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a blog from young economists at Nova SBE

An Economy for the 1%: challenges and main drivers of inequality

Are the rich getting richer? According to a publication from Credit Suisse, the richest 1% have now more wealth than the rest of the world put together. At the same time, the bottom half of the world population has seen a wealth decrease by a trillion dollars in the past 5 years. These findings suggest that we are currently living in a world where inequality has reached levels as we have not seen for over a century.

Numerically speaking, a study from Oxfam has shown that the richest 62 billionaires have the same amount of wealth as 3.6 billion people – the poorest half of the world’s population. In 2015 this figure was 80; in 2014 it was 85; and as recently as 2010, it was 388. Since 2010, the wealth of the top 62 richest people has increased by 44% – that’s an increase of more than half a trillion dollars ($542bn), to $1.76 trillion. The inequality crisis has gotten out of control.

Economists argue that some inequality is necessary to spur growth. In 1975, the economist Arthur Okun claimed that “a system of rewards and penalties is intended to encourage effort and channel it into socially productive activity”. If this system succeeded it would generate market efficiency, but “society faces a trade-off between equality and efficiency”. Despite most economists still hold this view, the rising economic inequality has made economists take a second look at its costs.

Concentrating wealth among a wealthy elite is bad for all of us. According to an article from The Economist, inequality undermines economic growth if those with low incomes would suffer from poor health, low productivity or struggle to finance investments in education as a result. Inequality can also spur protectionist sentiments, in a way that people will no longer support growth-boosting policies such as free trade if they feel as if they are losing while a small group of winners is getting richer and richer. An article from The Guardian also finds that a 1% increase in the taxable income held by the top 1% hurts life satisfaction of the remaining 99% as much as a 1.4% increase in the unemployment rate. One reason behind this could be that an increase in the wealth of the top 1% could make the rest feel as if their chances of moving up in life are growing increasingly beyond their reach, especially for those who are young, less educated or on low incomes.

But how did we create an economy that, instead of working for the prosperity of everyone, future generations and the planet, we have an economy that has reached tremendous inequality levels and seems to be designed for the top 1%? The report from Oxfam argues that one of the main drivers of this trend is the increasing return to capital versus labor. This means workers are receiving less and less and that the gains from growth are being channeled to capital holders. Tax avoidance by the owners of capital on capital gains has furthered these returns. An OECD report argues that the most important driver has been greater inequality in wages and salaries. This is not a surprising result taking into account that earnings account for, on average, three quarters of a household income in OECD countries. Wages of the top earners have been moving away from middle earners at a faster pace than low earners, resulting in an ever-more squeezing middle-class. Across the global economy, individuals and firms use their power and success to act for their own benefit. To exemplify this, we have tax havens and the industry of tax avoidance, which have emerged over recent decades. Those that should be paying the most tax, because they are the wealthiest, find a way to avoid paying what they owe.

It is time to put a halt on this inequality crisis. Leaders must come together and stand with the majority, incentivizing policy-makers to better regulate the activities of the financial sector and designing schemes that pay living wages to workers and close the gap with executives. There is still room to move to start building an economy that finds its balance between efficiency and equality.

Sara Vaz, Nova School of Business and Economics student

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Author: studentnovasbe

Master student in Nova Sbe

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