Inequality out in the open. Credit: A.D. McKenzie/IPS

By A. D. McKenzie
PARIS, Dec 12 2014 (IPS)

For years, many policy makers, including economists, have clung to the belief that if states do nothing to boost income equality, market forces will cause wealth to trickle down to the poorest citizens and contribute to overall growth.

That theory is now being increasingly debunked as experts affirm that the broadening gap in income is creating far-ranging problems for many societies.

In a new report  published on Dec. 9, researchers at the Paris-based Organisation for Economic Cooperation and Development (OECD) argue that “reducing income inequality would boost economic growth”.

Their research shows that countries where income inequality is decreasing actually “grow faster than those with rising inequality,” and the analysts would like to see governments take stronger action to reduce inequity.“Today, the richest 10 percent of the population in the OECD area earn 9.5 times the income of the poorest 10 percent; in the 1980s, this ratio stood at 7:1 and has been rising continuously ever since” – OECD

“The single biggest impact on growth is the widening gap between the lower middle class and poor households compared with the rest of society,” says the report titled ‘Trends in income inequality and its impact on economic growth’, and “education is the key: a lack of investment in education by the poor is the main factor behind inequality hurting growth.”

According to Michael Förster, a senior analyst in the OECD’s Social Policy division, one reason “the poor and lower middle classes are being left behind in unequal societies” is that they do not have the resources to spend on their own or their children’s education, compared with wealthier citizens,.

He said that governments needed to revise strategies that are based on outdated economic theories.

“The common assumption used to be that the more you did to enhance equality, the more you would hinder growth,” he argued. “So the idea was that if you take too much from the top earners, through taxes, you will have less growth. We haven’t found evidence for that. What we have found is that increasing inequality is bad for growth.”

For example, rising inequality is estimated “to have knocked more than 10 percentage points off growth in Mexico and New Zealand over the past two decades up to the Great Recession,” says the OECD.

Meanwhile, in the United Kingdom, Italy and the United States, the “cumulative growth rate would have been six to nine percentage points higher had income disparities not widened.”

OECD Secretary-General Angel Gurría said that this “compelling evidence” proves that addressing high and growing inequality is “critical to promote strong and sustained growth” and needs to be at the centre of global policy discussions.

“Countries that promote equal opportunity for all from an early age are those that will grow and prosper,” he added.

However, some scholars maintain that the consequences of inequality are hard to prove. American economist Jared Bernstein and others have pointed out that it is difficult to establish a firm connection between the inequities in education and economic growth.

These analysts acknowledge that wealthier parents do spend more overall on educational tools and “goods”, and that children from rich families often study at elite institutions in contrast to children from poor backgrounds who may attend lower-quality schools, but they have disagreed on the social or economic effects.

With the “new evidence”, OECD researchers say that the main means through which inequality affects growth is by “undermining education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development.”

“People whose parents have low levels of education see their educational outcomes deteriorate as income inequality rises. By contrast, there is little or no effect on people with middle or high levels of parental educational background,” the OECD said in a statement.

According to researchers, anti-poverty programmes will not be enough to create greater equality of opportunities in the long term.  Essential measures will include “cash transfers and increasing access to public services, such as high-quality education, training and healthcare”, the OECD says.

Förster stressed that the inequality study focused on income and not wealth. But recent discussions have centred on both, particularly in France since the election of Socialist President François Hollande in May 2012.

Soon after his election, Hollande announced plans for a 75 percent tax on all income over one million euro, and a watered-down version of the plan was approved by French courts a year ago, even as many wealthy families fled to Belgium and elsewhere.

Economists of different political colours have argued about whether the increased taxation is good for the economy, and the debate has grown more heated with last year’s publication of Capital in the Twenty-First Century by renowned French economist Thomas Piketty.

A lecturer in Paris and internationally, Piketty advocates a global tax on wealth. He has carried out studies showing that income inequality has grown in many countries, alongside 30 years of declining tax levels.

The gap is particularly marked in the United States, but even in “egalitarian” France, the top one percent earned an average of 30,000 euro monthly in 2010, compared with 1,500 euro per adult of the poorest 50 percent.

According to the OECD, a similar situation exists in many of its 34 member countries, which include European nations and others such as Mexico, Chile and the United States.

“Today, the richest 10 percent of the population in the OECD area earn 9.5 times the income of the poorest 10 percent; in the 1980s, this ratio stood at 7:1 and has been rising continuously ever since.”

Bucking the trend, income inequality has been falling in Chile and Mexico, but the incomes of the richest are still more than 25 times those of the poorest in these two countries.

The OECD’s Latin American Economic Outlook 2015, produced with regional partners and also launched on Dec. 9, focuses on the role of education and skills, and experts said more needed to be done to “raise educational standards and address persistent and substantial socioeconomic inequalities.”

Förster told IPS that the organisation hoped governments would consider the findings as a basis to change policy, “otherwise we won’t get out of the current situation.”

(Edited by Phil Harris)

By Judith Niehues
COLOGNE, Sep 20 2014 (IPS)

Thomas Piketty, a French economist who works on wealth and income inequality, has triggered a debate on the distribution of income and wealth in many countries. This is no small issue because views on income inequality and concomitant redistributive preferences are crucial to the design of tax and transfer systems.

Particularly in many European countries, society is concerned about distributional issues, reflected in recurring debates on redistributive policies. However, a study presenting international survey data on subjective perceptions of inequality and redistributive preferences reveals that perceived and actual inequality diverge quite substantially in many of these countries.

Dr Judith Niehues

According to the 2009 Social Inequality Module of the International Social Survey Programme (ISSP), more than 50 percent of Germans strongly agree that differences in income are too large.

Correspondingly, a similar portion of Germans thinks that it is “the responsibility of the government to reduce the differences in income between people with high incomes and those with low incomes” – a questionnaire item which is commonly used to capture subjective preferences for redistribution.

Regarding this majority of critical views on inequality, social justice and redistribution are topics for debate that continually feature on the political agenda in Germany – reflected in the current introduction of redistributive policies, such as a minimum wage and additional pension benefits for mothers.

On the other hand, in the United States – which is characterised by a far higher degree of actual income inequality – people are less concerned about income differences, and they do not see any reason for redistributive state intervention. There is virtually no empirical relationship between the actual size of inequality within a country and how critical people view these income differences to be.

The missing link between inequality and its assessment is not specific to these two countries. In a sample of 23 European countries and the United States, there is virtually no empirical relationship between the actual size of inequality within a country and how critical people view these income differences to be.

Obviously, there might be a range of individual and national factors which may explain cross-country differences in critical views on income differences and related redistributive preferences.

For example, in line with the argument of the “American exceptionalism”, people in the United States might just accept certain inequalities as incentives because they believe in the chance of upward mobility.

On the other hand, Germans may be more convinced that income positions arise from luck or other exogenous circumstances, thus regarding inequality as more unfair, and therefore they might demand more state redistribution.

However, current research on mobility reveals that there is a tendency for countries with higher inequality to also be associated with less income mobility.

Looking instead at how types of societies are perceived – a questionnaire item also included by the ISSP – gives some clues: 54.2 percent of Germans believe that the bulk of the German population lives rather at the bottom of society.

To what extent does this perceived type of society match with actual income distribution in Germany? Although there are different ways of demarcating society into a “bottom”, a “middle” and a “top”, studies generally reveal that the middle class represents by far the largest group in German society.

In particular, independently from the chosen definition of income groups, people on middle incomes are far more numerous than those at the bottom of the income distribution scale. This rather pessimistic view on income equality is typical of the European countries studied.

In most countries, the population significantly overestimates the degree of inequality. This is particularly true for former socialist countries such as Hungary, Slovenia as well as the Czech and Slovak republics.

In Hungary, for example, 56.6 percent of the population views Hungarian society as “a small elite at the top, very few people in the middle and the great mass of people at the bottom”, although the country is characterised by one of the lowest income inequalities in the European Union.

Thus, it is not that former socialist countries view already small income differences as much more critical, but that the population is just not aware of the small level of income inequality.

The situation is different in the Scandinavian countries. Here the various populations are much more realistic about the low levels of inequality and truly identify their societies as “typical middle class models”.

In contrast to the European countries, the United States reveals a completely different picture: U.S. citizens substantially underestimate the extent of inequality in their country. The lower income group in the United States is considerably larger than Americans suppose

This varnished view on inequality in the United States is not new – but it is rather new that in European countries it tends to be the other way round.

These results provide an explanation of why redistributive policies find more support in some countries than in others.

Although results from previous ISSP surveys suggest that cross-country differences in views on inequalities and redistributive preferences tend to change slowly, it would nevertheless be interesting to see if critical views on income differences and redistributive preferences would change if citizens were aware of the actual degree of inequality in their countries.

Interestingly, the overestimation of inequality is adversely related to the absolute level of living standards in corresponding countries. Thus, it might also be the case that the perceived structuring of the society is more associated with absolute levels of living standards than commonly suggested.

(Edited by Phil Harris)

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