Making the poor more well off would benefit everyone, so why aren’t we doing it?
Last week new figures were released confirming what many of us had suspected for some time.
While the incomes of the richest households grew by 4.7 per cent those in the poorest strata of society saw their incomes fall by 1.6 per cent on average, proving beyond doubt that the rich are indeed getting richer while the poor become poorer.
But what few people realise is that inequality benefits few people in the grand scheme of things, and there is a good economic incentive to make the poor better off that would benefit everyone.
In 2015 the International Monetary Fund backed research that proved conclusively that inequality creates a drag on economic growth. Supporting analysis by the Keynesian economist and Nobel prizewinner Joseph Stiglitz it warned that countries with high levels of inequality suffered lower growth than nations that distributed incomes more evenly.
It also proved that efforts to redistribute incomes had a neutral effect on GDP growth, which came as a blow to the many right wing politicians who argue that overcoming inequality robs the rich of incentives to invest and the poor of incentives to work, but that’s a debate for another time.
The key here was that the IMF managed to not only debunk the old myth that redistribution is bad for growth but also demolish the case for austerity – which has been shown to hit the poor the hardest – and they’re not alone in doing so.
Research from the Brookings Institution and the Reserve Bank of Australia found that giving poor people access to more money is key to the circulation of money in an economy. The institutions concluded that marginal propensity to consume for high-income earners is substantially less than for low-income earners, demonstrating that poorer people are likely to spend the bulk of any extra income while the wealthy are more likely to save it.
Last year, Portugal became a case study for this new way of thinking. By reversing cuts to wages, pensions, social security and offering incentives to businesses they showed that you don’t have to tighten your belt to survive during times of economic turbulence. Rather, if you create a virtuous cycle that puts the economy back on a path to growth then people will show a renewed willingness to spend which will benefit everyone.
Which begs the question, why isn’t everyone following their lead?
It’s easy to speculate possible reasons, but one argument is that the most powerful in society often enjoy a cosy relationship with the most well off, who are more likely to perpetuate outmoded arguments for austere policies. The UN’s Special Rapporteur on extreme poverty and human rights, Philip Alston recently concluded that the motivation to make cuts to welfare and social services is undeniably an ideological one, which goes some way in evidencing the aforementioned assertion.
But I prefer the environmentalist’s explanation.
As they have it, only “when the last tree is cut down, the last fish eaten, and the last stream poisoned, will we realise that you cannot eat money”.
Perhaps when the last person has run out of money we will realise the same thing.