Sunday, May 6, 2012

Inequality Also Destroys the Top 1%

Oct 13, 2011
Raymond Woo 

In the midst of a busy week primarily occupied with professional training courses and backlogged work, I am struck by the social phenomenon of ordinary people from different socio-economic backgrounds gathering en masse to protest against perceived inequality. However, since inequality is fundamentally an economic concept that is relative to a particular time and place, it would have been difficult to identify a singular target for protest, a tactic has been staple fodder for revolutions since time immemorial (think about the French ancien regime, Chiang Kai-shek, Sukarno and more recently, Hosni Mubarak).

Yet, we are seeing mass groups of people Occupying Wall Street. While they are protesting against the nebulous concept of “inequality”, the Wall Street Occupiers are targeting a clear social group: what the protestors themselves call “the top 1%”, the richest 1% (or more) of the country. To sweeten the deal, the protestors, despite being composed of a multitude of different groups such heartland moms-and-pops, environmentalists and blue-collar workers, self-identified as “the 99%” which has been a rallying cry for the past several weeks across more than 70 cities in the US. And what do we make of this? An emerging consciousness of unity in (relative) dispossession, a la “workers of the world, unite”?

More sinisterly, we witnessed the disenchanted youth-led violent riots in England a few months back, where the rioters seemed to have come from nowhere and yet, united in the action of “violent consumerism” as the New York Times had put it. Despite having some rich and spoilt kids among the rioters, most of those who damaged property and committed theft then were definitely dissatisfied people with problems of poverty in a land of plenty, and high youth unemployment.

Did I say relative again? Indeed, studies have shown that excessive inequality in wealth and income destroys productivity, economic growth and eventually, the well-being of even the Top 1%. Among many economists, Aghion, Caroli and Garcia-Penalosa (1999) proposed that when capital markets are imperfect, equity is not necessarily traded off with equality, and they showed empirically that inequality negatively impacts upon economic growth, while redistribution positively impacts upon economic growth. Also, Marriner C. Eccles, the Chairman of the Federal Reserve under President Franklyn D. Roosevelt believed that such inequality was the principal cause of the Great Depression.

Abject poverty is no longer a major problem facing us; relative poverty is. While there are less people around the world surviving on USD 1 per day (a global benchmark for absolute poverty as originally formulated by the United Nations Development Programme), surviving on a minimum wage of USD 8 (RM24) per hour in the US is also demeaning, both physically and emotionally. I remember being aghast when I read a few years ago that the difference in salary between the lowest-paid and highest-paid in Germany was less than 50 times, while that in the US was more than 500 times!

 Until recently, the economic boom in emerging markets of Asia, Latin America and Africa has created a booming middle class. However, weak institutional capacity in developing countries, and deregulation and industrial hollowing-out in the developed ones have increased inequality in general, as we can see from worsening Gini Coefficients (an index measuring the above-mentioned inequality, with zero indicating the perfect equality and one indicating perfect inequality) in most countries. These factors have limited the inherent redistributive function a state has, which developed from the growth of “bureaucratic states” in 19th-century Europe that meant to stem gross human rights abuses and suffering that faced the weaker sections of society then, such as orphans and industrial workers. Easy examples would be tax policy and social welfare; redistribution policies should never encourage a culture of dependence, but improve the allocation of resources so that idle resources (such as capital) can go to those who need it most and can provide better returns on capital. In the US, we see corporations either saving money or using cash to deleverage or pay back their debts, hindering capital and other resources from being used in productive pursuits such as job creation. Thus, we can possibly see a downward spiral of money sitting in isolated places and not generating good rates of returns, making the danger of Japanese-style deflation, or more relevant to the current situation, a double-whammy of high unemployment and high inflation, or stagflation real worries indeed.

At the same time, technological changes leveled the global allocation of human capital, enabling production to move more easily to where human resources lie, and vice-versa. Since the redistributive function of modern states have been markedly reduced, this massive global change would theoretically enable only those who already have some form of social or economic capital, thus worsening inequality.

Inequality can be a nebulous concept, but it has real consequences for people. Historically, real or perceived inequality has been a primary motivator for social instability, and we are seeing the consequences of extreme inequality today. It is time relevant stakeholders in society to play a role in enhancing the well-being of as many people as possible, so that the bottom 99% will not always be at loggerheads with the top 1%.  

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