Why inequality matters


Whatever else the Occupy protests (over 900 at the last count), have done, they have propelled the issue of inequality on to the front pages and into the political mainstream.  The idea of the ‘99%’ is brilliantly simple, pulling together every group and every person who has a nagging sense that they are losing out in the global economic race while others pull ahead out of sight.  

The case the protestors are putting basically an ethical one.  A world where the majority of the benefits of growth go to the few while the costs of failure, whether in the form of bank bailouts, of redundancies, or of cuts to public services are borne by the many is not, it seems, one that an increasing number of people want to live in any more. 

 If that fails to convince, there are other more prosaic reasons to care about inequality too. Inequality, at least at high levels, does matter to growth, to poverty, and to stability.  Here are five good reasons, drawing from recent economic research, for politicians to care about – and act on – inequality.

 One, inequality contributed to the financial crisisDebate rages about how much.  But it does seem clear that when real wages for the middle and working classes aren’t rising, as they weren’t in America for much of the 1980s and 1990s, and when aspirations are rising rapidly, partly because of the impact of the lifestyles of the super-rich whose incomes are heading North at a rapid rate, and when credit is cheap (thanks to the mega-profits being made in China due partly to low wages and growing inequality there), then an unsustainable credit bubble is only the click of a Wall Street button away. 

Two, (some) inequality is bad for economic growth.  This is one that economists have been arguing about for years.  But it’s clear that some inequalities – in access to education, to credit, to land in agricultural societies – are bad for growth, since they mean that the skills, energy and ideas of a large part of the population are being underused.  As growth becomes more about human capital and less about land and machines, this will only become truer. Inequality can also make growth less sustainable (in an economic sense), and make episodes of growth shorter than in more equal societies.

Three, inequality is bad politics.  This is one that makes everyone sit up and listen. So called ‘horizontal inequalities’ between groups are a factor in conflicts and political unrest in a large number of cases. 

Four, inequality slows down poverty reduction.  This is partly maths.  A very unequal country will tend to see a smaller share of the benefits of economic growth going to the poor than a more equal one.  But it’s more than that. Some inequalities – like those based on race, gender or caste, act as a barrier to poverty reduction and can, if left untouched, make poverty permanent for some groups.  Politicians in any country who want to reduce poverty – as most say they do – need to keep an eye on inequality.

Five, the moral case is a good one.  It’s not just the tiny minority of people who are prepared to spend the night in a tent in Wall Street or the City of London who think so.  Most people, as opinion surveys repeatedly show, do care about inequality and don’t want it to get too big.  If democratic politics is about giving people what they want, then this in itself is a reason for action. 

What to do?  While inequalities within many OECD countries have been widening since the 1980s, emerging economies might be showing the way.  Income inequality in Brazil, as in many other Latin American countries, has come down from its previously stratospheric levels over the last ten years, thanks mainly to redistribution of incomes in form of cash transfer programmes and to investment in education.  Most OECD countries have the infrastructure of the welfare state that could be used to reduce inequality – they need to deploy it better.  And many developing countries are starting to create those institutions, with cash transfers, and free and universal health and education.

 Policy change might be becoming more likely.  In sharp contrast to previous protests, the Occupy movement has got a very sympathetic hearing in the press, with even the Financial Times conceding that they have a point.  Could this be the moment that inequality becomes mainstream?