Promoting Income Equality

A political group organized the screening of a recently published documentary called ‘The Flaw’ at the London School of Economics.  The film sought to provide context on the financial crisis and, in so doing, explain the underlying causes of the crisis in greater depth than any previous documentary.  The documentary’s name was taken from Alan Greenspan’s October 2008 admission to the US Congress that he had found a ‘flaw’ in his model of how the world works.

I liked this film because it did not seek to demonize the few but rather explain how responsible the U.S. financial crisis is. By extension, the global economic turmoil should be placed at the feet of many.  British filmmaker David Sington (who was present after the screening to lead a lively debate) touches on how government economic policy changes throughout the 20th century created the policy environment that framed this disaster.  He also touches on the role of financial institutions and ordinary consumers whose greed fuelled the cycle of boom and bust.

Three points were of particular interest to me.  Firstly the whole concept of an economic bubble, secondly the pivotal moment that was the 1970s, and lastly, our notions of income inequality.

Firstly, economic bubbles are truly an interesting manifestation of human behavior.  Normally the higher the price of an item goes, the demand for it tends to decrease.  With a bubble, however, the higher the price goes, the more people demand it.  Most economists may say that this is limited to financial assets, but the property market bubble may demonstrate that other assets can be subject to a bubble.  In a bubble, the whole nature of cycles is forgotten as the market literally buys into the delusion that price increases would continue indefinitely.  In reality, an economic bubble can be accurately identified only after it bursts.
American Tax Singapore

The second interesting point was the level of profound changes taking place in the 1970s.  Yale University housing expert Robert Shiller and Harvard University economic historian Louis Hyman both agree that this decade saw the efficient market hypothesis becoming almost an article of faith.  This hypothesis believes that the government should step back and allow the market to function – a respect for the ‘wisdom of the crowd.’  This thinking saw a policy repositioning that eventually allowed the Margaret Thatcher – Ronald Regan tag team’s rise in the 1980s.  It is now obvious that, at times, when left unchecked, the crowd can be very wrong.  Perhaps the extent to which greed can distort the market is only now being understood.

The third and perhaps the most profound point was that debt could be fundamentally regressive, could lead to greater levels of social inequality, and could even stand in the way of economic growth and development.  Think about it?  In the film, Hyman produced data to demonstrate that the U.S. peaked income inequality at two times in the twentieth century – 1929 and 2007.  He also showed that overall household debt in the U.S. moves in direct correlation to income inequality.  This makes sense as rising debt is essentially a mechanism for diverting present and future income streams from debtors (the have-nots) to creditors (the haves). Rising debt makes sense for debtors only in the context of rising incomes.  So stagnating incomes plus rising debt levels contribute to greater income inequality.  We all know what happened right after each peak (1929 and 2007) – the great depression and the 2008 crash.

Most times, the debate over income inequality is framed within a moral context.  It is not ‘fair,’ or it is not a ‘good thing.’  Here we argue for greater levels of income inequality being bad for the entire society and the entire economy.  It may actually contribute to economic instability (we already know that it contributes to social instability).  We all benefit from a vibrant middle class.

From a government policy perspective, promoting greater income equality makes good economic sense.  The wealthy may not like it, but those who realize that it leads to greater social and economic stability will eventually appreciate it.  Therefore, the debate should shift away from attacking/defending social spending / social programs (sometimes called entitlement spending) to re-engineering these programs to reduce dependency, reduce abuse, and encourage education/training and entrepreneurship.

Again, the documentary is called “The Flaw,” and it is available online.  My name is Derren Joseph, and I love my country, and I love my region.  Despite our current challenges, I continue to have the audacity of hope that we will all enjoy a brighter tomorrow.

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