Inequality Bad for Economy says Professor

Date: 17th September 2013


From University of Auckland Business School.

Professor Robert Wade of the London School of Economics gave a public lecture on ‘Inequality and the West’ at The University of Auckland in July, supported by the Business School. He is a contributor to Inequality: A New Zealand Crisis, which was launched at the event.

Since the 1980s there has been a surge in income disparity in the developed world, with social elites significantly adding to their wealth at the expense of the poor, says Professor Wade. Such worsening inequality is not merely unjust, he argues. It carries a high economic cost.

Professor Wade says the trend – which is especially pronounced in the “Anglo-American” world – is partly the result of phenomena such as globalisation and technological change, which favours people with higher skills. But it is also the outcome of state policy.

Nor does it seem to matter who is in office. Under the administration of Democrat Bill Clinton, the top 1% of Americans gained 45% of the increase in national income, says Wade. Under Republican George Bush the same group gained 73% of the increase, and under Democrat Barack Obama the figure was 93%.

“In other words, capitalism and democracy are increasingly working at cross purposes.”

Far from being necessary to stimulate innovation and economic growth, as some proponents suggest, such growing inequality carries real economic costs, says Wade, including recurrent financial crises and what he calls “social and health malaise”.

Correlating inequality and economic performance in six Anglo-American economies and eight in Europe and Japan from 1913 to 2003, he found little difference between them until 1978, when the income share of the top 1% “took off” in the Anglo-American countries. However, the increased concentration of wealth had little effect on economic performance.

“This suggests that economies can remain highly productive and innovative, like the northern Europeans, with much less concentration of material income and wealth at the top than in the Anglo-American type.”

Furthermore, above a certain level of inequality, economies often become debt-intensive, he says. This is because falling demand for goods and services caused by lower real wages for the majority of workers prompts “a common interest” among firms, politicians, households and financial regulators to allow a rapid rise in private debt.

Developed economies with high inequality also tend to experience “bubble dynamics”, says Wade. In the early 1990s and again in the early 2000s, floods of global capital caused by wealthy individuals looking for new investments contributed to bubbles in housing, property, business and art.

“The bursting of the house price bubble in the US, UK, New Zealand, Iceland and many other Western economies helped to turn an ordinary business cycle downturn around 2007 into the larger financial crash and ensuing slump.”

Equally worrying is what Wade sees as a move in many Western countries from an “establishment” elite, which protected its own position by fostering the well-being of society as a whole, to an “oligarchic” elite that uses public power to claim a larger share of society’s resources.

Even among “progressives”, he says, there is a preference for talking about poverty – which implies helping someone “out there” – over inequality, which may lead to questions about the appropriateness of an individual’s own income and that of his or her peers.

Wade has some suggestions on what can be done in New Zealand to reduce inequality, including rethinking the policies and regulations that make market incomes (that is, before taxes and transfers) increasingly unequal. He also advocates introducing a capital gains tax.

However, he does not expect real progress until radical changes are made to the funding of political parties or until the world economy has been shaken by several more financial crises.

Meanwhile, he says: “We should in the interests of accuracy refer not to ‘democratic free market capitalism’ but to ‘plutocratic impunity capitalism’.”


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