A recent report claimed that inequality in wealth distribution is increasing. By 2030 the richest one per cent of the world will own two-thirds of the global wealth. It is pertinent to assess why this is happening and whether the causes of this increased wealth inequality are avoidable or not. This would then lead us to something Pope Francis said recently about the economy.
Let us place the issue in a wider historical context. Given that most economies in the EU can be described as social market economies, we may feel that the issue of inequality in wealth distribution has been effectively addressed.
However with the severe economic recession that we have suffered, inequality has also increased in Europe. Governments have had to balance their budget or at least reduce their fiscal debt to a sustainable level and this has hindered EU governments from allocating additional resources to their welfare system.
Moreover in other parts of the world, reducing income and wealth inequality has not been a priority policy issue at all. So we are now in a situation where the current levels of inequality are probably the highest they have ever been when one takes a global and not a regional or country perspective.
Yet, in the past, income inequality has provoked revolutions and revolt. Will it produce the same unrest in the future? It could especially if one recognises that some of the causes of such high inequality are induced by public institutions and their policies.
One such policy is low interest rates. When interest rates are kept low, one reduces the cost of debt. Cheap debt may seem to be a benefit for everyone. However it is of far greater benefit to wealthy companies and wealthy individuals, as they do not transfer the benefits of low interest rates to their customers. Moreover it enables them to speculate on the backs of the average man in the street.
Another policy worth noting is income tax legislation around the world
Another policy worth noting is income tax legislation around the world. Working individuals whose income is known and transparent pay all the taxes due. The wealth of the super-rich does not come from a salary but from appreciation in the value of their assets, most of which goes untaxed. So we have a tax system in most countries that penalises work and productivity but incentivises the hoarding of wealth.
Worse still, it actually enables persons to move money around the world, make a profit on such movement of money, and not pay tax on it. They have come to recognise that they could make a profit not through an investment in productive activities, but through the simple movement of capital - by speculating in currencies, bonds and equities and commodities.
The third element I wanted to mention is something that I have referred to in the past. Together with low interest rates, banks have also extended the term of loans provided for housing – again this is something that has happened in several countries. These two should have, in theory, enabled young house buyers to buy their own home. Instead, it has become a cash cow for building developers, as they pushed up house prices. The beneficiaries of low interest rates and extended loan repayment programmes have been the developers, who have been very eager to line their pockets.
So if we look at the global economy today, we note a paradox. It has enabled billions of persons to access new technologies and consumer goods of all kinds. On the other hand, we note an increased inequality in income distribution, not to mention other things such as irreparable damage to the environment or exploitation of human persons.
Recently Pope Francis made the point that the global economy can provide enough food, education, health and welfare systems, and housing for everyone who lives on this planet. Instead we have millions living in poverty, modern slavery and governments at the mercy of large corporations. This inequality is the result of a lack of level playing field, perpetuated by that one per cent I referred to in the first paragraph of this week’s contribution.
Will this economic inequality, which is leading to social inequality, become an issue that will define he global economy in years to come?