Why does the rich-poor
gap continue to grow?

Even in the US (and Europe), poverty is not unknown. So why are growing GDPs and the trickle-down effect failing to alleviate global hunger and homelessness?

IN MUCH of the world, the gap between rich and poor has been widening. As there has been strong economic growth for more than 40 years, this is something of a puzzle. Economic growth is meant to reduce inequality. The trickle-down effect, where the spending by the rich descends through some sort of economic filtration into the pockets of the poor, should have fortified the general population and raised living standards for everyone.

Yet, even in the rich world, millions of people live in conditions more like those of Victorian Britain. In the United States, 49 million people—out of a total population of 320 million—live in poverty. In Europe, one in every seven lives in poverty. In Eastern Europe, Spain, and Greece, poverty affects one in five, with women, single-parent families, and the young, worst affected.

When you add in those on very low incomes, you find that one-quarter of the population of the developed—rich—world is currently classified as being “at risk of poverty or exclusion.” That is almost 200 million people. Add the other 6.5bn who live on less than US$10 a day, including the 3.6bn who live on less that US$3 a day, and it is clear that something in our economic system is not functioning as it should.

Graeme Maxton

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In the United States, 49 million people—out of a total population of 320 million—live in poverty. In Europe, one in every seven lives in poverty. In Eastern Europe, Spain, and Greece, poverty affects one in five

As the gap between rich and poor has widened, unemployment has also risen across much of the world, and it remains stubbornly high. Particularly badly afflicted are those under the age of 25, though millions of baby-boomers in their 50s and 60s in the US and Europe have also found themselves without any income, pension, or work prospects too. And there has been a huge increase in the number of under-employed in the world, those who want to work more but cannot find a paid full-time job.

At a time of record global wealth, and after so many decades of healthy economic growth, none of this should be. For decades, economists have told people to expect the opposite. They have told people that economic growth will bring jobs, better incomes, and higher standards of living. But it has not.

What on earth is going on?

British charity Oxfam puts it simply. There has been a “power grab” by the rich, it says. It accuses the world's fattest fat-cats of manipulating the political system to rig the rules of the game in their favor, so that they are taxed less, regulated less, and scrutinized less. As a result, wealth and income have been moving in the opposite direction from what people believed.

Without change, this situation will not improve. The rich will continue to get richer because that is what the current economic system does. Proponents of today's free-market model may like to claim that it promotes a more egalitarian society, and that it rescues the world's poor from their plight. In reality, it has created a society that is more like a gigantic casino where the outcome is rigged in favor of the rich.

In his ground-breaking book Capital in the 21st Century, French economist Thomas Piketty predicts that if nothing changes, much of the developed world will gradually return to something more like the nineteenth century, to a time when factory owners, entrepreneurs, and bankers controlled most of the wealth and everyone else struggled to survive. He sees a future in which the rich world's middle-classes effectively disappear.

The implications of such a reversal of fortunes would be even worse in the poor world, bringing decades of social stagnation and dashing the dreams of billions of people.

Piketty's predictions also raise a fundamental and troubling question. Were the few decades after the second world war, when the gap between rich and poor greatly declined in most of the world, an anomaly caused by a particular set of circumstances? Is it possible that the natural order is more like the world of the past, more like that which reigned for most of human history, where a tiny minority controlled almost all the wealth and the vast majority were very poor?

It is an increasingly difficult question to answer. For most of the last 70 years, a rich world dominated by a middle class, with a growing middle class elsewhere has seemed so natural and so right. Yet, historically, it is an oddity. At no other time in the last two thousand years has a middle class existed on such a scale.

Unless there is a radical shift in economic direction, Piketty says, “the past will devour the future,” and the few decades of comparative comfort enjoyed by the middle classes during the second half of the twentieth century will be consigned to the history books as little more than an interesting, but temporary, social phenomenon.

Piketty's solution is a global wealth tax. He believes that there should be much greater cooperation between national tax authorities to exchange and share data on individual wealth, as well as a more “equitable tax system” for governments to invest in infrastructure and education. Taxation should be used to redistribute wealth and create a more balanced society, he says.

This will be difficult to implement, though, because it would require the rich world's politicians to do the opposite of what they have done for the last 30 years: to tax their biggest financial supporters and most powerful citizens more. 

Other economists have suggested that the inequality and unemployment problems of the world should be tackled by boosting infrastructure spending, to create jobs and spread the wealth around; by liberating trade and reducing regulation to free the hands of business; by changing intellectual property rights, to create more opportunities for people to exploit new technologies and ideas; and by changing the education system, to encourage more entrepreneurs.

None of these solutions address the underlying problem, however. Offering large numbers of people the chance to work—to build new roads or tunnels or to set themselves up in business, for example—gives them work and the opportunity to earn an income. But it does not fundamentally change a system in which wealth gradually flows from the majority of the population to the richest.

Such policy proposals only offer a temporary fix, helping the poor to earn more and the unemployed to find some work for a while, without offering long-term change. 

To create the change that is necessary, the solution needs to be much more radical. To reverse their descent into ever-wider social division, nations will need to gradually change their underlying economic systems in clever ways that fix the problems progressively. They will need to step back from today's economic mantra, which promotes individual freedom, applauds free markets and free trade, and minimizes state influence and instead, arrange their societies and economic systems so that they boost average well-being. Markets and trade should not be left largely unregulated any longer, but actively managed. Governments should be “right-sized”—that is, small enough to ensure that they operate efficiently but also big enough to do their job well and to be able to tackle the challenges that lie ahead 

There is one other problem, however. The current economic system requires continuous growth in the throughput of natural resources to function. This is built into the system's DNA. People need to consume ever more, and manufacturers need to produce ever more to stop unemployment rising and keep the system functioning.

The trouble is, this process is generating ever-greater quantities of greenhouse gases, and these are causing the climate of the planet to change. This has already become so bad that global weather patterns will continue to worsen for decades and sea levels will rise, regardless of what is now done.

Yet any conventional attempt to manage economic growth, and so slow down the environmental damage, shuts off the fuel that keeps the economic engine running. A slowing economy increases unemployment, and so also inequality and poverty, even more.

So the economic system has put the world on an ever-faster-turning treadmill which is driving society in a hopeless social and environmental direction, and yet any traditional attempt to stop what is happening only makes the situation worse.

Conventional solutions cannot reduce inequality and joblessness (or climate change), in other words. Nor will a wealth tax, boosting infrastructure spending, less business regulation or encouraging more entrepreneurs.

What are needed are unconventional solutions that are attractive to the majority of people, so that they will welcome a necessary transition. We need policies that share work and wealth; policies that redistribute incomes, and that reduce the level of damaging emissions.

Here are 13 unconventional policy proposals to reduce unemployment, inequality, and climate change

    1. Shorten the length of the work year to give everyone more leisure time.
    2. Raise the retirement age to help the elderly provide for themselves for as long as they want.
    3. Redefine “paid work” to cover those who care for others at home.
    4. Increase unemployment benefits to maintain demand during the transition to a cleaner, more sustainable economic system.
    5. Increase the taxation of corporations and the rich to redistribute profits, especially from gains in robotics.
    6. Expand the use of green stimulus packages by printing money or raising taxes to help governments respond to climate change and the need for wealth and income redistribution.
    7. Tax fossil fuels and return the proceeds in equal amounts to all citizens to make low-carbon energy more competitive.
    8. Shift taxes from employment to emissions and resource use to reduce the ecological footprint, protect jobs, and cut raw materials use.
    9. Increase death taxes to reduce inequality while boosting government income.
    10. Encourage unionization to boost incomes and reduce exploitation.
    11. Restrict trade where necessary to protect jobs, improve well-being, and help the environment.
    12. Encourage smaller families to reduce the pressure of humanity on the planet.
    13. Introduce a guaranteed livable income for those who need it most and give everyone peace of mind.

These policy proposals boost average well-being while cutting unemployment and reducing inequality at the same time.  Moreover, they offer an immediate benefit to the majority of people and show the poor world a different and more sustainable way ahead. 

That they also happen to reduce the impact of climate change (though not fix it) might be incidental to many people. But they are certainly not incidental to us.

Graeme Maxton is the author of seven internationally acclaimed books on climate change, energy, economics and the automotive industry, which have been printed in more than 20 different language editions. His latest books are A Chicken Can't Lay a Duck Egg (2020), - the German edition is F*ck the System (2021) - and Globaler Klimanotstand (2020). He is an Advisory Board Member of the UN's Pathways Project, and a member of the Editorial Advisory Board of Population Matters. He was previously Secretary General of the Club of Rome. www.graememaxton.com

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Arthur (22 November, 2016) – UK

An interesting read. But it will take a lot of political courage and muscle to push through the 13-point agenda the authors argue for. In the end end I am not even sure it would work. The spanner in the works is something called 'human nature'.