Wage restraint, welfare cuts, and a free market have been traditionally rationalised by conservative governments as essential measures to build a strong economy.
As companies increase their profits, the effects are said to “trickle down” to those below, increasing the wealth of all. Like the tale that Santa comes to good children, the idea that frugal public spending is necessary to drive the economy has been extrapolated for so long few question it.
There’s one essential problem with this theory: it’s inaccurate. Never mind it’s lacking in compassion – that’s another story.
Building on previous findings, a global report, prepared for the International Monetary Fund released this month, shows that income inequality is actually associated with a decline in GDP growth.
“Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down,” write the study authors. “In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth.”
Supporting this, a 2015 OECD report found, “between 1985 and 2005, inequality rose by more than 2 gini points on average across 19 OECD countries, an increase estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010.”
According to the report, inequality is associated with the rise in non-standard (part-time, casual, temporary, self-employed) work, which now accounts for about a third of all work in OECD countries.
So, how exactly does inequality erode the GDP?
Humans require education, health and secure housing to participate in the labour market. Inequality can deprive people of these and the ability to create and spend income – a factor strongly associated with demand and economic growth.
Thus, inequality dampens investment (less people with money to invest) and spending and promotes the increase of debt and overextension of credit.
Inequality increases poverty, compounding the issues. It also undermines social cohesion, which can lead to conflicts between the rich and poor that negatively affect growth and lead to poor public policy choices. A well-documented example of how class conflict adversely affects society is the relationship between inequality and crime rates.
Cast your eyes back to Kevin Rudds' stimulus package (worth over $50 billion) and largely consisting of cash payments and bonuses to ordinary Australians, and building, road and other projects. It was credited by economists such as Joseph Stiglitz - a Nobel Prize awardee and one of Time Magazine’s ‘100 Most Influential People’ - as saving Australia from the Global Financial Crisis.
“Recent experience around the world suggests that austerity can have devastating consequences, and especially so for fragile economies. Government cuts have helped push Britain, Spain and Greece's economies deeper into recession.”
Led by Abbott and Hockey, Australia is currently pursuing policies that entrench and exacerbate inequality. These include reducing access to education, family assistance, welfare payments and services and failing to tackle gross inequities in the tax and superannuation systems that favour the better off.
“Widening income inequality is the defining challenge of our time,” the authors of the IMF paper write. “Worryingly, they reveal that, “in advanced economies, the gap between the rich and poor is at its highest level in decades.”
The paper recommends greater investment in health and education, and policies that redistribute wealth. “The redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation, removing opportunities for tax avoidance and evasion, better targeting of social benefits while also minimising efficiency costs, in terms of incentives to work and save.”
Nations fail when political and economic power is monopolized by a narrow elite “feathering their nests at the expense of society,” and when individuals cannot use their “talent, ambition, ingenuity and what education they can get.”
This is the conclusion of the award winning 2012 book Why Nations Fail. Based upon 15 years of research, authors Daron Acemoglu (an M.I.T. economist) and James Robinson (a Harvard political scientist) address the burning question of why some nations are rich and others poor. What makes a nation rich, they say, isn’t geography, location, cultural traits, or poor knowledge, but inclusive political and economic systems.
With the Australian economy slowing, the question is, will our government take heed?
At the heart of inaction around inequality lies a harmful judgement: that people are to blame for their circumstances, and an unrealistic premise: that the advantages or disadvantages one encounters in life do not mark us. Equally absurd is the idea that the rich and poor can live separately without affecting each other.
Like ants, bees and other communal species, human societies are interdependent. Ensuring the strength of us all is the key to our survival and a better society. As the OECD publication on inequality reminds us: we’re in this together. Less inequality benefits us all.
Linda Moon is a freelance writer and natural therapist.
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