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Inequality – the real issues

May 12, 2012

Published in ‘New Europe’, 13-19 May 2012, page 32

InequalityThe political agenda of President-elect François Hollande was broadly based on the promise to restore a more just distribution of income within French society, going to such extremes as to include a 75% taxation rate for high incomes, those exceeding one million euro per year. President Obama’s tax agenda includes similar, though not so provocative, provisions in order to finance his entitlement policies in favor of the poorer.

The fact is that fighting inequality, that is the “abnormal” distribution of income, wealth, and the burdens of financial crisis, has been a central theme in most western-European and US politics for some time now. Social movements such as “Occupy Wall Street”, “the 99 percent”, anti-globalization movements etc are in essence a more or less conscious attempt to denounce inequality.

Yet, so far, all the problematic about inequality was focused on the social side of the problem, stressing the moral aspects of income and wealth unbalanced distribution. The new element that has become predominant nowadays is that inequality is more often viewed as a purely macro-economic parameter. In-depth economic research, well publicized among others by former IMF’s chief economist Raghuram Rajan in his book Fault Lines, has shown that inequality is a serious impediment to growth. Growing concentration of income leads to the so-called “savings glut”, a situation reflecting the fact that the rich and the super-rich tend to save a larger part of their income, especially in ultra-conservative forms of investments such as treasury bonds, thus impairing effective demand.

Another aggravating factor is that income concentration is suspected to be the main cause of over-borrowing by lower and middle-income people, facilitated by policies of low interest rates, and easy consumer and housing credit. Pro-market economic policies, followed by most western governments over the last 30 years, have profoundly affected income and wealth distribution. According to Dean Baker, another well-known economist who researched the subject, a “massive upward redistribution of income” has started in the US since President Reagan’s time, due to policies that changed the before-tax distribution of income, not the reduction in tax rates on the wealthy. A set of policies was put in place in order to press downwards the lower and middle wages, before tax cuts affect the income distribution to the detriment of the poorer even further.

A quick look at some key statistics in the US confirms these trends. Corporate profits are at an all-time high; top ten percent earners are capturing a higher share of national income than they have anytime since the 30s; CEOs’ pay is the highest in 20 years. On the other hand, total tax to national income ratio is at its lowest since the early 80s and, what’s more, average hourly earnings in constant dollars (when inflation has been removed) are at the levels of the early 70s…

In this context, it’s not surprising that both households and governments had to borrow massively from the banking system and the markets in order to maintain and improve their standards of living, and their offer of public services, respectively. Hence, the present mountains of private and public debt, at national and international level.

According to this analysis, both the weak demand and the debt problems are not the consequence of some policy “mistake”, but rather the fruit of a long-term well-thought set of policies, meant to alter the distribution of income and wealth. After three decades of such policies, that date back to the Reagan-Thatcher era, the ensuing extreme inequality of income and wealth have caused a fundamental imbalance in western economies. Without addressing the inequality issue, it won’t be possible to stabilize the financial markets, and find a viable solution to the current mess.

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