The costs of financial inequality

Wealth and income extremes hurt us all.

By Robert Fox, Oxfam Canada executive director

In a briefing note published ahead of the World Economic Forum in Davos this week, Oxfam says it’s time for a commitment to reduce poverty and to curb income extremes when the $240 billion net income in 2012 of the richest 100 billionaires would be enough to make extreme poverty history four times over.

Too often we focus on the symptoms of extreme poverty without looking at the causes. We look at the poor as if they are a problem rather than the consequence of a problem: growing inequality and injustice.

Elites in the north and the south are amassing greater wealth at an astonishing rate while the yawning gap between their privilege and the bleak reality of someone earning $400 a year – which is how low you need to go before you officially qualify as “poor” on this planet – grows wider by the moment.

The political corrosion, ecological damage, economic inefficiency and social injustice of the accelerating concentration of wealth and power are toxic. Action can and must be taken to tackle extreme wealth and its devastating impact. We know what we need to do to reverse this trend. And the first step is to name the problem and begin to rally opposition to this injustice. Only then will governments find the political will to act.

Already this year, the World Economic Forum’s Global Risk Report rates inequality as one of the top global risks of 2013. The IMF and the Economist agree. Around the world, the Occupy protests demonstrated the increasing public anger and feeling that inequality has gone too far. More and more experts and institutions agree that rapidly growing extreme wealth and inequality are harmful to human progress, and that something needs to be done.

In the last decade, the focus has been exclusively on one half of the inequality equation — ending extreme poverty. The question of wealth inequality and the extreme wealth that contributes to it were seen as either not relevant, or as a prerequisite for the growth that would also help the poorest, as the wealth created trickled down to the benefit of everyone.

There has been great progress in the fight against extreme poverty. Hundreds of millions of people have seen their lives improve dramatically – an historically unprecedented achievement of which the world should be proud. But as we look to the next decade, and new development goals we need to define progress, we must demonstrate that we are also tackling inequality — and that means looking at not just the poorest but the richest.

Oxfam believes that reducing inequality is a key part of fighting poverty and securing a sustainable future for all. In a world of
finite resources, we cannot end poverty unless we reduce inequality rapidly.

That is why we are calling for a new global goal to end extreme wealth by 2025, and reverse the rapid increase in inequality seen in the majority of countries in the last twenty years, taking inequality back to 1990 levels.

Extreme wealth and inequality are reaching levels never before seen and are getting worse.

Over the last thirty years inequality has grown dramatically in many countries. In the US the share of national income going to the top 1 percent has doubled since 1980, from 10 to 20 percent. For the top 0.01 percent it has quadrupled — to levels never seen before. At a global level, the top 1 percent (60 million people), and particularly the even more select few in the top 0.01 percent (600,000 individuals — there are around 1200 billionaires in the world), the last thirty years has seen an incredible feeding frenzy.

This is not confined to the US, or indeed to rich countries. In the UK inequality is rapidly returning to levels not seen since the time of Charles Dickens.

In China the top 10 percent now take home nearly 60 percent of the income. Chinese inequality levels are now similar to those in South Africa, which are now the most unequal country on earth and significantly more unequal than at the end of apartheid. Even in many of the poorest countries, inequality has rapidly grown. 

Globally the incomes of the top 1 percent have increased 60 percent in twenty years. The growth in income for the 0.01 percent has been even greater.  Following the financial crisis, the process has accelerated, with the top 1 percent further increasing their share of income. The luxury goods market has registered double digit growth every year since the crisis hit. Whether it is a sports car or a super-yacht, caviar or champagne, there has never been a bigger demand for the most expensive luxuries.

The IMF has said that inequality is dangerous and divisive and could lead to civil unrest. Polling shows the public is increasingly concerned about growing inequality in many countries, and by people across the political spectrum.

Extreme wealth and inequality = economic inefficiency.

A growing chorus of voices is pointing to the fact that whilst a certain level of inequality may benefit growth by rewarding risk takers and innovation, the levels of inequality now being seen are in fact economically damaging and inefficient. They limit the overall amount of growth, and at the same time mean that growth fails to benefit the majority. Consolidation of so much wealth
and capital in so few hands is inefficient because it depresses demand, a point made famous by Henry Ford and more recently billionaire Nick Hanauer in his much-discussed TED talk.

Quite simply, there is a limit to how many luxury yachts a person could want or own. Wages in many countries have barely risen in real terms for many years, with the majority of the gains being to capital instead. The top 100 billionaires added $240 billion to their wealth in 2012 — enough to end world poverty four times over.

If this money were instead more evenly spread across the population then it would give more people more spending power, which in turn would drive growth and drive down inequality. As a result growth in more equal countries is much more effective at reducing poverty. Oxfam research has shown that because it is so unequal, even with sustained economic growth, in South Africa a million more people will be pushed into poverty by 2020 unless action is taken.

Extreme wealth and inequality = politically corrosive.

If, in the words of the old adage "money equals power", then more unequal societies represent a threat to meaningful democracy. This power can be exercised legally, with hundreds of millions spent each year in many countries on lobbying politicians, or illegitimately with money used to corrupt the political process and purchase democratic decision making.

Joseph Stiglitz and others have pointed out the way in which financial liberalisation led to huge power for the financial industry, which in turn has led to further liberalisation. In the UK the governing Conservative party receives over half its donations from the financial services industry. Capture of politics by elites is also very prevalent in developing countries, leading to policies that benefit the richest few and not the poor majority, even in democracies.

Extreme wealth and inequality = social divisions.

Extreme wealth and inequality undermines societies. It leads to far less social mobility. If you are born poor in a very unequal society you are much more likely to end your life in poverty. As Richard Wilkinson, co- author of the Spirit Level, has said, the American dream is more real in Sweden than it ever has been in the United States. Social mobility has fallen rapidly in many countries as inequality has grown.

When rich elites use their money to buy services, whether private schooling or private healthcare, they have less interest in public services or paying the taxes to support them. Those from elites are much more likely to end up in political office or other
positions of power, further entrenching inequality. Their children are likely to be as rich, if not richer, than their parents, with inter-generational inequality increasing.

Inequality has been linked to many different social ills, including violence, mental health, crime and obesity. Crucially, inequality has been shown to be not only bad for the poor in unequal societies but also the rich. Richer people are happier and healthier if they live in more equal societies.

Extreme wealth and inequality = environmental destruction.

As the world is rapidly entering a new and unprecedented age of scarcity and volatility, extreme inequality is increasingly environmentally unaffordable and destructive. The World Bank has shown that countries with more equal distribution of land are more equitable and more efficient, and grow faster. Those in the 1% have been estimated to use as much as 10,000 times more
carbon than the average US citizen.

Increasing scarcity of resources like land and water mean that assets being monopolised by the few cannot continue if we are to have a sustainable future. Poverty reduction in the face of extreme wealth will become harder as resources become more scarce. More equal societies are better able to cope with disasters and extreme weather events.  Studies show that more equal countries are also better able to reduce carbon emissions.

Extreme wealth and inequality = unethical policies

Gandhi famously said “Earth provides enough to satisfy every man's need, but not every man's greed.” From an ethical point of view, it is extremely difficult to justify excessive wealth and inequality.

In fact, most philosophers and all of the major religions caution against the pursuit of excessive wealth at all cost and prescribe sharing of income with less fortunate members of the community. For instance, the Koran bans usury and says that the rich should give away a portion of their money. The decision of Bill Gates and Warren Buffet to give away their fortunes or to call for greater taxation of excess wealth is an example to the rest of the world’s billionaires.

Extreme wealth and inequality are not inevitable

After the Great Depression in the US in the 1930s, huge steps were taken to tackle inequality and vested interests. President Roosevelt said that the "political equality we once had won was meaningless in the face of economic inequality". These steps were echoed in Europe after World War Two, leading to three decades of increasing prosperity and reduced inequality.

Similarly the growth of the Asian tiger economies like Korea was achieved whilst reducing inequality and meant the benefits were widely spread across their societies. More recently, countries like Brazil, once a poster child for extreme inequality, have managed to buck the global trend and prosper whilst reducing inequality.

The policies required to reduce inequality are also well known. Decent work for decent wages has had a huge impact. The rise in the power of capital over labour has been identified by Paul Krugman among many others as a key cause of the recent crisis and one that means that assets are not being used productively, in turn reducing demand.
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Free public services are crucial to levelling the playing field. In countries like Sweden, knowing that if you get sick or injured that you will receive good treatment regardless of your income, is one of the greatest achievements and the greatest equalisers of the modern world. Knowing that if you lose your job, or fall on hard times, there is a safety net to help you and your family, is also key to
tackling inequality. Similarly, access to good quality education for all is a huge weapon against inequality.

Finally, regulation and taxation play a critical role in reining in extreme wealth and inequality. Limits to bonuses, or to how much people can earn as a multiple of the earnings of the lowest paid, limits to interest rates, limits to capital accumulation are all only recently-abandoned policy instruments that can be revived.

Progressive taxation that redistributes wealth from the rich to the poor is essential, but currently the opposite is the case – taxation is increasingly regressive and the poor pay higher effective tax rates than the rich, a point recently highlighted by Warren Buffet
among others, who has called for greater taxes on the rich.

Cracking down on tax avoidance and tax evasion goes hand in hand with more progressive taxation. Closing tax havens and ending the global race to the bottom on taxation, for example with a globally agreed minimum rate of corporation tax would make a huge difference. It is estimated that up to a quarter of all global wealth – as much as $32 trillion – is held offshore. If these assets were taxed according to capital gains taxes in different countries, they could yield at least $189 billion in additional tax revenues.

End extreme wealth and inequality

Whatever the combination of policies pursued, the first step is for the world to recognise ending extreme wealth and inequality as the goal. There are many steps that can be taken to reverse inequality. The benefits are huge, for the poorest – but also for the richest. We cannot afford to have a world of extreme wealth and extreme inequality. We cannot afford to have a world where inequality continues to grow in the majority of countries. In a world of increasingly scarce resources, reducing inequality is more important than ever.
 

Oxfam calls for an end to extreme wealth by 2025, by reversing increasing extreme inequality and aiming to return to 1990 inequality levels.

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© Copyright 2013 Oxfam, All rights Reserved. Written For: StraightGoods.ca