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The Financial Express

Rising income and wealth inequality: A major political issue

| Updated: August 05, 2021 20:43:38


Rising income and wealth inequality: A major political issue

Income inequality has been on the rise over the last three decades, so also wealth inequality in developed economies, especially in the United States (US). The issue of income inequality has become the major economic debate now, so much so that it has become a major political issue.

In economic terms, income inequality is the very large disparity  in how income is distributed between individuals or groups or social classes within a country. The concept can be extended to make comparison between countries also.

Since the very beginning of the 1980s many economists in the US started to point out that income started to flow unequally to those at the top of the income spectrum. The situation since then has not changed, the most affluent Americans were becoming richer much faster than Americans of modest means who were not  gaining any increases in income.

This emerging trend in the early 1980s essentially  reversed the trend that had emerged in the post WWII US where incomes of Americans of modest means  grew appreciably faster than those of the most affluent Americans. And that was the beginning  of the emergence of the modern world's first mass middle class.

This huge middle class people were not rich but they were not poor either. They could afford a middle class life style which had many comforts and elements of "American dream". They had a comfortable and enjoyable life. This was in conformity with the notion of "American exceptionalism". It indeed  produced and sustained a huge middle class who could enjoy the "American dream".

Political leaders had every reason to celebrate such a development and could claim that the  country and the people were doing very well. But the data that started to emerge in the early 1980s kept telling a different story-- most Americans were not feeling  better off, rather feeling being squeezed. The situation has continued to worsen and seeing the wealthy revel in their good fortune makes it feel even worse. In the US, the share of the country's income earned by middle income households has fallen by 21 per cent in the last three decades, while it increased by 75 per cent among top income earners.

"The rich get richer, the poor gets poorer" is not just a cliché. The concept behind it is a theoretical process called "wealth concentration".  Newly created wealth, under certain conditions, gets concentrated in the hands of already wealthy individuals because people who are already wealthy have the resources to invest or leverage that for the further accumulation of wealth. This turns wealth concentration into a process to perpetuate income inequality if bold and vigorous policy initiatives by the state are not taken to counter it.

Instead what we see, the rich put huge chunks of money to work for them  politically to achieve desirable political outcomes for them. The rich have already done so through a combination of economic policy reorientation and garnering political support  for increased role for the private sector in the economy, even in the public domain.

Rising wealth confers political power and that has allowed the rich to further reward themselves such as tax cuts and by assigning private economic motives to the public domain such as in areas like health and education.  

Since the 1970s, neoliberal economic policies as favoured by the rich  has caused rolling back of state's role in the economy to the minimum thus giving the private sector the primacy to  run the economy. There is a growing feeling that the system is rigged against the poor which has serious implications for functioning of a democratic system of government.

Therefore, it is critical to understand how the pursuit of neo-liberal economic policy has greatly diminished state's control over private interests. Therefore, it is most unlikely that the problem of "money in politics" can simply be undone within a neoliberal economic  framework that has given rise to neoliberal politics or simply what can be described as neoliberalism.

Thomas Piketty in his book "Capital in the Twenty First  Century" shows that in every country, the wealth gap has widened since 1980. Piketty, in fact, holds the view that inequality will remain in place  as long as the aforementioned wealth concentration process persists through generations.

So it can be argued that until the political reach of the rich, or more precisely corporate power gained through their wealth accumulation  to withstand the political will of the people is broken, no durable gains could be made for the economically disadvantaged groups

The most commonly used measurement of income inequality or less commonly wealth inequality across a population is the Gini Index or Gini Coefficient.  It enables us to gauge overall economic inequality in a country. It was developed by the Italian statistician Corrado Gini in 1912. The simplicity of the co-efficient makes it very attractive to use. It summarises the distribution of income into a single number. It ranges from zero, which is a perfectly equal distribution,  to  one, where only one person has all the money.

In the US, the top 20 per cent of the population earned 51.9 per cent of all US income while the bottom 20 per cent only earned 3.1 per cent of income in 2019. The US Gini coefficient which measures income distribution was 0.484 in 2019 compared to 0.386 in 1968 indicating rising income inequality.

Simon Kuznets argues that as an economy develops, a natural cycle of economic inequality occurs. This can be graphically represented as an inverted "U" and called the Kuznets Curve. An inverted U curve infers that as an economy develops , inequality first increases, the decreases after a  certain level of average income is achieved.

But empirical evidence do not lend support to  the Kuznets hypothesis. In fact, in East Asian countries  as economies developed, absolute poverty decreased i.e. inequality decreased. Also, Joseph Stiglitz suggests that high economic growth provides resources to promote equality which then provides positive feedback for growth. Therefore, there is no inevitability that economic growth leads to income equality, which then promotes growth.

In the US, between 1979 and 20007, household income increased  by 275 per cent for the top 1 per cent  while the bottom 5 per cent increased only by 18 per cent during the same period. The situation got even worse in the Post Global Financial Crisis (GFC) 0f 2007-08 period. More importantly, real hourly wage in the US went up by 17 per cent between 1979-2019 while productivity rose over 72 per cent during the same period indicating massive surplus created by labour  that was appropriated by capital.

According to the IMF Blog (July 22, 2021), IMF found that global price markups (the ratio of a good or services price to its marginal cost of production) have increased by more than 30 per cent, on average, across listed firms in advanced economies since 1980.   Market concentration and profits have also risen.

The increased market concentration will have serious detrimental effect on consumer welfare. Also, corporations sell what they make and set the price, not the market. This is why they need to advertise what they make. There is no magic of "invisible hand" there, they are all very visible.

The post WWII economic recovery flattened out in the early 1970s. At the same time wages were flattening and stagflation was setting in, the dollar was delinked from the Gold Standard, the government imposed wage-price control and then further compounding the problem an international oil crisis also added to the woes of the time. The US witnessed the end of the "American Dream" as income inequality started to rise.

Rising income and wealth inequality is not confined to the US alone. Income inequality in other developed countries has been also rising over the last three decades. The average income of the richest 10 per cent of the population is about nine times that of the poorest 10 per cent, across the OECD up from seven times 25 years ago. Uncertainty and fear of social decline and exclusion have been worrying the middle classes in many OECD countries.

While strong economic growth has helped newly emerging economies to lift millions out of abject poverty, the benefits of economic growth has not been equitably shared in these countries and high levels of income inequality have risen further.

Bangladesh is now considered as one of the fasted growing economies in the  world. Bangladesh has had an annual GDP growth rate of over 6 per cent since 2011. The latest Household Income and Expenditure Survey (HIES) report  provides data indicating rising income inequality between 2010 and 2016 whereas during the same period the share of household income  of the lowest 5 per cent declined from 0.78 per cent to 0.23 per cent while the same for the top 5 per cent increased from 24.61 per cent to 27.89 per cent. There are sufficient reason to believe that the share of the income of  top 5 per cent has been underestimated as sizeable amount of income and wealth of these people are stashed away in overseas countries, therefore have not been taken into account of in the HIES report, 2016. 

Despite achieving such impressive growth performance, the Gini coefficient stood at 0.482 in 2016 showing an upward trend since the early 1990s coinciding with the period of sustained economic growth. It is estimated that the income share held by the lowest 10 per cent was 3.7 per cent while that of the highest 10 per cent was 42 per cent in 2018. During the same year the top 1 per cent accounted for 16 of national income. Working poor at PPP $3.20 a day  as % of total population constitutes  45 per cent.  This indicates that developing countries like Bangladesh are also  experiencing rising income inequality while reducing the incidence of extreme poverty. Indeed, rising income inequality has become a global phenomenon.

There are no plausible reasons to assume that economic growth leads to income inequality even in the presence of such evidence before us now. Economic growth and more prosperity do not always buy more political stability either. Rising income inequality has all the potential for fueling  social and political instability because of the unfulfilled expectations of  the economically backward segment of the population. 

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