Income inequality between the rich and the rest
Friday, 13 May 2011
Gousal Azam
Income inequality among continents, countries and within the same country is the root of all financial crises. Politicans try to counter the growing gap between the rich and the poor by encouraging the poorer to take more credit. Another argument is that inequality of income perverts politics. Wall Street's influence in Washington may be cited as a glaring example of it. Between 1956 and 1986, there was not a single year in which the richest comprising one percent of American households earned more than a 10 per cent of national income. In 2007, the income share of the richest percentile reached a staggering 18.3 per cent which was 18.4 per cent in 1929. The resemblance in the evolution of income inequality in the years leading up to the Depression and the global economic crisis make for one of the striking parallels between the two episodes. Economists, no doubt, have been thinking deeply about the causes, extent and the consequences of the recent rise in inequality. Raghuram Rajan of the University of Chicago Booth School of Business argued in his recent book, 'Fault Lines' that the increased inequality, more precisely, the political response to it, helped cause the financial crisis. Rajon ascertains that technological progress enhanced the relative demand for skilled workers. This created a widening gap in wages between them and the rest of the workforce as because the supply of the skilled did not keep pace with the demand. Rajon's argument is widely accepted. Rajon goes further when he argues that this growing gap lay behind the credit boom whose souring precipitated the financial crisis. He argues, government could not simply stand by as the poor and the unskilled fell further behind. As a matter of fact, more should have been spent on education and training. Instead, credit was an easy way to prop up the living standards of those at the bottom of the economic pile. This was particularly true in case of America, with its relatively puny welfare state. On the early 2000s America saw a boom in lending to the poor including those folks that bank used to sniff at. Government also put pressure on the two state-backed housing giants, Fannie Mae and Freddie Mac, to lend more to poorer people. Affordable housing targets, slacker underwriting guidelines and the creation of new down payment mortgages were all used as instruments of public policy. Policy undertaken for affordable credit worked. Sub prime mortgages, whose share of all mortgages serviced rose from less than 4.0 per cent at the turn of the century to a pick of around 15 per cent before the crisis, were the most important example of this. They pushed American home-ownership to a record high. Credit boom also inflated an enormous housing bubble, whose collapse precipitated a financial crisis, brought on by defaults on those very sub-prime mortgages. As such, well-intentioned political responses to the rise in inequality that many found disturbing ended up having the devastating side effects. At the annual meeting of the American Economic Association (AEA), in Denver in January, 2011, two prominent economists,-Daron Acemoglu of the Massachusetts Institute of Technology and Edward Glaeser of Harvard University argued that Rajon's hypothesis is flawed. Neither of them doubts that inequality rose and the poorer people gained access to more credit. But both of them disagree with Rajon on the link between the two. According to Acemoglu expansion of credit came far too late for Rajon'js hypothesis. The sub prime boom began around 2000. Inspite of that, at the bottom of the income distribution were getting hammered by technological changes in the 1980s. The least skilled workers in America have not become still worse-off since 1980 largely because they work in service industries which are hard to automate. Inequality has persisted to rise because the rich has done the ever better; it is those in the middle who have fared relatively poorly. Glaeser thinks that the role of easy credit in the housing bubbles was not as large as Rajon believes. He cited the example that the increased mortgage availability pushed up American home prices by only around 4.3 per cent which was a small fraction of the rise in prices during the boom. Illogical exuberance and a willingness to bet on prices rising forever were probably much bigger contributors to the bubble than credit expansion. Inequality and the crisis were - the consequence of politicians' willingness to deregulate the financial sector, which partly- reflected the industry's lobbying prowess. It is also the consequence of irrational ever increasing salaries in finance backed by runaway lending and lax standards. Global economic conditions indicate that the gap between the rich and the poor has actually been narrowing as poorer countries are growing faster. Even in Latin America, long home to the world's most unequal societies many countries including the big Brazil have become a bit more equal, as the Government have boosted the income of the poor with fast growth and an overhaul of public spending to improve the social safety net. The gap between the rich and the poor has risen in other emerging countries notably, China and India as well as in many rich countries, especially in America. Inequality has also risen in Germany, reputed to be egalitarian. Although the rich in Bangladesh grew largely through state patronisation and is still growing, the ready made garment and ship breaking and building sub-sector of industries were used by many industrious and intelligent businessmen to become millionaire. Industries and service sector have been playing a vital role in the economic growth of the country pushing the agriculture behind. There is no doubt that the economic condition has been improving. But income inequalities are growing. It is now being told frequently in the newspaper that the number of millionaires in Bangladesh is about 27,000. But if their resources are considered in terms of world standard, their number is assumed to be half. In such a situation, think tank of the country may think over the inequalities very seriously as because everybody is passing his days in a transparent glass room. The writer is a former Secretary General of Institute of Bankers, Bangladesh
Income inequality among continents, countries and within the same country is the root of all financial crises. Politicans try to counter the growing gap between the rich and the poor by encouraging the poorer to take more credit. Another argument is that inequality of income perverts politics. Wall Street's influence in Washington may be cited as a glaring example of it. Between 1956 and 1986, there was not a single year in which the richest comprising one percent of American households earned more than a 10 per cent of national income. In 2007, the income share of the richest percentile reached a staggering 18.3 per cent which was 18.4 per cent in 1929. The resemblance in the evolution of income inequality in the years leading up to the Depression and the global economic crisis make for one of the striking parallels between the two episodes. Economists, no doubt, have been thinking deeply about the causes, extent and the consequences of the recent rise in inequality. Raghuram Rajan of the University of Chicago Booth School of Business argued in his recent book, 'Fault Lines' that the increased inequality, more precisely, the political response to it, helped cause the financial crisis. Rajon ascertains that technological progress enhanced the relative demand for skilled workers. This created a widening gap in wages between them and the rest of the workforce as because the supply of the skilled did not keep pace with the demand. Rajon's argument is widely accepted. Rajon goes further when he argues that this growing gap lay behind the credit boom whose souring precipitated the financial crisis. He argues, government could not simply stand by as the poor and the unskilled fell further behind. As a matter of fact, more should have been spent on education and training. Instead, credit was an easy way to prop up the living standards of those at the bottom of the economic pile. This was particularly true in case of America, with its relatively puny welfare state. On the early 2000s America saw a boom in lending to the poor including those folks that bank used to sniff at. Government also put pressure on the two state-backed housing giants, Fannie Mae and Freddie Mac, to lend more to poorer people. Affordable housing targets, slacker underwriting guidelines and the creation of new down payment mortgages were all used as instruments of public policy. Policy undertaken for affordable credit worked. Sub prime mortgages, whose share of all mortgages serviced rose from less than 4.0 per cent at the turn of the century to a pick of around 15 per cent before the crisis, were the most important example of this. They pushed American home-ownership to a record high. Credit boom also inflated an enormous housing bubble, whose collapse precipitated a financial crisis, brought on by defaults on those very sub-prime mortgages. As such, well-intentioned political responses to the rise in inequality that many found disturbing ended up having the devastating side effects. At the annual meeting of the American Economic Association (AEA), in Denver in January, 2011, two prominent economists,-Daron Acemoglu of the Massachusetts Institute of Technology and Edward Glaeser of Harvard University argued that Rajon's hypothesis is flawed. Neither of them doubts that inequality rose and the poorer people gained access to more credit. But both of them disagree with Rajon on the link between the two. According to Acemoglu expansion of credit came far too late for Rajon'js hypothesis. The sub prime boom began around 2000. Inspite of that, at the bottom of the income distribution were getting hammered by technological changes in the 1980s. The least skilled workers in America have not become still worse-off since 1980 largely because they work in service industries which are hard to automate. Inequality has persisted to rise because the rich has done the ever better; it is those in the middle who have fared relatively poorly. Glaeser thinks that the role of easy credit in the housing bubbles was not as large as Rajon believes. He cited the example that the increased mortgage availability pushed up American home prices by only around 4.3 per cent which was a small fraction of the rise in prices during the boom. Illogical exuberance and a willingness to bet on prices rising forever were probably much bigger contributors to the bubble than credit expansion. Inequality and the crisis were - the consequence of politicians' willingness to deregulate the financial sector, which partly- reflected the industry's lobbying prowess. It is also the consequence of irrational ever increasing salaries in finance backed by runaway lending and lax standards. Global economic conditions indicate that the gap between the rich and the poor has actually been narrowing as poorer countries are growing faster. Even in Latin America, long home to the world's most unequal societies many countries including the big Brazil have become a bit more equal, as the Government have boosted the income of the poor with fast growth and an overhaul of public spending to improve the social safety net. The gap between the rich and the poor has risen in other emerging countries notably, China and India as well as in many rich countries, especially in America. Inequality has also risen in Germany, reputed to be egalitarian. Although the rich in Bangladesh grew largely through state patronisation and is still growing, the ready made garment and ship breaking and building sub-sector of industries were used by many industrious and intelligent businessmen to become millionaire. Industries and service sector have been playing a vital role in the economic growth of the country pushing the agriculture behind. There is no doubt that the economic condition has been improving. But income inequalities are growing. It is now being told frequently in the newspaper that the number of millionaires in Bangladesh is about 27,000. But if their resources are considered in terms of world standard, their number is assumed to be half. In such a situation, think tank of the country may think over the inequalities very seriously as because everybody is passing his days in a transparent glass room. The writer is a former Secretary General of Institute of Bankers, Bangladesh