‘Working for the Few’: top new report on the links between politics and inequality

January 20, 2014

     By Duncan Green     

As the world’s self-appointed steering committee gathers in Davos, 2014 is already shaping up as a big year for inequality. The World inequality Eton-Harrow-class-279x300Economic Forum’s ‘Outlook on the Global Agenda 2014’ ranks widening income disparities as the second greatest worldwide risk in the coming 12 to 18 months (Middle East and North Africa came top, since you ask).

So it’s great to see ‘Working for the Few’, a really excellent new Oxfam paper by Ricardo Fuentes and Nick Galasso, tackling an issue best summed up by US Supreme Court Justice Louis Brandeis in the aftermath of the Great Depression, ‘We may have democracy, or we may have wealth concentrated in the hands of the few, but we cannot have both.’ i.e. the politics of inequality and redistribution.

The Brandeis quote is particularly relevant because this time really is different. After the 2008 global meltdown, we have not seen anything like the New Deal, in terms of redistribution or reform. The paper argues that this is because political capture by a small economic elite is much more complete this time around.

The numbers take your breath away – my favourite newkiller fact from the report (and there’s a lot of competition): The bottom half of the world’s population owns the same as the richest 85 people in the world. Read that again, please.

Palma for China, IndonesiaAnd it’s getting worse. In country after country, the ratio of the income of the top 10% and bottom 40% resembles an opening jaw (here’s China and Indonesia) – I tried to get Oxfam to superimpose a yawning crocodile on the graphs, but sadly, they said no.

Why should Oxfam care about what happens at the top? Shouldn’t we just worry about helping the people at the bottom? No, because of political capture – this is not about the politics of envy, but the politics of extreme wealth. There is a vicious cycle through which a high degree of wealth funds lobbyists and campaign contributions, which buys favourable policies, which concentrates wealth even more.

We are witnessing a titanic battle between two principles – an idealized market ($1 one vote) and an idealized democracy (one person one vote). Real politics is born of the tussle between the two: sometimes money, sometimes people wins out. Right now, money is doing far too well, as this graph of a measure of financial deregulation and the income share of the top 1% shows only too well.

All this suggests two urgent tasks: reduce the concentration of wealth and income, and build deregulation v inequality USbetter firewalls between wealth and political influence. We need to do both if we are to disrupt and reverse the vicious cycle.

Public opinion is increasingly on our side on this one. A survey conducted for Oxfam in six countries (Spain, Brazil, India, South Africa, the UK and the US) showed that a majority of people believe that laws are skewed in favour of the rich – in Spain eight out of 10 people agreed. Another recent poll of low-wage earners in the US reveals that 65 percent believe that Congress passes laws that predominantly benefit the wealthy.

There are clear examples of success, both historical and current, in reversing the political-economic death spiral. The US and Europe in the three decades after World War II reduced inequality while growing prosperous. Latin America has significantly reduced inequality in the last decade – through more progressive taxation, public services, social protection and decent work. Central to this progress has been popular politics that represent the majority, instead of being captured by a tiny minority.

The particular combination of policies required should be tailored to each national context. But developing and developed countries that have successfully reduced economic inequality provide some suggested starting points, notably:

  • Cracking down on financial secrecy and tax dodging;
  • Redistributive transfers; and strengthening of social protection schemes;
  • Investment in universal access to healthcare and education;
  • Progressive taxation;
  • Strengthening wage floors and worker rights;
  • Removing the barriers to equal rights and opportunities for women.

I read Angus Deaton’s new book, The Great Escape, over Christmas (review in the pipeline). Deaton argues that the breakup of great civilisations is often preceded by a period of sclerosis and distributive conflict. Unless we can curb the current tendency to increased concentration of power both in politics and economics (and the reinforcing feedback loops between them), the risks to stability can only grow. Let’s hope this discussion gets somewhere in Davos.

There's the have nots. And then there's the have yachts.

There’s the have nots. And then there’s the have yachts.