On Tuesday night (July 8) I attended the lecture of the Nobel-prize winning economist, Professor Joseph Stiglitz. The central theme of his lecture was not only the cost to human society from the growth in inequality, but that rather than being caused by economic factors, this was largely the result of deliberate policy and politics.
The prize for the highest inequality in the world went to surprise, surprise – the United States. In the last 30 years (Since the Reagan administration actually) the share of income to the top 1% is nearly one quarter all U.S. income. And Australia is experiencing a similar trend.
It’s often argued that if we allow for the “trickle down” effect, part of the wealth from the top 1% will trickle down to the bulk of the population. But according to Stiglitz, the trickledown theory simply hasn’t worked. Median income hasn’t grown in the U.S. Today it’s lower than 40 years ago. The average American worker is struggling to just keep up with what their parents were earning. And NO it’s not because we haven’t been productive. Productivity hasn’t stagnated over the last 30 years. It’s steadily grown. What we are seeing is in fact a growing gap between productivity and wages.
In the U.S., the rewards of increased productivity haven’t been shared amongst the bulk of the working population. In Australia, while the average wage has kept pace with economic growth, the minimum wage has fallen behind, as have unemployment benefits and most government pensions. In the U.S. 95% of the increase in incomes since the GFC has gone to the top 1%. One family in America, the Waltons (who founded Walmart), have more wealth than the bottom 30-40% of Americans. In Australia, the richest seven people hold more wealth than the bottom 20 percent of the population (Close to 2 million people).
America has traditionally been seen as the “Land of opportunity”, but as Stiglitz points out, even in terms equality of opportunity, America ranks the worst. Australia apparently does much better because of its education system.
The Price of inequality
Even the IMF acknowledges that inequality ultimately weakens our economies. Ultimately income inequality impacts on all aspects of people’s quality of life: life expectancy, access to education, opportunities for upward mobility and even access to the political process. The last factor is most evident in the amounts of money that are used to lobby politicians, especially when you consider the billions that were spent on the last U.S. presidential campaign. If you think about it, diminished access to the political process (or think of it as political inequality) is probably the most serious impact from income inequality. If our political representatives have been ‘bought’ our hopes of effecting changes in our society are greatly diminished. We are in effect losing our democracy.
And as to the causes of this inequality Stiglitz puts the blame largely on the policies and politics that are at play in Western countries. Stiglitz made reference to Australia’s current political leadership’s desire to emulate the U.S. He singled out the charge on visits to the doctor. The Abbott government also wants to change indexation arrangements for pensions and social security payments. This will mean pensions and other payments will fall further behind.
What about all that debt that the U.S. and Europe hold? Surely that’s an impediment to economic growth and makes government spending cuts necessary. Interestingly, U.S. debt after the 2nd World War was 130% of the GDP and yet the most rapid growth in the U.S. economy came in the period after the war.
What should be done
So what were Joseph Stiglitz’s suggestions, at least for Australia? Firstly that Australia (and other nations) needed to stop emulating the U.S. and protect their education and health systems. We need to stop selling our resources so cheaply. Stiglitz made the comparison between Australia and Norway, which has managed to build a substantial national wealth fund from its oil resources over the years. It was suggested we auction our mineral resources in the same manner we auctioned the electromagnetic spectrum to the communications providers. We also need to tax multinationals like Google and Amazon on the basis of their sales, capital invested and activity here. And governments need to discourage rent-seeking and monopoly activities and encourage full employment.
In addition, the Australia Institute has released its own paper on inequality in Australia: Income and Wealth Inequality in Australia. It highlights the fact that the top 20% of people have 5 times more income than the bottom 20% and hold 71 times more wealth.
Till next time