New OECD Study Rejects “Trickle-Down” Economics
Income inequality has been in the news a lot recently, and for good reason: the Great Recession and the collapse of the credit market have highlighted gross discrepancies in wealth that—disguised by a series of asset bubbles—had been growing precipitously since the early 1980s. Now, a new report from the Organization for Economic Cooperation and Development warns that rising income inequality is increasingly an international trend, even in historically egalitarian nations like Finland and Sweden. “The benefits of economic growth do not trickle down automatically,” concluded OECD Secretary-General Angel Gurría at a press conference yesterday. “This study dispels this assumption. Greater inequality does not foster social mobility. Without a comprehensive strategy for inclusive growth, inequality will continue to rise.”
According to the report, income growth for the poorest 10 percent of Americans was just 0.5 percent annually from 1985 to 2008, far less than social-democratic France (1.6 percent) and Spain (3.9 percent). And the United States remains one of the most unequal societies overall, with the average income for the top 10 percent nearly fifteen times that of the bottom 10 percent. That widening gulf is not helped by the top federal income tax rate, the report claims, which has fallen from 70 percent in 1981 to just 35 percent today.
The report’s authors suggest several reasons why inequality is increasing throughout the developed world, though they focus on the wage growth of highly educated and skilled workers, who have benefited more from recent technological changes. That wage premium has generally come at the expense of less-skilled, lower-paid workers, who have lost many of the protections that once made their jobs secure. Many such workers have had their hours cut during the global recession, pushing them into part-time status.
Unfortunately, public policy has done little to slow the tide. Regulatory and tax policy are essential tools for reducing market-driven inequalities, but they have become less progressive and less effective since the mid-1990s. Social transfers and benefits that once sustained a vibrant middle class have become constrained by budget cutbacks, failing to keep pace with the income growth of the OECD’s most affluent.
“A sustained period of strong economic growth has allowed emerging economies to lift millions of people out of absolute poverty,” said Secretary-General Angel Gurría at the report release. “But the benefits of strong economic growth have not been evenly distributed and high levels of income inequality have risen further.”
Sustained inequality inhibits growth and social cohesion. It is a real “live” economic issue as we could observe at the beginning of the crisis when the housing bubble burst, and the most vulnerable couldn’t afford to pay for their mortgages anymore. The framework and the incentives which made this happen had its roots in deep-rooted social imbalances.
Furthermore the economic crisis has added urgency to the need to address inequality. The social compact is starting to unravel in many countries. Uncertainty and fears of social decline and exclusion have reached the middle classes in many societies. People feel they are bearing the brunt of a crisis for which they have no responsibility, while those on high incomes appear to have been spared. Addressing the question of “fairness” is a condition-sine-qua-non for the necessary restoring of confidence today.
