested in the weight and convolutions of Einstein’s brain than in the near certainty that people of equal talent have lived and died in cotton fields and sweatshops.” Today, even in a wealthy country like America, millions of bright young children have their cognitive development stunted by poverty. Wealthy parents invest heavily in their children, while low income families have less to spend. Further, as Miles Corak notes, the United States funds education at the local level, meaning that wealthier kids go to better schools than low-income kids.
Inequality also undermines democracy. As some individuals become increasingly powerful, they may use that influence to shift the political system. As Theodore Rooseveltonce noted, “The absence of effective state, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase power.” As his cousin put it, “We know now that Government by organized money is just as dangerous as Government by organized mob.”
