In his recently published book The Price of Inequality, Joseph Stiglitz notes that “widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the world is unequivocal: there comes a point when economic inequality spirals into economic dysfunction for the whole society.” He discussed the same subject in his piece in Vanity Fair titled “The 1 percent’s problem.”
Stiglitz, winner of 2001’s Nobel Memorial Prize in Economic Sciences, has forcefully opposed the deep inequalities in US society. Vanity Fair is a fashion and celebrity magazine which generally focuses on the lifestyles of Hollywood celebrities, and the way Stiglitz writes shows that economic articles can be as readable as gossip about a Hollywood actress if the writer has the capacity to connecting it to people’s lives. It is as if his publication of articles on economics in a fashion and celebrity magazine were an attempt to rescue economic thought from tedious economic textbooks and journals.
Economic thought in the past generally emphasised that inequality is a natural outcome of the growth process. Rather, inequality is important for capital accumulation as the propensity to save is higher among the rich. Further, it was thought that through the trickledown effect, those at the bottom also share the fruits of growth and development. The stress was on an increase in the size of the cake, but without ensuring the distribution of its shares.
The premises of trickledown economics, however, turned out to be devastatingly fallacious as the income gap increased manifold between the top one percent and the remaining 99, in the US and worldwide. As a result, poverty is widespread despite tremendous increases in global GDP.
According to statistics contained in the ILO’s “Social Protection Floor Report” in 2011, 75 percent of the world’s population is not covered by adequate social security and 38 percent does not have adequate access to sanitation. Thus the point is that growth without distribution has not only accentuated inequalities but has also reduced the pace of growth.
First of all, high income and wealth inequalities reduce what the economists call aggregate demand. An extremely rich person may not consume all of his income, no matter how luxurious his lifestyle. Regardless of how much his expenditure, he hardly spends a fraction of his money during his lifetime. Most of the money and assets remain “dead capital,” without their contributing to economic growth and development in society at large.
Our story, however, has another twist to the aggregate demand argument. Most of the money accumulated by the rich in our country comes from rent-seeking activities. It is not difficult to find examples of persons in the domains of public bureaucracy and politics who are known to have amassed big fortunes through rent-seeking and corruption. Money collected through corruption either lies dead or is siphoned off to safe havens abroad. The income and wealth accumulated through corruption at the top generally does nothing for the country’s economic growth.
If income is widely shared by the society, aggregate demand will be high. Resultantly, the growth rate will rise. Stiglitz has given an interesting example in an article to illustrate as to how the concentration of wealth at the top reduces aggregate demand. “Consider someone like Mitt Romney, whose income in 2010 was $21.7 million,” he writes. “Even if Romney chose to live a much more indulgent lifestyle, he would spend only a fraction of that sum in a typical year to support himself and his wife in their several homes. But take the same amount of money and divide it among 500 people – say in the form of jobs paying $43,400 apiece – and you will find that all of the money gets spent.”
So the model of growth which emphasises capital accumulation through savings is now under question. It is being emphasised that we should increase people’s purchasing power of through redistribution as it would increase aggregate demand.
The rise of the middle class in developing countries like India and Pakistan (though we may dispute numbers and percentages) is also indicative of consumption-led growth in the future. The media has contributed to the rise of consumerism. If adequate and effective redistribution mechanisms are put in place and the gap between the top one percent and the rest is reduced, we can stimulate growth, and consequently people’s living standards will improve.
Stiglitz points to the element of fairness in the inequality problem. “People are not machines,” he writes. If people perceive that the system is not fair and it is working only for the benefit of the rich, then it becomes difficult for them to be motivated. Productivity goes down as people become disillusioned with the system. Such an environment erodes trust and lack of trust increases the cost of doing business. Moreover, in an environment of mistrust, people avoid entering into business with strangers. By reducing productivity and trust, inequality dampens economic growth.
Inequality has other elements through which it impacts economic growth. Empirics suggest a direct relationship between rise in inequality and crime. Inequality reduces deterrent effect especially in developing countries where institutions are weak. The rich go scot-free if they commit crime because they can buy everybody or think they can do so. Increase in crime means reduced business activity in the crime area, producing a negative impact on economic growth.
Inequality corrupts governance. If everyone has the same material wealth, it is difficult for anyone to buy up government officials, for example. It is not possible for anyone to bypass laws and procedures and become business tycoon overnight through rent-seeking activities. Andrei Shleifer et al have written in their paper titled “The injustice of inequality” that “if one person is sufficiently richer than another, and courts are corruptible, then the legal system will favour the rich, not the just.”
Ours is a rent-seeking society. The landlords have palatial homes. They do not pay taxes and have thrived on agricultural subsidies as state policies have subsidised the rich and the elite. Businesses have thrived behind huge tariff walls, quotas, export vouchers and licenses. Corrupt bureaucrats have amassed wealth due to huge discretionary powers and weak accountability. Business tycoons have risen to the top through payment of bribes as the majority of those who mattered were ready to sell themselves. The tax system is unable to perform its redistribution function as most of the taxes collected are regressive in nature.
Rent-seeking opportunities, corruption, and elitist policies all have created deep fissures between the top 1 percent (in our case it may be only 0.001 percent) and the rest of the populace. Ours is a pertinent case of “King John Redistribution,” where the rich are getting richer through subverting institutions and political processes and the poor are suffering due to acute inequalities in society. Do we need a “Robin Hood Redistribution” through a social and political revolution? I leave it to the readers.
The writer is a graduate from Columbia University with a degree in Economic Policy Management. Email: firstname.lastname@example.org