Income inequality: The good, the bad, and how to tackle it

Eight of the world’s richest men now own as much wealth as half of the world’s poorest people, anti-poverty organization Oxfam said in a report released on Tuesday.

Public reaction to inequality is driving political division in rich countries, the group wrote. On the upside, poor countries have also seen hundreds of millions of their citizens escape poverty in recent decades, Oxfam acknowledges. But it suggests that these countries have also missed out on an opportunity to do the same for hundreds of millions more.

“The very design of our economies and the principles of our economics have taken us to this extreme, unsustainable and unjust point,” says the report. “It’s time to build a human economy that benefits everyone, not just the privileged few.”

The report, based on data from a 2016 global wealth index from Credit Suisse and Forbes’ billionaires list, comes as political and business leaders meet at Davos, Switzerland, for this year’s World Economic Forum (WEF) summit, where inequality is a top item on the agenda.

And it sounds an alarm about a problem that is stirring unprecedented debate among the political classes of wealthy countries: what the gap between rich and poor could spell for the direction of world trade and security, as well as how national governments ought to address it.

“We’re in a moment where policy proposals being put on table are being held up against this light: that people feel that their economies are increasingly unfair and unequal,” says Paul O’Brien, vice president of policy and campaigns at Oxfam America. “And I think it’s harder for policymakers to talk about economic growth without talking about inclusive economic growth.”

But here's the catch: There’s no consensus among economists that inequality should be considered a problem. Conservative thought tends to see it as a consequence of a process that is actually quite beneficial for societies, even for those at the bottom rungs of the income ladder. The rich are getting richer, but so are the poor. Economists point to how the decades-long drop in global inequality of incomes – that is, between countries – has created new middle-classes in developing countries, especially in Asia.

“My own reaction is, well, who cares?” wrote Forbes columnist Tim Worstall about the Oxfam report:

Wealth, value, is something created. And some of it will stick to the people doing the original creation, some tiny, tiny, fraction and the rest of it goes out into the world to be enjoyed by the rest of us. Thus the solution to poverty is that there be more rich people, people who have grown rich by creating value for the rest of us to consume.

Others cast doubt on the viability of democracies in conditions of intense inequality – particularly in the case of the US, where some studies trumpet its arrival into full-blown plutocracy. Even much of the US political elite sees inequality as a catalyst of instability. Economists such as Branko Milanovic, a leading scholar on inequality at the City University of New York, have argued that the past century’s world wars came about in large part because of the pressures of inequality, as the Financial Times noted last April. And this past week, the WEF pointed to the election of Donald Trump and Britain’s vote to leave the European Union as evidence that “fundamental reforms of market capitalism” were in order.

The United States has made slight progress over the past few years, with median incomes and wages rising, says Jennifer Blanke, chief economist at the WEF.

But “there are huge warning signs right now,” she tells The Christian Science Monitor, “and a lot of disgruntlement.”

The assiduousness of inequality scholars in recent years has produced a few unorthodox proposals, including French economist Thomas Piketty’s proposed global tax on wealth. Still, the remedies that tend to be put forth – more progressive taxation, including new solutions to crack down on tax havens; stronger wage laws for workers; and expenditure policies that direct more money toward education, health care, and other programs designed to benefit the lower-income – read like pages cut out of a social democrat’s playbook. 

Since their shellacking in the 2012 presidential election, Republicans in the US have begun to speak the language of inequality, with figures such as House Speaker Paul Ryan (R) of Wisconsin drafting anti-poverty plans and candidates incorporating it into campaign rhetoric.

President-elect Donald Trump, meanwhile, has begun to sketch the initial contours of his America-first agenda, pressuring specific manufacturers (notably, Ford and Carrier) not to relocate production overseas and threatening tariffs on imports from countries such as China, Mexico, and even Germany. That would seem to set the interests of US workers against those of workers in places like China and Mexico who have carved out a livelihood with US companies. 

How a Trump government – and other conservative populists elsewhere – might manage protectionist measures, without causing a shock to their own economies, remains opaque. Another central question might be whether they will be able to pioneer solutions that reduce inequality at home, and convince their trading partners abroad to go along with this approach.

Mr. O’Brien of Oxfam sees uncertainty, with regard to how governments, including the US, will respond to pressure for a need to address income inequality. 

“We could see, as a result of the political moment, both heightened inequality by tax breaks to the rich, by speaking to the concerns of people in poverty but not doing much to help lift themselves out of poverty,” he says.

But “if one of the consequences of this election is that more politicians are paying attention to the fact that huge swaths of Americans and people around the world feel they’re being left behind by extreme inequality,” he adds, “then that awareness is a good thing.”