August 27, 2011

The Result of Income Disparity

What do the Arab Spring, the riots in London and the Great Recession have in common?  At first blush they seem to lack any commonality, but they’re all the result, in part, of the growing gulf between the rich and poor.  This is most obvious with respect to the civil unrest in many Arab nations, where the middle class has grown increasingly disgruntled over the massive wealth acquired by national leaders and their cronies.  While the rich have gotten richer, unemployment has gripped much of the region.  In country after country, popular uprisings have been the result. 

Perhaps less obvious is the effect of income disparity in the UK.  Despite the assertions of many, the recent riots in London can’t be explained away as just the acts of criminals and hoodlums.  Rather, they represent class warfare, clear and simple, as Clifford Stott, a social psychologist at the University of Liverpool has explained.  Britain—according to data provided by the OECD—fares worse than nearly every other developed country in the world in terms of income inequality.  Unemployment among its young people has skyrocketed and recent government budget cuts have hurt the disadvantaged most.  The violence was simply an outgrowth of people’s frustrations. 

The Great Recession, too, according to a recent IMF study, is rooted in the same development.  The study, in fact, implicates income disparity as the cause of the Great Depression as well.  Speaking of both historical developments, Time Magazine’s Rana Foroohar recently said:

As the poor and middle classes were squeezed, they tried to cope by borrowing to maintain their standard of living.  The rich, in turn, got richer by lending and looked for more places to invest, bidding up securities that eventually exploded in everyone’s face.

In short, the shrinking of the middle class wasn’t just a symptom of today's economic malaise, but a crucial factor in its occurrence.  Therefore, government budget cuts, in combination with the retention of Bush-era tax reductions to corporations and the rich, will exacerbate the underlying cause of the recession.  Until the financial security of the middle class improves and spurs consumption, the policy will only encourage the rich to continue hoarding cash and create no significant increases in employment.  

Which might result in an American Spring.

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