Counting the cost of inequality

The financial crisis and social trends are making the gap between rich and poor even wider.

Given its history, Europe ought to be more concerned than it is about surging inequality and ominous levels of long-term unemployment.

Unemployment, which is easier to measure than inequality, has now risen in both the EU as a whole and the eurozone to above 10%. The figures are the highest in the past 40 years. Behind them are variations and trends that, when coupled with outbursts of violence in some member states, are deeply troubling for a region in which political and social cohesion are under strain.

According to Eurostat, the European Commission’s statistical office, while unemployment is below 6% in Austria, Germany and the Netherlands, in Spain it is now almost 25% and in Greece 22%. For young people under 25 years of age, the figures are truly horrific, just over 52% in both countries.

Recent studies by the Organisation for Economic Co-operation and Development (OECD) shed light on the long-term trends that are threatening to undermine the relative calm that our welfare-state societies have enjoyed for more than 60 years – a calm too easily taken for granted.

Take off your rose-tinted spectacles. Work on the assumption that in many countries, from the troubled sovereign debtors of the southern periphery, such as Italy and Spain, to over-indebted nations such as the United Kingdom and France, it will be another five years, at best, before sustained economic recovery takes root. Then remember that across Europe social-welfare systems – health, unemployment and pensions benefits – are being cut back as government debts rise and populations age.

The twin – and related – challenges of rising longer-term unemployment and increasing inequality are even more threatening because they are both driven by seemingly inexorable long-term trends, which some refer to as the ‘decline’ of the West. Moreover, governments in the advanced economies are struggling to design policies to tackle these problems.

Downward spiral

It is not clear which way causation runs. Are the poorest poor mainly because of the long-term economic trends? This is the predominant social democratic/centre-left view. It is the essential theme of a recently published book on the subject, “The price of inequality”, by Joseph Stiglitz, a professor at Columbia University, one of the world’s best-known liberal economists and, in American terms, a trenchant critic of capitalism.

Or, as conservative analysts have long argued, are large and increasing numbers of the poor trapped in poverty by the perverse incentives of the welfare states created to support them, by the breakdown of the communities they live in, and to some extent by self-inflicted wounds, such as family-wide drug addiction? Causality probably runs both ways, which makes solutions even harder to find.

What is not in question is that, along with unemployment, inequality has also been on the rise, the rich have been getting richer for decades. Stiglitz points out, for example, that in the United States, since 1979 the share of after-tax income going to the top 1% of income earners has increased from 8% of the total national income to more than 17% of the total. In the UK it is now 14%. These may be the extremes, but the trend is now widespread in the wealthier states that are members of the OECD.

In the US and the UK, income inequality started to increase in the late 1970s and early 1980s. But since the late 1980s the trend has become more widespread. Even among the egalitarian Nordic countries and Italy, but not so much in Germany or France, income inequality rose sharply between 1990 and 2007. The share of total income held by the top 1% of income earners increased from 4% to 8% in Finland, and from 4% to 7% in Norway and Sweden.

What is going on? Is Western capitalism failing, as Stiglitz suggests, or is it undergoing a painful adjustment? Is the OECD right when it says, optimistically given the political outlook, that: “There is nothing inevitable about high and growing inequality?”

Labour force

One of the main culprits is globalisation, the denser economic and financial integration of the world economy. Between 1980 and 2010, management consultants McKinsey’s Global Institute estimated that the global labour force increased by 1.2 billion workers to 3bn, most of the increase coming in poor developing countries such as China and India

The off-shoring of low-skilled work to these legions of workers, and the growth of the developing world’s own indigenous economies, has sucked lower-skilled jobs out of the rich West, depriving the unskilled and under-educated of the work that had kept them out of poverty for three decades after the Second World War. Increasingly, even higher-skilled jobs are now under threat.

At the same time, the nature of work has changed, with more jobs requiring higher skills, partly as a result of the astonishing advances in information and communications technology.

The OECD cites a study that concludes “technological progress had a greater impact than globalisation on inequality within countries”. Both forces are working in the same direction, however: both tend to increase inequality.

Social trends and family structures are another influence. There is evidence that better-educated men are marrying better-educated women, both of whom are working. Stiglitz worries about the rise of a self-perpetuating elite that sits insouciantly in gated communities, isolated – like the 18th-century nobility – from a struggling middle class and desperate “lower orders”.

The financial crisis and, with hindsight, the construction in the 1950s and 1960s of over-generous welfare states, is forcing governments to cut their spending. As the OECD says, these welfare systems were already becoming less effective in countering poverty. Now, with unemployment and inequality rising and populations ageing, the resources being deployed to mitigate poverty are being cut at the least opportune moment.

Better universal education is now being touted by some as a virtual cure-all for inequality and unemployment, just as, as in the 1960s, it was presented by the left as the solution to class conflict. It is certainly necessary. But it seems likely that, unless opportunities are both carefully targeted and generously funded, the richer will profit more from better education opportunities than the poor and the disadvantaged.

As we watch the street demonstrations in Greece and Spain and recall how vulnerable France, for example, is to political violence in the streets, and consider the appalling human cost of inequality, we would do well to remember just how much damage the last Great Depression did to our European civilisation.

Stewart Fleming is a freelance journalist basedin London.

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