The cycle of growing inequality is in its final stages due to the social pressure and shifts in demographics, which I will address later. It will happen, whether under a liberal government or a left-wing administration. The pandemials have come to accelerate this process with their sense of justice and meritocracy. Depending on which kinds of policies governments adopt, we will either see a society that becomes poorer and more equal, or richer and more equal. But equality will undoubtedly play a central role.
EMERGING GAPS
In the 1980s, a massive gap began to emerge between the rich and the rest of society. The income of the lowest segment practically came to a standstill, while the richest 10% –especially the top 1%–watched their income grow leaps and bounds. Since 1980, the percentage of total after-tax income of the top 10% of Americans doubled, reaching 40%. (7) This group enjoys a high standard of living, large houses and apartments, luxury cars, organic food, trips to exotic destinations, education at the best universities, and a healthcare system with the best specialists in the world. In contrast, the bottom 50% of Americans saw their incomes shrink by 20%. Not only have they lost income, but also social status.
Inequality is not a problem in and of itself. It is understandable that there are people with higher incomes and more wealth than others. It is part of the capitalist, democratic system we live in. The question is: to what extent can this inequality be explained by meritocracy? Are the disenfranchised this way due to a lack of effort or lack of opportunities? The lack of an assured baseline –or the stall in the income of the lowest earners for decades on end– while also failing to see their efforts yield their desired results, brings them great frustration and unease.
If a businessperson who earns hundreds of millions a year wants to buy an enormous house in The Hamptons, a flat in NYC, a penthouse in Paris, an original Picasso, and a private jet to escape to an island during the pandemic, they are in their full right to do so, provided they pay their taxes and do not break any laws.
How should the system work in order to be fairer? Here are a few examples: for every flight taken by millionaires, they should pay to compensate for the CO2 emissions generated; for the apartments they own in New York and Paris, they should pay an additional tax if they are not their primary residence and are not offered as rentals and located in areas with housing deficits. Conceptually, these taxes are fair because the planet belongs to everyone: the use of scarce available space should follow a principle of fairness, while the damage to mother nature should comply not only with a rule of fairness but also of remedy and conservation, given it involves intergenerational resources.
Now, this person, like any other, should not be allowed to use fiduciary structures such as irrevocable trusts to diminish their tax obligations. I see no reason why they should pay an income tax higher than the 30% or 40% in effect in most countries, but –as Warren Buffet once said– their secretaries should not be paying a higher tax rate than them. Also, as in many countries, it would be fair for their heirs to pay an inheritance tax once that person passed away. These types of legal frameworks increase the perception that the system is fair.
In many countries, there is resentment toward the upper classes. In general, this is driven by politicians looking to politically benefit from poverty. In others, it is because some people believe that their fortunes come from privilege: that their companies are protected by powerful lobbyists, that the government favors them with fiscal benefits, that they are spineless bankers, that they inherited their money without pay taxes or something along those lines. Most of the time this is not the case, and these people are simply doing everything within the legal framework to maximize their income. On the other hand, when the poor see their lives become increasingly difficult, they become frustrated. But what we must understand is that the problem is not the millionaires, but rather governments and their flawed public policies that increase inequality.
IMPOSSIBLE ACCESS
The central issue here is meritocracy. During the post-war era, the belief that everyone had the same chances of success and that their accomplishments were a result of their effort was part of the national spirit of many countries. For a child born in a poor suburb, this meant having access to an excellent education, being able to receive training at the best universities without having to spend the rest of their life in debt, provided they pass their admission exam. The idea was that a person born at the very bottom could rise to the top, which was so much more frequent in the years leading up to the 1980s. For example, a middle-class worker could buy a house without becoming overwhelmed by debt or no one would go bankrupt for not being able to pay their medical expenses. When these problems disappear, the resentment toward the upper classes diminishes significantly.
In terms of social equality, Europe is much better off than the United States and most other regions in the world. Its model is very successful in terms of pre-distribution: investments in education, universal healthcare, and regulation of the job market to guarantee high minimum wages.
The issue of inequality in Europe has much more to do with access to housing, high taxation of consumption and labor, and strongly regulated job markets that result in high unemployment rates, especially among young people, which prevents economic growth.
Inequality and the rejection of the governing technocratic class, which is perceived as lacking empathy, corporate in nature, and alien to the problems of the common people, are the basis for the unrest that led millions to support Brexit in England or vote for Donald Trump in the United States. It is a reflection of the part of the population punished by globalization, automation, and a state that was unable to respond to those transformations.
Inequality has always been associated with periods of social instability. The French Revolution, the Gilded Age in the United States, the Russian Revolution, the post-WWI era that led to fascism, and the 1990s in Latin America that ended in populist governments were all periods of great inequality. People need to express their frustration, which makes them susceptible to falling into the hands of populist politicians. There are two types of populism: on one hand, left-wing populism which blames the rich and seeks to charge them higher taxes to rampantly increase public spending. This is the favorite solution of politicians like Bernie Sanders in the United States, the Podemos political party in Spain, or Kirchnerism and Chavism in Latin America. On the other hand, right-wing populism blames immigrants, the media, the opposition, and foreign nations. This group is represented by the likes of Donald Trump and Jair Bolsonaro.
If we follow the current trend of inequality, populist movements will grow massively within the next years alongside two phenomena. One is the pandemic that destroyed millions of jobs around the world, which will take years to recover from. On the other, the intensification of technological change will accelerate the expansion of the technologies of the Third Industrial Revolution, and in 10 or 20 years we will see the beginning of the Fourth Industrial Revolution. These two revolutions demand increasing numbers of IT specialists, engineers, scientists, researchers, mathematicians, and programmers, which will widen the wage gap between the world of science and technology and all other jobs. In the medium and long term, these advances will be extremely positive for the economy and society but in the short term, we will have to learn to live with its consequences.
I do not believe in radical solutions for dealing with inequality. I do not believe that a larger state or more taxes are the answer to recovering the ideal middle-class. These programs sound alright in speeches but they do not solve the underlying problem: the need for well paid, private-sector jobs, and reducing the cost of the meritocracy basket. The worst thing governments could do to face inequality is to introduce high income taxes, more public spending, and more regulation.