Monday, 16 February 2015

Inequality: a Real and Growing Threat to the Irish Economy

Nat O'Connor and Cormac Staunton: Economics has always been about the study of who gets what, when and how. This issue has come into sharp focus due to the problems that growing economic inequality is causing. International bodies like the OECD, World Bank, IMF and World Economic Forum have all stressed the challenges and risks posed to developed economies by economic inequality. Economists and leaders across the spectrum have called economic inequality ‘dangerous’ (free market advocate Alan Greenspan), ‘the most important problem we are facing today’ (Nobel laureate Robert Shiller), and ‘the root of social ills’ (Pope Francis).

TASC’s first annual report on economic inequality, Cherishing All Equally, shows that this global phenomenon is a very real threat for Ireland too.

Income inequality in Ireland has been growing since the 1970s, to the point that we are now the most unequal country in the OECD when it comes to how the economy distributes income before taxes and social welfare. Thankfully, our social welfare system and public services significantly reduce this market income inequality. However, as inequality grows every year, it becomes harder to maintain the tax and welfare system to restrain the underlying inequality from affecting the wellbeing of our society, the functioning of the economy and even the health of our democracy.

Here’s how. Income inequality leads to poverty and social exclusion. But it also lowers demand in the economy in a downward spiral of lost spending. The concentration of income in fewer hands gives the wealthy more power to lobby for tax cuts that will disproportionately benefit them.

One of the important contributions of TASC’s report is to demonstrate that economic inequality can only be reduced if policies join the dots between taxes, public services, family and the cost of living; not just focus on cash incomes.

Globally, the OECD has shown the fall in the share of economic growth that goes to people at work; for many reasons, from new technologies to the bigger role of finance in the economy. Thomas Piketty’s research shows that those in the top one in ten earners are taking an ever greater share of income, even while wages overall are in decline compared to the profits of investors and financiers.

This is happening in Ireland too. The OECD shows that Ireland has had the third largest decline in the share of economic growth going to people at work, down from 65% of national income in 1990 to below 56% in 2009.

It is important to acknowledge that real economic development has occurred over the last three decades. New technologies have helped bring a higher standard of living across society and some living costs are lower now than in the past, such as telecommunications or household goods. Nonetheless, even during recent periods of economic growth, many people’s circumstances have worsened. Essential costs like housing and energy are much more expensive than in the past. And of course, the economic collapse of recent years has devastated the economic position of many people in Ireland.

Up to now we have mistakenly relied on economic growth as the cure-all for economic inequality. But there was no ‘rising tide’. The notion of ‘trickle down’ is a discredited theory, dismissed by the OECD and others. Instead, we need to prioritise reducing inequality and meeting everyone’s material needs, and once we do this growth will follow.

It is a myth that the rise of inequality we are now witnessing is inevitable. Reversing inequality does not hinder economic growth. In fact, there are strong arguments that more equal societies — like the Nordic countries — have more productive, innovative and sustainable economies.

Over the years, as TASC has studied economic inequality, the complexity of the factors involved — and their interaction — are now better understood, as shown in Cherishing All Equally. This analysis provides a foundation for the development of more comprehensive solutions.

The International Labour Organization (ILO), a respected UN agency, has proposed an alternative to the unsustainable debt-based and export-led growth model pursued in many countries. The ILO alternative is for recovery based on wage growth, to reduce household debt and to allow for equitable and sustainable economic development. As Ireland has a fifth of workers classified as ‘low wage’, it is a strategy that makes sense here.

While we need to address the falling share of income and the weakening purchasing power of households, a new ethical economics must also take account of the global impact of climate change and resource depletion. In that context, increasing and broadening the provision of quality public services is a more important way of addressing people’s economic quality of life than increasing their cash incomes.

While all advanced economies are experiencing the same pressures that lead to growing inequality, the levels of inequality are not the same everywhere. Economic and social policy choices — including taxation and the provision of public services — have produced very different outcomes in different countries.

As we begin to see economic recovery in Ireland, decisions made now will determine the kind of society that will develop over the coming decades. Will we truly cherish everyone equally or will we continue to pursue what looking increasingly like the wrong direction. It is vital that a commitment to reducing economic inequality underpins today’s economic policy decisions so that we deal with the root causes and bring about a truly flourishing society.

No comments: