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Rich-Poor Divide Worst Among Rich Countries
WASHINGTON - The "American Dream" of upward social mobility appears to have emigrated from its birthplace in the United States to northern Europe, according to a major new report by the Organization for Economic Cooperation and Development (OECD) on the growth of economic equality over the past 20 years.
Of its 30 member states, most of which are also members of the European Union, the United States has the largest gap between its wealthiest and poorest households after Mexico and Turkey, according to the report, "Growing Unequal?", which was released at OECD headquarters in Paris Tuesday.
That gap has grown particularly large in the U.S. since 2000 -- that is, under the administration of President George W. Bush -- according to the report, which found that the gap between the U.S. middle class and the wealthiest 10 percent has also increased.
The growth in the divide has major implications for social mobility, according to OECD Secretary-General Angel Gurria, who said the report's data had demonstrated that the notion that inequality encourages the poor to do better is false.
"Social mobility is low in countries with high inequality like Italy, the UK (United Kingdom), and the United States. And it is much higher in the Nordic countries, where income is distributed more evenly," he told reporters.
"This means that, in most high-inequality countries, dishwashers' sons are more likely to be dishwashers and millionaires' kids can assume that they too will be rich," he said, adding that governments could do much to promote mobility, particularly through progressive tax policies, greater social spending, job creation, and increasing investment in education.
The new report, which found that inequality in most OECD countries -- not just the U.S. -- has grown markedly over the last two decades, comes at a critical moment given the ongoing global financial crisis and its impact on the presidential election here.
The crisis has sparked unprecedented worldwide criticism of the "free-market" economic model that the U.S. and Washington-based international agencies like the World Bank and the International Monetary Fund have vigorously promoted since the administration of President Ronald Reagan.
That model, sometimes called the "Washington Consensus", promised that greater reliance on markets and less government intervention would result in stronger economic growth that would also produce higher incomes for the middle class and the poor.
The current crisis, however, has called that model into question, not just overseas but in the U.S., where Democrats are urging major changes in economic and fiscal policies designed precisely to begin closing the gap between the rich, on the one hand, and the middle class and the poor, on the other.
Those changes -- including increased taxes on the wealthy, greater investments in education, public services and creating jobs, and tackling child poverty, in particular -- are precisely those cited by the OECD report as among the most effective in narrowing the rich-poor gap and reducing the poverty rate.
"This report does fit a certain Democratic narrative in recognizing that inequalities are a serious problem and that they're generated in the labor market," said John Schmitt, a senior analyst at the Center for Economic and Policy Research (CEPR) here. "The OECD recognizes that the U.S. performs poorly on social mobility, and I think that surprises a lot of Americans."
The report found that the U.S. is not alone in suffering growing wealth inequalities among the world's richest countries over the past two decades. In three out of four of 24 OECD countries surveyed, inequalities between the richest 10 percent of the population and the poorest 10 percent grew.
France, where government has long taken a particularly aggressive role in the economy, saw the rich-poor gap decline over that period, while, after a steep rise in inequality under former Prime Minister Margaret Thatcher in the 1980s, the wealth gap and poverty rate have declined faster in Britain than in any other country.
The greatest inequality between rich and poor among OECD countries was found in Mexico, where the wealthiest 10 percent of households had more than 25 times greater income than the poorest ten percent. In Turkey, the ratio was 17 to one, while the U.S. was just below that, at 16 to one.
The average for all 30 OECD nations in 2005 was about nine to one, with the smallest gap -- less than five to one -- found in Sweden and Denmark.
After Mexico and Turkey, the U.S. also has the highest poverty rate of the 30 OECD nations, according to the report, which defined poor households as those whose income was less than half of the media income in each of the member-countries.
For all OECD countries, the average poverty rate was just under 10 percent in 2005. In Mexico, the rate was highest at more than 20 percent. Turkey and the U.S. were tied at 17 percent. Lowest poverty rates were found in Denmark, Sweden, the Czech Republic, Austria, and Norway.
In his remarks, Gurria repeatedly underlined the importance of reducing the wealth gap in order both to enhance overall economic performance and reduce social friction, stressing that the implications of current trends were "very serious".
"(G)rowing inequality raises political challenges because it breeds social resentment, it questions the ultimate role of democracy and generates political instability," he said. "It also fuels populist, protectionist and anti-globalization sentiments...Ignoring increasing inequality is not an option," he added.
Among OECD countries, social mobility as measured by the relative earnings of fathers and sons was highest in the Nordic countries where the rich-poor gap was narrow, and lowest in Italy, Britain and the U.S. -- all countries where the gap was significantly wider.
The report noted that while poverty among the elderly has fallen in OECD countries, poverty among young adults and families with children, particularly single-parent families, has increased over the same period. On average, one child out of every eight living in an OECD country in 2005 was living in poverty. For the U.S., the ratio is closer to one in five.
In a companion article published by the OECD 'Observer', Oxford University economist Anthony Atkinson argued that government will have to take a stronger role in reducing the wealth gap and creating jobs, particularly if the world economy goes into recession.
"If the government can take on the role of lender of last resort [for troubled financial institutions], then we should think about the government taking on the role of employer of last resort," he wrote. "Put bluntly, governments have to step up to the plate, as [U.S. President Franklin] Roosevelt did in the Great Depression."