The elephant in the room

Introspective By Calixto V. Chikiamco

The twenty-first century’s elephant in the room is not population growth, food security, or joblessness. It’s growing income inequality. The Occupy Wall Street protests dramatically called attention to this problem. The wide income disparity between the 99% of the US population and the 1% who control the wealth is bringing a sense of unfairness about the system and with it rising social tensions.

Note that the cry of the Occupy Wall Street protesters is not about joblessness, but unfairness, directed particularly at finance capitalists, whom the people see as privatizing gains and socializing losses.

That the Occupy Wall Street protests have spread globally, if unevenly and fitfully, is not surprising because economists will tell you that growing income inequality is a problem not only in the United States, but almost everywhere else, including booming China and Brazil.

The GINI coefficient (a measure of inequality, with 1 being most unequal and 0 most equal) has worsened for many countries in recent decades. In “socialist” China, the GINI coefficient has gone from .3 a quarter century ago to nearly .5 today, comparable to the Philippines and Russia, according to Bloomberg Businessweek. Even egalitarian Scandanavian countries have seen a deterioration in their GINI coefficients, indicating that factors other than culture or national characteristics are at play.

In the Philippines, the GINI coefficient was at .44 in 1986; it’s nearly the same 23 years later. The top 1% of families earn the equivalent of the bottom 30%.

The causes of growing income inequality are due to several factors. One is technology. New communications technology allows “superstars,” whether they be celebrity actors like Tom Cruise or celebrity medical doctors, to reach greater audiences and bigger markets, while the non-celebrities fight over the crumbs. Moreover, the new industries, particularly in ICT, have a winner-take-all characteristic. For example, Microsoft has an unrivaled dominance in PC operating systems while Google enjoys the same position in search.

However, technology has had the most adverse impact on low skilled labor, whose jobs have been eliminated by automation or outsourced to other countries.

Another factor is the movement away from progressive taxation toward “flatter” taxes. Competition among nations to attract investors and highly talented individuals have led governments to offer flatter, less progressive taxes.

Unequal access to education is also a contributing factor to greater income inequality, especially since the pay disparity between high school graduates and college graduates has been increasing, perhaps due to the impact of technology and the greater pool of low-skilled workers caused by migration and globalization.

Whatever the causes, income inequality is now as great as it had been in the United States and Europe before World War II, a period characterized by depression, social instability, and political conflict. For this reason, Karl Marx is making a comeback in intellectual circles, a fact no less observed by business magazines like the Economistand Bloomberg Businessweek. Not the Marx of the withering away of the state or socialist planning or the dictatorship of the proletariat -- because all of that proved incorrect with the totalitarianism and bankruptcy of the former Soviet Union and other socialist states -- but the Marx who saw the internal contradictions of capitalism.

According to Marx, the primary contradiction of capitalism is the contradiction between the social character of production and the private appropriation of the fruits of that production. Simply stated, capitalism leads to the pauperization of the many and the enrichment of the few, which in turn leads to a crisis of overproduction because the masses cannot afford the goods that capitalism must keep on producing.

This is the situation we are seeing today: growing income inequality and massive joblessness led to low consumer spending and oversupply of capital, which lead to low growth and high unemployment, which lead to....you get the picture.

John Maynard Keynes provided a solution to this contradiction by having the state do “tax and spend” policies. If the economy suffers from low consumer demand, the state can do deficit spending -- tax the future to stimulate demand now.

Aside from the political economy problems with this solution (lobbyists steering government spending toward special interest projects and the curtailment of individual liberty by the state, which Frederick August von Hayek calls the Road to Serfdom), the present heavy indebtedness of governments leave little wiggle room to do deficit spending. The highly developed financial markets and informed consumers also act as a brake to government spending because higher interest rates negate the expansionary effect of more government spending, and more informed consumers adjust their behavior in anticipation of higher taxes in the future.

On the other hand, wars as economic stimulus are oversold; Afghanistan and Iraq were economically losing propositions to the US.

There’s another problem in the background: government investment spending in the West may be reaching diminishing returns. According to Tyler Cohen, who’s described as one of the most influential economic thinkers in the US today, the easy gains from investing in education, land, and technology (the internet increases utility but not GDP) in the US are gone. Government spending may not increase GDP much or create job growth. We are facing the Great Stagnation, says Cohen.

The solution to the West’s contradiction, therefore, may lie in investing in developing countries where there’s still plenty of unutilized land and labor and the marginal productivity of capital is still very high. By raising the incomes of developing countries, or lessening the income gap between developed and developing countries through investment, the West may gain by selling more goods and services to increasingly affluent consumers in those countries. This tackles the problems of depressed markets and low marginal productivity of capital in the West, and income disparity between developing and developed markets in one fell swoop.

However, this means that the West may have to export its legal infrastructure and institutions to the emerging markets in order that these places can become more hospitable to foreign investment.

If income inequality is the elephant in the room, the Occupy Wall Street movement is the canary in the coal mine: it may portend increased social tensions, intense political conflict, and even extremism, revolution, and war. Yes, political economy is in and Marx is back. Will there arise a new Keynes?

Calixto V. Chikiamco is a board member of the Institute for Development and Econometric Analysis.

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