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Recent trends in Income Inequality


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Literature review and summary of recent publications, blogs and reports. Delivered July 3 2014, At University of Novi Sad Conference: The Socio-Economic Aspects of Inequality.

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Recent trends in Income Inequality

  2. 2. EXTREME INEQUALITIES OF WEALTH & OPPORTUNITY ARE BARRIERS TO HUMAN DEVELOPMENT Failure to mitigate extreme inequalities and to redress the power relationships that perpetuate those inequalities will compromise our ability to rise to the great moral challenges of our day – challenges like the eradication of hunger and extreme poverty, avoidable child mortality, illiteracy and climate change. Kevin Watkins, “Inequality as a barrier to human development”
  3. 3. ECONOMIC INCLUSION & FINANCIAL INTEGRITY—AN ADDRESS TO THE CONFERENCE ON INCLUSIVE CAPITALISM BY CHRISTINE LAGARDE, MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND, LONDON, MAY 27, 2014 • If so, what would the attributes of inclusive capitalism be? • Trust, opportunity, rewards for all within a market economy—allowing everyone’s talents to flourish. Certainly, that is the vision. • Most recently, however, capitalism has been characterized by “excess”—in risk- taking, leverage, opacity, complexity, and compensation. • It led to massive destruction of value. It has also been associated with high unemployment, rising social tensions, and growing political disillusion – all of this happening in the wake of the Great Recession.
  4. 4. ECONOMIC INCLUSION & FINANCIAL INTEGRITY BY CHRISTINE LAGARDE, MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND, LONDON, MAY 27, 2014 • One of the main casualties has been trust—in leaders, in institutions, in the free-market system itself. • This is a wakeup call. Trust is the lifeblood of the modern business economy. • So the big question is: how can we restore and sustain trust? • First and foremost, by making sure that growth is more inclusive and that the rules of the game lead to a level playing field—favoring the many, not just the few; prizing broad participation over narrow patronage.
  5. 5. ECONOMIC INCLUSION & FINANCIAL INTEGRITY BY CHRISTINE LAGARDE, MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND, LONDON, MAY 27, 2014 • By making capitalism more inclusive, we make capitalism more effective, and possibly more sustainable. • Let me begin with economic inclusion. One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy. • The facts are familiar. Since 1980, the richest 1 percent increased their share of income in 24 out of 26 countries for which we have data. • In the US, the share of income taken home by the top one percent more than doubled since the 1980s, returning to where it was on the eve of the Great Depression. • In the UK, France, and Germany, the share of private capital in national income is now back to levels last seen almost a century ago. • The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population– that is 3.5 billion people.
  6. 6. ECONOMIC INCLUSION & FINANCIAL INTEGRITY BY CHRISTINE LAGARDE, MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND, LONDON, MAY 27, 2014 • With facts like these, it is no wonder that rising inequality has risen to the top of the agenda—not only among groups normally focused on social justice, but also increasingly among politicians, central bankers, and business leaders. • Fundamentally, excessive inequality makes capitalism less inclusive. It hinders people from participating fully and developing their potential. • A greater concentration of wealth could—if unchecked—even undermine the principles of meritocracy and democracy. • It could undermine the principle of equal rights proclaimed in the 1948 Universal Declaration of Human Rights. • It is therefore not surprising that IMF research—which looked at 173 countries over the last 50 years—found that more unequal countries tend to have lower and less durable economic growth.
  7. 7. ECONOMIC INCLUSION & FINANCIAL INTEGRITY BY CHRISTINE LAGARDE, MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND, LONDON, MAY 27, 2014 • So much for the diagnosis—what can be done about it? • We found that, in general, fiscal policies have a good record of reducing social disparities—for example, transfers and income taxes have been able to reduce inequality by about a third, on average, among the advanced economies. • Some potentially beneficial options can include making income tax systems more progressive without being excessive; making greater use of property taxes; expanding access to education and health; and relying more on active labor market programs and in-work social benefits. • But we must recognize that reducing inequality is not easy. Redistributive policies always produce winners and losers. • Yet if we want capitalism to do its job—enabling as many people as possible to participate and benefit from the economy—then it needs to be more inclusive. • That means addressing extreme income disparity.
  8. 8. INEQUALITY IS NOT INEVITABLE: NEW YORK TIMES SERIES. JUNE 27 2014. • The current brand of capitalism is an ersatz capitalism. • For proof of this go back to the response to the Great Recession, where we socialized losses, even as we privatized gains. • Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits. • CEO’s receive incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.
  9. 9. INEQUALITY IS NOT INEVITABLE: • The American political system is overrun by money. • Economic inequality translates into political inequality, and political inequality yields increasing economic inequality. • Wealth-holders keep their after-tax rate of return high relative to economic growth. How do they do this? • By designing the rules of the game to ensure this outcome; that is, through politics. • Justice has become a commodity, affordable to only a few.
  10. 10. INEQUALITY IS NOT INEVITABLE: • More than a half-century ago, America led the way in advocating for the Universal Declaration of Human Rights, adopted by the United Nations in 1948. • Today, access to health care is among the most universally accepted rights, at least in the advanced countries. • America, despite the implementation of the Affordable Care Act, is the exception. • It has become a country with great divides in access to health care, life expectancy and health status.
  11. 11. INEQUALITY IS NOT INEVITABLE: • We need not just a new war on poverty but a war to protect the middle class. • Solutions to these problems do not have to be new. Far from it. • Making markets act like markets (with necessary regulation) would be a good place to start. • The problem of inequality is not so much a matter of technical economics. • It’s really a problem of practical politics. • Ensuring that those at the top pay their fair share of taxes — ending the special privileges of speculators, corporations and the rich — is both pragmatic and fair.
  12. 12. • Some inequality of income and wealth is inevitable, if not necessary. If an economy is to function well, people need incentives to work hard and innovate. • The pertinent question is not whether income and wealth inequality is good or bad. It is at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy. • We are near or have already reached that tipping point. As French economist Thomas Piketty shows beyond doubt in his “Capital in the Twenty-First Century,” we are heading back to levels of inequality not seen since the Gilded Age of the late 19th century. The dysfunctions of our economy and politics are not self-correcting when it comes to inequality. HOW TO SHRINK INEQUALITY ROBERT REICH MAY 12, 2014
  13. 13. HOW TO SHRINK INEQUALITY SOLUTIONS (FOR THE US AT LEAST) • 1) Make work pay. • 2) Unionize low-wage workers. • 3) Invest in education. • 4) Invest in infrastructure. • 5) Pay for these investments with higher taxes on the wealthy. • 6) Make the payroll tax progressive. • 7) Raise the estate tax. • 8) Constrain Wall Street. • 9) Give all Americans a share in future economic gains. • 10) Get big money out of politics.
  14. 14. ADDRESSING INEQUALITY (U.N. INEQUALITY MATTERS: REPORT OF THE WORLD SOCIAL SITUATION 2013) • A. Universalism in the provision of social services • B. Reducing social exclusion and intergenerational disadvantage • C. Social protection • D. Investing in education and strengthening labour-market institutions • E. Fiscal and monetary policies to reduce inequality • F. Creating more and better-paying jobs • G. Reducing asset inequalities
  15. 15. THE POLITICS OF EXTREME INEQUALITY • Part of the rise in the inequalities can be traced back to the economic, financial and technological forces behind globalization. The development of global production systems and markets has expanded opportunities for wealth creation. International trade and new technologies are reconfiguring labour markets. We are witnessing on an international scale what the economist Jan Tinbergen once described as the primary engine of wage inequality – a ‘race between education and technology.’ • From the United States to Kenya, India and China the losers in that race are falling further behind. • But powerful as the economic and technological forces may be, it is politics that creates the environment for rising – or falling – inequality. Highly unequal societies are good at reproducing themselves. More accurately, perhaps, the political and commercial elites that hold sway in those societies are adept at pursuing their own interests with scant regard for the public good – and still less regard for the marginalized. Kevin Watkins, “Inequality as a barrier to human development”
  16. 16. • One of the most heartening developments in recent years has been the broad progress in human development of many developing countries and their emergence onto the global stage: the “rise of the South”. • This growing diversity in voice and power is challenging the principles that have guided policymakers and driven the major post–Second World War institutions. • Stronger voices from the South are demanding more-representative frameworks of international governance that embody the principles of democracy and equity. HUMAN DEVELOPMENT REPORT 2013: THE RISE OF THE SOUTH
  17. 17. CONCLUSIONS • Income inequality is more of a political issue than a purely economic one. • The current form of capitalism is broken and skewed to inequality. • Some forms of regulation & income redistribution (within countries and between countries) is required to balance the extremes of unfettered capitalism. • The general consensus is the situation is dire, but can be fixed with some political will and the adoption of longer term thinking.
  18. 18. MAIN SOURCES
  19. 19. MAIN SOURCES Overseas Development Institute, 203 Blackfriars Road, London SE1 8NJ
  20. 20. THANK YOU Rick Frank Dufferin Research Ottawa, Canada Novi Sad, Serbia