United We Fall: Inequality on the Rise

The incomes of the richest have now grown so large that even the think tank of the developed world’s governments is calling for tax hikes.

By Salvatore Babones

On Monday the Organization for Economic Cooperation and Development released a massive 400-page report surveying the state of inequality around the world.  The report, United We Stand: Why Inequality Keeps Rising reaffirms that inequality is now rising not just in the United States, but globally.  Still, it’s the United States that leads the way.[pullquote]Among OECD member states, only the two poorest — Mexico and Turkey — have higher levels of inequality than the United States.[/pullquote]

The 34 member countries of the OECD, an international economic think tank funded by the United States and other rich country governments, account for 71 percent of global output and 65 percent of global trade.  Their OECD is often referred to as “the rich countries club.”

The new OECD report is particularly harsh on the United States.  The U.S. has higher levels of inequality than any other developed country.  Among OECD member states, only the two poorest — Mexico and Turkey — have higher levels of inequality.

The report confirms what we already knew about top incomes in the United States.  The richest Americans are making more than ever before.  Over the past two decades “the share of after-tax household income for the top 1 percent more than doubled, from nearly 8 percent in 1979 to 17 percent 2007.”

“Over the same period,” the report adds, “the share of the bottom 20 percent of the population fell from 7 percent to 5 percent.”

On the bright side, the OECD concludes that “the growing share of income going to top earners means that this group now has a greater capacity to pay taxes than before.”  In the past, the OECD has consistently recommended tax cuts around the world.  The incomes of the richest Americans have now grown so large that even the OECD is recommending tax increases.

The accompanying figure uses data from the OECD report to illustrate changes over time in income inequality in the G-7 countries, the world’s seven largest rich countries.  Data are available for 1980 through 2008.  The seven countries are ranked from lowest to highest inequality in 1980.

Inequality is measured using the “Gini” coefficient, an index of inequality that runs from 0 (perfect equality) to 1 (one person gets all of a country’s income and everyone else gets nothing).  The Gini coefficient is the standard statistic economists use to measure income inequality.  Most countries have Gini coefficients in the 30s and 40s.

As the figure shows, the United States had the highest level of inequality among G-7 countries both in 1980 and in 2008.  France is the only G-7 country to have experienced declining inequality over that period.  Inequality rose in all of the other six.

According to the OECD, the Gini coefficient for the United States rose from 33.7 to 37.8 between 1980 and 2008.  Income inequality was already high in the United States in 1980.  In fact, only one other G-7 country, the United Kingdom, has even reached our 1980 level.  The levels of inequality seen today in America have no parallel anywhere in the developed world.[pullquote]The U.S. inequality statistics reported by the OECD are much lower than those reported by the U.S. Census Bureau.[/pullquote]

What’s more, the U.S. inequality statistics reported by the OECD are much lower than those reported by the U.S. Census Bureau.  Since the OECD does not make its methodology public, it is impossible to know the reasons for the differences.  But according to the Census Bureau, the Gini coefficient for the United States now stands at 46.9.

That’s far higher than the US figure of 37.8 reported by the OECD.  In fact, according to the Census Bureau (Historical Income Table IE-1) the lowest Gini coefficient ever recorded for the United States was 38.6, in 1968.  It has been on the rise ever since.

The OECD traces rising inequality around the world to a decline in income redistribution.  The report concludes that “from the mid-1990s to 2005, the reduced redistributive capacity of tax-benefit systems was sometimes the main source of widening household-income gaps.”  In other words, lower taxes on the rich combined with lower benefits for the poor to push out the income gap.

The solution?  Offers the OECD: “More and better jobs, enabling people to escape poverty and offering real career prospects, is the most important challenge.”  After 25 years of promoting labor market “flexibility,” the OECD has now come full-circle to recognize the need for more secure employment. [pullquote]The OECD seems to imply that trend toward privatization has gone too far and should be reversed.[/pullquote]

The OECD has also come to recognize the indispensable role of government in reducing inequality: “Another important instrument . . . is the provision of freely accessible and high-quality public services, such as education, health, and family care.”  The OECD seems to imply that trend toward privatization has gone too far and should be reversed.

Free universities, free health care, free child care, and free elder care could go a long way toward ameliorating the problems that result from high levels of inequality between rich and poor.

The study concludes with a categorical condemnation of past policies and clear guidance for the way forward.

“This study dispels the assumption that the benefits of economic growth will automatically trickle down to the disadvantaged and that greater inequality fosters greater social mobility,” the new OECD study sums up. “Without a comprehensive strategy for inclusive growth, inequality will continue to rise.”

Salvatore Babones is a senior lecturer in sociology and social policy at the University of Sydney and an associate fellow at the Institute for Policy Studies