Wednesday, 14 November 2012

Wealth inequality means economic inefficiency

It is well known that wealth inequality in the USA and UK has grown greatly in recent decades.  E.g. the index of inequality in disposable income over 1975-2009 has risen in both countries:

UK: from 0.25 to over 0.34
US: from 0.31 to 0.37

Capital wealth has also come to be more unequally distributed. The same trends, though less marked, have occurred across Europe. In Russia and China the inequalities are also, I suspect, increasing but I don’t have comparable data on these.

I do not see wealth differentials as intrinsically wrong as long as those at the bottom of the ladder are above a minimum standard of living. If people want to devote their lives to building up personal fortunes, with multiple yachts and houses, that to me is their misfortune as slaves to materialism. Pursuit of wealth for its own sake is destructive of the individual and the society around him or her. Becoming wealthy as an incidental part of seeking to build up the world or add value to it and its people is just something that happens, though the degree of wealth is not in proportion to the worthiness of the activity. People who acquire wealth this way presumably enjoy it. On the other hand there are children living on rubbish tips in India who seem happier than most westerners living in luxury.

But these mounting and extreme inequalities are morally wrong, economically unhealthy and socially divisive, a consequence of obsession with gain per se. Society cannot exist without hierarchy but it is not acceptable to consign millions of people to a life without hope, unable to earn a living, and in a constant state of insecurity about housing, food, health, elderly care and the education of their children. Such a society does not reflect the values of Christ.

Insight into the problem of wealth inequality in the Anglo-American world and how to deal with it emerged from a recent one page book review by Richard Lambert, former editor of the Financial Times. It appeared in the August 2012 issue of Prospect and the book in question is The Price of Inequality by the Nobel laureate Joseph Stiglitz.

This is what I got from it:

Inequality is happening because

  •  the new rich use their political power to gain a larger share of wealth

  •  IT increases the productivity of those who can use it while replacing the jobs of those who can’t

  •  globalisation increases and therefore cheapens the supply of labour

Joseph Stiglitz
The result is not only that a minority get a disproportionately large slice of the wealth cake but that the size of the cake gets smaller because  the rich spend a smaller proportion of their income. Typically they save 15% to 20% of it while the poorest save nothing because they have no spare income. Consequently less money is injected back into the economy and this leads to less economic activity, less wealth generation and more unemployment, unless the savings of the rich find their way into productive investment, which is often far from the case in an economy weighted heavily towards  financial services rather than more value-generating activity.

Moreover, as large wealth differences set in it leads to a decline in social mobility which in turn leads to fewer talented people getting into positions where these talents can be utilised for wealth creation.

Thus large inequalities of wealth mean lower economic efficiency, to the detriment of all. They also have bad social consequences. Stiglitz describes a grim future in which society is divided into haves and have-nots: the rich living in gated communities, the rest in a world marked by insecurity, poor healthcare and mediocre education. At the bottom are millions of young people alienated and without hope.’


Three remedies are suggested, particularly for the UK but no doubt they have a more general relevance to the USA and other nations :


/1/ help young people in houses where no one works to find their way into work

/2/ increase the incentives to take on and train British workers

/3/ reform the tax system, making it simpler, more progressive and free of tax havens

 Lambert does not mention direct investment by the government in large enterprises. Personally, I think there is a role for major flagship projects which generate technological spin offs, create valuable skills and provide inspiration. The American space programme did this. The revolutionary engine propulsion technology developed by the Skylon project, for example, could employ 70,000 people if a government would support it.(No private investors seem interested, possibly because of bureaucratic or political factors or because they don't understand the technology.)
The most just economy is also the most efficient and I don’t believe this is coincidence. It is the way reality has been set up.

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