Sunday, March 18, 2012

Paying for inequality

Inequality in the capitalist world today is striking and immoral. We have the greatest social inequality since the 30s. In a recent report, OECD warns about the danger of rising inequality and its social costs. But let's be clear, the rise in inequality has largely been the product of neo-liberal policies pursued during more than three decades.

The facts about inequality are undisputed. Since the mid-70s, income inequality (among working age people) has risen fast. Using a standard inequality measure, the report points out that the wealthiest 10% of the population have incomes 12 times greater than the  poorest 10% up from eight times greater than 1985.  This trend is especially pronounced in Britain, where the dramatic rise in inequality has been fuelled by the creation of a super-rich class. The share of the top 1% of income earners increased from 7.1% in 1970 to 14.3% in 2005 . Even in countries viewed as more 'egalitarian' - such as Germany, Denmark and Sweden, the income gap between rich and poor is expanding from five to one in the 80s to osix to one today. In the rising powers of Brazil, Russia, India and China, the ratio has reached 50 to one ! 

Here is a chart which shows the rising trend of inequality in OECD countries: 

Some argued that inequality has contributed to the crisis. Redistribution from the poorer, who spend almost all their income to the richer who spend a much smaller fraction of their income and save more reduces aggregate demand. This happens when resources are redistributed from households with credit constraints to those not having similar constraints or much less. This has generated low interest rate policies and triggered increases in household debt beyond sustainable levels. In parallel, the search for high returns by investors with  growing incomes has contributed to the formation of asset-price bubbles. High and increasing inequality could have fueled the economic instability. This means that a very large part of the inequality increase has come from the financial services. 

On the other hand, national budgets have become less redistributive and less benefits were given to the poor; instead more fiscal bonuses went to the rich . The effect has been a dramatic weakening of the State's ability to increase the society's welfare. As the OECD points out, the tax benefit system cannot offset the rise in income inequality. There are sweeping consequences for the rich societies with a rash of occupations and protests, especially for the young people around the world. But the paradox is that such legitimate protests are not grounded in popular support. 
The OECD is not a dangerous, radical left wing organization; its mission is to promote a free market system. But it warns against the excesses of capitalism and it expresses a general concern about inequality about  as a factor of social disruption and the risk of disappearing middle classes. Who will pay for these social costs?

In fact, the OECD calls for a series of measures focusing on job creation, increased redistribution and free access to high quality public services in education, health and family care. While agreeing that fiscal consolidation is important, it wants to see governments increasing, or least maintaining social investments instead of cutting them.

The need to redistribute more equally is the most urgent priority for our societies. The problem is not to have a new kind of compassionate capitalism. Milton Friedman, probably the most reactionary and cynical economist,  said that deflation could be fought by "dropping money out of a helicopter". In other words, if the poor want money, let's give them money! The real issue is about human dignity - the greatest inequality is youth unemployment which means sacrificing an entire generation which does not know what a job actually means. Mala tempora currunt ! .

P.S: There is a wide ranging debate about inequality among economists and politicians. One way of looking at the issue is in terms of trade off between equality and efficiency  and the possible range of outcomes as in the Okun's law. I found a book published in 1994 whose title is 'paying for inequality - the economic cost of social injustice" which contains interesting ideas. Interestingly, it was edited by Andrew Glyn and David Miliband, the current Labour leader's brother ! 

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