Red and blue inequality

The Holy Grail of inclusive growth now poses as much of a challenge to developed as to developing countries. The Occupy Wall Street Movement (OWSM), which claims to represent the disadvantaged 99 percent of the American population, echoes with greater resonance around the capital cities of the West than in the emerging economies.

In the last two decades, the top 1 percent more than doubled their income, while average income dropped 6 percent. David Brooks conceded the gravity of this “blue inequality,” the widening income gap between the 1 percent and the 99 percent. But Brooks believed that the more serious issue was “red inequality,” the gap in income and future prospects between those who have a college education and those who don’t.

In 1979, college graduates earned 38 percent more than high school graduates. The income gap has widened to 75 percent, promising to grow wider still, as 21st-century global job markets raise the requirements for educational credentials. College graduates not only earned more, they also tended to lead healthier (there were fewer smokers among them) and more productive lives. They were more likely to get married and stay married, building stable families and a wider social network that also promoted business and professional interests.

Paul Krugman, warning about “blue inequality” since the 1990s, disagrees with this view, pointing out that college graduates were not immune from income stagnation and were fast falling behind the “oligarchy.” In 1976, the top 1 percent received only 19.6 percent of the income, but by 2007 they took a 34.6 percent share. Their share of the compensation pie had not risen since 2000. In the wake of the 2007 financial crisis, even Ivy League graduates were finding it difficult to get jobs appropriate to their qualifications.

Citing Congressional Budget Report data on inflation-adjusted, after-tax income during the period 1979-2005, Krugman concluded that “blue inequality” had cut even deeper than the OWSM suspected. The bottom 80 percent of the population received less than 50 percent of total income.  But the more dramatic difference was between the 21 percent increase in the income of Americans in the middle of the distribution and the gain of over 400 percent captured by the top 0.1 percent (.001) of the population. Inequality prevails even within the top 1 percent.

Different perspectives on inequality lead to divergent policy prescriptions on tax measures and safety nets, and who should benefit from them. Krugman noted that taxes on capital gains were higher in 1979 and went down even as income inequality between the richest and the rest widened. While recognizing that entrepreneurs should reap the rewards of innovation, Krugman questioned how many of the privileged 0.1 percent could claim the kind of contribution Steve Jobs and Apple made to the economy.

Economic inequality has persisted in the Philippines, even after its emergence as a sovereign state. In a recent forum, Tomas Africa, former administrator of the National Statistical Office, reported that the top 1 percent earned in 1985 as much as the income of 32 percent of the families at the bottom of the pyramid. Some 25 years later, they had given up only 2 percent of the income. Going farther back, he concluded that the top 50 percent of families have controlled 80 percent of the income in the last 50 years.

Africa noted the “utter lack of information on distribution of family income” and appealed for an official definition of the ABCDE socio-economic categories used by government to estimate income gaps more accurately. Inadequate empirical evidence about the extent and endurance of inequality over time, he suggested, contributed to underestimating its persistence and impact.

Red inequality is a serious issue in the Philippines, because those who drop out of school before completing a college degree constitute a bigger segment of the population. But making quality higher education more accessible will produce impact measurable only over the long term—which argues for targeting it as a policy priority.

In the meantime, last week’s summit in Cagayan de Oro on poverty, inequality and social reform focused on an even more urgent problem: the 26.5 percent of the population—nearly 24 million people—living below the poverty line of P46 per day.

Theoretically, blue inequality could be addressed more expeditiously with more equitable taxes, more effective collection on the income of the top 0.1 percent of the oligarchy and more adequate safety nets. But the staggering amounts reportedly lost through corruption underline the lack of data on the wealthiest .001 percent and the extent of their hidden wealth.

Corruption scandals suggest that wealth is now more easily amassed, concealed, and increased through political and possibly criminal rather than business, “entrepreneurship.”    Notwithstanding the democratic demand for inclusive growth, what would drive blue oligarchs exploiting both political and economic power to redress inequality of either color?

Here lies the root of Krugman’s concern over blue inequality: “extreme concentration of income is incompatible with real democracy.” And it makes real democracy more difficult to achieve.

Edilberto C. de Jesus is president of the Asian Institute of Management.