First published: Prospectmagazine.co.uk, 5/03/2014
Barack Obama vowed to tackle it in his State of the Union speech in January. Last month, Ed Milliband said it is the new centre ground in politics. Christine Lagarde of the IMF thinks it deserves urgent attention. Alan Greenspan thinks it’s the most dangerous part of what’s going on in the US. The OECD and national statistical agencies produce ever-greater amounts of data on it. Income inequality, take a bow, it look’s like your time has come. But as I’ll explain, bringing the subject of income inequality into the mainstream is relatively simple, compared to the challenge of getting politicians to do something sensible about it.
Even though some politicians and social commentators simply want to punish the better off for being, well, better off, most abhor growing income inequality on moral grounds, based on fairness, equality of sacrifice in hard economic times and so on. Important though this moral case is for social policy, the plague of rising income inequality merits a much more thorough economic examination. The reason is that income inequality is endogenous to our capitalist system. It is a function of how we incentivise businesses, entrepreneurs and innovation. But taken to extremes it can become pernicious to the pace and durability of economic growth. It does this by undermining progress in health standards, educational attainment levels, economic stability, and the social cohesion needed to keep our system adaptable and responsive to shocks….“more:”