Wednesday, December 15, 2010

Why growing inequality matters

I have long believed that the growing inequality in global, North American and Canadian society is immensely destructive both socially and economically.  The Globe published an article on the growing economic/geographical divide in Toronto. It captures a part of the problem:
Toronto is becoming a city of stark economic extremes as its middle class is hollowed out and replaced by a bipolar city of the rich and poor – one whose lines are drawn neighbourhood by neighbourhood.
The issue in Toronto is not one of urban form or policy.  It is more fundamental, a fact that David Hulchanski, the author of the study highlighted in the Globe, summarized during an online chat on the Globe website:
Comment From Robert: what is the reason for increase in disparity?
David Hulchanski: The reason: From 1945 to 1985 all types of evidence indicate we were becoming a slightly more equal society. After 1985 the top ten percent have taken an ever greater share of income. Public policies and changing labour markets left people with either very high paid jobs or very low paid jobs.
Addressing this issue is urgent. Income disparities are not just a cause of urban malaise. As this post from Kevin Drum makes clear, inequality is at the root of the current economic crisis and stagnation.
"Inequality, Leverage and Crises," an IMF paper written by Michael Kumhof and Romain Rancière, is full of long equations populated by many Greek letters. I won't even pretend that I can evaluate it. However, their introduction is pretty easy to understand: they've constructed a simple model for financial crises that essentially proposes the following narrative: (a) growing inequality produces less money for the middle class and more money for the rich, (b) the rich loan much of this money back to the middle class so they can continue to improve their living standards even with stagnant incomes, (c) the financial sector balloons to mediate all this, and (d) the system eventually collapses since, after all, this kind of thing can't last forever.
It certainly cannot. It is an issue that ought to be addressed by all those on the centre and left.  Achieving greater equality would be complex, and is not so much about taxes as it is about paying those who earn less, more, and paying less to those who earn more.  It is in the interest of all of us including the well-off.