I had the opportunity to read the November 2018 issue of Scientific American, a popular US science magazine, the articles in which focused on various aspects of the interesting issue of inequality. One article, in particular, written by Joseph Stiglitz, the Nobel prize-winning economist, analyzes the causes of US economic inequality and proposes clear guidelines for solving this problem.
The United States has the highest economic inequality among developed countries, even though the country is an economic power, with the world’s largest economy and the most millionaires (almost twice as many as China).
In the last 40 years, the level of economic inequality in the United States has risen to its highest point: the 1% of people in the country who are rich has double the share of income than the rest, and the 0.1% of people who are very rich has a share of income that is 4 times greater, while the share of country’s income allocated to the remaining 90% of the country has been reduced.
Many economists have explained the cause of the inequality in the United States as being due to many reasons:
1) Technological development has created a need for more skilled labor and, as a result, the wages of unskilled labor have been reduced, leading to increased income inequality;
2) Globalization has led to a decrease in the bargaining power of labor; companies can move production bases to foreign countries if workers demand higher wages and refuse to reduce their wages.
3) Economic structure that changed from the industrial to the service sector, resulting in more inequality. For example, the wages of very popular actors are in millions of dollars, while general actors and industrial workers make only a small amount of money. In addition, companies in the service sector tend to have monopolies, allowing them to set prices higher than competitive market prices.
4) Rich people deposit large amounts of funds in banks that have relatively high yields and stability compared to the rate of economic growth, resulting in higher incomes for these rich people and higher economic inequality.
However, Stiglitz explained that the reasons mentioned above are still unable to clearly explain the economic disparity occurring in the United States. This is because they cannot explain why the average wage in the United States hasn’t increased in the last 60 years and why the situation in the United States is worse than in other developed countries.
Stiglitz further analyzed that, in fact, the situation is the result of policies, regulations, and laws that were revised to better serve the rich and take advantage away from others. It has occurred continuously since the year 1970, so, as a consequence, the problem of inequality in the United States is worse than in other developed countries.
Economic inequality has led to political inequality because wealthy people have more political power and these people start to pass regulations to the advantage of their businesses and to increase their own wealth. This causes further economic inequality and becomes a vicious cycle that still occurs today. For example:
1) The enforcement of antitrust laws in the United States is not as strong as it should be. The monopoly power of large enterprises has increased and, recently, US companies are not only creating innovative products and services, but are trying to find ways to expand their monopoly power even more.
In contrast, in Europe, the European Commission has fined Microsoft and Google billions of dollars for breaching EU antitrust rules and ordered both companies to end the practice of trying to dominate the market. However, in the United States, there has been very little action, which is why monopolies have increased in many business sectors.
2) Efforts to weaken unions have resulted in the situation where workers are unable to negotiate with companies that try to lower wages and refuse to improve their work environment.
3) Weakening of corporate governance laws by allowing executives of companies in the United States to approve remuneration for themselves at a level that is 361 times higher than for general labor.
Looking at the situation in Thailand, inequality has become worse and has tended to deteriorate constantly. The income gap between the rich and the poor is getting wider, as reflected in rankings and statistical data of various departments. If we are looking at the reasons for inequality in Thailand, I think it is much related to Stiglitz’s explanation of what has happened in the United States.
So how do we solve this economic inequality? Stiglitz has proposed many ways by which the inequality issue in the United States can be solved. These proposals were not only proposed in the recently published Scientific American magazine article in November last year, but also some time ago in his book “The Price of Inequality”, published in the year 2012.
Some of the proposals are: progressive taxation and inheritance tax levied at an appropriate rate; amendment and enforcement of laws and regulations to make them effective, for example the antitrust law, labor protection, good governance in the business sector, prevention of deprivation of women’s labor, regulations controlling the financial sector so that it does not take advantage of consumers, reform of various systems such as the public health system, elderly welfare system and the allocation of suitable housing for people, etc.
However, Stiglitz’s most important proposal to solve inequality, which corresponds to what I have proposed in the book “Open Thoughts: Political Reform” published in year 1995 (pp. 75-82), is to eliminate the money of capitalists from politics by reforming the financial system and granting state money to political parties to support their election campaigns, in order to make politics belong to all people and create policies for the people.
I think that, on the occasion of an imminent election in Thailand, it would be very good if the government sector seriously reforms politics, not only the financial system and donations to political parties but to make political parties serve the people.
Not only does it make for clear elections, increases people’s participation in politics and ensures that the new government is fully justified in running the country, but it also solves the problem of inequality, which is a major problem that we are currently facing in the country.
ISSUE 0142 (October– November 19)
Senior Fellow at Harvard University’s Center of Business and Government.