As a record number of private jets landed in Davos in January 2019 for the World Economic Forum, non-profit Oxfam released its annual inequality statistics. The report stated that the 26 richest billionaires own as many assets as the 3.8 billion people making up the poorest half of the planet’s population. It added that, in the 10 years since the financial crisis, the number of billionaires has nearly doubled, and between 2017 and 2018, a new billionaire was created every two days. Oxfam has often blamed governments for making inequality worse by failing to invest enough in public services. The solution, according to the NGO, is greater government funding to these. In addition, Oxfam has called for fairer taxation, including on corporations and the richest individuals’ wealth, which, it argued, were often undertaxed.

 

How and Why is Economic Inequality Rising

Economic inequality is largely driven by the unequal ownership of income and wealth, which can be either privately or publicly owned. Since 1980, increasingly large transfers of public to private wealth have occurred in nearly all countries around the world. Thus, while national wealth has substantially increased, public wealth is now negative or close to zero in rich countries (see the graphs below). In other words: countries have become richer, but governments have become poorer. Low public wealth limits governments’ ability to tackle inequality, which has, in turn, direct implications for wealth inequality among individuals.

 

The Rise of Private Capital and the Fall of Public Capita (Source:  WID.world (2017))

 

 

Total income growth by percentile in China, India, US-Canada, and Western Europe, 1980–2016 (Source: WID.world (2017))

 

There are several factors influencing the rise in inequality. The industrial revolution created great inequality between countries, but today, globalization and international trade are accelerating it. Many economists agree that, while globalization has helped the world’s poorest people, it has helped the rich much more. Put in Harvard economist Richard Freeman‘s words:

 “The triumph of globalization and market capitalism has improved living standards for billions while concentrating billions among the few.

There are other reasons why inequality is growing. Economists have pointed out the so-called skill-biased technological change. The new jobs created in modernised economies are increasingly technology-based and often require new skills. Thus, workers that have the education and skills to do those jobs thrive, while others are left behind. In a way, technology has become a complement for skilled workers and a replacement for unskilled workers.

Other often-cited reasons why the economic gap is widening are tax policies that favour the wealthy, economic loopholes and corruption. In addition, race, gender and other forms of discrimination can also exacerbate inequality.

Most probably, some degree of inequality will be inevitable in a market-based system, but extreme divisions can have important consequences. Take, for example, the polarization of politics and the rise of populism around the world. Many have argued that the rise in populist leaders mirrors people’s discontent with the system and a growing sense of perceived inequality. Ted Howard, the co-founder of Democracy Collaborative, thinks this is essentially a democratic issue:

“Can you hold together a democratic state when the wealth holding patterns show no democracy at all?”

But increased inequality does not only affect politics and democracy, but also the economy. Inequality generates political and economic instability that reduces investment; therefore, societal divisions may destabilize growth and foster an economic slowdown. Furthermore, economies may restrain if too many people are held back from contributing to their full potential. Research has found that inequality may be harmful to a nation’s growth because it deprives the poorer of the ability to accumulate human capital and it impedes the social consensus required to adjust to shocks and sustain growth.

 

How to Prevent Rising Inequality

The prevailing logic for the past decades has been to pursue stronger economic growth – the “greater” the economy, the more each individual gets. Until now, the main instruments to tackle inequality have been tax and spending tools available to governments. But, while progressive taxation and welfare transfers are key to combat the division of wealth in society, they are by no means the only way.

One widely discussed solution is the implementation of a universal basic income (UBI). This could provide a safety net to prevent poverty, but such schemes could prove quite expensive and have received great scepticism. Further, some argue that more targeted spending on the most disadvantaged could be more effective. French economist Thomas Piketty has called for a global wealth tax, while the Organisation for Economic Cooperation and Development (OECD) has suggested using higher inheritance taxes to reverse the extreme concentration of wealth.

There are also calls to improve funding for education and services. Increased spending on health and education could lower the persistence of income inequality across generations, but also increment productivity rates, employment and earnings in the long run. Further, some economists suggest greater democratic ownership could prevent rising inequality.

 

Final Remarks

While there is no universal consensus on how to solve the problem of inequality, the issue will not go unnoticed. The perception will surely differ from one individual to another, but the truth is that inequality does not only weigh on those below. The biggest effects are on the poor, but the vast majority of the population performs less well in a more unequal society. Perhaps we might go back in history and cite a classic economist – Adam Smith already warned: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable”.