What is the problem about economic inequality?

What is the problem about economic inequality?

The alarming signs of economic inequality were already apparent at the dawn of the Millennium. The World Institute for Development Economics Research at the United Nations University reported the richest 1% of adults alone owned 40% of global assets, and the three richest people in the world possess more financial assets than the lowest 48 nations combined in year 2000. The trend continued to worsen exponentially, as the combined wealth of the “10 million dollar millionaires” inflated to nearly $41 trillion by 2008. Last year, Oxfam revealed data citing the wealthiest 1% owning more than half of the global wealth.

The Nobel Prize winning Economist, Robert J Shiller summed up the destructive impacts of economic inequality. “High and persistent unemployment, in which inequality increases, has a negative effect on subsequent long-run economic growth. Unemployment can harm growth not only because it is a waste of resources, but also because it generates redistributive pressures and subsequent distortions”. He further warned inequality “drives people to poverty, constrains liquidity, limit labour mobility and erodes self-esteem promoting social dislocation, unrest and conflict”. The French Economist, Thomas Piketty, whose expertise is based on wealth concentration and income inequality over 250 years, stipulates the rate of capital return in developed countries persistently overwhelm the rate of economic growth is the source of Economic Inequality. He argues such worsening economic disparity is an inevitable consequence of free market with labor market outcomes, regressive taxation and globalization.

The past President of the United States arguably the most political savvy personality with the meteoric rise to the White House, from the background of seven unremarkable years at the Illinois Senate. Barack Obama is well recognized for making “revolutionary” speeches to tens of thousands of adoring crowds on his agenda of change. Obama once called the economic inequality “the defining challenge of our time”. Did the Obama administration really have the formula to the best way to tackle inequality?

The irony is that Obama’s vision for the reduction of Economic Inequality is modeled against Ronald Reagan. In an interview with Reno Gazette Journal, Obama confessed: “I think Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not and in a way Bill Clinton did not. He put us on a fundamentally different path because the country was ready for it.” He added: “I think they felt like with all the excesses of the 1960’s and 1970’s and government had grown and grown, but there wasn't much sense of accountability in terms of how it was operating.” Obama concluded: “Reagan just tapped into what people were ready feeling, which was we want clarity and optimism. We want a return to that sense of dynamism and entrepreneurship that had been missing!”

There is little doubt Reagan and Thatcher changed the trajectory of America and the rest of the world. The 1980’s economic liberation, deregulation and decline of the union, arguably was the very beginning of Economic Inequality in modern times. The 2015 study conducted by International Monetary Fund (IMF) also echoed the findings of the decline of unionization and neoliberalism in 1980’s indeed fuelled the unstoppable rise of the Economic Inequality.

The Widely Agreed.

Among the many policies which have been proven to reduce relative inequality, it is is has been generally been agreed upon the fact that the current policy of corporation tax. Where the vast majority of shareholders of any kind of firm tend to be among the highest of income earners in a country, by reducing the profits through taxation, it would thus reduce dividends of high income earners. The role of tax policies fueling wealth disparity has also been an age-old debate between the politicians and economists. Economists such as Krugman and Orszag argued appropriate progressive taxation leading to social spending is the key to minimize inequality. On the other hand, regressive taxation, which naturally favours the rich, is often the incentives taken by politicians to gain votes and attract investments.

The renowned US Historian, Michael Beschloss once described Barack Obama as “Probably the smartest guy ever to become President.” There was no doubt Obama was eager to secure his place in history amongst the Giants. Obama has grandiose intent to leave his legacy in solving the worst financial crisis since the Great Depression, withdrawal from the War in Iraq, reconcile the United States to a less dominant role in the world. And above all, this is the President who wants to be “transformational” by putting millions of American back to work, redistribute wealth and reducing economic inequality as the top of his domestic and global agenda. Judging from the figures, Obama failed spectacularly! Globalization under his presidency had witnessed further widening of rich-poor divide and spelled the worst Economic disparity in history.

Romer and Romer Laffer curve study suggested a 33% on income tax is the ideal rate of income tax for the US. This estimated that an additional increase in a percentile income taxation, would reduce GDP by 3.042%. This study poses an inconvenient consequence to taxation as, it possesses the question to whether or not we should sacrifice the small benefit of the poor for the growth of the economy. In reference to the United States, where their constitution idolises capitalism and the rule of the free market. The use of taxation does not pose as a good idea. The 19th century American theologian and author, James Freeman Clarke, once said: “A politician thinks of the next election. A statesman, works of the next generations.” The current conventional systems such as monetary policies and fiscal policies are insufficient in tackling inequality, as these policies keep in mind of politics first, economics second. Davos 2017 will undoubtedly go down in history as the cornerstone that marked the beginning of change. Whether the emergence of protectionism is like “locking oneself in a dark room, keeping out the light and air” described by Xi, or light at the end of the tunnel that is “Making America Great again” by putting millions of American back to work, redistributing wealth and reducing economic inequality, remains to be judged in due course.

It is also essential for countries to have economic and political stability when considering factors of inequality. Unemployment creates political as well as social and economic risks. Unemployed youth are more likely to turn to crime, to join rebel groups or armies or make perilous trips in search of a better life overseas. If Africa is unable to provide work for its burgeoning population the risks to stability at home and the likelihood of mass migration increase. In the last decade war and poverty have caused significant numbers of people to flee the Middle East and Asia for Europe. Migration and borders have moved centre stage in the European political debate. The best response to such forced population movements is to create good government and opportunity at home. This lesson will not be lost on European policy makers conscious that Sub-Saharan African has a far larger, and faster growing, population than the Middle East and North Africa combined.

BIG ideas come from BIG data.

Trade liberalization or better known as globalization, has been implicated for shifting the inequality from a global arena to a domestic platform. Innately, when a rich country trade with the poor, the low-skilled laborers will see employment opportunities and wage increase, while similar workforce in the rich nations bear the consequences of wage stagnation or reductions. In addition, globalization is believed to reward firms in particular niche providing more opportunities for the elites, resulting in increasing international influence and decreasing local effects.

This year in Davos, the Chinese President, steadfastly defended globalization in the face of endless challenges. Xi highlighting “Economic globalization was once viewed as the treasure cave found by Ali Baba in the Arabian Nights, but now become the Pandora’s box in the eyes of many.” Acknowledging globalization as a double edge sword and describing global economy as “the big ocean we cannot escape from” and “Voices against globalization have laid pitfalls in the process of economic globalization that we need to take seriously”. So, what are the pitfalls? The analysis has indicated that the global top 1% and the middle class of the emerging economies, such as Brazil, India and China, are the real winners of globalization. On the other hand, the middle class of the developed nations experiencing little real growth over time, widening the income gap domestically.

One of the rising revolutionary theories in modern economics is the role of big data. The famous example of this science is “Google Flu Trends (GFT)”, which uses search outcomes of Google to predict flu outbreaks. This has been proven to be extremely quick to produce predictions and is also very cost-effective. The increasing volumes of raw data and the accompanying improvement of computer science have enabled us to fill other kinds of data gaps in ways that we could not even have dreamt of in the past.

Encouraging Pro-equality Culture

Indeed the evidence consistently supports Shiller’s views. Empirical economists support the evidence of a negative correlation of about 0.5-0.8 percentage points between long-term growth rates and sustained economic inequality. Researchers in both sides of Atlantic's have also found inequality generated higher health and social problems including drug abuse, teenage pregnancies, incarceration, obesity and suicide. The same studies also highlighted negative correlations with life expectancy, educational performance and social mobility. Moreover, multiple studies have concluded inequality to be “the single factor most closely linked and consistently related to crime.” Unsurprisingly, the studies also supported inverse link between income inequality and social cohesion.

This issue can be encouraged and reinforced into society through the use of welfare cards. This scheme is currently being used on aboriginal tribes in Australia for social security payments. Such schemes have been proven to encourage responsible saving according to the Orima research group.

The founder of the world Economic Forum, Klaus Schwab, who already had the foresight in predicting the rise of populists as the consequence of inequality. As Xi’s joked about the idealism of “Schwab-onomics”, Schwab read out the text he himself had written more than two decades ago. He warned “against populism and demanded that globalization must benefit the majority of the population and not just a small elite.”

The Only way, rather than the best way.

Indeed, the widening income gap has become an issue that generated clouds of uncertainty globally. At the eve of this year’s World Economic Forum in Davos, Oxfam again published the report on “An economy for the 99 percent”. The rich poor divide is far greater than had been feared, as the headlines read “Eight richest men in the world own the same wealth as the 3.6 billion people who make up the poorest half of humanity”. The charity detailed how the elites are fueling the economic inequality by influencing politics, tax avoidance and driving down the wages. As usual, this raised the condemnations that the elites who are advocating changes in Davos are “all talks and no actions”, as they only cements the power of bankers, industrialists, technocrats and politicians serving the common interests: their own! That really raised the fundamental questions of the roles of the world leaders attending Davos in the past decades in solving or fueling Economic Inequality?

Social scientists could use big data to inform citizens, policy-makers and debates more widely about the inequalities that mark our world. The most effective kinds of social science now are ‘data-rich’. However, they are also theoretically sophisticated and offer an alternative form of data analysis to technocratic models derived from computation and information sciences.

The authors highlighted above are also deeply ‘objective’ in that they carefully report their data sources, their analysis of them, and thus where their findings come from. Yet all three also take a passionate, even politicized, view of their purposes. Putnam makes it clear that he wants to halt the decline of social capital. Wilkinson and Pickett are deeply perturbed by how socially damaging inequality is, while Piketty’s concern to document the dynamics of wealth and income inequality throughout the past century and to reform capitalism is also clear. Data, theory and politics are richly and fruitfully combined in these three works. As we look to the future, it is important for social scientists to demonstrate their effectiveness in knowing how best to present and select data, in contrast to the data driven and empiricist models often used in more technocratic visions of the ‘big data’ world, which are poorly placed to analyse inequality. Social scientists should not feel threatened by ‘big data’. They should embrace their skills and sophistication in knowing how to deploy it to best effect.

Whether “Big Data” methods work or not comes down to whether the data reflect the distribution of populations of interest or not. Analysis using a database of customers, which is often massive, will be extremely useful for a retailer because they are mostly likely the retailer’s population of interest, i.e., future customers. But, “Big Data” collected through internet or compiled in data clouds might not be particularly useful for poverty estimation and analysis because the data providers might not include the poor in whom we are most interested. Even if the data include the poor, the relative frequency of observations describing the rich will likely be higher than for the poor, and thus simple averages of this kind of data will be biased towards the rich. “Big Data” science is still at its early stages and innovations in this field are rolling out at the speed of light. Such innovations might yield entirely new solutions in the near future. But I strongly believe that it is very important to recognize the risks that could attend use of “Big Data” methods. Before conducting any analysis using ”Big Data”, we must carefully check whether the underlying data accurately capture the populations of interest

The However

The determination of wages by free market capitalism is an unachievable Utopia. The competition, skill and opportunity distribution are never equal, which inevitably results in market failures. With such discrepancy, the market concentrates wealth, pass the environmental costs to the society, and take advantages of the highly abundance low skill workers. The Neoclassic economic theory often implicates inequality in wages and salary is the most obvious culprit for economic inequality. The Marxian economics theory also attributes inequality to job automation and increase in capital intensity within capitalism aiming to minimize cost and maximize profits. In modern era of computerization and technological advancement replacing human labour, inevitably exerts reduction in employment opportunities, which invariably widening of the rich-poor divide.

Beyond the anxieties of alleviating poverty, the establishment should really tackle the problems economic inequality seriously. The wealth disparity is shown to stifles growth, diminishes access to health and educations, provoke ethnic and gender discrimination amongst the “masses”. On the other hand, the concentration of power and wealth amongst the “elites” continues to support nepotism and plutocracy. Facing such adversity of inequality, some studies even cautions unequal society ultimately results in politically instability, as interregional inequality has the tendency to increase the risk of coups. Of course, the lack of robust data, it is difficult to support the correlations between inequality and political violence. However, upon reflection on Hobson, Luxemburg and Lenin’s argument that World War I was triggered by inequality, and the economic stratification of society into “elites” and “masses” eventually brought about the downfalls of civilizations of Roman, Han and Gupta empires, can the ruling governments still ignore the potential apocalypse of the economic inequality?

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