Inequality: Getting Better, Getting Worse
Income inequality is on the minds of everyone from Pope Francis and Ban Ki-moon, to Janet Yellen, Economist Thomas Picketty, the World Economic Forum, and alumni of the Harvard Business School, to name just a few. A slow-moving recovery from the 2008-2009 recession has brought into focus the uneven distribution of the benefits of the global economy.
Changes in equality are not all in a negative direction: As a new study prepared for the Peterson Institute for International Economics reports, on a global perspective income equality is improving, even as inequality within many countries is increasing. The study notes that the reason this is possible “is that rapid income growth among substantial segments of the population in places like China, India, and even in sub-Saharan Africa will tend to reduce global inequality, at the same time that it increases inequality within these countries.” (See “The Future of Worldwide Income Distribution”)
The causes of rising inequality are many and varied, but are interrelated. A list, compiled from a recent book by Joseph E. Stiglitz titled The Great Divide, and a current on-line course by Professor Mauro Guillen of the Wharton School titled Analyzing Global Trends for Business and Society, includes the following:
- Technological change – many middle-class jobs have been replaced by advancing technology, while demand for highly educated workers has increased
- Growth of the service sector – high-paid manufacturing jobs replaced by jobs of varied skill levels and pay rates
- Globalization – less-skilled jobs moved from expensive workers in developed countries to cheaper workers in developing countries, increasing inequality in the former and decreasing inequality in the latter
- Decline of unions which at one time represented a third of American workers
- Austerity measures have cut programs that protect the unemployed, as well as children and elderly
- Tax policy eliminated the highest tax rates and provided lower tax rates for unearned income
- Lower tax rates for higher incomes translates into higher savings and greater wealth over time
An article in the September 2011 issue of Finance & Development by Branko Milanovic, lead economist of the World Bank research group, suggests that income inequality can become self-perpetuating. In the article, titled More or Less, Milanovic states “failure to redistribute income may also reflect a political reality – that the rich wield a disproportional influence over policy because they are more politically active and contribute more to politicians than their less affluent counterparts.” He concludes, “Political decisions would then coincide much more with the preferences of the rich,” moving political systems closer to “’one dollar, one vote,’ from the more traditional ‘one person, one vote’ model.”
Stiglitz offers that this trend is not in the best interests of the rich. “Widely unequal societies,” he writes, do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole of society.”
Stiglitz believes that “insufficient aggregate demand is the major source of global weakness today.” His solution is creating jobs in education, technology, and infrastructure, which in turn create demand for goods and services and thus more jobs. Writing in a 2011 article in Politico, he wrote that “remarkably low long-term interest rates” provide the opportunity for these public investments.