Equal in name, unequal in income

Income inequality has risen sharply since the 1970s in most advanced economies around the world and has been blamed for increasingly polarised politics. While growth powered ahead in the second half of the 20th century, and resumed more fitfully after the 2008-09 financial crisis, there have been major winners and losers from the wealth generated.

Sir Angus Deaton, the Nobel prize-winning economist, says: “There is this feeling that contemporary capitalism is not working for everybody.” There are a host of causes, including fiscal policy, technology, globalisation, deregulation, education, emasculation of trade unions and austerity.

The COVID-19 pandemic has exacerbated the problem: more than 3.1 million deaths and rising, 120 million people pushed into extreme poverty, and a massive global recession.

Branko Milanovic, one of the world’s leading experts in inequality, has found that the rise of globalisation has fuelled a boom in inequality in advanced nations. The biggest winners have been the richest 1% of people on the planet. 

We economists like analogies. One about the impact of inequality goes like this: when traffic comes to a standstill on the road, people often become angry when the lane next to their own pulls ahead, leaving them trapped. This seems to have increasingly become the feeling for many in society over the past decade as global economic growth has raised the living standards of a few, rather than the many.

“The trigger for people becoming more aware of inequality was the crisis and the slowdown in real growth,” says Milanovic. “It wasn’t a topic on its own that came up just as people saw Bill Gates or Jeff Bezos being rich. It came as incomes hadn’t risen as they’d been expecting they might be. And then somebody else really at the top was taking all the gains.”

It is extremely difficult to make definitive statements about inequality. Inequality of what: household income, or GDP per head, or even of mortality rates themselves across different groups? Inequality among whom: at the level of individuals, households, countries?

According to the Credit Suisse Global Wealth Report, the world’s richest 1%, those with more than $1 million, own 43.4% of the world’s wealth. Adults with less than $10,000 in wealth make up 53.6% of the world’s population but hold just 1.4% of global wealth. Individuals owning over $100,000 in assets make up 12.4% of the global population but own 83.9% of global wealth.

The World Inequality Report data shows that since 1980 the share of national income going to the richest 1% has increased rapidly in North America, China, India, and Russia and more moderately in Europe. World Inequality Lab researchers note that this period coincides with the rollback in these countries and regions of various post-World War II policies aimed at narrowing economic divides. 

The headline measure of inequality is the so-called Gini coefficient which gives a score from 0 to 100 to measure the distribution of a nation’s income or wealth (a score of 0 would represent total equality while 100 would represent total inequality, where one person has everything).

Inequality in Malta has fallen

Malta’s Gini score declined from 30 in 2000 to 28 in 2013 (i.e. inequality has fallen) and has remained at that level, improving versus that in the EU. Finland has the best Gini coefficient in the EU, and Romania the worst.

There are good reasons to expect that the COVID pandemic will have created new inequalities as well as exacerbated pre-existing income gaps. Long-standing evidence from many countries shows that people entering the labour market during a severe recession earn less than the cohorts just before and after them — and that those differences linger for many years. By inducing a massive global recession, COVID-19 has certainly created new inequalities among cohorts of young people.

.Despite all the talk of “essential workers” and everyone being “in this together”, the stark reality is that job and income losses are likely to have hit lower-skilled and uneducated workers the hardest. Early evidence from both public and private big data sources in the United States seems to confirm this. This year, hundreds of millions of such workers faced very stark trade-offs, on a daily basis, between staying safely at home or facing the threat of infection to provide food for their families.

Capital markets are also likely to have played a non-trivial role in generating inequality during the pandemic. In response to the widespread economic collapse in March and April 2020, the world’s key central banks further loosened monetary policy, injecting enormous amounts of liquidity into financial markets. That additional liquidity has certainly helped keep asset prices high. Although these monetary policy interventions were well-intentioned, nonetheless they did inflate the value of assets held primarily by rich people.

On the other hand, evidence is emerging from some countries that social protection policy responses — such as income transfers targeted to poor and vulnerable workers — have worked rather well.  But more action is needed: perhaps the most insidious new inequality spawned by the pandemic is between children who have been able to continue their schooling over the past year —whether in person or online — and those who have not, because of poor connectivity or weaker, poorer schools.

Perhaps the most insidious new inequality spawned by the pandemic is between children who have been able to continue their schooling and those who have not.

Students in the latter category are often at great risk of falling substantially behind in their learning, or even of dropping out altogether. The learning and schooling inequalities arising from these differences are as stark as they are widespread, and as these children join the labour force the consequences are likely to be with us for decades to come.

While some degree of inequality might be inevitable in a market-based system, extreme divisions can have far-reaching consequences. Among the most visible in recent years is the polarisation of politics and the rise of populism everywhere in the West.

Right-wing economists argue that redistributing income is self-defeating, but the IMF – no champion of socialism – believes societal divisions can undermine growth and create the conditions for a sudden slowdown. Economies can be suppressed when millions of people are held back from contributing to their full potential.

Complete equality might be impossible to achieve. Indeed, some economists claim an entirely equal society might be undesirable, positing that a wholly homogenous world would lack diversity and dynamism. However, the most important questions to ask are whether inequality has risen too far, how to reverse it, and how to prevent extremes from arising.

The prevailing logic of the past four decades has been that stronger economic growth serves as the greatest antidote to inequality. Increasing the size of the pie means everyone has a bigger slice. Peter Mandelson, the British Labour peer, is infamously quoted as saying in the 1990s that he was “intensely relaxed about people getting filthy rich as long as they pay their taxes” for this reason. 

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