Thursday, 9 August 2012

Scale of inequality now a drag on our economy and well-being

Colm O'Doherty: The results from the Central Statistics Office Survey of Income and living Conditions 2010, released earlier this year, confirmed what most Irish people are acutely aware of – the gap between the top and bottom 20% of income earners is increasing. The well-off are getting richer compared to the rest of the population and are suffering little or no repercussions from the economic crash. Average income of the top 20% of earners was 5.5 greater than those in the lowest 20 per cent. This inequality ratio is up from 4.3 a year earlier.

Persistent and increasing inequality is a serious threat to both our economic prospects and our well-being. A new wave of research on the effects of inequality, growth and financial crisis all see inequality as a driver behind the unsustainable surge in household indebtedness which triggered the crash.

On the level of individuals, Joseph Stiglitz suggests that in the US people on lower incomes over-borrowed in order to maintain a rising standard of living in the face of stagnating real incomes. This borrowing, over time, became unsustainable and led to default and pressure on over-extended financial institutions such as Fanny Mae, precipitating the wider financial crash. A second set of theorists (Rajan, Fitoussi and Saraceno) argue that on the societal-level inequality is the driving force for policy choices which, in turn, lead to unsustainable household and governmental debt levels. In this scenario, neo-liberal economic policies use regulatory tools to facilitate low income households’ access to credit , particularly mortgages.

These policies encouraged low interest rates and financial deregulation to compensate for inadequate incomes. They also aided and abetted financial liberalisation and raising top incomes, seen as progressive policies by neo-liberals, through regressive taxation strategies. Policies such as these permeated the thinking of successive Fianna Fail coalition governments and, many people were convinced that that they represented a natural economic order. It appears that the current Government is also in thrall to these doctrines. While there is some overlap between these theoretical standpoints, they all clearly make valid links between inequality and the financial crash.

The consequences of inequality are also becoming clearer. Economic hardship, manifested as unemployment, wage reductions and income support cuts, is affecting all tiers of Irish society except those at the top who are becoming more and more adept at looking after themselves and their own. A recent report from the Irish League of Credit Unions found that 1.82 million adults, say they have less than 100 Euro a month spend after bills are paid. Poverty rates are on the rise with yearly increases in consistent poverty and at-risk–of-poverty rates being recorded by the CSO. Reductions in essential public services such as health and education, are weakening the social contract between citizens and the State.

The State is pursuing policies which openly discriminate in favour of the wealthy and against all other citizens. This policy direction is the road to economic and social ruin. While the left here appear not to have woken up to this reality – blaming the EU, the IMF and global capitalism for everything - world leaders in the US and France accept that government policy needs to be framed around re-distribution of wealth in order to balance the fiscal books and fulfil the social contract obligations of the State.

On the academic front, Robert Putnam, the author of Bowling Alone, who is recognised as an authoritative academic but not a firebrand, has pinpointed inequality, the closure of social mobility and diminishing social trust as threatening America’s economic future. The tax burden in Ireland, at 28% of GDP, is one of the lowest and most regressive in the EU. Sweden and Denmark and other Scandanavian countries have tax burdens of the order of 45.8 % and 48.2% respectively, and are not in the same economic disaster zone as us. Despite going against the economic orthodoxy we have been in thrall to for the past twenty years the Nordic region's tax policies have protected their social models, encouraging and realising more equal societies and avoiding the financial crash which is now inflicting terrible damage on the most vulnerable and weakest sections of our society.

The big question facing our Government now as it begins to frame its second budget is: will it continue to progress inequality and ramp up social and economic decline in the pursuit of measures which are widely discredited or will it put in place fair and equitable taxation measures which share the burden of economic and social renewal?


Paul Hunt said...

Bang on cue. A perfect example of typical left-wing delusion - with a self-serving depiction of the right-wing delusion on the side - which I described in my comment on the previous post.

colm o doherty said...

Hi Paul, thanks for your comments. I intended my piece to be a commentary on where we are and where we are headed if we do nothing to change our actions. Leading scholars in many fields, (economics, sociology, social policy, psychology), recognize that growing inequality is a trend which has negative consequences- checkout Harry McGee's article in Thursdays Irish Times page 5.

Paul Hunt said...

There seems to be this perception, because that is all that it is - that the increased use of the private sector operating via markets coupled with a reduced role for the state generates excessive and harmful inequality. The resulting false conclusion is that the solution is raid, tax and spend policies. Even if this were true, there is no way of securing the democratic legitimacy for these policies in Ireland. See my comment on a recent Michael Taft post:
(which, unsurprisingly, evoked no response. It's always easier to ignore what one struggles to refute.)

But it isn't true. Increased reliance on the private sector and markets will increase inequality, but it will boost economic prosperity more efficiently and effectively than the state will as the main driver. The role of the state is to govern markets and to ameliorate the impact of the inequality generated.

The excessive and damaging inequality we're seeing now in many developed economies is not the result of the use of markets. It is a result of the subversion, distortion and the rigging of markets by those exercising economic and political power and the suborning of governing politicians, policy-makers and regulators to facilitate rent-seeking and monopoly profit-gouging.

And there is no shortage of those, ostensibly on the left, who facilitate this monopoly profit-gouging and rent-seeking and would fight to the better end to protect their own rent-seeking.

Anonymous said...

Hi Paul, I couldn't agree with you more that the role of the state is to govern markets and to ameliorate the impact of the inequality generated - or indeed to lessen the scale of the inequality being generated. This is exactly what the Nordic countries are doing and what Obama and Hollande are signalling they will do.

colm o doherty said...

Hi Paul, I also agree with your view that it is the role of the state to manage capitalism. We face a triple crisis: no growth, no jobs and falling living standards for those at the sharp end of our society. There is strong evidence available which shows that the growth in inequality and the policies which created this growth triggered the crash here, in the UK and the US. For a truly sustainable recovery we need to grow the economy through the creation of a progressive tax system which re-distributes, inreases demand and preserves vital health, welfare and educational services. This requires the creation of a good capitalism that works for all rather than sustaining our inefficent and failed plutocracy.

Paul Hunt said...

@Colm O'Doherty (and 'anonymous'),

Many thanks for these responses. (Though you may need to be careful not to rouse the wrath of Ernie Ball, the doyen of academic Marxist sociology, by pursuing this exchange.)

But we are back to the basic conflict between the ease and simplicity of pronouncing what 'should be' - in this instance the 'creation of a good capitalism' - and the hard-grind of securing the broad-based democratic consent to make this happen. Indeed, the ease and simplicity with which what 'should be' is advanced - and the associated demonising of those who might not share this vision in its entirety - frequently repels those with whom the progressive-left should be making common cause to build this democratic plurality.

This repulsion is reinforced when many, ostensibly, on the progressive-left either fail to confront or support rent-seeking by certain narrow sectional interests that is detrimental to the public interest (or support the effective veto exercised by these parties over any changes in the structure and organisation of state-directed activities or state-owned industries that would be unambiguoulsy in the public interest).

And it is further reinforced when many on the left advance the case for the state 'superceding' markets in all instances. The Marxian critique of capitalism (and the language in which it was expressed) retains its relevance and resonance; but Marxist prescriptions should be relegated to the dust-bin of history.

Until the social democratic left exorcises these demons there will be no possibility of building the coalition with liberal and centrist progressives required to secure the democratic consent to create this 'good capitalism'.

Though I will continue argue and make the case for such a coalition, unfortunately, I don't see it taking shape. The out-dated slogans, shibboleths and ideological baggage of the left are far too comfortable and comforting and the protection of limited privileges for some is far too important to make the necessary advance in thinking and practice.

It is the dominant - and dominating - feature of the modern era that centrist, liberal progressives and social democrats will fight each other with an intensity that should direct collectively at their enemy. And this conflict sustains and entrenches the centre-right hegemony.

Anonymous said...

Colm O'Doherty writes:

< For a truly sustainable recovery we need to grow the economy through the creation of a progressive tax system which re-distributes, inreases demand and preserves vital health, welfare and educational services >

But for some reason the Irish people do not want this. Election after election, the Irish have consistently voted for parties whose policies - in practice, in reality - are the very antithesis of these laudable goals.
What drives the Irish love of inequality, suffering, misery, abuse and indeed ultimately, denial of fundamental rights?