There is a debate among sociologists, political scientists and economists on whether or not absolute wealth or relative wealth is more important. There seems to be a trend recently that happiness is linked more to relative wealth than absolute wealth. The number of people who say they are happy has not gone up with a rise in standard of living, and in fact it may have even come down. Also, a paper in the journal Science last year reported that activation in brain areas related to reward responded more to relative differences in wealth than absolute amounts. I recall reading an article recently about Silicon Valley millionaires feeling poor and unsatisfied because of the billionaires in their neighbourhood. There was a difference between being rich and being “plane”-rich.
However, the current economic turmoil is uncovering a more complex (or maybe obvious) interaction at play. The anti-correlation between the performance of the economy and the likelihood of a Democratic US president seems to indicate that there is a threshold effect for wealth. Happiness does not go up appreciably above this threshold but certainly goes down a great deal below it. For people above this threshold, other factors start to play a role in their political decisions and sense of well being. However, when you are below this threshold then the economy is the dominant issue.
This may be why the growth of income disparity did not create that much outcry over the past decade or so. When the majority of the population was above their wealth comfort threshold, they didn’t particularly care about the new gilded age since the rich were largely isolated from them. It mostly caused unease among the rich that weren’t keeping up with the super-rich. However, when the majority finally fell below their comfort threshold, the backlash came loud and strong. Suddenly, everyone was a populist. However, when (if?) the economy rights itself again then this regulatory fervor will subside in kind. The general public will tune out once again and the forces that pushed for policies favourable to unequal growth will dominate the political discourse.
The system may always be inherently unstable. Suppose that fervor for political activism and where you sit on the left-right divide are uncorrelated but have approximately equal representation. We can then divide people into four types – Active/Left, Active/Right, Nonactive/Left and Nonactive/Right. Also assume that when the economy is doing poorly, all the left are motivated but when the economy is doing well then all the right are motivated. A graph in the New York times yesterday showed that stock market growth was higher when democrats are in office, even when you don’t count Herbert Hoover, who was in power during the crash of 1929. So let’s assume that when the left is in power there is more total economic growth and less income disparity and when the right is in power there is less total growth but more income disparity. The nonactive fractions of the left and right determine the policy. When things are going well in the economy, the Nonactive/Left relax but the Nonactive/Right become motivated. Thus we have half the population pushing for more right leaning policies countered by only a quarter of the population, namely the Active/Left. This then leads to the right attaining power resulting in a widening of income disparity. When enough people fall below the wealth threshold, the Nonactive/Left become engaged while the Nonactive/Right disengages, which then allows the Left to come back into power. The interesting things is that the only way to break this cycle is for the right to enact policies that keep everyone above threshold. For the other stable fixed point, namely left wing policies failing completely and keeping everyone down would eventually lead to a breakdown of the system.