In the debate about rising inequality, the behaviour
of Chief Executive Officers (CEOs) has been cited as a major cause. They are accused of putting short-term (shareholder) interests ahead of long-term (firm)
interests. Their actions are hardly surprising
considering that CEO remuneration has historically been tied to short-term objectives
such as annual shareholder returns.
But are politicians equally guilty of short-termism? Consider that their time horizon is the electoral cycle. Their objective is to be re-elected. Their method is policies that target the median voter.
A problem that, until recently, affected only a minority, is unlikely to
be adequately addressed by the political process. Cue civil society. Over the past few years, as a direct response
to the discontent caused by rising inequality, we have seen the emergence of
the Occupy movement, the UK Living Wage campaign and the Arab Spring.
Grass-root movements have a long history of affecting change
in the United States and beyond. Giving
women the right to vote in the UK, the campaign for equal rights in the US, the
fall of the Berlin Wall in
Germany. Activists were drawn together
by a shared set of principles, which helped spread their reach and eventually spurred
national and global campaigns.
But in generating a sufficient mass, they also drew the
attention of political parties. The slow
rumblings of discontent transformed into substantive political pressure, that
forced the hand of politicians into declaring an active policy response. Such events mimic the “stick-slip” dynamics
of an earthquake, where the forces below the earth’s surface eventually
generate enough strength to push against the forces holding the plates
together, to produce an earthquake (Jones and Baumgartner (2012)). In this case, the political system with its
procedures, rules and norms acts as a retarding friction against the public
movements that generate information about pressing issues of the day that
require action.
The rise of the Occupys, the election of Bill de Blasio to
Mayor of New York on an agenda of tackling inequality, the rejection of the
Conservative-led coalition in recent UK elections, all
suggest that the time is ripe for a major political earthquake. Yet, the world is still waiting for a major
set of policies to resolutely tackle income inequality in the US and
beyond. In the language of our
earthquake analogy, what further information is required to overcome such political
frictions, taking into consideration the time horizon over which politicians operate?
First, dispelling the myth that monetary and fiscal stimulus have put the economy on a path of stable, inclusive growth and
that no further action is required. In the US, the wealthiest one per cent captured 95 per cent of post-financial crisis growth between 2009 and 2012, while the bottom 90 per cent became poorer (Oxfam (2014)). The vulnerabilities that formed the basis of the 2008 financial crisis still exist and
could generate another crisis in the near-term.
Second, agreeing that reducing inequality can be growth
enhancing, as the IMF has strongly argued.
Elections have been won and lost on the state of the economy. The 2015 election in the UK and the 2016 Presidential election in the US will be no different.
Third, an acceptance that, because of the nature
of technological progress that is driving rising income inequality, for the first time, our children could be worse-off than us (Kotlikoff and Sachs (2012)). This, unlike the first two, may fall outside of a politician's traditional time horizon, but is surely the strongest argument for action.
