Income Inequality on the Rise

The rediscovery of inequality is one of the more startling realisations of the post-global financial crisis, post-globalisation world writes Professor Thomas Clarke, for The Conversation.

A Berkeley University professor Emmanuel Saez with colleagues has recently published a series of studies on the growth of absolute poverty in the United States.

He reports that the top 10% of income earners in 2007 accounted for 49.7% of total US income, higher than in the roaring 1920s.

It is as if President Lyndon Johnson’s great war on poverty launched in the 1960s had never happened.

Incoherent, idealistic, and a little tragic as the Occupy Wall Street demonstrations that have spread around the world have been in recent weeks, they are protesting a residual truth: that poverty, inequality, and extreme wealth have returned to disfigure the Western world in ways that would have been unimaginable in the buoyant post war decades of economic growth and social democracy.

How on earth did this occur?

The return of poverty

There are three dimensions to poverty: absolute poverty, relative poverty, and social exclusion.

The website poverty.org provides a handy definition for each, saying “the concept of absolute poverty "is that there are minimum standards below which no one anywhere in the world should ever fall.

“The concept of relative poverty is that, in a rich country… there are higher minimum standards below which no one should fall, and that these standards should rise if and as the country becomes richer.

“Social exclusion is an all-encompassing term to describe situations where people lack many of the opportunities that are available to the average citizen.”

The United States (which remains the most prosperous country in the world) has led the way in reintroducing the ugliness of naked poverty and inequality.

Child poverty in the United States stopped declining and began to increase again in the US, rising from 18% in 2007 to 19% in 2008 and then to 20.7% in 2009 (while in the UK, confronted by similarly high rates of child poverty, a concerted government effort has reduced this trend dramatically).

According to the US Census Bureau the number of Americans living in poverty has increased from 31.6 million in 2000 to 41.6 million in 2010, where the poverty line is calculated as an annual income of $22,314 for a family of four and $11,139 for an individual.

The increase lifted the poverty rate to 15.1% of the US population, while unemployment presently stands at 9.1%.

Growing Inequality

During the periods of rapid economic growth in the 1990s fuelled by the Nasdaq boom, and in the 2000s fuelled by the financial sector boom, average wages in the US virtually stalled, and the minimum wage declined.

Meanwhile chief executive pay and the rewards for senior executives in the finance sector sky-rocketed.

Two forces disguised, while intensifying, the growing inequality occurring in the US and in much of the western world.

The first force was globalisation as more than a billion people entered the global labour force, linking up in advanced production networks to provide every kind of consumer product at increasingly low prices.

Who in the West paused to think that the gleaming new electronic products and high fashion accessories were assembled in the sweat shops of Asia?

Globalisation may have lifted hundreds of millions of people out of poverty in the developing world, but there has been a worsening of poverty among the world’s poorest billion citizens.

Rampant consumerism in the West was turbo-charged by the apparent unlimited access to personal credit that was made available in the 2000s (the financialisation of everyone).

Then the “we had never had it so good” days ended in tears (we had never been had so good!). The indebtedness of those enticed into the expanding housing market in the US, bundled into toxic securities, exploded in the global financial crisis.

Making connections: CEO Pay

The increasing prevalence of inequality in the West – as well as the public outcry against this – has even been acknowledged recently in the pages of free market publications such as the Financial Times and The Economist.

The Financial Times reported that income tax which traditionally has been designed to progressively tax the rich more in the US has become fiercely regressive – taxing those on lower incomes the most.

It conceded in an editorial that: “the political class has not acknowledged the human dimensions of the financial crisis.”

There is even acknowledgement of the possible need to reintroduce a supertax being considered in several European countries, and some sympathy for President Barack Obama’s proposal that no household making more than US$1 million should pay a lower average rate than lower earners.

But the connection between growing inequality and the rampant inflation in CEO pay that has become heavily entrenched in the US over the last 20 years is rarely made.

CEO pay in the US in the middle decades of the 20th century was up to 50 times average pay (a much higher ratio than the rest of the world).

In the 2000s CEO pay in the US inflated to several hundred times average pay. The arrogation of an increasing share of the wealth of corporations by CEOs impacts upon relationships with other employees, shareholders, and the wider community.

Excessive and unrestrained CEO compensation displaces objectives that drive the development and success of the company to individual strategies of how to maximise their personal reward.

For example, making large scale redundancies in the post-gfc recession normally will ramp up share prices and executive compensation.

There is a real danger that the inflated compensation secured by US executives will become the benchmark for executive reward in other regions of the world where, up till now, executive rewards have remained modest in comparison.

As well as inducing economic instability and social inequality, it is both socially unacceptable and economically inefficient.

In Australia we have had the authoritative Productivity Commission report on executive pay.

The controversial “two strikes” remuneration law rule introduced following the inquiry empowers a 25% voting bloc of shareholders to spill a board if they consistently fail to consider shareholders concerns on executive remuneration.

Already shareholders are pursuing this action, and perhaps this is the beginning of the long awaited revolt on executive pay.

Are you seeing a rise in inequality? Have your say below.