The Growing “Economic” Divide

The Growing “Economic” Divide
by Nick Lee

 

According to Forbes, the combined net worth of all billionaires in 2017 is $7.67 trillion.[1] This is more than a two-fold increase as compared to a decade ago.[2] In addition, the wealthiest 1 per cent of the world population now own 50.1 per cent of all household wealth globally[3], as  compared to 45.5 per cent back in 2000. Outlook for the less affluent however remains bleak. According to a report by Credit Suisse, the number of people with wealth of less than USD 10,000 is expected to shrink by a mere 4 per cent in 2022.[3]
 

Evidently, wealth is increasingly concentrated in the hands of the rich; this is a growing concern as it causes numerous societal problems.

 

The various drivers of economic inequality

Financialization
During the Reagan Administration in the 1980s, deregulatory reforms led to the development of financial capitalism that increased the relevance of finance in the US economy. The share of financial sector grew in the process of financialization and non-financial firms became increasingly reliant on the financial activities as a source of revenue. Numerous non-financial firms shifted their focus from traditional productive activities to investing in financial instruments to increase corporate profits. This meant that the finance sector expanded at the expense of the productive industries’ growth. Blue-collar workers operating in productive industries experienced a decline in wages as profits slumped for non-finance sectors.[4] Companies were motivated to cut labour costs as they were pressured to keep up with rising profits during the period of financialization.[5] Coupled with the declining union power that undermined the bargaining capacity of American workers, salary-earning employees often faced job losses or a reduction in wage growth.

 

Technological disruptions
Technology is growing at an exponential rate in this digital age. As technology advances, relative prices of investments fall accordingly and jobs will be made redundant as firms have incentive to replace labour with capital.*[6] Furthermore, not only will routine jobs be replaced by automation, the evolution of artificial intelligence might even render skilled-workers jobless.
While only a handful (the rich few that own and control the capital) benefit from technological advancement, the large majority of unskilled labor face job losses and depressed wages. This ultimately aggravates the existing economic inequality and causes the distance between the rich and poor to get bigger and increasingly non-reconcilable.

 

The self-perpetuation of hindered opportunities
When there are high levels of economic inequality, the poor more often than not has impeded opportunities that prevent their social mobility and economic success. A number of factors contribute to the hindrance of opportunities for the poor. Due to being economically disadvantaged, the poor are often held back from realizing their human capital potential as they have limited access to higher education and skill upgrades. Through a mechanism as such, it is observable how income inequality self-perpetuates hindered opportunities for the poor, that which ironically results in a vicious cycle of income inequality.

 

Negative consequences of economic inequality

The effects of income inequality on youths
An empirical study has shown that youths with low socioeconomic status (SES) backgrounds (with boys in particular) who reside in places with wider income disparity are more likely to drop out of high school. That said, girls with low SES backgrounds are no less afflicted by economic disadvantages. It was found that they are affected by a different margin as compared to their male counterparts – they are more likely to become young, unmarried mothers.[7]

 

Economic inequality in determining political influence
In places with high economic inequality, political decisions often reflect the policy preferences of the wealthy as they are likely to employ their economic and political clout to legitimize their interests. With the wealthy having a bigger say in government policies, various problems would inevitably surface.

 

Redistributive policy remains to be one of the most frequently applied policy in tackling income inequality. Though effective, the extent to which income is redistributed is often met with dissatisfaction when political influence is sufficiently sensitive to income.[8] Moreover, the wealthy may even prevent policies disadvantageous to them from taking place through lobbying and vote-buying. Influential power over political decisions will therefore push the wealthiest onto a path of higher income growth, thereby keeping income inequality in check.

 

Adverse effect on economic growth
Disruptions to economic growth can take form in many ways, one of which includes sociopolitical unrest that stems from economic inequality. Several studies have pointed out that regions with pronounced economic disparity are more likely to have higher rates of crimes and disruptive activities.[9] When the poor engage in crimes and anti-social activities, this translates to a loss of productive efforts. Furthermore, defensive efforts by potential victims represent a waste of resources while threats to property rights discourage investment into the economy.[10] Productivity and economic growth will hence be adversely affected when inequality gives rise to sociopolitical unrest.

 

Economic inequality: A necessary evil?

The question about  the existence of  economic inequality is still a constantly debated issue amongst economists. While some might argue that high wealth concentration hinders equal opportunities, impedes social mobility and causes social friction, others may claim that it is an inevitable necessary evil within a successful economy and is beneficial to the society on the whole.

 

While it can be largely agreed that economic inequality to some degree damages social structures, there are however upsides to it that justifies its necessity. Income inequality, no doubt, has lifted the poor out of squalor through innovations and job creations. Rewards incentivize hardworking, talented, and creative people to take educated risks which in turn improve the lives of masses and promote economic growth.

 

 

References

  1. Forbes, 2017. [Online]
    Available at: https://www.forbes.com/sites/kerryadolan/2017/03/20/forbes-2017-billionaires-list-meet-the-richest-people-on-the-planet/#1d7734d62ff0
  2. Forbes, 2007. [Online]
    Available at: https://www.forbes.com/2007/03/06/billionaires-new-richest_07billionaires_cz_lk_af_0308billieintro.html#47f5d47d16b6
  3. Credit Suisse, 2017. Credit Suisse. [Online]
    Available at: http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=432759CA-0A73-57F6-04C67EF7EE506040
  4. Kus, B., 2012. Financialisation and Income Inequality in OECD Nations: 1995-2007. The Economic and Social Review. 4, Winter, Volume 43, pp. 477-495.
  5. Golebiowski, G., Wisniewska, D. & Szczepankowski, P., 2017. FINANCIALIZATION AND INCOME INEQUALITY IN SELECTED EUROPEAN COUNTRIES, 2004-2013. e-Finanse, 12(4), pp. 20-32.
  6. International Monetary Fund, 2017. World economic outlook: Gaining Momemtum?. [Online]
    Available at: https://www.imf.org/~/media/Files/Publications/WEO/2017/April/pdf/text.ashx
  7. Kearney, M. S. & Levine, P. B., 2016. Income Inequality, Social Mobility, and the Decision to Drop Out of High School. Brookings Papers on Economic Activity, Volume 2016(1), pp. 333-396.
  8. Przeworski, A., 2012. Institute of political economy and governance. [Online]
    Available at: http://www.barcelona-ipeg.eu/wp-content/uploads/2015/09/inequality_final.pdf
  9. Enamorado, T., Lopez-Calva, L.-F., Rodriguez-Castelan, C. & Winkler, H., 2016. Income inequality and violent crime : evidence from Mexico’s drug war. Journal of Development Economics, Volume 120, pp. 128-143.
  10. Barro, R. J., 1999. The National Bureau of Economic Research. [Online]
    Available at: http://www.nber.org/papers/w7038.pdf

* Relative price of investment is a measure of technological advancement in the production of investment goods.