The in­equal­ity Tri­fecta

Financial Mirror (Cyprus) - - FRONT PAGE -

There were quite a few dis­con­nects at the re­cently con­cluded An­nual Meet­ings of the In­ter­na­tional Mon­e­tary Fund and World Bank. Among the most strik­ing was the dis­par­ity be­tween par­tic­i­pants’ in­ter­est in dis­cus­sions of in­equal­ity and the on­go­ing lack of a for­mal ac­tion plan for gov­ern­ments to ad­dress it. This rep­re­sents a pro­found fail­ure of pol­icy imag­i­na­tion – one that must ur­gently be ad­dressed.

There is good rea­son for the spike in in­ter­est. While in­equal­ity has de­creased across coun­tries, it has in­creased within them, in the ad­vanced and de­vel­op­ing worlds alike. The process has been driven by a com­bi­na­tion of sec­u­lar and struc­tural is­sues – in­clud­ing the chang­ing na­ture of tech­no­log­i­cal ad­vance­ment, the rise of “win­ner-take-all” in­vest­ment char­ac­ter­is­tics, and po­lit­i­cal sys­tems favour­ing the wealthy – and has been tur­bocharged by cycli­cal forces.

In the de­vel­oped world, the prob­lem is rooted in un­prece­dented po­lit­i­cal po­lar­i­sa­tion, which has im­peded com­pre­hen­sive re­sponses and placed an ex­ces­sive pol­icy bur­den on cen­tral banks. Though mon­e­tary au­thor­i­ties en­joy more po­lit­i­cal au­ton­omy than other pol­i­cy­mak­ing bod­ies, they lack the needed tools to ad­dress ef­fec­tively the chal­lenges that their coun­tries face.

In nor­mal times, fis­cal pol­icy would support mon­e­tary pol­icy, in­clud­ing by play­ing a re­dis­tribu­tive role. But th­ese are not nor­mal times. With po­lit­i­cal grid­lock block­ing an ap­pro­pri­ate fis­cal re­sponse – after 2008, the United States Congress did not pass an an­nual bud­get, a ba­sic com­po­nent of re­spon­si­ble eco­nomic gov­er­nance, for five years – cen­tral banks have been forced to bol­ster economies ar­ti­fi­cially. To do so, they have re­lied on nearzero in­ter­est rates and un­con­ven­tional mea­sures like quan­ti­ta­tive eas­ing to stim­u­late growth and job cre­ation.

Beyond be­ing in­com­plete, this ap­proach im­plic­itly fa­vors the wealthy, who hold a dis­pro­por­tion­ately large share of fi­nan­cial as­sets. Mean­while, com­pa­nies have be­come in­creas­ingly ag­gres­sive in their ef­forts to re­duce their tax bills, in­clud­ing through so­called in­ver­sions, by which they move their head­quar­ters to lower-tax ju­ris­dic­tions.

As a re­sult, most coun­tries face a trio of in­equal­i­ties – of in­come, wealth, and op­por­tu­nity – which, left unchecked, re­in­force one another, with far-reach­ing con­se­quences. In­deed, beyond this trio’s moral, so­cial, and po­lit­i­cal im­pli­ca­tions lies a se­ri­ous eco­nomic con­cern: in­stead of cre­at­ing in­cen­tives for hard work and in­no­va­tion, in­equal­ity be­gins to un­der­mine eco­nomic dy­namism, in­vest­ment, em­ploy­ment, and pros­per­ity.

Given that af­flu­ent house­holds spend a smaller share of their in­comes and wealth, greater in­equal­ity trans­lates into lower over­all con­sump­tion, thereby hin­der­ing the re­cov­ery of economies al­ready bur­dened by in­ad­e­quate ag­gre­gate de­mand. To­day’s high lev­els of in­equal­ity also im­pede the struc­tural re­forms needed to boost pro­duc­tiv­ity, while un­der­min­ing ef­forts to ad­dress resid­ual pock­ets of ex­ces­sive in­debt­ed­ness.

This is a dan­ger­ous com­bi­na­tion that erodes so­cial co­he­sion, po­lit­i­cal ef­fec­tive­ness, cur­rent GDP growth, and fu­ture eco­nomic po­ten­tial. That is why it is so dis­ap­point­ing that, de­spite height­ened aware­ness of in­equal­ity, the IMF/World Bank meet­ings – a gath­er­ing of thou­sands of pol­i­cy­mak­ers, pri­vate-sec­tor par­tic­i­pants, and jour­nal­ists, which in­cluded sem­i­nars on in­equal­ity in ad­vanced coun­tries and de­vel­op­ing re­gions alike – failed to make a con­se­quen­tial im­pact on the pol­icy agenda.

Pol­i­cy­mak­ers seem con­vinced that the time is not right for a mean­ing­ful ini­tia­tive to ad­dress in­equal­ity of in­come, wealth, and op­por­tu­nity. But wait­ing will only make the prob­lem more dif­fi­cult to re­solve.

In fact, a num­ber of steps can and should be taken to stem the rise in in­equal­ity. In the US, for ex­am­ple, sus­tained po­lit­i­cal de­ter­mi­na­tion would help to close mas­sive loop­holes in es­tate plan­ning and in­her­i­tance, as well as in house­hold and cor­po­rate tax­a­tion, that dis­pro­por­tion­ately ben­e­fit the wealthy.

Like­wise, there is scope for re­mov­ing the an­ti­quated prac­tice of tax­ing hedge and pri­vate-eq­uity funds’ “car­ried in­ter­est” at a pref­er­en­tial rate. The way home own­er­ship is taxed and sub­sidised could be re­formed more sig­nif­i­cantly, es­pe­cially at the top price lev­els. And a strong case has been made for rais­ing the min­i­mum wage.

To be sure, such mea­sures will make only a dent in in­equal­ity, al­beit an im­por­tant and vis­i­ble one. In or­der to deepen their im­pact, a more com­pre­hen­sive macroe­co­nomic pol­icy stance is needed, with the ex­plicit goal of rein­vig­o­rat­ing and re­design­ing struc­tural­re­form ef­forts, boost­ing ag­gre­gate de­mand, and elim­i­nat­ing debt over­hangs. Such an ap­proach would re­duce the enor­mous pol­icy bur­den cur­rently borne by cen­tral banks.

It is time for height­ened global at­ten­tion to in­equal­ity to trans­late into con­certed ac­tion. Some ini­tia­tives would tackle in­equal­ity di­rectly; oth­ers would defuse some of the forces that drive it. To­gether, they would go a long way to­ward mit­i­gat­ing a se­ri­ous im­ped­i­ment to the eco­nomic and so­cial well­be­ing of cur­rent and fu­ture gen­er­a­tions.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.