THE BLOG
05/07/2018 09:49 EDT | Updated 05/07/2018 09:49 EDT

Why You Should Care About Economic Inequality

It goes beyond the moral argument.

Financial and economic crisis. Recesion, Depression. Flip image horizontal when things get better.
Aifos
Financial and economic crisis. Recesion, Depression. Flip image horizontal when things get better.

From the Occupy Wall Street protests to the recent Fight for $15 movement, income and wealth inequality has been a hot topic in recent years. This development is unsurprisingly given that an increasing share of the wealth generated globally has for years been making its way into the pockets of a smaller percentage of the population. In 2010, for instance, the wealth of the poorest half of the world's population was equal to that of the richest 388; today that number is even lower at approximately 62, and it continues to decrease.

Regrettably, Canadian and American inequality levels have not defied this trend. For well over 20 years the GINI coefficient, which is used to measure economic inequality, has ticked up steadily. The rise in Canadian inequality levels appears to match the broader trend witness in OECD countries, as indicated in the chart below.

OECD

Both Canada and the U.S. scored poorly by OECD standards when it came to mitigating economic inequality.

Canada scored a "C" and ranked 12/17 countries, while the U.S. ranked last with a "D" score.

Opinions continue to vary as to why economic inequality has been on the rise. On the one hand many well-respected economists, such as Paul Krugman, argue that factors like national government policies are largely to blame. They point to things like the taxation structure (i.e. trickle-down economics) and the systematic weakening of unions as chief contributors to growing inequality. On the other hand, other economists are convinced that economic factors (e.g. like globalization and market demands) are the primary causes — less so the "institutional" forces.

Regardless of which of these positions you side with, growing income inequality is a real phenomenon. In the U.S. it's actually reached a point where Wall Street CEOs, such as Goldman Sachs' Lloyd Blankfein, have publicly expressed their concerns.

Why should we care about income and wealth inequality?

Moral arguments aside, one important reason why we need to address inequality is that it is associated with potentially lower economic growth. For years now the negative economic ramifications brought on by inequality have been cited by Nobel Laureates like Joseph Stiglitz. There is convincing evidence that lower net inequality is actually good economics, gives a boost to growth, and leads to longer-lasting periods of economic expansion. In recent years, the IMF too has sided with Stiglitz's line of reasoning — the article which may be found here for those interested.

Further research has raised other striking economic concerns. For instance, one major study noted a correlation between higher levels of income inequality and lower levels of economic mobility.

As inequality levels grew, a parent or guardian's income became an increasingly important determinant of their child's earnings.

The problems associated with rising economic inequality likely played a role in the recent increase of the minimum wage in Ontario under Premier Kathleen Wynne's Liberal government. Of course, the move may have been politically motivated to a degree also, which bring us to my next point: the politicalcosts of inequality.

One need not look far to find politicians who are popular chiefly due to their stance on this issue. For instance, the popularly of both Democratic Senator Bernie Sanders and Republican President Donald Trump were partly attributable to the fact that they managed to tap into this issue. Both candidates frequently bashed corporate America CEOs and blamed them for some of the lost blue-collar jobs, which contributed to the growing inequality.

As the discrepancy between the "have's" and the "have not's" becomes great, distrust for government may be enhanced as a result. It is not a far stretch to assume that exasperated economic inequality is one of the reasons for the bleak approval of the U.S. Congress and why many Americans turned away from the conventional candidate in the last election. These feelings do not strengthen a democratic society but rather make it easier for populist, "outsider" politicians like Trump to rise to power.

Certainly, the higher level of inequality south of the border has made it a bigger societal issue than it is in Canada. If left unchecked, however, some of these socio-political problems may surface in Canada in the coming years.

Growing inequality is not just bad economics, it is bad public policy and governance, too.

Growing inequality is not just bad economics, it is bad public policy and governance, too. We clearly have a lot to gain as society by combating this trend and further strengthening our middle-class. Let's hope our politicians begin to take this matter more seriously in the coming years.