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Income Inequality: Views & Solutions From Experts

Income inequality, or the wide gap in wage growth and value between the highest-earning citizenry and the lowest-earning workers in a given nation, is increasing at an alarming rate.

On a global scale, the bottom earners’ income increases by only 1.4 percent, while the top earners’ grows by 2 percent yearly. In the United States, income inequality increased the widest among developed nations – the richest 1 percent growing by 275 percent, while wages of the poor grew by only 20 percent in 30 years.

Perhaps the most controversial question is how income inequality affects economic growth. There are those who view it as a necessary “tool” to boost personal wealth, while there are those who think economic stability will remain shaky when income growth is not properly distributed.

How do the world’s best minds on economy and policies view income inequality? Does personal income matter in the grander scheme of national growth? How serious is it as a problem and what are the ways to tame it? Who must bear the brunt of the beatings to correct what’s wrong? Are globalization and technological innovation really to blame?

We rounded up the opinions of top experts and the views of global organizations on income inequality, and discovered that their differences are as wide apart as the income gap that they are talking about.

The Pro Inequality Busters

This is the group of like minds that views income inequality as a threat to the economy (not a stimulus for growth and motivation), associates the issue with moral justice and foresees dire consequences if the worsening gap remains unchecked.

Joseph Stiglitz – a Nobel laureate in economics, a Columbia University professor and a former chairman of the Council of Economic Advisers and chief economist for the World Bank. Moderator for The Great Divide series on inequality.

On the issue:  

“There are all kinds of excuses for inequality: It is beyond our control – market forces like globalization, trade liberalization, the technological revolution, the “rise of the rest.” Others assert that doing anything about it would make us all worse off, by stifling our already sputtering economic engine. These are self-serving, ignorant falsehoods.”

View:

Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined. Inequality stifles, restrains, and holds back our growth. The US cannot quickly and meaningfully recover without policies that directly address inequality. The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson.

Solutions:

  • Straighten and strengthen the legal framework to prevent abuses.
  • Market forces should be shaped, not left as “forces.” Other countries shaped their market forces in ways that have lowered inequality while creating more opportunity and growth.
  • Take care of the young, as they are our most valuable resource. Countries far poorer than the U.S. have decided that all young people should have access to food, education and health care so they can fulfill their aspirations.

Warren Buffett – Chairman and CEO of Berkshire Hathaway, a multinational holding company based in Omaha, Nebraska. American business magnate, investor, and philanthropist considered as the most successful investor of the 20th century. Openly opposed to the increasing income inequality in the U.S., his proposal to raise taxes on the wealthy was dubbed the “Buffett Rule.”

On the issue:

The wealth of the 400 richest Americans has increased more than fivefold over the past 20 years. “My gang has been leaving the middle class in the dust.”

“It was sickening that rich people and companies use the Cayman Islands to lower their tax bills, but moral outrage is a weak weapon against international tax arbitrage.”

View:

While there have been improvements in some areas of the economy, many others haven’t fared so well. Winners include corporations, who have seen good equity returns, as well as the wealthiest American citizens. The losers? The housing market and average American workers.

Solutions:

  • Better taxation system. “Through the tax code, there has been class warfare waged, and my class has won; it’s been a rout.”
  • Do the right thing. Buffett has made two substantial investments in American businesses in recent months to struggling IBM and Bank of America.

Nouriel Roubini – Professor of economics at Stern School of Business, New York university,  co-founder and chairman of Roubini Global Economics.

On the issue:

“Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, public protests will become more severe, with social and political instability eventually harming long-term economic growth and welfare.”

View:

The global wave of social and political turmoil and instability, while having no unified theme, express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites.

Solutions:

  • Higher taxes, particularly for the upper-middle class and up, will help even things out, thereby “unlocking the U.S. economy’s growth potential in a sustainable way.
  • The government should limit the tax breaks, subsidies, and loopholes allowed to the major energy, agri-business, pharmaceutical, and financial companies.
  • Make sure corporations and individuals whose income is derived from investments pay taxes commensurate with the benefits they get from the US citizenship.

David Cay Johnston – Author and Pulitzer Prize winner for his coverage on tax policy while at The New York Times. Professor at Syracuse University College of Law.

On the issue:

“The drop in incomes among the vast majority holds back economic growth, because there is just not enough aggregate demand to support creating enough new jobs to keep up with population growth. And who was hit hardest by the new federal taxes that took effect this year? The vast majority.”

View:

Where the average increase in real income reported by the bottom 90 percent of earners in 2011, compared in 1996, would measure at one inch, for the top 1 percent of the top 1 percent it would extend almost five miles. This $59 increase for the vast majority covers a time longer than most people work.

Solutions:

  • We cannot balance federal budget by raising taxes only on those at the top, because there is not enough income there, even if we taxed away everything the top makes. We cannot increase tax revenue if the incomes of the vast majority keep falling.
  • The rules allow the rich to make their fortunes grow like a giant snowball rolling down a hill. This debate can change if we understand how the national income pie is being sliced now and how it was in more prosperous times.

Alexander Baron ­- London-based baron writes for the Digital Journalist with expertise in unemployment, politics, music, government and the Internet.

On the issue:

“It is technology that enables the economy to produce services and especially consumer goods more cheaply and in greater quantity than ever before, but clearly the current financial system is incapable of distributing them, especially to the underclass and the unemployable.”

Views:

Clearly we need a root and branch reform of the oppressive financial system, in particular banking. Usury, as it is properly called, sucks the lifeblood out of all nations and transfers wealth from the have-nots to the haves.

Solutions:

  • Taking the power to create credit away from the banks must be the first step.
  • We must also look to alternative methods of distributing purchasing power from wages, salaries and dividends. For the poor we have what was originally envisaged as a safety net: the benefits system in the UK; welfare in the United States. This safety net has now become a virtual prison, locking those at the bottom into a permanent poverty trap.

ORGANIZATIONS

International Monetary Fund (IMF)

On the issue:

“Inequality tends to cause economic volatility. Sustainable economic reform is possible only when its benefits are widely shared.”

“Inequality matters for growth and other macroeconomic outcomes, in all corners of the globe.”

Views:

The IMF has strongly debunked the Okun theory which states that pursuing equality can reduce efficiency and not only can more equal distribution of incomes reduce incentives to work and invest, but the efforts to redistribute—through such mechanisms as the tax code and minimum wages—can themselves be costly.

In contrast, the IMF says: (as voiced by Andrew Berg, Chief, Development Macroeconomics Division, IMF Research Department.)

Societies do not face a choice between efficient production and equitable wealth and income distribution. When growth is looked at over the long term, the trade-off between efficiency and equality may not exist. In fact equality appears to be an important ingredient in promoting and sustaining growth.

In countries with more income inequality, the economy more frequently plunged into deeper recessions, while economic growth lasted much longer in more equal societies.

BROOKINGS INSTITUTION – a non-profit public policy organization based in Washington, D.C. with a mission to conduct high-quality, independent research and provide innovative, practical recommendations that will help democratic America.

On the issue:

“Economic inequality reflects factors as diverse as education, IQ.., lack of opportunity and discrimination. But government policies also make a difference. Globally, economic disparities pose even greater challenges as they can contribute to cycles of poverty, disease, social unrest, and political turmoil.”

View:

Income inequality is an economic threat in the U.S., increasing and becoming permanent, reducing social mobility in the U.S. Today, the top 1 percent of Americans own 38 percent of the nation’s wealth, while the bottom 40 percent possess less than 1 percent of U.S. wealth.

Solutions:

  • We should reform the tax system, no question, William Gale, a tax policy expert at the Brookings Institution and co-director of the nonpartisan Tax Policy Center.
  • We are going to need to move beyond the current set of tax instruments to raise the needed revenues — a VAT and or a carbon tax seems like the obvious way to go.

LET INCOME INEQUALITY BE

This is the group whose “members” share the opinion that income inequality is not a morality issue, that it’s role is exaggerated where national economic growth is concerned, and that taxing the rich more is not the solution.

Michael Goodwin – New York Post columnist and Fox News contributor

On the issue:

“Income equality. That would be utopia. The only answers offered are massive tax hikes and more entitlements to spread the wealth around. First, the only thing “equal” in America is the guarantee of life, liberty and the pursuit of happiness. Opportunity is equal, outcomes are not.”

View:

On one level, income inequality is real, and growing. Yet as a bedrock and urgent political issue, it’s pure hokum, cooked up in the socialist faculty lounges. The aim is to hijack emotions and grow the government pie so favored voters get a bigger slice. I see the raging battle as little more than a ploy to get into other people’s wallets.

Solutions:

  • Focus on the real problem – Redistribution doesn’t expand wealth, it only shuffles it. And it exacts a price on the future. The focus on income inequality serves only the ideological prejudices and political aims of proponents, while throwing more obstacles in front of growth and job creation.
  • Help the middle class. The movement won’t do anything to help the huge middle class, which is losing ground.
  • Don’t pit Americans against each other in a fight certain to make losers of all of us.

David Malpass – Economist, senior fellow in Economic history at the Council on Foreign Relations

On the issue:

“President Obama is openly fueling the protests over this state of affairs but is focusing on pitting the classes against one another instead of repairing America’s growth engine.”

View:

The policy issue is whether our goal as a society should be higher incomes for all or less disparity between incomes  – countries almost never achieve both.

When growth is fast, the incomes of the poor go up as the incomes of the rich go up even more. When growth is slow or negative, the real incomes of the poor go down the most. Income disparity widens most when the dollar is weak, in part because the incomes of all but the rich lag behind the inflation rate.

Solutions:

  • The policy goal shouldn’t be to divide up the existing income but to allow the private sector to create more for all, a process that has virtually ceased.
  • The Reagan action to class warfare was to get the economy to grow faster, raising the incomes of the bottom half, even though the top half might do even better. Reagan believed that society should promote higher incomes for the bottom half, not redistribute or block the income gains of the rich. To achieve this he strengthened the dollar and by 1986 lowered the top marginal income tax rate.

William McBride – Chief Economist at the Tax Foundation, taught macroeconomics at the George Mason University, where he obtained his Ph.D. in economics degree.

On the issue:

“What slows the rate of income growth: demographic and economic changes such as millions of low-skilled immigrants entering America slow the rate of income growth of the bottom quintile.”

Views:

There are factors that tend to exaggerate growth in income inequality. The income measure comes from the IRS, and does not include fringe benefits such as healthcare and government transfer payments which go disproportionately to low-income households and have grown substantially. It ignores the changing size and structure of households, including increased cohabitation rather than marriage and increased dual-income marriages.

Solutions:

  • There are a number of issues that people need to keep in mind when looking at average incomes: Aggregates tell you very little about the well-being of individuals.
  • Be wary of analyses; they are often misleading and far too simplistic. Aggregates are useful, but they can be misused.

Paul Krugman – Author and Op-Ed columnist for The New York Times. Professor of Economics and International Affairs at Princeton University. One of the founders of the “new trade theory,” a major rethinking of the theory of international trade.

On the issue:

“Am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play.”

View:

On high income inequality depresses tax receipts, fueling fiscal fears: our tax system isn’t as progressive as it should be, but it is at least mildly progressive even when you take state and local taxes into account.

Arthur Okun (1928-1980) – Yale University and Brookings Institution economist, author of the controversial 1975 book Equality and Efficiency: The Big Tradeoff. (Some of his theories were later debunked by economists, notably Andrew Berg of the IMF.)

On the issue:

“Some of the resources transferred from rich to poor “will simply disappear in transit, so the poor will not receive all the money that is taken from the rich – the result of administrative costs and disincentives to work for both those who pay taxes and those who receive transfers.”

View:

Pursuing equality can reduce efficiency and not only can more equal distribution of incomes reduce incentives to work and invest, but the efforts to redistribute—through such mechanisms as the tax code and minimum wages—can themselves be costly.

INSTITUTIONS:

American Enterprise Institute (AEI) – a Washington-based organization composed of scholars and experts engaged in public policy research promoting freedom, opportunity and liberty and in increasing individual opportunity and strengthening free enterprise.

On the issue:

“Most people are not actually surprised when they hear about non-Americans with very little money and knowledge of English who rose in American society, or whose children excel in school and go on to professional careers. In utter disregard of such plain facts, so-called “social scientists” do studies which conclude that America is no longer a land of opportunity, and that upward mobility is a “myth.”

Views:

  • Most of the media publicize what is happening to the statistical brackets — especially that “top one percent” — rather than what is happening to individual people.
  • In response to the viral video titled “Wealth Inequality in America,” AEI produced a counter-video titled ”What Wasn’t Said in ‘Wealth Inequality In America” showing what is happening to actual people whose income and wealth change all the time.
  • Most working Americans who were initially in the bottom 20 percent of income-earners, rise out to the top 20 percent. People who were first in the bottom 20 percent have had the highest rate of increase in their incomes, while those who were first in the top 20 percent have the lowest.

Solutions:

  • Follow individual people, not the trends in income brackets to get a real picture of income inequality.
  • Comparing the top income bracket with the bottom income bracket over a period of years tells you nothing about what is happening to the actual flesh-and-blood human beings who are moving between brackets during those years.

Watchdogwire – a citizens’ online journalism initiative in the US, exists to train citizen journalism by covering stories in local community that are otherwise ignored by the establishment media, supported by The Franklin Center to create a more vibrant democratic society based on accountability and open government.

On the issue:

“Inequality is used to arouse ‘man’s basest instinct’… envy. To further his political ambition, when President Obama says, the rich don’t pay their fair share, or they didn’t build it themselves, he is appealing to the ‘basest instinct that afflicts mankind’… envy. This instinct has been part of mankind’s dark side for time immemorial.”

Views:

The Welfare Trap creates Income and wealth inequality. Welfare was supposed to help people temporarily in distress. Instead it morphed into a permanent support system that is handed down from generation to generation. Permanent welfare reduces people’s incentive to work. Higher wage earners haven’t caused this problem; government policy is largely to blame.

Solution:

  • No to increase taxes for higher-income citizens. If you reduce the income of upper income people by increasing taxes, several things happen. They cut back on spending; cut back on retirement savings; are less able to send a child to college and are less motivated employees and businessmen.
  • The additional tax revenue will be used to expand government, welfare and permanent dependency which prevent economic growth, as has been demonstrated over the years,
  • Improve literacy in America. Illiteracy and low literacy is rampant in America. Economic policies and poor education are the main drivers of inequality.

CONCLUSION:

While new research is challenging some traditional view that inequality is a necessary evil for a “dynamic” society, there are those who remain firm that it is never acceptable. The varying views and opinions mirror the great divide in terms of solutions ranging from moderate changes to very radical shifts.

Despite this, we’ve also discerned that great minds can unite when it comes to the more pressing issue – income distribution. In the words of Yugoslav economist and World Bank’s research head Branko Milanovic, “despite the impression that nothing more substantial can be said on the topic, economists and political philosophers have worked out, within fairly consistent frameworks, the ideas about what the optimal, or a better, distribution of income would be.”

Category: Financial News

5 Comments »

  • J. Krenzelok says:

    Thank you for a fair and decent assessment of the situation. It was useful and informative- normally, I would have a counter-argument ready to go, but I believe that it is a testament to your integrity that I really have nothing to rebut, but do have some new points to consider. That’s the pinnacle of journalism, and you deserve praise for that.

    Well done.

  • Zach says:

    I really benefited from reading this article. I am doing a research paper for my English class on income inequality and am in need of a few primary source documents. If you could send me the links to some of these quotes I would greatly appreciate it!

  • William I. Griffith says:

    Paul Krugman of the New York Times writes frequently about Income Inequality. You have him in the group that doesn’t view it as a threat and is not particularly concerned about it. Nothing could be further from the truth.

  • Bob Rye says:

    I always see solutions involving taxation. Surely we can be more creative than that. First, if I make $50K/year and my neighbor makes $100K/year he may be taxed higher, but “income inequality” still exists. And although you would (presumably) tax him more and be more generous to me with a higher refund, for issues like retirement/401K my neighbor will come out way ahead (assumes we both tuck away 10% of our yearly income).

    So how could a company boost my income and stay fiscally solvent? Just a thought – keep things pretty much as is, but instead of a company paying their tax liability to Uncle Sam, have those funds directed to an “income equality account” for that company. This concept would need much more thought, but I addition to having ready access to additional funds to boost low pay, it also encourages non-workers presently accepting government handouts, to seek employment since that’s where the money will be.

    • Barryeod says:

      You are comparing working class with working class. The inequalities among working class workers is hardly a concern. At 100k, the higher income worker may be better off, but he’s not going to spend millions of dollars to buy a politician.

      As a share of the total workforce, the federal government’s share of civilian employment is the lowest it’s been since World War II. If smaller government is the answer to our problems, when will it start working?

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