Wednesday, October 17, 2012

A progressive agenda to tackle inequality

Rising inequality is a matter of common concern not only for policy makers, but for  citizens. Protests are proliferating against social injustice to get their fair share. The 'Occupy Wall street' initiative is against the domination of the 1% super-rich, which hold a growing fraction of US national income. 

The OECD warned against the danger of high inequality in western societies  which have to cope with mass unemployment and weak prospects of growth . Now the Economist relaunches the debate on how to tackle inequality. This is a summary of their analysis: 

"The twin forces of globalisation and technical innovation have actually narrowed inequality globally, as poorer countries catch up with richer ones. But within many countries income gaps have widened. More than two-thirds of the world’s people live in countries where income disparities have risen since 1980, often to a startling degree. In America the share of national income going to the top 0.01% (some 16,000 families) has risen from just over 1% in 1980 to almost 5% now—an even bigger slice than the top 0.01% got in the Gilded Age".


The issue is that too much inequality is inefficient as it reflects both market and government failures and reduces growth potential, as (human) resources are not utilized fully or in an optimal way. Therefore, it calls for a reform agenda to reduce income disparities, which is less about higher taxes than " attacking cronyism and investing in the young", in particular through rebalancing of government spending. This is what the Economist calls “True Progressivism”.

It is true that in most countries ((except the US) government spending is an important tool for combating inequality. The reason is that it ensures equality of opportunity for citizens, in the sense of Rawls' conception of equity which is based essentially on an equality of means, i.e. freedom, rights, income, wealth  and primary goods, rather than an equality of outcomes. As Stiglitz argues in his last book ("The price of inequality), the US is where income gaps are biggest and have increased fastest, putting in question the principle of equality of opportunity.  

Globalisation has reduced the space for redistribution and has put considerable   pressure on wages. Austerity policies have introduced further cuts in social spending, even in basic services. The result is that they create more inequality  as shown by recent experience in Greece, Spain, Portugal and Italy. 

Governments have the responsibility to promote to a large measure equality of opportunity (and possibly of outcomes). This can be done by attacking special privileges or vested interests but this is not enough. The main task is to  create  jobs for everyone as this is the main foundation of our democracies. Subsequently, a reform tax can be achieved to introduce more equity in the distribution of incomes. Higher taxes on the rich could be a way to finance income redistribution for lower income groups and help demand stimulation. In fine, effective redistribution policies  can be achieved by focusing on education, training and healthcare in order to make workers more productive and citizens more protected. There is no real justification to dismantle the welfare State; instead, there should be incentives to make it more equitable and efficient. 

So far, policy responses have been weak and timid. Last year in a speech at Osawatomie, Obama called inequality "the defining issue of our time". It is time to act urgently with bold initiatives. 

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