‘A field day for the 1%’: Consequences of rising inequality

In February, the Financial Times published an article online. It was titled, ‘Donald Trump is creating a field day for the 1%’.

It began, “He was supposed to be leading a revolt against America’s elites. In practice Donald Trump is laying out a banquet for their delectation. The Trump White House is drawing up plans for across-the-board deregulation, tax cuts and a new generation of defence contracts.”

In anticipation of these measures, the markets in the US responded in a predictable way. In the very same week the Dow Jones recorded its best streak in 30 years, closing at a record high for a twelfth straight session.

Much of the upturn was in response to a speech made by the American president to congress,  in which he said, “My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone. It will be a big, big cut. At the same time, we will provide massive tax relief for the middle class.”

In his sights is the Dodd-Frank Bill, created by the Obama administration to regulate the financial industry following the crash in 2008. The bill increased the amount of regulation in the financial industry, and was introduced to restrict financial institutions speculating with other people’s money and to protect consumers from reckless market practices which caused a global meltdown.

The president is proposing an 10% increase in budget spending, roughly $54 billion, which means there will be widespread cuts in other areas.

Among many dissenting voices was Senate Democratic leader Charles Schumer of New York, who said Trump’s budget would take “a meat ax to programs that benefit the middle-class.”

“A cut this steep almost certainly means cuts to agencies that protect consumers from Wall Street excess and protect clean air and water,” Schumer said in a statement.

Also in his sights is the EPA (Environmental Protection Agency). Created in in the 1970s it has been the driving force behind the increased well-being of the environment in the United States and beyond. The EPA has an annual budget of roughly $8 billion, a minuscule fraction of the entire budget, with a staff of around 15,000. Myron Ebell, who led the Trump transition team which focused on the EPA, said the agency’s workforce could be cut to a third of its current size.

To counterbalance the increase in budget spending Trump will cut the enormously beneficial foreign aid package the United States offers annually. This aid goes to organisations and charities around the world that combat disease, famine and war, and is an indispensable stimulus many of them cannot do without.

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These are just some examples of Trump’s ideas but they illustrate a deeper perspective he holds; that businesses fuel growth, create jobs and increase wealth. If only we can roll back regulation we can jump-start a seemingly lagging economy.

His basic assumptions are not only false, but demonstrably counterproductive. The overarching result of such measures, designed to allow businesses to flourish and develop, will be the increase in inequality between the rich and poor.

Developing huge tax breaks and decreasing regulation means the money will have to come from somewhere else, primarily the American taxpayer. This is called shifting the burden, and ultimately the American people will have to shoulder it.

We have witnessed in our lifetime how ripples in the economy of the United States can have far reaching consequences, especially for Ireland and for Europe.

What affects can increased inequality have on people at a local level?

There is extensive research to show that wealth inequality has detrimental affects on our health, our education, our environment; it also increases poverty, is a driving force in conflict and something that in itself can lead to a perpetual disenfranchisement among poorer classes. It is the disenfranchisement many commentators have surmised led to the election of Trump and Brexit.

Health

For EMDCs, data on access to skilled health personnel for births suggest that there are large disparities in health access across income levels within developing countries, and to a lesser extent in emerging market countries. However, even in advanced economies, income inequality is increasingly being reflected in lower life expectancy. This is particularly striking in the United States, where income today is a stronger predictor of life expectancy than it was a generation ago.

Healthier societies, as proxied by a lower female mortality rate, tend to have lower income inequality. This finding suggests that greater and more equal access to quality health services allows people to be more productive, thus lowering income disparities.

Higher inequality lowers growth by depriving the ability of lower-income households to stay healthy and accumulate physical and human capital.

As a result, labor productivity could be lower than it would have been in a more equitable world.

In developed countries such as the US the level of obesity is much higher among the poor. Research shows this is mainly due to the low cost of high sugar foods.

Education

Education can play an important role in reducing income inequality, as it determines occupational choice, access to jobs, and the level of pay, and plays a pivotal role as a signal of ability and productivity in the job market.

The opportunity to prosper seems almost unreachable for many.

In a world in which technological change is increasing productivity and simultaneously mechanizing jobs, raising skill levels is critical for reducing the dispersion of earnings. Improving education quality, eliminating financial barriers to higher education, and providing support for apprenticeship programs are all key to boosting skill levels in both tradable and nontradable sectors.

These policies can also help improve the income prospects of future generations as educated individuals are better able to cope with technological and other changes that directly influence productivity levels. In advanced economies, with an already high share of secondary or tertiary graduates among the working-age population, policies that improve the quality of upper secondary or tertiary education would be important.

Technological advances have been found to have contributed the most to rising income inequality in OECD countries, accounting for nearly a third of the widening gap between the 90th and the 10th percentile earners over the last 25 years.

Financial crises

A growing body of evidence suggests that rising influence of the rich and stagnant incomes of the poor and middle class have a causal effect on financial crises, and thus directly hurt short- and long-term growth. The impact of financial deepening, as proxied by the ratio of private credit to GDP, on both market and net inequality varies across advanced economies and EMDC. Results suggest that financial deepening is associated with higher income inequality in EMDCs. This likely reflects the fact that while financial deepening has accelerated over the past two decades, the record on financial inclusion may not have kept apace in these countries.

Studies have argued that a prolonged period of higher inequality in advanced economies was associated with the global financial crisis by intensifying leverage, overextension of credit, and a relaxation in mortgage-underwriting standards.

The promotion of credit without sufficient regard for financial stability, however, can result in crises, as evidenced by the subprime mortgage crisis in the United States, with disproportionately adverse effects on the poor and the middle class. Moreover, it illustrates the broader point that deep social issues cannot be resolved purely with an infusion of credit. Policies thus need to strike a balance between fostering prudence stability, and inclusion, while encouraging innovation and creativity.

We find that less-regulated labor markets, financial deepening, and technological progress largely explain the rise in market income inequality over the last 30 years.

According to economist Dean Baker, “The elites have written these rules to redistribute income upward. Needless to say, they are not eager to have the rules rewritten — which means they also have no interest in even having them discussed.

“The changing structure of financial regulation and financial markets has also been an important factor in redistributing income upward. This is a case where an industry has undergone very rapid change as a result of technological innovation. Information technology has hugely reduced the cost of financial transactions and allowed for the development of an array of derivative instruments that would have been unimaginable four decades ago.

“Rather than modernizing regulation to ensure that these technologies allow the financial sector to better serve the productive economy, the United States and other countries have largely structured regulations to allow a tiny group of bankers and hedge fund and private equity fund managers to become incredibly rich.”

Social Cohesion

Extreme inequality may damage trust and social cohesion and thus is also associated with conflicts, which discourage investment. Conflicts are particularly prevalent in the management of common resources where, for example, inequality makes resolving disputes more difficult. More broadly, inequality affects the economics of conflict, as it may intensify the grievances felt by certain groups or can reduce the opportunity costs of initiating and joining a violent conflict.

There is considerable research that illustrates a connection between high inequality and crime.

Poverty

Income inequality affects the pace at which growth enables poverty reduction. Growth is less efficient in lowering poverty in countries with high initial levels of inequality or in which the distributional pattern of growth favors the non-poor. Moreover, to the extent that economies are periodically subject to shocks of various kinds that undermine growth, higher inequality makes a greater proportion of the population vulnerable to poverty.

There are solutions

Better access to education, improved health outcomes, and redistributive social policies help raise the income share of the poor and the middle class irrespective of the level of economic development of a country.

In developing countries with currently low levels of education attainment, policies that promote more equal access to basic education (for example, cash transfers aimed at encouraging better attendance at primary schools, or spending on public education that benefits the poor) could help reduce inequality by facilitating the accumulation of human capital, and making educational opportunities less dependent on socioeconomic circumstances.

By contrast, easing of labor market regulations and technological progress dampen the income share of the poor and the middle class, consistent with other studies. This result is not surprising, since the poor are often disproportionately employed in lower-paying and less secure jobs (often in the informal sector) and tend to benefit more from labor market regulations such as minimum wages and firing restrictions. This points to the policy role of making education more accessible, while ensuring that changes in labor market institutions do not excessively penalize lower-income individuals. Moreover, to the extent that redistributive policies can play a role in reducing inequality, they can be supported by making the tax systems more efficient and progressive and improving targeted spending.

Redistributive policies also have been shown to work. Governments in advanced economies have historically mitigated inequality through public policy—primarily progressive taxes and social transfers such as public retirement benefits (CBO 2011). However, many advanced countries have now seen an increase in net income inequality, indicating gaps in existing tax-and-transfer systems to counteract rising market inequality. The progressivity of tax systems has declined in some advanced economies over the past few decades, with the result being that high-income households and corporations now face lower effective tax rates.

Tax revenues are critical for funding the policies and services that can fight inequality, and progressive taxes directly shrink the gap between rich and poor. Tax revenues also provide the services that the corporations benefit from, including infrastructure and healthy, educated citizens. However, tax is largely something that corporations seek to minimize. This can be achieved in two ways: through making use of accounting tricks using tax havens and loopholes in the law; or by securing preferential tax agreements.

Excessively expansionary fiscal policy in the US – but also in Europe – alongside ongoing loose monetary policy could cause the economy to overheat if the recovery is more pronounced than expected. A sharp jump in inflation to well above the 2% mark in the industrial countries would prompt central banks to change course abruptly, risking an economic slump in 2018/19.

It is evident from the global meltdown in 2008 that the world economy depends on the strength of the economy of the United States. Considering the election of Trump and the policies he is introducing it would be safe to assume another crisis is well on the way to fruition.

Oxfam: An economy for the 99% (2017).

IMF: Causes and Consequences of Income Inequality: A Global Perspective (2015)

World Bank: Taking on Inequality (2016)

Engelhardt & Wagener: Biased Perceptions of Income Inequality and Redistribution (2014)

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