Saturday, November 15, 2008

The ebbing tide

Economic inequality is growing in the United States, jeopardizing the American Dream of social mobility just as the world enters a recession, said a 30-nation report by the Organization for Economic Cooperation and Development released on October 21, 2008. The United States has the third highest inequality and poverty rates in the OECD, after Mexico and Turkey, and the gap has increased rapidly since 2000, the report said. Coincidentally, that is the year that the Bush administration began to govern.

George Bush and the ultra-conservative wing of the Republican party have a unyielding belief in trickle-down economics and therefore did all they could to remove taxes and regulations for the wealthy corporations, including the financial sector. At the same time, they did very little for all other citizens, except for a couple of "stimulus" packages which gave the average family around $600 to $1200 – a tiny drop in the bucket compared to the billions raked in by the CEOs of oil, financial, and pharmaceutical companies. Indeed, the “rising tide” did not lift all boats as promised by Presidents Reagan and George W. Bush. Remember: although the wealthy love trickle-down economics, President George H.W. Bush called it “voodoo economics.”

And just how well did “voodoo economics” work? Rich households in America have become much richer, leaving both middle and poorer income groups behind. This has happened in many countries, but nowhere has this trend been so stark as in the United States. The average income of the richest 10% is $93,000 in purchasing power, the highest level in the OECD. However, the poorest 10% of U.S. citizens have a purchasing power of $5,800 per year – about 20% lower than the average for OECD countries.

The main reason for widening inequality in America is that the distribution of earnings between rich and poor in the United States has widened by 20% since the mid-1980s, more than in most other OECD countries. This is partly because the level of spending on social benefits, such as unemployment benefits, and family benefits, like Medicare, is very low – equivalent to just 9% of household incomes, while the OECD average is 22% of household incomes.

This widening inequality causes a low level of social mobility in the United States. Children of poor parents to be less likely to become rich, much less middle class, than children of rich parents. Wealth is distributed much more unequally than income: the top 1% control some about 33% of total money in the U.S. The top 10% hold 71% of the wealth. This is just the opposite in countries such as Denmark, Sweden and Australia where social mobility is high due to a low inequality level.

In nearly all countries studied, the gap between rich and everyone else has widened over the last 20 years, even as trade and technological advances have spurred rapid growth in their economies. In a 20-year study of its member countries, the OECD found inequality had increased in 27 of its 30 members as top earners' incomes soared while others' stagnated. Rising inequality threatens social mobility: Children will have great difficulty doing better than their parents; the poor will no longer improve their lot through hard work – in fact, hard work will barely keep their heads above water, if at all.

Why is the gap between rich and poor growing? Wages have been improving for those people who were already well paid, while employment rates have been dropping among less educated people. Also, there are more single-adult and single-family households than ever before.

Who is most affected? Statisticians and economists assess poverty in relation to average incomes. Poverty among young adults and families with children has increased. On average, one child out of every eight living in an OECD country in 2005 was living in poverty. In the U.S., the trend is exactly the opposite: Child poverty – that is, children in a household with less than half the median income – has fallen since 1985, from 25% to 20% but poverty rates among the elderly increased from 20 to 23%.

What can be done? In some cases, government policies of taxation and redistribution of income through programs such as Medicare and Social Security have helped to counteract widening inequalities, but this cannot be their only response. Governments must also improve their policies in other areas. Active employment policies are needed to help unemployed people find work. Access to paid employment is key to reducing the risk of poverty, but getting a job does not necessarily mean you are in the clear. The OECD found that over half of all households in poverty have income from work. Therefore, education policies should aim to equip people with the skills they need to find better paying jobs in today’s labor market.

What will happen if the next decade is not one of world growth but of world recession? The widening gap between wealthy households and all other income earners in countries such as the U.S., Canada, and Germany, has potentially ominous consequences if the global financial crisis sparks a long recession. With job losses and home foreclosures skyrocketing, many of these countries now face a deep recession that could last as long as five to ten years.

Oxford University economist Anthony Atkinson said it well:

"If a rising tide didn't lift all boats, how will they be affected by an ebbing tide?"