Inequality: The next big thing

Before, when economists talked about inequality, they meant it in a global sense. There was the prosperous ‘North’ and the developing ‘South’ and a clear gap existed between the two. What worried economists was not only the size of the gap, but the fact that it was continuing to grow, despite their sure-fire belief that globalisation would lead to prosperity for all. This is still true today. While the 08’ recession no doubt halted the progress of the rich world, it still enjoys a comfortable lead over its southern counterparts. While it is true to some extent that the developing world has made considerable gains, this is mainly the result of the rise of China and south-east Asia. Take the growth rate in sub-saharan Africa instead, and its people will not halve extreme poverty until well into the next century. This is unacceptable and a proper coordinated international action must be taken in order to lift these countries from their destitution.

However, the debate regarding inequality nowadays  now takes on a much more internal tone. More and more people are becoming aware of the extreme income inequality within their own countries and it is making them incredibly angry. This is what fuelled the Occupy movements and to a lesser extent, the Tea Party. This is why the top rated documentary on Netflix is Inequality for All,a fantastic report  by former Clinton advisor Robert Reich. Books which attempt to explain inequality, such as Joseph Stiglitz’s The Price of Inequality or more recently Thomas Piketty’s Capital in the 21^st Century are bestsellers. Piketty’s work in particular has become a runaway success, such that he has been dubbed both a ‘Rock-Star economist’ and a ‘Modern Marx’. Both books and indeed, the documentary argue that while in the immediate post-war years there was very  much an egalitarian society, in recent decades inequality has soared. As the rich become richer, they use their wealth to influence or ‘lobby’ politics, government and the rule of law. They fear the rise of an oligarchy society, with the rich on one side, the poor on the other, and zero possibility of progressing between the two.

How justified is this view? The short answer is very. Take the United States for example, the so-called ‘land of opportunity’. Starting from around 1980, income concentration in the top 1 per cent skyrocketed, to its now mammoth proportions. For the last 35 years, the vast majority of the income increases have gone to this tiny fraction of Americans. While middle-incomes have stagnated, the wealthy have more than quadrupled their share of national wealth. From 2009-2012, they captured almost 95% of the new income that was created.  Fortune 500 companies top executives went from being paid an average of 42 times their normal workers pay to a staggering 344 times. The USA now has the highest density of dollar billionaires relative to the population, a typical red flag that something is amiss. In his book Piketty goes further and argues that it is total wealth which should be the key concern. Segregated communities have been appearing again in  the United States, but this time they are not between black and white but rich and poor. As inequality has risen, social mobility has plummeted, while the incarcerated population has soared. Even the UK, with its aristocracy, cannot match the huge gap in income inequality which now exists in America today.

What are the causes of this dramatic surge in inequality? While there are various theories, each with their own merit, there are two in particular which stand out. The first, and most obvious cause, is the Reagan era tax cuts. By taxing the highest levels of income at the phenomenally low rates, it allows the rich to use their wealth to generate more income for themselves. As they gain more income, they gain more wealth and so on until you are left with an incredibly small, yet extraordinarily wealthy class of people. To prevent this, governments should tax income at progressive levels, and use it to create a more equal society. Yet because the wealthy no this will happen, they use their money to ensure that politicians favourable to their cause are elected. Lobbyists have become a huge industry in Washington, and exist mainly to ensure that elected officials do the bidding of the wealthy, who in turn will ensure they are re-elected. Piketty, while agreeing that tax cuts have had a significant impact on the distribution of wealth, also shows that such levels of inequality are natural to a capitalist society. For the entirety of the 19^th century, income inequality was at the levels we now see today. It took the combined triple-shock of two world wars and the Great depression, combined with high levels of inflation to erode the riches of the wealthy and create a more egalitarian society. The inequality we see today has much to do with capitalism recovering, and returning to its natural order.

The solution? Both argue for higher rates of taxes on the wealthy. This is only fair, as is the closing of loopholes which allow the rich to pay capital gains levels of tax, leading to the absurd situation of venture capitalist Warren Buffett paying a lower rate of tax than his secretary. Yet Americans are so violently opposed to new taxes that it is questionable as to how feasible this solution really is.

Karl Marx, the father of Communism, believed that Capitalism would ultimately fail because it would lead to such extreme levels of inequality that the working classes would rise up and revolt. This happened in Russia in 1920 and across the world after the end of WW2. Is such a revolution likely today? Democratically elected politicians should be a safeguard against this, but Americans have lost so much faith in their useless representatives that they will sooner or later look for alternative methods. The top 1% will no doubt balk at the idea that their fortunes are responsible for much of America’s problems today. There have always been those who are rich and those who are poor, and that is simply a fact of life. This is true, but it misses the point. Yes there are rich people and poor people. But there are rich people because there are poor people.