Economics

Income equality and good economic performance go hand in hand

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(Image via Senator Scott Ludlam)

The argument of free market economists and plutocrats that income inequality is the price society must pay for strong economic growth is, demonstrably, bunkum, explains Dr Adnan Al-Daini.

SO, LET ME GET THIS RIGHT: free market economists', right wing politicians' and commentators' solution to the economic depression engulfing Europe and the United States is to cut government spending, slash welfare payments to the bone and make it easier for employers to fire people. And additionally, to cut taxes to those at the top and give them a freer hand to "incentivize" them to use their entrepreneurial skills to create businesses, and with that jobs.

Do not worry about the gap between the rich and the poor, they say, this is the price we have to pay for a dynamic economy that will make us all richer; they seem to have forgotten why we are in this mess.

Let us for a moment put aside the immorality of the impact of such actions on the vulnerable, the poor and the rising army of the unemployed — are they right? Do we really need to sacrifice social justice for good economic performance?

Research by the Canadian Council on Social Development sought to examine those assertions and ideas.

Put simply, it examined the proposition of the U.S economist Arthur Okun, who wrote:

'Inequality reflects a system of rewards and penalties that is designed to encourage effort .... The pursuit of efficiency necessarily creates inequalities. And hence society faces a trade-off between equality and efficiency.'

The work looked at per capita GDP growth in the 1990s and for household after-tax income inequality (Gini index) in 1995 for Canada, the U.S., Australia, the UK and eight other European countries.

The work concluded:

'The key point that emerges from this comparison is that relatively low income inequality [more equal societies] is associated with either low or high growth. Two low income inequality countries - the Netherlands and Denmark - did very well in terms of per capita growth in the 1990s (2.1% and 2.3%, respectively) and indeed, growth in these countries over the period was more rapid than in the U.S. or the UK [1.7% for each country], the two countries with the highest levels of after tax income inequality. There was no statistically significant relationship between growth and income inequality in the 1990s.'

Of course, in less equal societies, the average per capita income is significantly skewed towards the higher end of income distribution and is, therefore, not a useful indicator of income for the majority of people.

As an example, the research compares Canada and the U.S. by looking at the 1997 data. The analysis shows that although the average per capita income in Canada was 80% that of the U.S., the median income was the same, and the bottom 25% of households were considerably better off in Canada than in the U.S., and that the

'... income privilege of being American only becomes significant for about the top 20%.'

A more recent report (2011) by the Bertelsmann Foundation presented the findings of a study that examined the policies of 31 OECD countries on poverty prevention, access to education, labour market inclusion, health and social cohesion.

It not only confirmed the finding of the Canadian study that: 'there was no statistically significant relationship between growth and income inequality', but it went further, suggesting that if anything countries with more equal societies do better economically than those with high income inequality such as the U.S. and the UK.

Bertelsmann Foundation executive board member Aart De Geus, referring to the study, said:

'Social justice and economic performance are by no means mutually exclusive. Northern European countries in particular demonstrate that the opposite is true. Iceland, Norway, Denmark, Sweden and Finland top the ranking.'

And in their book The Spirit Level, Richard Wilkinson and Kate Pickett present rigorous statistical analysis of the effects of income inequality on the lives of people in 23 rich countries and across U.S. states. Examples of more economically equal societies (low income inequality) are Japan, Norway, Finland and Sweden. Examples of less economically equal societies (high income inequality) are the U.S., UK, Singapore and Portugal.

Their analysis clearly demonstrates that most of the ills that afflict rich countries rise with income inequality. Mental illness, alcohol and drug abuse, obesity, stress, anxiety, homicide and prison populations are higher in less economically equal societies. Positive traits such as high life expectancy, social mobility, and trusting each other are lower in less economically equal societies. The widening gap between the 1%ers and the rest is a cancerous growth that destroys the health of our societies — rich and poor.

Free-market economics – shrinking the state, low government spending and unleashing the market beast into every facet of society – is not only morally wrong, but also economically unjustifiable.

Follow Dr Al-Daini on Twitter @respect65.

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