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U.S. Economy Will Grow But Not Trickle Down, OECD Warns on Inequality

Even though the U.S. economy is now expected to grow – albeit sluggishly – over the coming two years, inequality will not improve without policy reforms, a major grouping of rich countries is warning.

President Barack Obama has named income inequality the “defining challenge of our time”, and has tried to make the issue a central focus for the remainder of his time in office. That concern is now being backed up by two new reports from the Organisation for Economic Cooperation and Development (OECD), an international body of 34 developed countries.

“It’s no longer just about inequality but about inequalities – inequality leads to greater polarisation in education and health outcomes.” -- OECD Secretary-General Angel Gurria

“Americans have increased working hours by 20 percent but incomes have still fallen. It’s no longer just about inequality but about inequalities – inequality leads to greater polarisation in education and health outcomes,” OECD Secretary-General Angel Gurria said at a Washington panel discussion on Jun. 12.

“Inequality was a direct cause of the [2007-08] financial crisis … but contrary to popular thought, there doesn’t need to be a trade-off between growth and inclusivity.”

Gurria in recent months has become a powerful voice on the issue of inequality. During his time in Washington, he also affirmed the gravity of income inequality for the U.S. compared to other developed countries.

The OECD has now released two new reports, Tackling High Inequalities in the U.S. and the OECD’s Economic Survey of the United States. The reports warn that, while there doesn’t necessarily need to be a trade-off between growth an inclusivity, the latter also does not inevitably follow the former.

“Real [gross domestic product] is about six percent above its pre-crisis level, the housing sector is beginning to recover, banks have returned to health,” the reports note, “corporate profitability is high and equity prices have reached new peaks.”

Yet despite these strengthening indicators, income inequality in the U.S. has continued to worsen, with wages for most workers having been slow to bounce back following the economic crisis.

Out of the 34 OECD countries, the U.S. has the fourth-highest inequality, behind Chile, Mexico and Turkey. It is also in third place in terms of the gap between the society’s richest and poorest 10 percent.

While the recession hurt all OECD countries, equality in the U.S has suffered more than in the others.

Between 2000 and 2012, the average disposable income of the bottom 10 percent in the U.S. dropped by some 14 percent. Yet in Canada, the United Kingdom and Switzerland this figure dropped by only half that figure, and by even less in New Zealand and France.

Some observers say the technology and the housing crisis could be two possible reasons that share of income is today more among the rich in the U.S.

“Innovation and the returns to those innovations are concentrated in the U.S. and among people at the top,” Aparna Mathur, a resident scholar at the American Enterprise Institute, a conservative think tank here, told IPS. “Also, the recent recession may have made the situation much worse at the bottom in the U.S., where the housing crisis affected many more low-income people who were highly indebted.”

Global models

During his talk in Washington, the OECD’s Gurria offered four recommendations for bolstering inclusive growth in the United States: investing more in human capital, promoting inclusive employment, improving the tax and benefits system, and providing more efficient public services.

Improving education and health services is certainly widely recognised as one way to improve inclusion, but the U.S. experience with related reforms has seen mixed results, particularly given the highly polarised politics that continue to stymie legislative progress in Washington. Obama focused much of his first administration with improving human capital through education legislation, attempts to increase the minimum wage and the highly controversial Affordable Care Act.

Meanwhile, the U.S. spends 25 percent less than OECD countries on policies to connect unemployed citizens to jobs, Gurria noted. Many other rich countries have invested significantly in “activating” their unemployed, or helping match them with jobs that match their skills.

Indeed, certain models do exist across the globe that appear to be able to garner bipartisan support here.

“There are some lessons that we can learn from other countries, such as the use of work-sharing arrangements in Germany that allowed workers to keep their jobs while reducing their hours,” AEI’s Mathur says. “Germany and many other European countries have also done a better job of matching youths to apprenticeship programmes and training programmes.”

In addition to job matching, the U.S. needs more job creation. While the U.S. Senate proudly reports that 9.4 million private sector jobs have been created in the country over the past four-plus years, the OECD and other critics say these include too many low-wage positions.

Of course, not even full employment would fully solve inequality. The OECD credits globalisation, technological change and policy reforms such as lower wage ratios (between the median and minimum) for driving up the wages of the most skilled, especially in information technology or financial sector. Yet these have also left behind low- and middle-skilled workers.

Other countries have offset this difference through redistribution measures like social transfers and lower, progressive tax burdens. In the United States, redistribution measures have reportedly offset two-thirds of the fall in household income brought on by the financial crisis, but this still lags far behind other OECD countries.

“Taxes and transfers readjust inequality by one third in France, but only one fifth in the U.S.,” said Gurria. Yet he also cautions against putting too much faith in tax reforms, warning that “Taxing the rich is an easy way out, but there’s no quick fix.”

AEI’s Mathur agrees that policies must be holistic, targeting not just income inequality but also economic mobility.

“At AEI, we have been doing work looking at consumption inequality, and we find that consumption inequality is much narrower than income inequality,” she says. “This suggests that transfer programmes have to some extent been successful in improving material standards-of-living at the bottom of the income distribution.”

Mathur recently co-authored a study on economic mobility that suggests policies such as expanding school choice to help low-income students graduate high school and helping single mothers by expanding child-care subsidies, among other recommendations.

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