THE SOCIAL COSTS OF INEQUALITY

...Seven of the 62 SMSAs I observed have greater than median equality and very low (under $10,000 a year median) family income...

...Second, the patient has next to no idea what it is that he wants, in terms of product...

...The traditional place of inegalitarian incentives in economic theory must be called into question...

...The doctor will treat the 100 most wounded for one half hour each for a fee of $1,000 per person...

...According to the basic model I drew, price should most exceed cost in the inegalitarian SMSAs since the relatively rich set the price for housing demand with their bids on the limited supply good...

...A 1965 study by the Kansas Blue Cross Association found that while populations were homogeneous there were three- to four-fold variations in surgical rates for the population of different areas, because there were large differences in the number of surgeons and hospital beds in the different regions...

...According to neoclassical economics and its philosophical derivatives, inequality as such is acceptable, as long as it also serves to raise the level of those at the bottom...

...The wheels of technical progress spin and, at Time II, each man finds himself with an income of $3,000...

...part of an administered supply is in 296 credible discretion over location by the suppliers...

...The stock of housing stays fixed even after the relatively rich bid up the price to maintain "their" space in times of population growth, and the poor have to squeeze together to match the bids of the rich for the remaining space...

...cient...

...For instance, milling grain or weaving clothes may not be a task for an Indian peasant...

...The ambiguous nature of health and the uncertain delivery of medical care cteate a situation akin to permanent excess demand, a situation requiring rationing...

...but they demand that the rates for the rich not have a disincentive effect that would increase equality at the cost of lower total national income...

...One might imagine that the general preference for housing is greater in the inegalitarian SMSAs and that the poor ratios of housing price to income and to cost are merely based on higher general demand rather than higher inequality and the associated housing bids of the relatively rich...

...Assume there have been two shipwrecks, each with 1,000 people and one doctor who can give 50 hours of medical care, to be distributed by economic criteria alone, in the week before the rescue ship comes...

...Equality of opportunity, then, depends on equality of condition as well as the elimination of poverty...

...Assume at Time I that there are two art lovers earning $1,000 a year, one (X) willing to spend his total income on the Rembrandt, the other (Y) willing to spend half...

...30 percent of the hospitals equipped to do closed heart surgery had no such cases in the year they were studied by the President's Commission on Heart Disease, Cancer, and Stroke...

...Consumption, it is acknowledged, has externalities or neighborhood effects...

...Within SMSAs as well, doctors will choose to go where the rich are: some ghetto areas of New York have less than 10 doctors per 100,000 people while the SMSA as a whole has well over 200...

...Dispersed job markets make expensive transportation part of the production cost for the poor worker who requires it for work...

...If the doctor says surgery, it is surgery...

...The corresponding mortality rates were 5.26 for the urban population and 3.94 for the rural...

...But there is still only one Rembrandt, and he is still outbid...

...In all fairness, neoclassicists do concede that there are some costs to inequality per se...

...The average lowermiddleclass male between the age of 20 and 45 experiences over a 20-year period approximately one life-endangering illness, 20 disabling illnesses, 200 nondisabling illnesses, and 1,000 symptomatic episodes: an average of one new episode every six days...

...The decision to see a doctor, then, is based in large part on a judgment of his potential effectiveness...

...In much the same way, hospitals have done very little to improve the quality of their community services—a 1970 New England Journal of Medicine study showedthat emergency-room care was effective in only 27 percent of cases—while they have overinvested in fancy, technologically advanced machines...

...The four poorest, extremely inegalitarian SMSAs (Albuquerque, Oklahoma City, Phoenix, and Tacoma), all with family incomes averaging under $10,000 a year, have a median of 179.7 physicians per 100,000 people, compared to 111.4 for the eight richest egalitarian SMSAs, all with median * All SMSA data exclude Southern SMSAs, which are universally far more inegalitarian, so I am always comparing Northern SMSAs to one another...

...More immediately, such policies as investment tax credits and accelerated depreciation, though clearly most beneficial to those at the top, are lauded because they lead to economic growth which, in turn, may raise the real income levels of the poorest members of society...

...But the fact is that of the four basic consumption items— housing, medical care, clothing and food— the first two partake, each in its own way, of this supply inflexibility, so that mass access to them is determined by the degree of inequality rather than the real levels of income...

...The vast overprescription of antibiotics that is frequently pointed to also reflects the fact that doctors feel they've got to give something to their many patients who come "not feeling well," but who have untreatable virus infections...

...Only one egalitarian SMSA had as high a housing value/income ratio as the median inegalitarian SMSA...

...Similarly, the median price-to-cost ratio in the fast-growing egalitarian SMSAs is 1.35 compared to 1.48 in the slow-growing inegalitarian ones...

...If we assume, just for argument now, that there is some good G in fixed supply which poor people are willing to spend a very large proportion of their income for, their ability to obtain the good depends upon the relative income (and preferences) of the richest class...

...Since the poor spend a higher proportion of their income on vital goods than do the rich, any change that raises their relative price hurts them (in much the same way as the superrich would be better off if the price of yachts dropped relative to bread, even if their income stayed the same...

...A Winter '72 Public Interest article, "Does Money Buy Happiness?," confirmed this bit of economic theory...

...The trade-offs between growth and equality must be weighted more toward equality, for the welfare cost of growing inequality may well outweight the gain of higher productivity...

...If, as I think is the case, the demand for medical services by the rich is limitless within conceivable supply constraints, an attempt by the poor to procure medical care by raising the proportion of their income they are willing to spend on medical care will merely cause further price inflation and higher doctor's incomes for the rich will simply up their bids to retain their share of medical care...

...All but the most rabidly Ayn Randist disciples urge that the government establish a "negative income tax" program to share some of the copiously growing income with the impoverished...

...Though the "poor" are richer in the second shipwreck, they are less able to obtain a good in fixed supply...

...Ordinarily, if MARK KELMAN five items costing $1 each are offered at Time I and there are five buyers willing to pay $10 (as well as a sixth willing to pay $9.99), the price will be $10, but production will increase immediately till demand = supply = cost, perhaps when there are 50 buyers and the 50th buyer is willing to pay only $1...

...But this "envy" explanation is not at all adequate...

...THE SOCIAL COSTS OF INEQUALITY Similarly, for 23 hospital regions in New York State, the urban population's appendectomy rate was 8.11 per 1,000, the rural population's 3.44 per 1,000...

...Even in the long run, housing is dependent on "locations" that are intrinsically somewhat scarce...

...For most radicals, the problem of poverty and the problem of inequality have been connected...

...For an ordinary good, demand functions are discrete and independent, i.e., one knows pretty well what one wants and what price one is willing to pay for it before one knows whether it is available at that price...

...The five fastest growing of the 17 egalitarian SMSAs all grew faster in the 1960s than the five slowest inegalitarian ones...

...It will argue against the proposition that growing inequality is perfectly acceptable as long as the real income of the poorest members of society is increased...

...Similarly, the higher population growth that characterizes the more inegalitarian SMSAs does not explain their poor performance...

...It's hardly fraud: the doctors are indeed doing the best they can in most cases...

...THE SOCIAL COSTS OF INEQUALITY In the extreme form I have presented, only totally nonhomogeneous collectors' items and Veblenesque goods (those whose rarity is the basis of their value) would be considered in completely inelastic supply, and these are hardly very important cases...

...In other words, merely raising everyone's in come level does not change anyone's satisfac tion with his economic lot...

...Doctors, taking advantage of consumer ignorance and uncertainty, sell their particular service whether it is needed or not...

...With any conceivable level of output expansion, demand will expand to exceed it...

...If increasing inequality raises the Gross National Product, they say, the lot of even the poorest can then be improved by some redistributivetaxation...

...In underdeveloped societies particularly, the use of vastly inegalitarian development schemes such as land consolidation must be looked at with great suspicion: not only will access to the many supply-inflexible goods in such societies be rationed in a more skewed direction but the destruction of the positive cultural underpinnings implicit in economic restructuring will be tremendously harmful...

...The problem, though, is that demand is not independent of supply...

...IVS upply inelasticity is a problem in other important markets as well...

...Class III respondents checked ten items less than 25 percent of the time and only three symptoms, all related to unexplained bleeding, were checked by more than half of the respondents...

...This increase in price will make food production unusually profitable and divert some of the society's resources into the production of food until its price drops down again to the lowest possible cost of production (including a "normal" rate of profit...

...Of the 62 Northern SMSAs that I checked, 34 diverged considerably from the median equality figures...

...If the poor cannot get such a good, their "income" is devalued...

...For a start, in purely economic terms, different infrastructures inflate the needs of the poor in increasingly rich societies so that those left out of growth are directly hurt...

...In a permanent excess demand market rural and ghetto areas simply cannot attract doctors...

...The mechanism by which doctors locate in areas where there are rich people to fill their practices is probably not direct: med-school graduates hardly check Gini indices of income equality...

...This view has for some time been under attack, with the result that the issue of equality has also seemed to fade...

...Antidemocratic political corruption grows out of the existence of inequality: both offering and accepting bribery is based on the expectation of becoming better off than your neighbors, not just "well off...

...Unless accompanied by a decline in inequality, a growth in real income for the poor would not necessarily procure more medical care for them: doctors would simply spend more time treating more abstruse, hopeless, or imaginary illnesses in more technically sophisticated ways in the enriched pockets of wealth...

...If we assume that education is an accreditation rather than a training process —i.e., if we assume that one needs a college degree not to be able to handle a businessman's job but to distinguish oneself from the multitude with mere high school degrees —then a growth of real income will not increase the poor's chance of getting the real output of schooling accreditation...

...The result of a market distribution of medical care in an inegalitarian setting is very simple: the poor can try to spend more of their income for medical services, but the rich will still get a disproportionate share of the doctors...

...While he would like to feel better, the patient has no idea what procedure should be employed...

...Likewise, the prescription of skin creams and antibiotics for acne by dermatologists, of various combinations of ups and downs for imprecisely diagnosed depression, and the ungodly speed with which a stomach ache is greeted with a GI series are all basically attempts to delude the rich into thinking that their untreatable diseases are being attended to...

...Similarly, rich egalitarian SMSAs have a 6.6 median and an average of 6.8—the poor inegalitarian SMSAs have a 6.9 median and a 7.8 average...

...While there is no perfect measure of the cost of building housing, permit valuations are fairly good since they account for land and construction costs...

...Yet the poor received, according to all measures, far better medical care in the latter two countries...

...This position is consistent with a fairly justified faith in consumer choice and a thoroughly foolish faith in the perfection of markets...

...In the second shipwreck, 90 percent of the passengers have $2,000, 10 percent have $50,000...

...While there is the mediating factor that the inegalitarian SMSAs are to some degree "regional" centers or sites of medical schools, the explanation seems insufficient: Detroit and Toledo, which fit the same bill but which are egalitarian, have 138.6 and 134.9 doctors per 100,000 people respectively...

...Most immediately, recognizing that America is an inegalitarian society, it requires us to abandon any "flat grants" strategy of dealing with poverty...

...More important, social relations and structures in poor societies may make perfectly acceptable certain activities that would be a burden in a rich society...

...Medical care is not like that at all, for two main reasons...

...In the case of education, I will be even sketchier...

...Estimates that one-third of hysterectomies are completely unnecessary prompt the common comment that the indications for the operation are two children and $400...

...All manner of inequality-producing economic arrangements are justified by this presumption, from incentive bonuses to entrepreneurial profits to interest on capital...

...but their neighborhoods are far more pleasant places for doctors who themselves are generally upper-middle-class in background...

...In some important sense, people are always sick...

...Both prices and utilization are extremely high though the supply of physicians in these towns is many, many times above any conceivable national level...

...It is a product of increases in hours worked and in productivity, an increase in the output of tangible goods and services...

...A check of the tele phone directory indicates that there are roughly 750 physicians per 100,000 inhabitants in Great Neck, more than five times the national average...

...If we give the poor, some money, they'll get what they want...

...Of our 17 extremely inegalitarian SMSAs, 11 have median incomes over $10,800, yet their median proportion of units with more than one person per room was far higher, 6.9 (the average was 8...

...While no good figures for prices or hours worked are available by neighborhoods, simple observation indicates that doctors in Great Neck or White Plains or Newton have no trouble filling their appointment books...

...Specialists generally provide high-cost, very high-price medical care for more uncertain diseases, while primary care tends to handle the more certain, cost-effective areas of medicine: antibiotics for infection, prenatal checkups for expectant mothers, treatment of injuries...

...Furthermore, construction itself is quite time-consuming...

...Extreme overcrowding, too, is related to inequality rather than levels of income, just as would be expected from my model...

...First, the demand for medical care is based more on "treatability," a supply factor, than on "disease...

...Since everyone is willing to spend high portions of her or his income to obtain medical care, a widening 293 spread of income will simply exclude the bottom portions of society from private medical care...

...In the 17 most inegalitarian SMSAs, the median value (price) of housing was 1.80 times the median family income (the MARK KELMAN average was 1.85) while in the 17 most egalitarian SMSAs, the median was 1.48 and the average 1.54...

...Radicals have failed to mount an ade quate counterattack on either of the two key assumptions the neoclassicists make...

...In 1931, fewer than 20 percent of physicians were engaged in specialty care...

...With no stream nearby, a washing machine becomes a necessity...

...The implications of this article, though, go much further than simply attacking the rapidly growing school of anti-interventionists, as important a task as that is...

...In the inegalitarian society, price is set by the price the rich can pay...

...People live with arthritis, backache, coughs, allergies because there is not much that can be done for them, just as they once lived with infectious diseases, tuberculosis, etc...

...All indications are that the presence of an unusually rich class does dramatically increase the price of housing as the relatively rich bid to hold on to housing for themselves and the poor must match their bids...

...it is fixed by demand...

...A relatively old but dependable study of an upstate New York city, Earl Koos's The Health of Regionville, divided the population into three socioeconomic classes and asked respondents which of a list of symptoms should be called to the attention of a doctor...

...In addition, housing supply expansion is dependent upon two key factors outside the housing market itself: credit rates and transport and infrastructure development...

...Whether they had a theory of the exploitation of the working class or a gut sense that price-gougers and sweat-shop operators stole the bread of the poor, radicals have long felt that many were badly off because a few were so well off...

...Man Y surmises that this income should give him his Rembrandt plus more clothes for his family...

...Even the slightly wounded will offer $5,000 for the doctor's time...

...Economists often explain this "neighborhood effect" in a most unflattering way: a textbook example is that a poor person with a black-and-white television set still feels deprived because he knows there are color television sets around...

...They can buy more years of schooling as their incomes rise but never so many as the relatively rich who, in an increasingly inegalitarian regime, continuously have even more to spend...

...The mainstream of economic thinking holds firmly to the notion that the only poverty program we need is a negative income tax...

...What is needed (short that is, of what is really needed, a restructuring of all property relations such that income is distributed more equally), is that government supersede the market and provide medical care, housing, and education according to nonmarket criteria...

...Since none of the "flat grants" people want to give the poor enough of rich folks' money to change the basic shape of the income-distribution curve, their efforts will be largely useless in getting the poor shelter, medical care, or economically rewarding eduTHE SOCIAL COSTS OF INEQUALITY cation...

...Not only can they give the doctors more money (for their vastly higher relative incomes permit them to outbid the poor even when they are willing to give only small portions of their income for treatment, i.e., when the ailment is particularly trivial...

...1) Are the "economic incentives" really necessary for overall economic growth—or are the in stitutions inegalitarian and hierarchical merely to maximize the income of the elite...

...for the "richer" yet relatively more deprived ghetto-dweIling American, a lack of money to buy processed food or clothes off the rack is quite a deprivation since making these items would scarcely fit into an urban culture...

...2) Does the well-being of the poor improve in proportion to their changing real income if the rich get disproportionately richer— or does inequality itself hurt the poor...

...What will occur, instead, is that the poor will obtain more of those goods that are in elastic supply and the visible paradoxes of American poverty will simply intensify: dilapidated units will have refrigerators and color TVs and the poor mother dying in childbirth because she never had a prenatal checkup will be buried in rather nice clothes...

...In one shipwreck, 90 percent of the victims have the same amount of money, say $1,000, and 10 percent have $1,999...

...Only two symptoms were checked as needing attention by less than 75 percent of Class I respondents...

...Once they are set up in rich areas, there is no reason to believe they cannot fill their time...

...The median proportion of units with more than one person per room in these SMSAs is 6.2 percent, the average 6.8...

...Such a process has gone on in all "free medical markets": in the late 1960s, America and Canada spent 8.2 and 9.7 percent respectively of GNP on health care, compared to 6 and 7.1 percent for nonmarket Britain and Sweden...

...by 1967, the figure was 61 percent...

...For example, unique goods, like an authentic signed Rembrandt, are in completely inelastic supply...

...Only 2 of 13 observations cross medians...

...nonetheless, the ratio of housing price to median family income is far lower (1.59 to 1.9) and there is overlap in only one of ten cases...

...The poor will obviously be able to get more of some services and 292 goods (that is, after all, what a rise in real income means), but they may not get more of all kinds of goods, and those goods from which they are excluded may be among the most important...

...Even if you do look around, most doctors, as a result, tell you to do what your doctor says, because the state of medical technology is generally so uncertain that only missionaries and fanatics are particularly sure of their own opinion in complex or chronic cases...

...Deferential behavior, and an associated dehumanization and loss of self-esteem, clearly arises from discrepancies in economic position rather than from a lack of goods or from poverty...

...it will remain as far above cost as the demand price for the number of available goods...

...Housing supply is extremely inelastic in the short run as leases preclude immediate unit subdivision and zoning laws and small landholders unwilling to sell hold up density changes by blocking multiple dwellings...

...And though people pay for a great deal of medical care for certain kinds of cancer, heart disease, 294 and nerve disorders, they're not buying anything but reassurance that all was done that could be...

...This is simply not true, though: the median vacancy rate in the egalitarian SMSAs is 1.26 percent of units compared to 1.41 in the inegalitarian SMSAs...

...THE FACT that obtaining medical care, housing, and education requires not only a change in real income levels but a narrowing of inequality has many implications...

...I will draw the case in detail for medical care, and suggest outlines for a similar case in the housing and education markets...

...Confiscatory taxation at the top, then, would probably have good effects even if the money were burned rather than spent on meaningful social programs...

...Since there is only a given, fixed amount of food in the stores at a single point in time, they will bid up the price on this existing stock of food...

...While space limitations preclude a full detailing of the process, suffice it to say that inelasticity has roughly the same results in housing as were outlined in the case of the unique Rembrandt: i.e., the relatively poor get squeezed out even if they get richer...

...The neoclassicists also attack the goal of equality by hexing it with their worst curse: it is inefficient...

...While there is a considerable time lag in the first and most vital of these methods, because of the long training period involved (if one wanted to double the total supply of physicians by 1990, one would now have to increase the size of medicalschool entering classes by 400 percent) there is every reason to believe that, on the supply side, the medical market is relatively "normal," i.e., entry is induced by excess profits...

...For ordinary items like food, the process by which economic growth leads to the procurement of goods can be described quite simply: with their additional income, people go to the store to buy food...

...If we say that people in the poorest class have experienced a real income growth from, say, $1,000 to $2,000 a year, we mean that they can consume twice as many goods of identical quality or twice as many hours of equally efficient service...

...This essay will concentrate on the second of these questions, presuming, solely for the sake of argument, that "economic incentives" are necessary to growth...

...Although the relatively well off seem to express satisfaction in all manner of public opinion polls and psychological tests, there seems to be no evidence that people get happier as a society gets richer or that people were happier in richer societies than in poorer ones...

...Tonsillectomies, costing $150 million and 300 lives a year, are generally considered worthless...

...MARK KELMAN incomes over $11,000...

...More clothes, yes, but no more Rembrandts...

...In an egalitarian society, the good is rationed according to a preference based on need, i.e., the severity of the disease...

...Supply can be raised through an increase in the number of doctors, longer working hours for current practitioners, and wider use of paraprofessionals...

...If the supply is fixed at five, though, the price will remain at $10...

...If you've got a lot of money and you're sick, trying anything is not always a bad idea...

...The real income of the American poor has shot up since the Depression, yet there seems to be little reason to believe that their access to medical care has increased significantly...

...But I am most interested here in pursuing a pointthat is vehemently denied in neoclassical theory: that a real growth in income for the poor may not even enable them to obtain more of some of the most essential goods if there is a concurrent increase in income inequality...

...If you and I both consume more goods but I continue to consume less' than you, I may feel no better off...

...When demand exceeds supply, two rationing systems 'are possible in the market...

...Shopping around" is not very relevant in medical practice: it is far too expensive, time-consuming, and often impossible to elicit a number of opinions—besides, the consumer couldn't judge among them anyway...

...The 100 most injured are willing to give all their money for treatment, the next 800 are willing to give 50 percent, and the last 100, who are slightly wounded, 10 percent...

...THE SUPPLIERS' MARKET response to this uncertain demand is simple: establish practices where there are rich people and sell them as much medical care as you care to provide...

...III N o serious observer could claim that the supply of medical care is constant...

...If development has very uneven economic benefits, it may well be destructive...

...But research grants, expensive machinery at hospitals, and "nice" neighborhoods where doctors live are all more likely to be found in inegalitarian SMSAs...

...The rich simply learn to go to the doctor for symptoms the poor would ignore...

...This is in fact the case: the median ratio of housing value (price) to permit valuations (cost) is 1.43 for inegalitarian SMSAs and 1.08 for the egalitarian ones...

...While the number of physicians has doubled since 1931, the absolute number engaged in primary care has declined...

...And, on the part of the patients, it's not stupidity but reasonable risk-taking...

...What occurred was that the expansion of medical-care supply resulted not so much in an expansion of patient visits as in an expansion of the "quality" of care—i.e., of costliness of care for the rich...

...We could certainly get a lot, but we couldn't get very much satisfaction...

...What is economic growth...

...For goods in totally inelastic supply, price is not fixed by supply cost, even in the long run...

...it is as if we were given $10,000 but allowed to spend it only in a store selling bubble gum...

...But for certain goods this process could not occur...

...The pattern of the medical market in the United States today fits this model appallingly well: • According to the 1970 Census, egalitarian Standard Metropolitan Statistical Areas (SMSAs) have a higher median family income than inegalitarian ones ($10,800 to $10,500), but in 44 of 59 cases,* abovemedian egalitarianism is associated with below-median physician supply (doctors per 100,000 population) and below-median egalitarianism with above-median physician supply...

...When one gets older, it gets worse: as the body ages and chronic disease arises, there is hardly a moment when every part of the body feels perfectly fine...

...Altogether, when one considers the social costs of inequality and an inegalitarian economic system—in terms of alienation of the lower classes from the society at large, crass materialism, and cut-throat competitiveness —and then realizes that its immediate economic costs are quite substantial as well, a commitment to egalitarianism becomes an urgent commitment...

...El 298 MARK KELMAN...

...Some neoclassicists would also concede that there are sociopolitical costs to inequality as such...

...Assuming injury is distributed randomly so that 90 of the most injured are relatively poor, the richest 10 percent will still be the only ones treated since they will all outbid even those "poor" willing to spend 100 percent of their income...