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Let’s not talk about inequality

 
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By Mark Thomas, PA strategy expert

Insight contributed to Oxfam 'Even It Up' report 2014  

        

Whilst many people are concerned about current levels of inequality, there is neither universal agreement that inequality has become too extreme, nor any basis for determining what would be considered too extreme. A degree of inequality is inevitable – there has never been a society without inequality – and may even be desirable to ensure there are strong incentives to work and innovate.  

Mass impoverishment 

A clearer problem to focus on is mass impoverishment, or running a country in such a way that the majority of its population become poorer in real (inflation adjusted) terms over time. This arises from a reduction in individual earning power and decreasingly redistributive tax and social policies.

Over the last 25 years the US economy has grown 76% in real terms but the bottom 90% of the US population are now worse off in real terms than in 1982. In the UK, the issue is less severe, but most households are worse off now in real terms than in the year 2000. Without significant changes in the way the economy runs, by 2025 the UK could be looking back on a quarter century of mass impoverishment, as the US does today.

For many businesses, who rely on a large and comfortable middle class buying their products and services, continued mass impoverishment puts their survival at risk. The low cost business models challenging many large employers could create a vicious circle in which mass impoverishment drives unemployment, which in turn exacerbates mass impoverishment.

Taking action

Happily, ending mass impoverishment is much easier to achieve than reversing shifts in inequality. Fixing inequality at today’s levels means that the whole population shares in any future growth of the economy. Ending mass impoverishment should therefore be an absolute minimum goal of government policy. Three approaches seem most apparent:

Option 1 – do nothing, hoping not to make it worse

The evidence of the last three decades suggests that this option is least likely to succeed. The consequences of another decade of mass impoverishment are hard to predict, but it is not implausible that financial and economic instability would increase, leading to further disillusionment with governments, the rise of fringe and extremist parties and increasing levels of civil unrest.

Option 2 – direct or indirect action to address unequal earning power 

Direct action might include laws to limit percentage rises in total compensation at the top levels of an organisation to those at the lowest level. This would not reverse recent decades of rising inequality, but would prevent further rises in inequality. 

Indirect action could include measures to charge businesses for their externalities, – those profit-boosting costs they impose on society, such as polluting or paying below a living wage. Action to prevent a destructive race to the bottom and address individual earning power   should have a dramatic effect over time, but progress will be slow.

Option 3 – redistribution, a very difficult but quick win 

In principle, legislation to increase redistribution of earnings could be implemented, and take effect quickly. Significant measures of this kind will likely prove politically difficult, however, because of the difficulty in trying to persuade beneficiaries of  inequality to give up money they already have. 

Time is of the essence

Whilst ending mass impoverishment will not be easy it is far easier than dealing with the economic, social and security issues raised by allowing the problem to run for another decade. Unless we address the current situation urgently, the problems we see today will become even more severe with profoundly dangerous consequences. With current policies, however, we should expect a continuation of the experience of recent decades.

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