Economic and Social Impacts of Income Inequality - Essay Example

Economic and Social Impacts of Income Inequality Introduction Income inequality simply means differences in access to income. In most developed countries, market income comes from salaries as well as returns on capital such as rents and stocks. People’s market income is then slashed by taxation or increased by government benefits like child payments and pensions (Aguiar and Bils, 2011:43). Income inequality is often talked about in terms of equivalised family income, which considers how many people the income supports and (usually) whether rent is paid. Income inequality is often measured as the ratio of high to low incomes. For example, a study can measure the ratio of the upper 10% of equivalised family incomes to the lower 10%. Economic Impacts Income inequality has become a core part of many economies, developed and underdeveloped. In fact, in January 2014, President Obama condemned income inequality in his State of the Union address. Now, scholars argue that income inequality is not only affecting those at the bottom; it is extending to economic development as a whole and is a major reason why most countries are yet to recover or have recovered slowly from the 2008 financial crisis. The fact that the American President and the American public felt the need to address it is evidence of its growing importance. Studies show that stagnant income among the bottom ninety-five percent of salaried people makes it impossible for them to spend as they did in the years before the 2008 financial crisis (Kincaid, 2011:53). This inference is based on data from many developed, developing and underdeveloped economies. For example, consumer spending, which supports averagely 60% of developed economies, declined sharply in 2008. Although it has increased in the past three years for the top five percent earners, which are defined as families making more than $166,000 annually, there is no concrete evidence of redemption for the bottom ninety-five percent. More research shows that there is a relationship between rising income inequality, household spending and consumer debt (Aguiar and Bils, 2011:49). All other factors being constant, increasing inequality leads to an increase in the savings rate at all levels of the economy. The reason for this is quite well understood: the rich consume a smaller percentage of their earnings compared to the poor. The result of income inequality, scholars argue, is a lack of balance between the available supply of and the existing demand for goods and services. This imbalance can only be remedied through a sharp rise in credit or rising unemployment. Increasing income inequality lowers the demand for goods and services; it does so in two ways (Stiglitz, 2012:26). Firstly, it has a direct role in driving down the consumption percentage of GDP. Secondly, it lowers productive investment by driving down the type of effective demand for their goods that would warrant a reinvestment of their capital reserves in new plants. Some researchers have added a new dimension to the age-old debate about under-spending and income inequality (Stiglitz, 2012:28). They argue that there is another, very crucial type of increasing income inequality that also drives up the savings rate in an identical manner; this has been particularly significant in the last two decades. A reducing household share of GDP has a similar net effect as increasing income inequality. This has been evident especially in countries like China and Germany in the last decade. In both countries, policies were instituted which, to drive growth as well as employment, effectively moved income from households to GDP producers (Lawrence, 2008:19). For the twenty years after 1960, real incomes of the top five percent and the bottom ninety-five percent rose at virtually the same rate: four percent annually for the five percent and 3.9 percent for the rest. However, incomes started diverging in 1980, and the trend continued all the way to 2007, with the ninety-five percent experiencing yearly increases of 2.6 percent. On the other hand, income growth for the top five percent rose to five percent annually. For decades, families at the bottom made up for that by increasing their debt, which ensured that consumption and the wider economy continued growing despite low interest rates and high inflation rates (Lawrence, 2008:23). Studies show that the debt to income ratio increased nearly a dozen times as much for the ninety-five percent as for the five percent between 1980 and 2007. Unfortunately for the five percent, the 2008 financial crisis brought their borrowing spree to an unexpected stop. Traditional economic theory states that during hard times, people increase debt or draw down on savings to maintain their ways of life. However, in the case of the last financial crisis, people in the bottom ninety-five percent were already scraping the barrel following years of debt-fuelled spending (Lawrence, 2008:28). This left them with virtually nothing to borrow or fall back on. Now, almost five years into the rebound, normalcy has been restored in the top five percent. They are spending as they did before the recession. In spite of this, everyone else is still reeling from the effects of the downturn and their spending levels are far below what they had sustained for almost twenty years before the crisis. That is a major challenge for the larger economy. The beaten-down customers now represent almost half of the country’s total economic activity. With them financially enslaved, slow overall growth is all that should, and can be expected. Government sources acknowledge that there are no silver bullets to distribute. However, they are convinced that any response would have to surpass simply raising the minimum wage (Lawrence, 2008:33). This is one of the proposals President Obama articulated in his State of the Union speech in January 2014. Full employment, which would raise wages for employees across the board, is the solution, according to one scholar. It is clear that the few rich are doing better than during the recession, but that cannot drive the economy on its own. Social Impacts Studies show that health is often better in societies and populations with more equal distribution of income. Recent data shows that many other social challenges like violence, poor school performance in children, mental illness, teenage births, imprisonment obesity, distrust and drug abuse are also more prevalent where income inequality is high (Stiglitz, 2012:49). Disparities in the prevalence of poor health and social challenges between more and less equal populations seem to be huge and to overflow into the majority of the population. The earliest evidence of a tendency for populations with lower income inequality to enjoy better health came from a global cross-sectional examination of 56 developed and undeveloped countries (Stiglitz, 2012:51). Life expectancy and infant mortality rates were compared with national income per capita as well as the Gini coefficient of income distribution. The study established that the biggest finding is the consistent importance of the income distribution variable. This is a very confident inference which holds in multiple specifications. The findings for life expectancy at birth insinuate that the variations in average life expectancy between a relatively inegalitarian and a relatively egalitarian society are likely to be as much as 5-10 years (Stiglitz, 2012:51). Research on the relationship between health and income distribution should be understood in the context of a broader body of findings that indicates that a wide range of social challenges can also be more common in societies that are more unequal. Findings have always been grimmer in more developed countries that are more unequal and rich. Since the release of these findings, the list of social challenges sparked by income inequality has grown to include issues like women’s role in society, child conflict, child obesity, juvenile homicides, and substance abuse. Considering that the broad range of health and social problems linked to inequality tend to be those having social gradients, it would be inaccurate to think that the degree of income inequality affects social outcomes via hitherto unfamiliar processes that clash with social status differentiation (Stiglitz, 2012:53). It is much more feasible that it works via all the dynamics of social status stratification that have been critical to the social sciences for ages. This includes the ways in which so many indicators of social position become tattooed on us from childhood onwards. The fact that social problems are more prevalent and health is poorer in more unequal populations does, however, show us something important about those dynamics. Although views contrast as to what extent the social gradients in health and other findings derive from social selection, selection is basically sorting technique acting on a specific prevalence of a problem (Stiglitz, 2012:56). No degree of social mobility can, independently, create major disparities in the prevalence of social challenges from one population to another. It could also not show why the prevalence is fundamentally higher in more unequal populations. Many important inferences suggest themselves. The first one is that income inequality is an indicator that allows researchers to compare the significance or scale of social stratification in different populations (Sommer, 2008:43). The second inference is that since it is challenges with social gradients that are associated with inequality; this could be a manifestation of their volatility. Manifestations occur, in one corner, to the current status differentiation and, in the other corner, to the importance and scale of the status variations as they differ from one society to another. The third inference is that the types of social dysfunction linked to higher inequality are not limited to the economically poor but overflow into almost all levels of society. The fourth inference is that the most feasible rationale for the impacts of income inequality is that material inequality is a measure and determinant of the degree of social status stratification (Sommer, 2008:44). The ability to compare income inequality in different populations may, therefore, symbolise the costs of varying degrees of status stratification. Finally, health and social wellbeing standards in rich societies may now rely more on minimising income variations than on economic development without redistribution. Future studies should measure inequality in large populations or whole societies and should desist from manipulating for variables that eliminate some of the impacts of social status stratification. Vital areas for more research are likely to comprise the psychosocial processes that relate the degree of social stratification to the different problem linked to inequality. Research shows that the variations in performance of more and less equal populations are usually huge (Sommer, 2008:46). In countries like Portugal, Britain and the United States, most of these challenges are between two and ten times as common. These countries have large income disparities in comparison to countries with smaller lower income inequality. Examples of such countries include Japan and Scandinavian countries like Norway. Conclusion From this discussion, it is obvious that income inequality has serious negative consequences on economic and social welfare. It is necessary to develop the right instruments; policies and regulations to ensure that income inequality is reduced or its effects are reduced as much as possible (Galbraith, 2012:35). Governments, private sectors and nongovernmental organisations should fund more research on income inequality and how to mitigate it – not manage it. Some studies have suggested that. Other studies have also shown that income inequality has positive effects on economic growth, but these are yet to be investigated further. It is important to understand that income inequality is not a class problem; it affects everybody and should, therefore, be eliminated or reduced as much as possible. It is also crucial to understand the difference between wealth, inequality and poverty. Contrary to popular opinion, inequality is not the same as poverty; they are very different concepts. For example, a country can be wealthy but relatively unequal, while a country can be poor but relatively equal. Understanding the difference is key to developing solutions to mitigate problems associated with these concepts. Many impacts of poverty are perceptible. For example, children from poor backgrounds do not do well academically as those from rich backgrounds (Betti, 2008:21). Poor people’s health is worse than affluent people’s. These are correlates or findings of poverty, and they have been reported in most societies. The relationships are often fairly simply to exhibit by correlating two variables. For example, a researcher can relate family income of many subjects and the health status or test scores of those subjects it is harder to exhibit a causal relationship between social problems and inequality of itself, primarily because inequality is a not a personal attribute. References Aguiar, M. & Bils, M. (2011) Has consumption inequality mirrored income inequality? Cambridge, Mass., National Bureau of Economic Research. Betti, G. (2008) Advances on income inequality and concentration measures, Abingdon, Routledge. Galbraith, J. (2012) Inequality and instability: a study of the world economy just before the Great Crisis, New York, N.Y., Oxford University Press. Kincaid, K. (2011) Perspectives on global development 2012: social cohesion in a shifting world, Paris, OECD. Lawrence, R. (2008) Blue-collar blues is trade to blame for rising US income inequality?, Washington, DC, Peterson Institute for International Economics. Sommer, M. (2008) Understanding the trends in income, consumption and wealth inequality and how important are life-cycle effects, Mannheim, University Mannheim, Sonderforschungsbereich. Stiglitz, J. (2012) The price of inequality: how todays divided society endangers our future, New York, W.W. Norton. Read More