Skyrocketing pay packets for the already wealthy and stagnant incomes for everyone else – it's a recipe for financial and societal ruin, says a visiting economics professor.
In New Zealand for the launch of Inequality: A New Zealand Crisis, a book looking at the growing gap between the haves and have-nots, Professor Robert Wade of the London School of Economics says New Zealand has seen big increases in inequality in the last 20 years – more so than in many other Western nations.
"There is income inequality, wealth inequality in all capitalist countries, indeed in all countries, including for example in relatively equal ones such as in Scandinavia and northwest Europe. Inequality is inevitable, it is necessary – the question is only a question of degree," says Prof Wade.
"Anglo countries – like the US, the UK, Canada and… Australia and New Zealand, have had big increases in inequality by most measures over the past 20 years or so, so that they're much more unequal than the northwest European countries and Japan."
The three-decade experiment in neoliberal economics – both here in New Zealand and around the world – has seen huge increases in wealth, but over the last 15 years or so, much of that prosperity has been increasingly concentrated in fewer and fewer hands.
Between 2000 and 2007, the top 1 percent of Americans banked 93 percent of the increase in national income, and in the UK, CEOs of the top 100 companies are now paid about 145 times the median wage.
While incomes of those at the bottom have also risen they haven't kept pace, and Prof Wade says inequality's negative effects are felt regardless of how many are living in genuine poverty.
"Economic inequality refers to the distribution of income in a society from top to bottom, over the whole distribution," he says. "That is, it's different from poverty, which refers to say, the share of the population living below a particular poverty line. Economic inequality refers to the whole distribution of income in society.
"It's pretty clear from a lot of evidence that inequality, at the level reached in these Anglo countries, carries quite large social and health costs for the whole society."
As more and more wealth is concentrated at the top there is less available for those in the middle and bottom, says Prof Wade, who then struggle to keep up with the Joneses.
"What they do is then try to borrow in order to increase their consumption, so they run up increasing amounts of debt relative to their income, hoping that increases in house prices, for example, to sustain that debt," says Prof Wade.
"The problem then is that when the increase in house prices stops, then they are over their heads in debt relative to their ability to repay it, and that's the kind of crisis that engulfed the Western world in 2008, and we're still living through the repercussions of that."
The influential 2009 book The Spirit Level: Why More Equal Societies Almost Always Do Better argued that societies with greater inequality generally perform worse than more equal societies in a range of areas – including health, crime and happiness – almost regardless of the country's overall wealth. Prof Wade says this even extends to the economy, saying there's no evidence greater pay packets for the elite manifests in better economic performance.
"You cannot say that the economic performance of the more unequal [countries] is better than that of the northwest European countries and Japan.
"The more equal countries are every bit as prosperous as the more unequal ones, and the more unequal ones have greater social and health problems, also political problems – their democracies work less well when there's this big gap between people at the top and everybody else."
Prof Wade will be speaking on these, and other issues raised in Inequality, at Te Papa in Wellington tonight.