Inequality – The Right Balance
By Daniel Forde | Nov 10 2016
Daniel Forde examines whether inequality has become a global policy. [br] IN the ’60s and ’70s, governments grappled with high inflation and high unemployment, a scenario thought previously impossible based on a prevailing economic idea of the day: The Philips Curve. The Philips curve theorised that the rate of inflation inversely affected the rate of unemployment. Governments subsequently used this as a tool to ensure equality, believing that by setting the right interest rate they could minimise unemployment.Unfortunately, by the 80s, it appeared that Philip’s research was incorrect, and inequality persisted. Policy decisions based on the Philips Curve were effectively abandoned.Today inequality exists in many forms: inequality of opportunity, outcome, or political inequality, but one of the most sinister incarnations is the trap of income inequality. Income inequality is defined as how unevenly income is distributed amongst a group of people. The Institute for Policy Studies, a Washington D.C. Think Tank, claims that currently, the world’s richest individuals, approximately 8.1% of the population, hold 84.6% of global wealth, while the World Bank estimates that roughly 10.7% live on less than $1.90 per day.“The world’s richest individuals, approximately 8.1% of the population, hold 84.6% of global wealth, while the World Bank estimates that roughly 10.7% live on less than $1.90 per day.”
These figures are staggering, but the picture is more complicated than they might seem. A month ago, the World Bank reported that the amount of people living in poverty has continued to fall, despite a slow global economy. Furthermore, over the past half-century, worldwide market growth has skyrocketed. While global poverty levels are decreasing, the rate at which the rich accumulate wealth seems ever increasing.Plans to assist underdeveloped countries have been suggested to them by the World Bank. These mainly propose to improve the resources and infrastructures within developing nations, like providing better health care, stronger education, and more progressive taxation. However, closer to home, the difficulty of inequality proves even more complicated.Governments’ fiscal policies are compromised in that they are still trying to use yesterday’s tactics to fight today’s battles. The fight against inflation, which the saw the rise and fall of the Philips curve, had the unforeseen consequence of exacerbating wage inequality.Central banks implemented a ‘tightening’ during recoveries, to maintain a low level of inflation. Over time this eroded workers’ wages, as central banks welcomed recessions as additional tools to control inflation. Now policies are split between keeping eyes on rising prices, and addressing workers’ demands.“In today’s globalised economy, workers must compete with the emergence of cheap and often unregulated foreign manufacturers.”
In today’s globalised economy, workers must compete with the emergence of cheap and often unregulated foreign manufacturers. Thus, there are calls for economic protectionism and harsher immigration laws, to insulate advanced economy workers from wage erosion and unemployment. This is best reflected in the rise of Donald Trump, who decries NAFTA and the offstage threat of China, as a base cry to his followers.Economies move in cycles from boom to bust and back again, and previously inequality was at a much lower rate. However now that markets have moved past national borders and the growth in the middle class has stagnated, it’s harder to regulate the economy. A greater global population has also changed how wealth is distributed. For instance, tax is much easier to avoid when you have headquarters spread across numerous borders.Laws and tax regimes which differ widely from country to country have allowed multi-national corporations to dupe tax authorities and reduce their liabilities at the expense of taxpaying residents. Tax controversies involving large tech companies such as Apple, Amazon, and Google occur frequently. Even proponents of globalisation and free trade have begun to recognise its benefits have shifted to one side.So, is there anything that governments are not doing when it comes to inequality policy? Most appear to favour one side over the other. Currently, trade deals such as the EU-Canada Comprehensive Economic and Trade Agreement (CETA), are presented as tools to re-engineer the balance of world trade. However there have been cries that these only give more power to multi-nationals. Protests have been organised against CETA.In the US, meanwhile, Hillary Clinton has claimed, in a speech to the Goldman Sachs Group leaked by WikiLeaks, that the Dodd-Frank Act, financial regulation enacted after the Great Recession, was created only for “political reasons”, and that she is unconvinced of its effectiveness.However, if she wins, she must listen to the large mass of disgruntled workers who support her opponent and oppose ‘pro-Wall Street’ policies. Governments, in short, have to find the balance between big business and the common man. That however, is easier said than done.