Comment & Analysis
Feb 4, 2017

Inequality is Rising and More Needs to be Done to Tackle It

Seán Barret argues that inequality is rising, and the education system needs to be the one that tackles it.

Seán BarrettColumnist
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Eavan McLoughlin for The University Times

Alienation is a theme running through much of the analysis of the election of President Trump, the Brexit vote and the rise of populism in Europe. The economy is no longer seen to work for many people, so they used the ballot box to express their dismay. Data indicates that inequality is rising steadily in OECD countries. Those who have missed out on rising incomes formerly voted for Labour in the UK and for the Democrats in the US. To the disaffected, these parties no longer represent working people in 2016. Almost in despair, that group have transferred their votes to President Trump and Nigel Farage.

The bank rescues changed everything. For decades, we allowed traditional jobs to disappear in areas such as shoe manufacturing, shipbuilding, textiles, railway engineering and small farms and shops. The view was to let them go. We will get better products by not protecting such jobs and the new economy will generate new jobs in new occupations. The declining sectors will not be a great loss because there will be better products produced by new firms. In 2016, people in the US midwest and the north of England said no. Too many jobs in those areas had not been replaced. Large segments of society had received no income increase for decades. Having allowed so many other industries to perish to the detriment of their employees, governments intervened to save incompetent financial institutions at huge public expense. That was the last straw.

Regulatory capture is the term used in economics to describe how the regulation of activities by a public body acting in the public interest is captured by the industry in order to promote the interests of the sector. Few bankers and regulators paid the price for their incompetence and greed. The public as a whole paid the bills. Some of the bills, such as the introduction of water charges here in Ireland, were highly regressive. People revolted through the ballot box, and there may be more to come.

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The OECD Economic Survey for Ireland (2015) found that salaries for recent graduates had fallen from €26,800 in 2007 to €23,800 in 2012, a fall of 11.2 per cent. This was a classic insider-outsider labour market decision. Those already with jobs might organise protests. Those not yet in jobs or who were at school before 2007 did not have the leverage to organise protests. In the contest between large pay packets and small pay packets, Ireland’s contribution to the survival of the fattest was benchmarking.

Many of the figures at the core of the Irish financial crisis earned more than President Obama, Chancellor Merkel and Prime Minister Cameron. The OECD data indicates that between 1980 and 2009 the top 10 per cent of earners in Ireland increased their share of total earnings from 31 per cent to 36 per cent. The top one per cent increased their share of the cake from seven per cent to 10 per cent. The corresponding changes in the US were an increase from 33 per cent to 47 per cent for the top 10 per cent of earners between 1980 and 2013 and from eight per cent to 18 per cent for the top one per cent.

Education has been seen as a major cause of rising inequality by the OECD because it both rewards those who have consumed a lot of it and penalises those who don’t. Increasing the share of spending on primary education, where there is universal participation, is proposed by many economists both on educational and equity grounds. Also a major cause of rising inequality is the growth of the tax lawyer and tax accountant propagating the tax avoidance industry. This sector serves wealthy clients in order to pay less tax. Every finance bill contains new tax shelters for high rollers. These receive little media attention as the Finance Bill lacks the theatre of traditional budget day. There should be low standard across the board tax rates with no deductions or allowances in order to curb and eliminate the tax avoidance industry. Lobbying pays and inequality increase more than ever.

The OECD breaks the recent rise in Irish inequality into three phases. In the Celtic Tiger (1997 to 2002) era, all income groups experienced strong growth in market income. In the bubble period (2002 to 2007), only those in the top ninth decile plus benefitted, reflecting both capital income and the growth of labour earnings at the high end of income distribution. During the bust (2007 to 2012), labour incomes declined by 14 per cent in aggregate with the burden disproportionately borne by those in lower income deciles.

In the UK, the Institute for Fiscal Studies (IFS), whose team in this area includes Trinity alumnus and scholar Cormac O’Dea, finds that “younger people have fared worse than older age groups over the period since 2007-08 as a whole”. The IFS states that “our projection is that income inequality will rise significantly over the course of the current parliament”.

There are tentative proposals in the UK to activate shareholders to wake up to the massive gaps between chief executive pay and average pay in firms. Employment insecurity is set to rise.

Defined benefit pensions are in rapid decline. House rents are spiralling and health cost control has eluded both the cabinet and private health insurers for some time. As I write, house purchase schemes raise the price of a house by more than the amount of the assistance to those whom we seek to assist in their housing needs. Developers and house sellers laugh all the way to the bank, rescued by taxpayers at huge cost. With badly designed policies, inequality booms. The new generation of economists reading now for their courses in university have a huge mess to tidy up with new and better ideas. I hope that they succeed.

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