Inequality holding back recovery in rich West
Growing inequality between the rich and poor in Western societies has again become a key issue. But the reason this time is not only the social unrest caused by unjust income distribution in the Western world. There are some new ideas that poverty might be the most serious problem hampering recovery.
Until the beginning of the last century, unjust income distribution was effectively accepted as a mechanical problem that could halt economic growth whenever there was a deterioration in the interests of investors or the working class. The logic behind that belief was simple: A sharp decline in profits or a serious fall in total demand that again resulted in a profit loss would discourage new investments and, as a result, would halt economic activity.
During the last century, governments, especially in Western countries, began to approach unjust income distribution as a social and humanitarian problem. Naturally, it was accepted that poverty could also create some political problems, but not as serious as social ones. Governments which had different ideologies again implemented different policies to fight poverty, but the percentage of poor families in the total population, even in some rich countries, did not change considerably. The situation in poor and emerging countries is obviously worse.
From all this information, it must be accepted that poverty is not only a serious social problem, but also an economic one that hampers economic recovery, even in rich countries. Past experiences indicate that fighting against poverty is not easy. Some simple remedies in the macroeconomic sense such as increasing wages and salaries or taxing the richest have never been effective in balancing income distribution.
It is now understood that poverty is also holding back recovery, even in problem-free rich countries. First of all, growing inequality has weakened the purchasing power of the middle class in every country. As a result, even loose monetary and fiscal policies have not acted as a catalyst for consumer spending.
When people can’t predict what will happen in the future, they naturally prefer to save even the slightest increase in their monetary income instead of spending that amount. For the same reason, they also shy away from using those small amounts to invest in their family’s future (such as better education for themselves or for their children), even if such measure could improve their living conditions in the coming years.
The unfortunate result of the European problem is increasing poverty in countries that have implemented austerity measures. Cuts in public spending and higher taxes, which also mean a cut in wages, salaries, retirement payments, social aids and the like, as well as a rise in the jobless rate, deepens the poverty problem, even in developed countries in Europe.
Another important point is the International Monetary Fund’s finding about the close relationship between inequality and economic/political instability. When this finding is generalized, especially in emerging economies, it is not difficult to understand some of the truth about the repeated economic, social and political crises in those countries which had no connection to any worldwide problems.
These problems and the difficulties in tackling them must not prevent the search for rational ways to fight against poverty. This is also necessary for worldwide social peace and for the prevention of political turmoil that not only harms recovery but also the democratic structure of Western countries. For poor and hopeless people, any kind of irrational promises might seem rational. There is wisdom in remembering that history generally repeats itself.
* Erdoğan Alkin wrote this article originally scheduled for April 1 before his unexpected death yesterday at the age of 77. The Daily News offers condolences to the late academic’s family, students and friends.