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Equality: economic wonderfuel

Growing inequality gyrates the business cycle, constricts productivity; stokes inflation and asset appreciation; and is unfairSinéad Pentony 

The latest data (for 2011) on income inequality and poverty will shortly be published by the Central Statistics Office, revealing if the trend towards growing income inequality and increasing poverty is continuing or if it has subsided.

The gini coefficient is an index ranging from 0 to 100 where 0 represents a perfectly equal distribution of income and 100 represents a perfectly unequal distribution. The gini coefficient stood at 29.3 in 2009. This compared with an EU 27 average of 30.4.

The gini coefficient grew in the early years of the boom from 30.2 in 2000 to 32.4 in 2005. There was then a move towards greater income equality in the later boom years and early years of the crisis up to 2009. However the gini coefficient has since risen precipitously to 33.9 in 2010. This compares with an EU 27 average of 30.5 in 2010.

The Nevin Economic Research Institute (NERI), in the latest Quarterly Review, analysed disposable income to show that almost a third (31%) of households had a disposable income of less than 500 euro per week. Their research uses 2009 data, which does not cover the last four budgets that have had a depressing effect on incomes. The proportion of households on lower incomes is likely to have grown.

While most households have been affected by years of austerity, the impact has been greatest on low-income households.  Budget measures that do not take account of household income have a disproportionate impact on low-income groups, which have the least capacity to absorb reductions in income. The relentless downward pressure on low incomes is one of the main reasons why the domestic economy remains in the doldrums.

Stewart Lansley in his book The Cost of Inequality: Why Economic Equality is Essential for Recovery presents evidence from the last 100 years which shows that more equal societies alleviate, and more polarised societies exacerbate, the ‘gyrations’ of the economic business cycle.  His work shows that equality has a smoothing effect, which buffers societies against the peaks and troughs of economic booms and busts.

Lansley argues that inequality is not just an issue about fairness and equity, but that it is integral to economic success. An economic model that encourages the richest members of society to accumulate more and more wealth leads to demand deflation, asset appreciation, and a constriction of the productive economy. This ultimately results in economic instability.

The OECD in its recent report, Economic Policy Reforms: Going for Growth 2012, states that there is a growing consensus that assessments of economic performance should not focus solely on overall income growth (GDP) but should also take into account income distribution. The OECD notes that rising income inequality tends to be shaped by an increasing concentration of income at the top end of the income distribution.

Ending the present crisis and building a sustainable global economy requires a fundamental leap that accepts that there is a limit to the level of income inequality a country can have that is consistent with stability. The successful management of economies depends on securing a more equal distribution of incomes. Reducing inequality has not yet been a central economic goal alongside, for example, controlling inflation or tackling fiscal deficits.

Measures to reduce income inequality must be seen as having a central role in creating the right conditions for sustainable and inclusive growth. The Government needs to set clear targets for a number of key economic relationships to make progress on income inequality, including:

 

  • Striking the right balance between wages and profits, because a lower wage share leads to lower growth;
  • Reducing the pay gap between top and bottom earners, as this will contribute to maintaining and increasing aggregate demand;
  • Putting limits on the level of income concentration and using the tax system more effectively for redistributive purposes. T. Pickety, E. Saez and S. Stnatcheva, in their 2012 paper, Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities, illustrate how the trend where the top 1% are paying less tax than they were thirty years ago needs to be reversed.