Economic inequality: causes, consequences, and policy approaches

Economic Inequality

There are certain specific factors associated with the rich. As along as one can afford decent shelter, sumptuous meals; better education and access better health care then such a person cannot be said to be poor. It is so natural for the rich to remain healthy and live longer than the poor. They lead an easy life, for instance, it is unheard of for a business executive to go without food or sleep out on a park bench. They understate the equally undisputable fact that by equitably distributing and allocating wealth human injustices and misery can be prevented. It is important to note that unfair distribution of wealth is not a recent phenomenon or something unique to America but it is a situation that humanity has faced since the start of civilization. Most contemporary economic systems, unfortunately, worsen this situation by extolling, defending and promoting this brutal distribution of wealth due to their basis on three ideological principles of competition, individualism and greed which work against economic and social justice. It is estimated that only about 20% of the world's population consumes more than 70% of the earth's resources while the other 80% consumes a mere 20%. Advocates against the global economy do not get tired of pointing out this disparity although rarely does their advocacy turn to concrete action.

Inequality in developed nations

The Credit Suisse Global Wealth Databook which came after a previous report by the United Nations is so far the most authoritative source that offers a comparative analysis of wealth distribution and concentration. Its most recent edition published in 2013 claims that 75.4% of all the wealth in the U.S. is owned by 10% of the population. Other developed countries also have similar degree of inequality, for instance, in Sweden it is 71.1%, Spain 54.0%,Singapore 61.1%,Norway 65.9%, U.K. 53.3%, Switzerland 71.5%,New Zealand 57.6%,Germany 61.7%,Israel 68.9%, Italy 49.8%, Japan 49.1%,Ireland 58.4%,Australia 50.3%,Canada 57.4%,France 51.8%,Finland 44.9%,Denmark 72.2%. Out of all these 20 most developed nations, the U.S. shows the widest disparity in wealth distribution. There also other not so developed nations such as South Africa 74.8%, Chile 72.5%,Indonesia 75.0%, and India 73.8%, where the situation is the same as that of the U.S. USA is in a sphere of its own amongst the developed countries because only 24.6% of the privately held wealth is in the hands of almost 90% of the disadvantage population while in the rest of the First World about 90% of the low class own up to 40% of the total wealth. It therefore means that the level of wealth concentration in the hands of a minority is great with the less developed countries being the only exception.

For instance, it is estimated that just 1% of the American population gained a whopping 95% of the total national income during Obama's much touted economic recovery regime. The program increased the income of the 1% by 31.4% whereas the rest only realized a meager increase of 0.4%. Some other reports insinuate that the 95% of the population at the lowest end of the economy have experienced a general reduction in the levels of their income in the course of Obama's economic stimulus program. This means for many Americans the recession has not ended (Zuesse, 2013).There was vigorous economic development and the resulting benefits were distributed almost equitably across the income curve. However this period of equal prosperity came to an abrupt end in the 1970s and from then to date an acute difference has been seen in the income, growth and distribution curve with the market oriented wealth showing an unbalanced tilt towards the top of the income scale (Fieldhouse, 2013).

In the most advanced Western democracies and particularly in the U.S.A., two thorny issues are at the core of political discourse. One is the increasing rise of economic disparities and 2, the measure being adopted to redress this. The rate of growth of these disparities is almost spiraling out of control in the capitalistic postindustrial world. But contrary to what many in the extreme political left suppose, this is neither a political issue nor something with political solutions because the problem is intractably rooted in several other factors than generally accepted. Ironically, the capitalistic notion of increasing productivity only serves to worsen these disparities, the basic reason being that some individuals and societies are better disposed to take advantage of advancement and development that capitalism brings. This is not just a problem for some, as the people on the right think, but a problem for all and not for only those who are ideologically predisposed to egalitarianism or those who are poor. One clear thing is that if this disparities and economic injustices are left to mushroom unchecked, it can lead to erosion of social order, increased inequality and economic insecurity resulting in a backlash by the masses against the capitalistic edifice (Muller, n.d).

Krugman (2014) fears that Capital in the Twenty-First Century hasn't just fell back to the patrimonial capitalism, a system in which the mainstays of the economy are managed by family dynasties and not professionals or experts. This is an astounding claim that needs careful analysis. Many researchers primarily consider inequality in terms of earned income majorly from salaries without paying attention to the real players in the arena of capital investment which hardly commands their interest. Piketty on the other hand demonstrates that at the top of the distribution curve, income from capital investments predominates as opposed to earnings. He further proves that during America's Golden Age and Europe's Belle Epoque, income disparities were primarily driven by imbalanced ownership of property and not unequal pay. He states that the prevailing trend show a move back that type of society without treating this as mere speculation. His work "Capital in the Twenty-First Century" is premised on empirical notions formed by a theoretical framework that tries to combine a discourse on the distribution of wealth and income and economic growth (Krugman, 2014).

Domhoff (n.d), In the United States, believes that wealth is mostly concentrated in comparatively fewer hands. According to surveys conducted in 2010, the top 1% of the upper class households privately held 34% of wealth while 19% of them were in the small business stratum, professional and managerial positions accounting for 53.5%. This implies that a mere 20% of the population owned a significant 89% while only 11% was left for the large 80% for the lower classes of salary and wage earners. In relation to a person's total net worth minus the value of a person's wealth or financial wealth the lion's share of this was still in the hands of the top 1% accounting for 42.1%. By considering different types of financial wealth, this same category - the upper classes - had64.4% of financial securities,62.4% of business equity, nearly 80% of non-home real estate and 64.4% of financial securities of all privately held stock. This included 81% to 94% of stocks, trust funds bonds and business equity. It would therefore not be wrong to assume that only 10% of the population owns the U.S.A. If the only criterion for this is assets that produce income or financial wealth (Domhoff, n.d).

Historical context

Many researches indicate that the distribution of wealth has been concentrated mainly on the top 1% throughout America's history, with the upper classes owning 40-50% in larger cities like New York, Boston and Charleston from the 18th and 19th Centuries but the problem was not as pronounced as it is in the 20th Century. However, this trend was slightly disrupted during the Second World War and during the New Deal when many people were forced to work for salaries and therefore couldn't save enough for investment. The rich also contributed some money through the progressive income tax in order to help run the government. Another decline occasioned by a sharp drop in the stock prices was felt in the 1970s when the rich mostly lost some value in their stock. But come the 1980s and the trend of wealth distribution went back to a situation similar to what prevailed around 1929 with the top 1% controlling 44.2% of all wealth. Except for a slight decline experienced around 1998-2000 when the economy crashed and the lower classes were pushed down again towards the end of 2000, the pattern has continued to grow (Domhoff, n.d).

Income inequality

Most remarkably, is a 2006 study by the World Institute for Development Economics Research which employed the statistics for year 2000 to give available data on how wealth is distributed globally by comparing what happens in the United States and other developed countries. The authors of the document accept that the quality of data available for many nations is not accurate and is probably wrong by many percentage points but by employing use of various sets of data and advanced statistical methods, they compensated for these inaccuracies. However, even with such admonitions in mind, it would still be safe to say that the top 1% of the world's population still control a massive 85% of the entire global wealth which can be broadly defined as all assets including financial assets without debts nearly accounting for almost 69.8% for the top 1% in the United States. Interestingly, the only other developed country that nearly beats the U.S. with the concentration of wealth in the hands of the 10% upper class, is Switzerland at 71.3% (Domhoff, n.d).

Using the Gini coefficient which is a mathematical ratio that allows economists to put all countries on a scale with values that hypothetically vary from zero, assuming that everyone in the country has the same income to 100 assuming that only one person in the country controls all the income inequality in the United States could easily be compared to that of other countries. Of all the countries that have been studied using this method, the United States is ranked 95th of the 134 countries with grave income disparities. Its Gini index is 45.0 while Sweden's is the lowest with 23.0. South Africa tops the scales with 65.0 (Domhoff, n.d).

Napoleon emphasized high inequality the concentration of wealth in France because he insisted the country was a meritocracy. This is according to Madrick (2014) and Thomas Pikettyin his celebrated book Capital in the 21st Century. This meant that even then hard work paid. However, such gross exaggerations about income distribution have been a refuge where the privileged classes at the top of wealth distribution hide. This is the central pillar upon which the American dream is built, and since the start of the year the compelling findings of Piketty and other renowned economists have challenged the long held beliefs that America is a Meritocracy by entering the national discourse on this subject. They bring to attention the lopsided nature of wealth distribution and how widespread it is and also demonstrate that those in the lower echelons of society have little or no chance of moving to the top quarter.

This definitely means that42% of people born into the lower fifth will have no room to move up, while another 42% will only manage to climb to the next two levels. However, 39% of those born at the top will retain their status while 23% might fall but only to the second and third levels. The problem of unequal distribution of wealth is not adequately described by this situation because it has traditionally pointed to the top income earners growing at a faster rate than the next group etc. It has been apparent for economist through the years that all groups can grow at the same rate but this does not take place. The wider American population faces economic stagnation while there are runaway incomes at the upper classes particularly amongst the topmost, a tenth, of the top 1% (Madrick, 2014). It is the poor who suffer mostly when the income gaps widen with the consequence, in many unequal societies, that most of the population bears the brunt of poverty, disease and the sickness of richness, cancer and cardiovascular cases being amongst the latter a manifestation of how the affluent are victims of anxiety and depression. In this scenario they can only find consolation in spending extravagantly, overeating and obsessive shopping (Hacker, 2012).