Can an Unequal Economy Self-Correct?

Lars Osberg, Instability Implications of Increasing Inequality: What can be learned from North America? Canadian Centre for Policy Alternatives. May 2012.

Economist Lars Osberg has been writing about income distribution since the 1970s. Back all those years ago, few other scholars shared his preoccupation.

Income distribution, as a field of study, had turned rather boring. America’s incomes had been trending more equal ever since the New Deal, and that trend seemed all but certain to continue. Income distribution struck most researchers, Osberg remembers, as “about as interesting as watching grass grow.”

But things have changed. Income distribution, in our Great Recession and Occupy movement world, has suddenly become hot.

That equalizing trend that seemed so boringly eternal back in the 1970s? Totally reversed. The United States and Canada, the two nations Osberg knows best, have been growing ever more unequal — and now this trend to ever more inequality seems to have become our distributional default.

That prospect doesn’t, of course, at all bother cheerleaders for grand fortune. They have no doubt that greater wealth for the wealthy, once we get past our Great Recession unpleasantness, will usher in a steadily richer and better world.

But increasing income inequality, Lars Osberg helps us understand in this new Canadian Centre for Policy Alternatives analysis of inequality in North America, cannot give us a “steady” anything. Inequality in our economy can no more grow “without limit” than can carbon dioxide in our atmosphere.

In both cases, our political system either has to intervene or we’ll have a real disaster on our hands. And that disaster will surely come economically, Osberg argues, because our U.S. and Canadian economies, left to their own devices, have nothing going on within them that could increase our lowest incomes.

In Mexico, by contrast, the economic bedrock is shifting. Mexico has had until recent decades a high proportion of its population engaged in agriculture and relatively few women in the paid labor force. But these and other structural realities of the Mexican economy are evolving, and these evolutions are placing an upward pressure on household incomes at Mexico’s base.

But structural changes alone, Osberg adds, don’t explain why income distribution in Mexico has turned more equal the last dozen years. Mexico has also witnessed a powerful — and equalizing — political intervention, via a massive income redistribution program that provides poor families cash transfers linked to regular school attendance and health clinic visits.

Mexico’s movers and shakers had this 1997 intervention — initially known as the Progresa, now the Oportunidades program — essentially forced upon them.

In 1994, the onset of the NAFTA trade agreement had begun ushering Mexico into economic crisis, and that same year, Osberg notes, the Zapatista insurrection in Chiapas province had “forcefully reminded” Mexico’s elite “of the country’s deep and recent history of violent revolution and civil conflict.”

Continued growth in inequality, Mexico’s elite understood, might “push the populace towards social unrest, with unpredictable consequences.”

Osberg sees no comparable political pressure in the United States and Canada, only a “dominant political feedback loop” that translates more income for the top 1 percent into more political influence for that same elite few.

The political consequence of this increasing 1 percent power: a gridlock that prevents any move to reforms — like steeply graduated progressive income taxes — that could temper income inequality. The economic consequence: serial financial crises that leave “deeper and longer busts in the real economy.”

At some point, amid the resulting higher levels of inequality, something has to give. But give way to what? The state of affairs that will come next, Osbergobserves, has not yet become clear.

History does offer hints. In the 1920s and 1930s, the developed world saw the same sort of financial volatility and bust that plague us today. Something did give. Democracy and decency. In Italy, Germany, and Spain, Osberg relates, the world witnessed a “catastrophically dysfunctional” fascist response.

But the world also witnessed the New Deal in the United States and the massive programs of reform and renewal that created what Osberg calls the “enduring success stories” of the Scandinavian social democracies.

“Political forces and decisions made the difference then,” sums up Osberg, “and they will make the difference this time around as well.”

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