10 Dec 2023 – Income inequality: The debate continues

BREAKTHROUGH – Elfren S. Cruz – The Philippine Star
December 10, 2023 | 12:00am

The issue of income inequality has actually become an international debate. The most interesting to me are the disputes between academicians and economists. However, this scholarly battle over inequality has effects not to be underestimated. Sooner or later, a consensus will emerge that will become the norm for economists all over the world. This in turn will become the basis of economic policies for many countries.

It is a trio of French economists that has popularized the belief that income inequality is soaring in the world, including in the United States of America. They are Thomas Piketty, Emmanuel Saez and Gabriel Zucman.

I have read the books of Piketty and I highly recommend them (Capital in the Twenty-First Century, A Brief History of Equality) for those interested in a serious reading of the topic of income inequality.

A decade ago, Piketty became a popular name among economists, policymakers and academicians when he started arguing that income inequality had surged. At that time, he seemed like a voice crying out in the academic wilderness. I remember the first time I brought up the topic of income inequality in a committee meeting in the Management Association of the Philippines. In that meeting, my comments did not generate much debate; much worse, were politely ignored.

The belief that income inequality should be the main focus rather than economic growth is now gaining adherents. There are still those who refuse to believe that capitalism in its purest form is still tailored to benefit the wealthy and discriminate against the overwhelming majority of the population.

A principal argument against the rising income inequality is that all over the world, wages are increasing. This is true but it still does not address the problem of income inequality.

The Gini index or Gini ratio is the most common statistical measure of income inequality in a country. The latest result of this indicator is that income inequality is rising in the world. It should be noted that even in countries where poverty rates are decreasing, the Gini index shows that inequality is increasing.

The coming age of artificial intelligence and the shift to a digitized world will only accelerate the need for a more highly educated labor force. This will also lessen the employment opportunities for most of the blue collar workers. This increase in demand for college graduates with higher educational attainment and computing skills will only make the situation even worse.

In fairness, there are those in the upper class who are thinking of ways to reduce income inequality. One of these is Eddie Yap, a wealthy businessman, a concerned citizen and a cultural impresario. He recently wrote me the following, a reaction to my previous column, “Reducing Income Inequality: a Must:”

“Education of the youth will take one generation to bear fruit. The imperative is to close the wealth gap yesterday. One way is to close the ratio of total top executive per capita pay versus per capita pay of rank and file. Another way is to clamp down on DOSRI loans and reciprocal loans to other bank owners and impose mandatory minimum MSME loan ratio to total loans to compel wider distribution of bank liquidity. Another is profit-sharing to employees of listed firms if annual profit growth exceeds say 15 percent. This rewards productivity, although radical, but needed if serious in closing wealth gap.”

I find that Yap’s proposals should be seriously considered. The idea of setting a ratio of total top executive per capita pay versus per capita pay of rank and file is one that has been discussed in many sectors for a long time. One should try and imagine the ratio of the pay of the top CEO in a company in comparison to the pay of the lowest ranked messenger or janitor. Executive pay should be computed based not only on salary but should include dividends and other benefits like housing and car allowances.

If the lowest paid in a company is earning P15,000 a month, what would be his ratio with the consolidated pay and benefits of the CEO? I will leave that to your imagination.

But the more important question is: What should be the reasonable ratio? In addition to Eddie Yap’s proposal, I believe that a wealth tax and other tax reforms should still be included in any serious attempt to reduce income inequality.

I can only say that I am happy that the issue of reducing income inequality is becoming more and more prevalent. Unfortunately, I still hear most economists and government policy makers and business leaders obsessed with economic growth in their belief that the “trickle down” theory still works. I will say again that this theory has never worked, as proven historically and statistically.