Not Made Equal !

The Planet has recently approached a historically unimaginable population figure of 7 billion. And out of that number, a good 15%, i.e. 1 billion, live in poverty. With record-breaking spikes in global food and commodity prices, which pushed headline inflation in the developing countries to ultra high levels, the less fortunate citizens of this world have been struggling to make ends meet, spending up to 80% of annual income on food and related products. Meanwhile, the rich have been steadily accumulating enormous amounts of wealth. What we are experiencing is a truly landmark rise in income inequality all across the globe, and we are doing almost nothing about it.

Income inequality is not a fresh development. Records show that the gap between high earners and the rest of us has been growing at extraordinarily high rates for decades. Of course, the recent Financial Crisis made matters much worse for everybody, and the income gap will likely grow even further.

However, inequality has been (or at least should have been) on the policy agenda for a good part of the past century. This is a global issue, a socio-economic trend without a “ground zero”, which has led to fundamental. demographic imbalances. Societies have changed, and so have the lives of millions. So, what is the big deal?

What facts are we talking about here? First, the gap between rich and poor has grown ever wider over the past three decades. A recent report by the OECD shows that the Gini coefficient, a standard measure of inequality in which 0 corresponds to everyone having the same income and 1 means the richest person has all the income, increased by almost 10% from 0.29 in 1985 to 0.32 in 2008, for working-age people in OECD countries.

Second, the US Congressional Budget Office has concluded that while after-tax household incomes grew by 275% for the richest 1 per cent between 1979 and 2007; they rose by 65 per cent for the rest of the top 20 per cent of Americans. For the 60 per cent in the middle-class, after-tax incomes grew by slightly less than 40 per cent, and for the poorest 20 per cent by only 18 per cent. That is an almost 250% differential between the top 1% and the lowest 20% earners.

Third, the pay of the richest 10% of employees has increased at a far greater rate than that of the poorest 10% of employees. Within the upper echelons, the top 1% has reaped the greatest gains. This trend can be best reasoned by the ability to take advantage of the 21st century’s technological revolution. Technology has disproportionately benefited exactly the high-earning workers, who also spend far longer hours at work than do low-earners. Also, if we add to these numbers the complete remuneration packages of top corporate executives, which would include both salary and bonuses, we would get staggering results such as multi-million dollar pay contracts for bosses whose companies essentially tore the global financial system into pieces.

Furthermore, rising inequality has drastic demographic consequences. For one, high earners tend to marry other high earners. This voluntary consolidation based on status lowers the chance of someone from lower echelons of the money pyramid getting to a higher stratum. In addition, surveys and research have shown that people of similar income levels tend to cluster geographically, i.e. live in areas where other rich people live. High net-worth individuals obviously have more opportunities for sending their kids to better schools, which further worsens inter-generational income inequality. Therefore, a common contra-argument against income inequality that people earn more because they know more is a dead-end logical fallacy. Those with better diplomas are also those whose parents were able to pay for those diplomas in the first place.

On the policy front, our governments are doing less to redistribute the wealth than they have done in the past. Taxes on high earners have remained lower than historical averages, especially in the US; more and more the politicians we elect fall prey to the lucrative campaign donations of the very wealthy; states choose to promote policies that balance their long-term budgets at the expense of short-term suffering of the poor and the elderly. The Financial Crisis of 2008 was created really by the economic and financial elite, whose greed went beyond imaginable. And as a result, we cut entitlement spending and destroy social welfare. We should already get used to the idea that policy is not made equal. Because apparently humans are not made equal!

Rustam Jamilov

AZERBAIJAN

Junior Economist at the Central Bank of the Republic of Azerbaijan

Lecturer at Azerbaijan State Economic University

Alumnus of CEU Business School