Why inequality is bad for economic health and political stability!

By ABDEL AZIZ ALUWAISHEG

Published: Dec 4, 2011 00:53 Updated: Dec 4, 2011 00:53

Injustice is popularly believed to be behind a lot of the protests around the world, whether they are the “Arab Spring” or “Occupy Wall Street” and similar “Occupy” movements. The common refrain in most of those protests is that the rich have gotten much richer, while everyone else had gotten poorer.

Sympathetic economists provided evidence that unemployment was rising and real wages stagnating in the United States more than at any time since the Great Depression, while corporate profits were on the rise, and CEO pay reached unprecedented levels. For example, it was calculated an American CEO in 2011 makes 350 times as much as an ordinary worker, on average, compared to 50:1 ratio in 1985.

Now Nobel Laureate Kenneth Row has provided evidence (and theory) to back up that popular belief and argued for policy reversals. Prof. Arrow is no flaming radical, although he has impeccable liberal credentials. In a measured article published in the Boston Review last Wednesday, he pointed out that gains from increased productivity in the US had gone to a small group of upper-income individuals. According to his calculations, “the bulk of the increase went to the top 1 percent of income recipients and much of that to those in the top .1 percent.” In other words, the touted economic growth in the past 25 years benefited only a small group of people, while the rest were left behind.

Arrow pointed the finger to two industries in particular: Financial and medical services, which have taken advantage of what is characterized as “asymmetric information” to enrich themselves at the expense of their customers. In cases of asymmetric information, competition is weakened and customers have little access to relevant information, either because it was not revealed or it is too complex to understand.

This is quite revolutionary. Mainstream economics has consistently discouraged policy makers from thinking of equality as a virtue. The leading authority on this idea was the Yale economist (later of Washington fame) Arthur Okun, who argued that there was essentially a “big trade off” between equality and efficiency. According to Okun, policies that sought to reduce inequality (such as minimum wage and progressive taxation) would instead reduce overall efficiency of the economy because they weakened competition and reduced the incentive to work and produce, not to mention the cost of bureaucracies necessary to implement such policies.

Arrow would probably reverse this logic. He would argue that arising inequality is indeed a symptom of limited competition and thus should be mitigated to restore competition, which is the secret behind the “invisible hand” success.

How much is Arrow’s argument a harbinger of things to come in economic thinking? I will try to explore that in the coming weeks.

http://arabnews.com/opinion/columns/article542561.ece