Government Intervention and Income Equality
Income equality can be understood as the disparity or gap in the distribution of economic assets between individuals or groups. It encompasses not only the income but also the welfare of individuals or groups in the country. In an article of The Economist dated October 13, 2012 about inequality and the world economy, the twin forces of globalization and technical innovation were noted to have narrowed inequality globally, with the poorer economies catching up with the richer economies. However, income gaps within countries were found to have widened. With the increasing disparity of income between individuals and groups in an economy, the debate is very timely to tackle the role the government should play or not play in relation to income equality.
The debate was the about whether the government should intervene in ensuring income equality in the country. The pro-interventionists group believed that government intervention is necessary because inequality creates inefficiency in the economy. The following were the arguments made by the group: (1) inequality is bigger in countries where government intervention is minimal; and, (2) cooperation of the private sector (companies) and the government is necessary to attain equality and efficiency that will result to sustainable growth of the economy; and (3) the government can deal with inequality through taxes and subsidies, laws and regulations, policies to foster long-term growth, income transfers and social plans, and fiscal policies for stimulus measures. Moreover, the pro-interventionists emphasized that corruption (which is always associated to the government) does not only happens at the government level (it also happens in the private sector!) and so there is no assurance that equality will be attained without government intervention in ensuring income equality.
Meanwhile, the anti-interventionists group maintained that income inequality is a result of economic and political problems and not the cause of economic and political problems as what economists have established in most empirical studies (due to wrong calculations and measures of inequality). The group also presented the following points: (1) the government’s setting of minimum wage is causing the inequality, and that the worker’s real value should be decided in the market to lessen the disparity in income distribution; (2) the government’s effort to eliminate inequality through progressive tax is not effective since it will only drive the rich tax-payers out of the country; and (3) intervention to correct inequality in the form of taxation does not resolve the problem because of corruption in the government.
Pro-Interventionists: The Government Should Intervene in Ensuring Income Equality
Moreover, the group could also have cited the points raised in The Economist that suggested reforms on how the government should approach the issue of income inequality. In particular, the article suggested the introduction of greater transparency in government contracts and effective anti-trust laws. This could have been a good point to show that corruption can be eliminated and that the public can rely in the government to correct inequality. It was also suggested that the spending of the government should “really” target the poor and the young—this implies more government financed pre-school education, elementary and secondary school, and retraining for the unemployed. And tax reforms! The goal is not to “punish” the rich and drive them out of the country but to raise funds in an efficient manner.
The group could have mentioned Keynesian perspective on the role of the government in the economy. The Keynesian argument is that government intervention in the economy is aimed at achieving the equilibrium among savings, consumption, and investment. Such intervention is the key mechanism to correct the problem of unemployment and income inequality as stated by Zafirovsk (2002) and Herzer & Vollmer (2011). According to Bradly et. al. (2003) the revenues derived from a progressive income tax can be utilized to augment social demand through such redistributive policies as welfare expenditure and social security. As Lee (2005) stated, the spending will in turn decrease the likelihood of excessive saving, consumption, and unemployment, since increased demand provides investors with an incentive to invest in the markets. This will ensure sustainable growth.
Anti-Government Intervention in Ensuring Income Equality
The argument of the anti-interventionists focused on a free-market argument. However, they could have presented stronger points if the group was able to present most recent studies to justify a free-market correction of income inequality. Also, in the opening argument that “inequality is the result of economic and political changes” the speaker could have cited the works of Rosenthal (2004) on Politics, Public Policy, and Inequality: A Look Back at the Twentieth Century to establish facts of how changes in the political and economic structure of the country have resulted to widening disparity in income distribution. For instance, Rosenthal (2004) found that the trends in economic inequality in the US over the last century match closely with the changes in political polarization, immigration, and many redistributive policies.
Further, the group could have supported their argument with discussion of government’s spending on public goods and merits goods that tend to create inefficiency and excess bureaucracy. In their argument on the efficiency of private companies in handling market transaction, the anti-interventionists could have justified their proposition by stating that government-owned companies tend to lack profit incentive resulting to inefficiency in reducing, if not eliminating, income inequality. Also, the problem relating to moral hazard could also be a strong argument against government intervention through inequality-reducing programs. They could have argued that such interventions in the form of subsidies and social insurances only create dependency program among people, that is, people may not bother to efficiently to have a better standard of living because they expect that the government will always be on assistance. And finally, a good argument also includes the real business cycle theory that maintains that government intervention may only create another problem, that is, the accumulation of public debt especially with the subsidies and assistance of the government to the poorer group of the economy.
The discussion of the group focused heavily on inefficiency of the government to correct inequality because of corruption.
Generalization
The arguments of the pro-interventionists are more appealing than that of the anti-interventionists. The points are clear, and the ideas are organized. All in all, they have stronger arguments than the anti-interventionists group since the latter presented mostly corruption evidences of the government. But this was countered by the pro-interventionists by saying that corruption is not only in the level of the government and that even the private companies have to be monitored for corruption.
References
Herzer, Dierk and Sebastian Vollmer (2011), "Inequality and Growth: Evidence from Panel Cointegration," Journal of Economic Inequality, Online First
Zafirovski, Milan (2002), "Income Inequality and Social Institutions: Beyond the Kuznets Curve and Economic Determinism," The International Journal of Sociology and Social Policy, Vol. 22, No. 11/12
Lee, Cheol-Sung (2005), "Income Inequality, Democracy, and Public Sector Size," American Sociological Review, Vol. 70, No. 1.
Bradly, David, Evelyne Huber, Stephanie Moller, Francois Nielsen, and John D. Stehpens (2003)., "Distribution and Redistribution in Postindustrial Democracies," World Politics, Vol. 55, No. 2
Wu, Ximing, Perloff, Jeffrey, and Golan Amos (2006). “Effects of Taxes and Other Government Policies on Income Distribution and Welfare. Accessed from .
The Economist (2012), “Inequality and the world economy- True Progressivism: A new form of radical centrist politics is needed to tackle inequality without hurting economic growth Oct 13th 2012. Accessed from
Rosenthal, Howard (2004), “Politics, Public Policy, and Inequality: A Look Back at the Twentieth Century”. Accessed from http://www.princeton.edu/~rosentha/POLARIZATIONPOLICYINEQUALITY.pdf
Davis, L.S. (2007), “Explaining the evidence on inequality and growth: informality and redistribution”. B.E.J. Macroecon. (Contributions) 7, Issue 1, Article 7.
de la Croix, D., Doepke, M. (2003), “Inequality and growth: why differential fertility matters. Am. Econ. Rev. 93, 1091–1113
