Consequences of Income Inequality

In a world of weak demand and oversavings, the last thing we need are policies that encourage income inequality. The people who benefit most from income inequality will use their political power to continue the process. It will eventually will hurt them as well

I live in a small city in New England south of Boston. The town of Newport  in the 18th century was once one of the largest cities in the American colonies. Today the town is not known for its large in tact collection of 18th century houses. Instead it is usually identified with another time in American history, the Gilded Age.
The Gilded Age occurred in the late 19th and early 20th centuries. It was a time of great economic growth. It was also dominated by some famous names such as Rockefeller, Carnegie and Vanderbilt. Many of these so-called robber barons took their enormous wealth and built huge summer houses in Newport. So as not to be ostentatious, they referred to them as ‘cottages’.
The largest of these cottages is called the Breakers. The house was finished in 1895. It has 70 rooms and cost $150 million in today’s money. It appears as a symbol not only of extravagance, but also of income inequality. The fabulously wealthy could build palaces, because the top 1% had managed to corner 18% of the country’s wealth.
But times change, or do they? Today the wealthiest 1% of Americans have managed to even out do the robber barons. They now own 24% of the nation’s wealth.
America is not alone. Throughout the world income inequality is a major problem and growing. Is this simply a question of unfairness? Yes, but is it more than that. It threatens not only social stability, but also economic growth.
The good news is that the rapid economic growth in China and other developing countries has made the world a more equal place. Over the past 30 years literally billions of people have been lifted out of absolute poverty. The Asian Development Bank (ADB) defines the demarcation line between the poor and the middle class as those living on more or less than $2 a day. In 1981 58% of global population lived below that line. Only 20% or 930 million lived above it. This group is defined by the ADB as ‘middle class’. They earned between $2 and $10 a day.
Today that middle class has grown substantially. Today 2.8 billion people or 40% of the world’s population live on between $2 and $10 a day. This is exceptionally encouraging, but there is a down side. Although almost 2 billion people have climbed out of absolute poverty, few people make it beyond the middle class and the margins to slip back into poverty are very narrow.
Part of the problem is that as the world became wealthier, the wealthy did much better than anyone else. The GINI index measures the disparity of wealth. It is a scale of 0 to 1.0. The lower the number, the more equal the country is. If the GINI coefficient was 0 all people would have the same wealth. If it is 1.0 just one person owns everything. In Asia the GINI index rose about 1% per year throughout the 1990s and 200s.
Part of this trend has to do with urbanization.  People in urban areas have more opportunities than subsistence farmers. Urban areas also grow faster. So as countries develop and urbanize inequality grows. But this is not the whole story. This is particularly true in China where the gap between the urban population and the countryside rose. In contrast in India inequality has risen sharply among urban populations.
Rising inequality though is not just a problem for the developing world. It is interesting to note that the United States and China have similar numbers.  According to the World Bank the GINI coefficient for the US is 45 and 47 for China. This compares rather unfavorably. The numbers for Germany and France are 28 and 32 respectively. India and Indonesia are both about 34.
The inequality in both the US and China are based on the legal infrastructure. The US as Warren Buffet famously pointed out taxes him less than his secretary. Investment and speculation are taxed at half the rate of earned income. The finance industry makes up 8% of the US GDP, but generates 29% of the profits. The Federal Reserve has been exceptionally helpful by providing extra  money to spur the speculation Not surprisingly talent and political power have gravitated to finance.
The costs of elections in the US have been skyrocketing. The total cost of the 2012 elections, including congressional races, topped $7 billion. The money has to come from somewhere and its not given for free. The US Supreme Courts’ recent decisions haven’t helped.
But the US politicians pale besides their Chinese counter parts. The 50 richest members of the US Congress control $1.6 billion. The 50 wealthiest delegates to China’s congress control $15 billion.  
But so what? Does inequality slow growth? The answer is an unequivocal yes. It reduces demand by forcing down consumption. The obvious point is that the poor have to spend more of their incomes than the rich and the rich save more. If you take purchasing power out of the hands of mass consumers, then it decreased demand. Without demand the rich have fewer reasons to justify reinvestment in productive ways such as new plants.

We are seeing this in the US. Corporations are sitting on huge piles of uninvested money. In China they keep investing, but in unproductive ways such as new uninhabited cities and over capacity. Since households retain an ever-smaller share of the total amounts of goods and services, it is hardly surprising that they also consumed an ever-declining share of GDP.
Income inequality is not a natural form of capitalism. It is not a prerequisite for growth. It is a choice. It is often a choice of those entrenched interests who benefit by it. But in a world of weak demand and over savings, the last thing we need to are policies that encourage income inequality. Yet the sad fact is that the people who benefit most from income inequality will use their political power to continue the process. Tragically it eventually will hurt them as well

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)



Ramesh Poapt

3 years ago

Good,analytical article!Not many serious readers to appreciate?


3 years ago

The Monopoly "end game". I remember that after the players were reduced to just two who owned all the sites and hotels and all the others were bank rupt, the winners would distribute all the money in the Bank (equitably) to all the players to prolong the game and the joy of winning. Provided the other players were young and naive enough. Like stealing candy from babies! The next revolution will come when the "divine rights" of "capitalism" are exorcised from the minds of the Great Unwashed of the West as the "Divine Rights" of feudal Lords was not so long ago, and the "Divine Rights" of Commissars and Neta-Babus are being questioned as we speak.


3 years ago

The Monopoly "end game". I remember that after the players were reduced to just two who owned all the sites and hotels and all the others were bank rupt, the winners would distribute all the money in the Bank (equitably) to all the players to prolong the game and the joy of winning. Provided the other players were young and naive enough. Like stealing candy from babies! The next revolution will come when the "divine rights" of "capitalism" are exorcised from the minds of the Great Unwashed of the West as the "Divine Rights" of feudal Lords was not so long ago.

How to use the RTI Act to Empower Yourself
RTI is the only act that allows  you to enforce your rights without moving out of your home, says Shailesh Gandhi, former Central Information Commissioner (CIC)

Sometimes, simple Right to Information (RTI) applications lead to significant results, said Shailesh Gandhi, former Central Information Commissioner (CIC) addressing Moneylife Foundation members today. The key is to keep trying different things, you never know what may work, he said, giving the example of how his simple RTI request seeking information led to decisive action agaisnt a police official who was accused of rape.

Mr Gandhi went though the key provisions of the act and provided important tips on how to file effective applications and carry forward the demand for information through first and second appeals. He explained at length the rationale behind various provisions as well as what information can be provided under the act and what cannot. For intance, he said, the RTI act is only meant to provide information to a citizen as her right, but one cannot demand an explanation for various actions or decisions. Similarly, information that is already available on record can be provided, but a citizen cannot ask for information to be gathered or collated under the act.

Mr Gandhi pointed out that the RTI Act derived its power from the short and succint Section 3 which states, “Subject to the provisions of this Act, all Citizens shall have the Right to Information.” He explained how Section 4 gives a person to right to inspection of documents and was “the heart of the RTI Act” . Mr Gandhi, who evangelises the use of RTI by ordinary people, firmly believes that when a larger number of citizens demand information, the government will be under pressure to put out a lot more information out in the public domain and on their website, leading to a substantial reduction in inefficiency and corruption.

Mr Gandhi also explained what sort of information cannot be obtained under the act and the exemptions to disclosure of information  set out in section 8 and section 9 of the act which allows some applications to be rejected.

This time, Mr Gandhi also informed his audience about another important statute in Maharashtra that could empower citizens tremendously, when used in conjunction with the RTI Act. He said most people were not even aware of the existence of this legislation called the ‘Government Servants Regulation of Transfers and Prevention of Delay in Discharge of Official Duties Act (Act 21 of 2006)’, whose strict provisions of action could lead to better governance and delivery of timely services if citizens filed application under its provisions.

In case if any RTI application is not taken, false information is given, there is non-compliance with section 4,  excessive fees are asked for etc a first appeal to the First appellate authority can be made within 30 days and the second appeal within 90 days of the order.  

According to Mr Gandhi, certain bottlenecks which impede the effectiveness of this act are lack of a culture of transperancy, awareness of the law and the slow pace of  the Information Commission mainly.

RTI is an act which provides public information and brings transparency and efficiency in the system. It leads to  SWARAJ- a true participatory democracy. It is a tool which can be used to bring about a difference sitting at home. So its time that enough of us try and make democracy more meaningful.

At the closing, Mr Shailesh Gandhi emphasised that we all need  to work together to make our nation a perfect place. He said, "Mera Bharat mahan nahi hai, Per yeh dosh mera hai!"  inspiring the audience to start taking action.




3 years ago

RTI applicant if denied information is entitled compensation under Consumer Protection Act

praveen sakhuja

3 years ago

i fully agree with Gandhi,"Mera Bharat mahan nahi hai, Per yeh dosh mera hai!" We cater to service of those who do not deserve respect, it is our ill fate. Chronology given by Gandhi to get information fails in the hands of CIC, when you are ill treated by those occupying the posts with their past sins.They do not hesitate in harassing citizens to please the Respondents. until or unless transparency travels from CIC first, respondnats cannot be blamed as they enjoy protection from CIC.

Nifty, Sensex will keep making attempts to hit a new high

While Nifty will likely hit a new high, caution is warranted

The BSE 30-share Sensex closed the week that ended on 18th April, at 22,628.84 (down 0.12 points), while the NSE’s 50-share Nifty closed at 6,779.40 (up 3 points or 0.05%) for the week. Last week we had mentioned that the indices would be weak this week. The benchmark edged lower on two out of three trading session this week, although it made up for the losses on the third day.

On Monday the market were closed on account of Ambedkar Jayanti. On Tuesday the market witnessed weak trading throughout the session and closed in the negative. Nifty closed at 6,733 (down 43 points or 0.64%).

Infosys reported a good fourth quarter result and has forecast revenue growth of 7% to 9% in dollar terms for the year ending 31 March 2015. The company has forecast revenue growth of 5.6% to 7.6% in rupee terms for FY 2015.

Snapping its declining trend, wholesale price index (WPI) in March rose to a three-month high of 5.7% mainly on a spurt in the prices of food items such as potatoes, onions and fruits. March CPI inflation rose to 8.31% on higher food prices.

On Wednesday indices witness a range bound session until noon after which it slipped into negative and continued to move lower. Nifty closed, in the negative for the third consecutive session, at 6,675 (down 58 points or 0.86%).

US economic data showed manufacturing in the New York region grew at a slower pace in April while the cost of living in the US rose more than projected in March as food and rents became more expensive. Confidence among US homebuilders rose less than forecast in April.

On Thursday market regained its lost strength and closed in the positive snapping three days of negative move. Global credit rating agency Standard & Poor's said it may upgrade India's rating outlook if the government that is elected next month address some of the country's fiscal and economic challenges through steps such as passing a goods and services tax. Nifty closed at 6,779 (up 104 points or 1.56%).

For the week, among the other indices on the NSE, the top two performers were FMCG (2%) and I T (1%) while the worst two performers were Realty (4%) and Media (3%).

Among the Nifty stocks, the top five stocks for the week were United Spirits (12%); Wipro (3%); Cairn (3%); I T C (3%) and TCS (3%) while the top five losers were D L F (9%); HDFC (4%); I D F C (4%); Tata Power (3%) and H D F C Bank (3%).

Of the 1,435 companies on the NSE, 617 companies closed in the green, 781 companies closed in the red while 37 companies closed flat.

Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:


ML Top sector

ML Worst sector

Lifestyle & Leisure


Real Estate


Software & IT Services






Farm & Farm Inputs












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