Monday, February 03, 2014

Growing wealth gap 'reaching point of hurting society'

THE Obama administration has devoted countless campaigns and speeches, and political muscle to the issue of income inequality, but the gap between the very rich and everyone else continues to grow.
In his latest State of the Union address last week, United States President Barack Obama noted that "today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged".

Indeed, "inequality has deepened" and "economic mobility has stalled", he said.
Some figures to consider: From 2009 to 2012, the incomes of the top 1 per cent grew by 31.4 per cent, according to a study by economist Emmanuel Saez from the University of California, Berkeley. But for the remaining 99 per cent, incomes grew by a meagre 0.4 per cent.
Dr Dimitri Papadimitriou, president of the Levy Economics Institute, said: "If you look at the income distribution among the top 0.1 per cent, they control close to 12 per cent of total income. This doesn't exist in any other country."
The top 5 per cent of households, with incomes of US$191,157 (S$244,000) or more, took home 22.1 per cent of earnings in 2012, census bureau figures show. In contrast, a similar proportion of income - 27.2 per cent - was shared among the bottom 60 per cent of households earning US$64,584 and under.
Professor James Galbraith, who directs the University of Texas Inequality Project, attributes the rise in inequality over the last two decades in large part to the growth of two sectors: finance and information technology.
Dr Papadimitriou noted: "Finance has controlled a big part of the economy... and most of the highest paid are getting more than 100 times the average salary."
According to a survey done last year by the Pew Research Centre, 47 per cent of Americans say inequality is a "very big problem". "It's difficult for people to be oblivious to what is happening around them… people are working hard, playing by the rules, but they are not on a level playing field," said Dr Papadimitriou.
The growing wealth gap and the anger it causes have had rippling effects, which surface in varying forms such as the Occupy Wall Street protests and the trouble Republican presidential candidate Mitt Romney faced fending off attacks that he was an out-of- touch plutocrat.
Besides unhappiness on the ground, experts point out that inequality has other far-reaching consequences.
Dr Galbraith said that "extravagant gains by the already rich" causes inequality which "affects the distribution of political power". In particular, he points to the finance industry's lobbying power and ability to influence policy.
For example, after the 2008-2009 financial crisis, the Dodd-Frank legislation was signed into law in 2010 with the intention of providing greater controls. But till today, many parts of that law have not been implemented because of the pushback from the financial industry.
Many proposals have been offered as ways to narrow the wealth gap, including raising the minimum wage and tax reform. "The top tax bracket is only 35 per cent and in Scandinavian countries it is double (that)," says Dr Papadimitriou.
But raising taxes for the rich is hugely difficult given the fraught relations the Obama administration has with Congressional Republicans. It also runs against an American mindset that supports rewarding enterprise.
As Harvard professor Larry Summers put it at the recent World Economic Forum in Davos: "America succeeds by raising everybody up... The rhetoric of envy and the rhetoric of tearing down, I don't think, is the right rhetoric for America's leaders." He argued that it is easier to allocate resources while growing the pie, rather than cutting up a "stagnant pie".
Some observers have cautioned that longer-term trends such as the rising cost of college education and the tendency of people of the same educational attainment to marry one another will make even more intractable the problems of social immobility and wealth disparity.
Princeton professor Alan Krueger, who is noted for creating the "Great Gatsby curve", which traces the link between higher income inequality and lower income mobility, recently warned that while inequality may act as useful spur, a growing imbalance, driven by globalisation and technology, is reaching the point where it hurts society, the Cornell Chronicle reported.