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Inequality is the plat du jour

By       Message Jean-Luc Basle     Permalink
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The World Economic Forum put inequality on its agenda. Barack Obama mentioned it three times in his State of the Union Address. It is as though, suddenly, the American President and business people meet their epiphany on the road to Damascus.


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Yet, the issue has been around for some time. In the United States, it began in the mid-1980s. The top 1% income share progressively rose from 9% in 1985 to 19% in 2012. Should world leaders worry about inequality?   Certainly, but the problem is complex and will take time to resolve. It also demands a culture change.

Inequality has many causes. Ronald Reagan's decisions to lower taxes and cut social benefits were the first steps. All subsequent presidents followed on his footsteps culminating with George W. Bush's tax cuts for the top 1% income earners -- a novel and unexpected way to redistribute wealth. Policy decisions, however, do not explain everything. Inequality traces its roots back to Nixon's decision to free the dollar from its "golden fetters". But, the clincher was the Berlin Wall collapse and Deng Xiaoping's "socialist market economy". In the early 1990s, over a few years span, everything was in place for the world to undergo a great transformation, to become global, beginning with trade.

Trade, whether national, international or global, brings benefits. It also brings disruptions. Going global, trade initiated potent power shifts. It shifted power away from nations-states towards the United States. The Federal Reserve System (the Fed) is the world's central bank and will continue to be so for as long as the dollar remains the world's international and reserve currency. Wall Street, the world's largest financial center, benefits from this privilege. Deregulation freed it from the New Deal shackles and innovation allowed it new opportunities to make money. Power also shifted from nations-states to international institutions* and transnational corporations. Last but not least, power shifted from labor to capital. This last shift is all the more acute since union membership began to decline in the early 1980s, before the drop in manufacturing and the rise in global trade. It follows from these shifts that nations-states and unions are the weakest at a time they need be the strongest. These shifts set the stage for a reordering of wealth creation and distribution. Resolving the inequality issue means establishing equitable balances of power. A tall order. Obama's decision to raise civil servants' minimum wage is a step in the right direction but insufficient.

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The subprime and euro crises added salt to injury. Fearful that the world banking system would collapse in a domino-like manner, after Lehman's bankruptcy, governments used most of their borrowing power to rescue the banking sector, leaving little for the common man. Communication and information technologies also contributed to the new state of affairs by making manufacturing and service sector jobs obsolete, depriving workers from their livelihood. No wonder, under those circumstances, that inequality is on the rise.

Through history, the common man took quite a bit of abuse. His pain threshold is defined by his life and family livelihood. He becomes violent when both are threatened. He no longer has anything to lose. He no longer has a stake in society. Are we nearing this point? We are close, judging by turmoil in some countries. Eric Schmidt, Google chairman, reminded his Davos peers that the state of the economy on which their wealth ultimately depends, hinges on the middle-class welfare. For transnational corporations to prosper, the common man must have the means to buy their products. Statistical evidence, however, points in the other direction. In real terms, the American median family income is lower today than it was in 1997. Employment is below its 2008 level, five years after the beginning of the subprime crisis. Unemployed and part-time workers total 14% of the labor force. If long term unemployed are added, the total rises to 17% -- a figure far from the official number (6.7%). Statistics for other advanced economies are worse, except for Germany which pursues a mercantilist policy.

Political and business leaders have reason to be concerned. Not only is the state of the world economy worrisome but social networks give the disgruntled a new way to organize and make their grievances known. Will they be heard? Just as it takes time for the common man to rebel, it takes time for leaders to change their minds and attitude. Fortunately, the point of no-return has not been reached yet. There is hope for a Grand Bargain.

*World Trade Organization, International Monetary Fund and soon perhaps the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership.

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Former Vice President Citigroup New York (retired) Columbia University -- Business School Princeton University -- Woodrow Wilson School


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