The Cost of Global Inequality

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By GREGORY N. HEIRES
Inequality around the world is deepening as the international elite sets the rules of the global economy, which allows them to accumulate vast wealth and income at the expense of everyone else.

The widening inequality stifles economic growth and poses a threat to political and economic stability.

“Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate,” concludes “An Economy for the 1 %,” a recent report by Oxfam International. “The global inequality crisis is reaching new extremes.”

Squeezing the Middle Class and Poor

Today, the richest 1 percent holds more wealth than the rest of the people in the world combined according to the Oxfam report.

In 2015, 62 billionaires had accumulated the same wealth as 3.6 billion people, the bottom half of the world’s population. They increased their wealth by 44 percent in the five years that followed 2010, amassing $1.76 trillion.

During the same period, the bottom half of the world’s population saw its wealth decline by 41 percent, a little over $1 trillion.

Some analysts suggest the Oxfam report overstates the growth of inequality. But in a sense that’s beside the point: It’s simply undeniable that inequality has deepened in recent decades as the concentration of income and wealth has become greater. Other reports also cite disturbing data:

• A 2015 Credit Suisse report concludes that the top 1 percent own half of the world’s wealth. The report says an individual must have more than $759,900 to be in that exclusive class.

“Middle class wealth has grown at a slower pace than wealth at the top end,” said Tidjane Thiam, the chief executive officer of Credit Suisse, when the report was released.

• A 2015 report by the International Monetary Funds says, “Estimates suggest that almost half of the world’s wealth is now owned by just 1 percent of the population, amounting to $110 trillion—65 times the total wealth of the bottom half of the world’s population.”
“In most countries with available data, the share held by the 1 percent wealthiest population is rising at the expense of the bottom 90 percent population,” the report says.

A Barrier to Social Mobility

Conservatives often respond to concerns about inequality with two words: “So what.”

Reflecting a Darwinian philosophy, they contend that the rich earn their vast wealth thanks to their superior intelligence and talent. And they say the accumulation of wealth and income benefits the larger society.

Yet if inequality had not grown between 1990 and 2010, 200 million more people would have escaped from poverty, according to Oxfam. Had economic growth benefited the poor, more than the rich, that figure would be 700 million.

The Divergence of Productivity and Wages

One of the most important reasons for the deepening of inequality is that since the late 1970s capital has taken and ever growing portion of the increase of productivity.

From the end of World War II until then, the income of the typical family in the United States rose along with productivity. If that trend had continued, the median family income would be $9,220 higher today, according to the Economic Policy Institute.

The wages of the bottom 70 percent of earners, according to EPI data, have been basically stagnant since the late 1970s.
Between 2000 and 2013, real wages fell for the bottom 90 percent of wage earners. The real wages of 70 percent of four-year college graduates have been stagnant since 2000.

The divergence between productivity and income is happening around the world. It’s the case in nearly all rich countries and most poor countries.

From 1988 to 2011, the top 1 percent accumulated a higher percentage of global income growth than the bottom half of the global population, according to Oxfam.

Public Policy and Tax Havens

Inequality is no accident.

It results from public policies and other factors that include: deregulation; financial secrecy; the growing power of the financial sector; trade liberalization; a weakening of labor regulations; the growth of casual and part-time work; privatization; the loss of union power; globalization, and tax cuts for the wealthy and corporations.

The global elite has filled its pockets by shaping the global tax system and taking advantage of tax havens. National taxes are becoming less progressive and governments are unable to collect revenue because of cross-boarder tax dodging.
Oxfam found that:

• Among 200 companies, including the 100 largest firms in the world, nine out of 10 are present in a tax haven.

• Tax dodging by multinational corporations costs developing countries about $100 billion each year.

• About $7.6 trillion of individual wealth is deposited in tax havens. That’s more than the combined gross domestic product of United Kingdom and Germany.

• If taxes were paid on the income generated by offshore deposits, governments would have $190 billion more available each year for spending on public services.

Instability and the Financial Sector

The growth of the financial sector’s role in the economy has contributed to greater inequality and an increase of the concentration of political power of the economic elite.

In countries with strong financial sectors, economic growth tends to be slower.
The sector’s high salaries exacerbate inequality and the gender pay gap. In the financial sector, men with similar profiles earn 22 percent than women.

Economic and Political Upheaval?

One must wonder how much longer this economic polarization can continue until there is major economic instability, social unrest and political upheaval. Inequality along with other factors—poorly paid jobs, stagnate and falling wages and a loss of faith in democratic institutions—is behind the social, political and economic polarization evident in the presidential primaries in the United States.

High inequality is bad for the economy, according to the 2015 IMF report, “Causes and Consequences of Income Inequality: A Global Perspective.” With workers no longer receiving their fair share of productivity, their stagnating and falling wages result in lower demand, which hurts economic growth.

Deregulation has caused instability in the financial sector. Deregulation was at the root of the bursting of the housing bubble and the financial crisis of the late 2000s.

Only 38 financial crises occurred from 1945 to 1971, according to actionaid.org. The world experienced more than 130 crises between 1973 and 1997.

“Increasingly, people are saying inequality has a deep impact on economic growth and often precedes cataclysm,” says Jeffrey Madrick, author of “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World.”

He adds, “The best example is the Great Depression.”

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