Back in December 2011 the Organisation for Economic Co-operation and Development (OECD), an international economic forum located in Paris, published this report, Divided We Stand: Why Inequality Keeps Rising. The report illustrates how income inequality in developed nations has grown dramatically in the last thirty years between the rich and poor, or as we refer to them today, the 1% and the 99%. This report validates many critiques made of supply-side, trickle down economic theories by Anti-Capitalists and the Occupy Wall Street movement. These theories have without doubt failed the majority of us.
This post examines the growing alarm with the issue of income inequality in the few months since the release of the OECD report, including a look at the Obama Administrations recommended remedies in addressing the problem.
The OECD Report
First, you should take a look at this brief video from the OECD summarizing the report.
Over the two decades prior to the onset of the global economic crisis, real disposable household incomes increased by an average 1.7% a year in OECD countries. In a large majority of them, however, the household incomes of the richest 10% grew faster than those of the poorest 10%, so widening income inequality. Differences in the pace of income growth across household groups were particularly pronounced in some of the English-speaking countries, some Nordic countries, and Israel.1 In Israel and Japan, the real incomes of those at the bottom of the income ladder actually fell compared with the mid-1980s (Table 1).
In OECD countries today, the average income of the richest 10% of the population is about nine times that of the poorest 10% – a ratio of 9 to 1. However, the ratio varies widely from one country to another. It is much lower than the OECD average in the Nordic and many continental European countries, but reaches 10 to 1 in Italy, Japan, Korea, and the United Kingdom; around 14 to 1 in Israel, Turkey, and the United States; and 27 to 1 in Mexico and Chile.
Here's that Table 1
A review of the report from Bloomberg News. Rich-Poor Divide Is Widening, OECD Says concludes that income inequality is unraveling our societies.
“The social contract is starting to unravel in many countries,” OECD Secretary-General Angel Gurria said in a statement. “This study dispels the assumptions that the benefits of economic growth will automatically trickle down to the disadvantaged and that the greater inequality fosters greater social mobility.”The prescription is not an immediate or simple one, but one we all know as common sense. We have to educate and train our populations to be able to maintain functional economies and societies.
“There is nothing inevitable about high and growing inequalities,” Gurria said. “Up-skilling the workforce is by far the most powerful instrument to counter rising inequality. The investment in people must begin in early childhood and be followed through into formal education and work.”From the Guardian: Income inequality growing faster in UK than any other rich country, says OECD
The OECD warned about the rise of the top 1% in rich societies and the falling share of income going to poorer people.From the LA Times: OECD report cites increasing income inequality in U.S.
This trend is especially pronounced in Britain, where the dramatic rise in inequality has been fuelled by the creation of a super-rich class. The share of the top 1% of income earners increased from 7.1% in 1970 to 14.3% in 2005.
Just prior to the global recession, the OECD says the very top of British society – the 0.1% of highest earners – accounted for a remarkable 5% of total pre-tax income, a level of wealth hoarding not seen since the second world war.
From the Washington Post: OECD report cites rising income inequality
Overall, inequality among working Americans has risen 25 percent since 1980, the report said. In 2008, the average annual income of the top 10 percent of Americans was $114,000, nearly 15 times higher than that of the bottom 10 percent.My own response to this report was the conclusion that it is long past time to reject the economic models imposed on this country since the 1980’s, brought to us courtesy of Republicans, Neo-Liberals among Democrats and the Finance Industry that subsidizes them. They have failed the majority of the people in this country. They have failed the majority of the people globally.
That finding is consistent with other studies documenting the widening economic gulf, which has become a growing political issue in the United States.
The share of income going to the nation’s richest 1 percent more than doubled between 1980 and 2008, rising from 8 percent to 18 percent, the report said. The richest 1 percent of Americans make an average of $1.3 million in after-tax income, compared with $17,700 for the bottom 20 percent.
Meanwhile, the top federal income tax rate has fallen from 70 percent in 1981 to 35 percent, the report said.
And what model could be used as an example to replace it? In the near term, I suggest we look to those countries that have low inequality, that score the best on the Corruptions Perceptions Index. I suggest we look there and think hard about how those systems could be modified to work here.
I wondered if there would be a response from the White House on this report, or at least on this subject. In January of this year, one appeared, in a speech given by the Chair of the Council of Economic Advisors to the President, Alan B. Krueger.
The pdf of the speech may be found here, The Rise and Consequences of Inequality in the United States
After a brief historical review, Krueger presents similar conclusions to the OECD report, relative to the United States.
Because of these trends, the very top income earners have pulled much further ahead of everyone else… Not since the Roaring Twenties has the share of income going to the very top reached such high levels.He then describes how in the same period that income inequality has increased, income mobility has decreased. As to causes contributing to income inequality he mentions variability in hourly earnings, the escalation of “skill biased technical change,” economist speak for automation. He also notes the domination of the Financial Sector in the economy and its contribution to income inequality.
The magnitude of these shifts is mindboggling. The share of all income accruing to the top 1% increased by 13.5 percentage points from 1979 to 2007. This is the equivalent of shifting $1.1 trillion of annual income to the top 1 percent of families. Put another way, the increase in the share of income going to the top 1% over this period exceeds the total amount of income that the entire bottom 40 percent of households receives.
A consequence of the momentous shifts in the income distribution that I have just documented is that the middle class has shrunk.
In particular, it is clear that the proliferation of high salaries earned in the financial sector has contributed to the rise in income inequality. The proportion of people in the top 1% who were from the finance and real estate industry nearly doubled from 1979 to 2005. And in 2005, executives from the finance and real estate sector made one quarter of the income in the top 0.1 percent.Other contributing factors or causes include globalization, (off shoring labor due to NAFTA and other free trade agreements), the decline in Union membership, and a tax code that increasingly favors the wealthy over everyone else.
As to consequences of income inequality Krueger suggests three likely trends: ongoing decrease in income mobility, Increase in overborrowing and debt along with a decrease in aggregate demand, and finally, less long term growth in the overall economy.
We all know these things here, being avid students of the collapse in 2008, but what are the Administrations suggested solutions? The current gap between the 1% and 99% is completely unsustainable. What does Krueger, via the Office of the President, suggest? He first suggests the Affordable Care Act will help the Middle Class.
… the ACA will help the middle class and those struggling to get into the middle class by lowering the growth of health care costs, by preventing those withSecond, he suggests the American Jobs Act. Third, he suggests regulating the Financial markets against excessive risk taking and corruption, factors that contributed to the problem of income inequality. Finally, he recommends ending tax cuts for the wealthy and adopting the principle behind the Buffett rule.
pre-existing conditions from being denied health insurance coverage, by creating exchanges for small businesses and lower income families to obtain health insurance at competitive rates, and by providing tax subsidies to small businesses and lower income workers to purchase insurance.
What do you think of these suggestions? What do you think would tackle the problems of income inequality in the immediate and ultimately and necessarily in the longer term? Do you think the Obama Administration via Krueger’s conclusions will make a positive impact? Enough of an impact?
It would be wonderful if we could hash through this issue here, because it is a long term and complex problem, a global problem, that will require a many faceted approach in my view. The more voices and opinions the merrier!
And before heading to comments, please take a look below at some other links and resources for you to review.
Income Inequality by State
U.S. Neighborhood Income Inequality in the 2005–2009 Period U.S. Department of Commerce
And here are the solutions that I recommend, believing they will have a most beneficial effect …
And thanks very much for reading.