Why Inequality is an Economic Problem

Why Inequality is an Economic Problem

In recent years, rising economic inequality has become more apparent and obvious. According to Alice Martin (2014) of New Economics, the OECD has recently thrown out the concept of “trickle down” economics, as this cannot really be seen to be happening in many cases. The problem with rising inequality is that there are risks for financial stability. As Martin points out of the recovery of the economies in the USA and UK:

“… as GDP picks up, so too has the widening gap between rich and poor… the aftermath for ordinary workers – depressed wages and growing debt – is only getting worse.”

The argument is made that while the wealthy are no longer impacted by the crisis, in fact many people still are, and that only minimal growth has been achieved, and that this has certainly not benefited the masses.

Richard Wilkinson, a public health scholar explains in the following talk given to TED in 2011 how inequality harms societies:

Alice Martin mentions that following the economic crisis of 2007 and 2008, the UK experienced the most extensive ongoing decline in real wages since the commencement of keeping records of this statistic. What this means is that incomes have not improved in the seven or so years following the crash – rather they have declined for the majority of people. There is one group of the population that this does not apply to however – the top 10 per cent of wage earners. In fact it is reported that up until the end of 2013, real earnings for this group increased by 3.9 per cent, compared with a 2.4 per cent fall for the other 90 per cent of the population. And what is the result of this decline in wages? An increase in debt. Figures show that the rate of household personal debt is growing at £1 billion per annum. What all of this means is a slip in standards of living standards for the vast majority of people living in the west. In the USA, Martin explains:

“Income inequality has seen a sharp return – the top 1% of earners have reaped 95 per cent of the USA’s economic gains since the crash.”

Is The Growing Financialisation Promoting Inequality ?

During the past forty years it is reported that the financial sectors, especially in the UK and USA have experienced a considerable deregulation and the consequence has been that the financial sector in these countries has grown tremendously. One of the impacts of this is that finance now drives the economy. The concept of raising the standard of lives for the masses which was popular following the two world wars has fallen by the wayside. There has been an over-reliance on the concept that trickle down benefits would be achieved as the rich got richer. This has been an accepted concept for many years, but it has unfortunately not transpired.

Some argue that this process of change is called “Financialisation” and that it includes the extension of financial markets into our lives. Examples of financialisation include privatisation, social insurance and pensions. There is also increasingly a focus for organisations on creating shareholder value, which really means creating the biggest profit in the shortest time, and often only involves consideration of the short term. All of this is worrying, especially the increase in household debt. After all, we all know now that household debt was one of the major factors that fuelled the financial disaster of 2008. And yet, through allowing people to increase debt and continuing to encourage this great inequality between rich and poor, the risk of another crisis occurring is high.

Proponents of reducing inequality to promote financial stability argue that increasing inequality leads to a lowering of demand for products and services. That is because if people have lower wages they cannot afford to buy so much. They also suggest that with declining wages, households are forced to rely on debt to maintain themselves. Also, it is argued that financial liberalisation has the net effect of money being invested in countries with trade deficits which simply provides more money for consumption that is focused on debt. A fourth factor contributing to the instability is that those amassing wealth at the top of the chain are more likely to invest in a risky manner.

It seems that inequality can no longer be argued to support economic growth. Rather it is preventing countries from growing their economies. The current system is unsustainable, and debt cannot continue to be used to support the economy. And yet we continue in the same way. Maybe there is another financial crisis just around the corner?