The rich/poor gap: inequality just keeps growing

April/May 2013, Volume V, No. 3

The gap between the rich and the poor - and especially between the very rich and most of us - has grown rapidly in recent years (please see our Open Space, The Rich and the Rest, March/April 2011). And it just keeps growing. Read this Open Space for more, plus inspiration from women in the Global South who are working together for their needs and creating forests as well.

Mitt Romney, the recently unsuccessful Republican candidate in the hotly contested US presidential election, offered a word of advice about discretion in public discourse when he appeared on the Today show [Jan11/12]. He said, “Inequality is the kind of thing that should be discussed quietly and privately.”

Billionaire investor Warren Buffett is a little more brash about these delicate matters. He admits there has been class warfare going on for the past 20 years or so, and guess what? “My class won,” he summed up.

Needless to say, other voices are speaking more seriously about the growing gap between rich and poor—or rather, between the rich and everyone else. Nobel prize-winning economist Joseph Stiglitz believes that inequality is divisive and a serious threat to democracy. And Canadian economist Armine Yalnizyan argues that Canada’s 30-year experiment with trickle-down economics always was a hollow promise, and has turned out to be a costly experiment.

In any case, the cat is out of the bag today. The financial/economic crisis has dragged inequality out into the open for everyone to see. Taxpayers saw governments bailing out banks with hundreds of billions of dollars of tax money—remember “too big to fail”?—when those same banks had just played a major role in causing the crisis.

Rather belatedly, governments moved to spend much smaller funds to stimulate the economy and so in some ways help the victims of the mortgage crisis and create employment. In some respects, the stimulus worked; the economy began to revive. Meanwhile most of the new income continued to go to the richest 1% including many of the bankers involved.

Yes, it is no secret that the gap between rich and poor—especially between the very rich and most of us—has grown rapidly in recent years. If you believe in the intrinsic wisdom of the “invisible hand” of the free market, you might be led to conclude that the contribution to society made by bankers, corporate leaders and very skilled workers has greatly increased in that span of time. Correspondingly, since the income of most workers has not been rising, it must mean that their contribution to society isn’t very crucial, doesn’t open up the future for society, and can safely be left stuck in a rut. We might not want to say so before an election or during an advertising blitz, but we all know that’s the only way things can work, don’t we? It may not be pretty, but it’s necessary and inevitable, isn’t it?

Not by a long shot. In fact, these policies cannot be justified. They are blatantly untrue and unfair, and when “ordinary people” are supported in taking a hard look at the big picture, they respond with anger. That’s why such popular public protests as the “Occupy Wall Street” movement struck such a loud international chord. That’s why slogans such as “the rich and the rest,” and “the 1% and the 99%” so quickly found their way into common language.

For a couple of decades after the Second World War, the income gap (or the income-and-services gap) was shrinking in most Western societies. How come the pattern is so different in the past couple of decades?

With financial globalization, inequality in income spread quickly not only in Europe and North America, but also in developing countries such as Brazil and South Africa. Presently, China and USA among the larger countries have the biggest “gap”, the highest inequality - but the gap has been recently been growing more rapidly in Canada. Our richest 1% - those with incomes over $465,000 – took 32% (or almost one third) of all the growth in income in the period 1997-2006. And the richer one was, the better it got. Since 1970, the richest 1% (in income) saw their income doubled; for the richest .01%, income tripled. And the richest .001% (that’s about 2,500 people with incomes of approximately $4 million), found their income quintupled since the late 1970s. This is the widest gap in incomes in Canadian history.

Why does it happen? And why does it matter?

Basically it is the result of a renewed battle of ideas or ideologies between those who believe in smaller governments and freer markets, and those who believe that government has to regulate markets for the common good of all the people, and to provide vigorously for public production of public goods, an indispensable role of government.

Who wins in such a battle of ideologies? It depends in part on who has the most power to frame public questions in ways that will be believed by a majority of the people. And presently, corporations seem to have the power and the prevailing means. Their well-honed advertising skills work brilliantly in the mass media. And in political back rooms and pre-election policy tweaking, corporate lobbyists are highly skilled in making politicians in and out of office believe their view is right. Or if not exactly “right”, at least the promoters of the present disorder can argue very persuasively that to change the status quo would be very costly for them and for us, if the status quo could indeed be changed.

In another culture these pressures might be called ‘propaganda’ or ‘brainwashing’. Here they are seen as the necessary “interface” between economic leaders and officials entrusted with the making of public policy. Sometimes, the electorate is allowed a peek or two into this interface.

In Canadian experience after World War II there was a widely felt conviction that “we’re all in this together.” Economic growth was accompanied by creative social reforms in education, health, pensions, minimum wages, a strengthening of trade unions, etc. And inequality of income dropped substantially. But in the 1970s, beginning in the UK and the USA, the ideology of free markets returned with a vengeance. Weaker regulation of markets was seen as true progress, and almost immediately, greater inequality in income returned.

Globalization of the financial economy also favoured corporations over both governments and labour, since now corporations could always use the threat of moving their business abroad and/or outsourcing their labour to regions where people will work for far less, regulations are fewer, and unions absent or weak. And governments, eager to attract foreign investments, felt forced to look for more labour “flexibility”, which included lower wages, much less job security, and less public intervention on working conditions (not to mention environmental protection). As governments realized more and more that they must approach investors cap in hand, even industries that cannot threaten to pack up their core business and take it elsewhere (such as the fossil fuel industry, and mining in general) could not easily be required by legislation to cover the cost of the damage they did to the environment.

The secret is, of course, that markets are never fully free. The “Occupy Wall Street” movement has been trying to show us how those who control large pools of capital shape the markets through interest rates, lending practices, currency manipulation, control of mass media, and in countless other ways. Governments also try to shape markets through legislation on conditions of work, minimum wages, rights of unions, tax policies, social programs, and through subsidies and exceptions to corporations and preferential tax treatment for investors.

When governments feel keenly their reliance on the investing classes, tax policy tends to develop a bias in favour of the controllers of wealth. Income tax in Canada is no longer strongly progressive, and estate tax is almost ineffective. The government continues to keep corporate taxes low on the assumption that corporations and rich people automatically invest in the economy. But it isn’t so automatic. Conditions have to be perceived as right for the maximum return on potential investment. In recent years we have heard some policy leaders chiding corporate leaders for sitting on the profits they have made from the reviving, “stimulated” economy, instead of investing to create jobs while unemployment is dangerously high.

Of course, governments have tools to facilitate fuller employment, as has been shown in Canada’s earlier history. They do this by spending heavily on infrastructure such as roads, bridges and other public works as well as on education and skills training. High unemployment and idle industrial capacity cost society billions of dollars—and we don’t have to view such social pain as a turn of fate over which we have no control. Public protests about lack of economic fairness are a sign of the times, and a portent—perhaps—of a re-awakening of a democratic instinct. In fact, Joseph Stiglitz (quoted at the beginning of this article) is right: inequality is destructive of the trust and community that a country needs if it is to remain democratic. There are limits to people’s patience, as we see in several countries today.

People feel their inequality especially in times of financial or economic crisis. While wealthy people have a fat kitty to sustain them, the unemployed are only a cheque ahead of not putting food on the table. Indeed, most Canadians are now in debt on an average of $27,000 per household.

And how could we reduce the amount of inequality in Canada?

In addition to points already made of what government can and should do:

Insist on improving access to good education and skills training for all youth; equal access to the courts and to true information for all citizens.

Restore more countervailing power to trade unions so that they are in a stronger position to bargain effectively with large corporations.

Strengthen civil society in its role of building public trust, solidarity and community—the“social cohesion” without which democracy cannot long be sustained.

Insist on transparency for corporations and government so that citizens can reach well-founded conclusions about the system’s fairness (or lack of it).

Promote investment in technology designed to protect and heal the environment. Such investments can also reduce unemployment while building infrastructure sustainable for the longer term.

Finally, work towards more reliable ways of publicly measuring society’s economic progress and welfare.
Simply counting the ups and downs of GDP (Gross Domestic Product) is no longer good enough.

Some countries and agencies are experimenting with much more sensitive barometers of what our ancestors called “the common weal” (and what the old CCF called the “cooperative commonwealth”).

Our government could make a good beginning by modifying GDP to include the full cost of damage to the environment. Granted, that might scare a lot of us at first—but hey, We the People are ready for a much more honest accounting. Or maybe—well, try us, at least!

Bill Ryan sj